June 05, 2017

Supreme Court Decides Kokesh v. SEC

On June 5, 2017, the Supreme Court of the United States decided Kokesh v. SEC, No. 16-529, holding that disgorgement claims must be commenced within five years of the claims’ accrual because such claims operate as penalties.

The SEC brought a civil enforcement action in 2009 against petitioner Charles Kokesh on allegations that he violated securities laws by concealing the misappropriation of $34.9 million from four businesses from 1995 to 2009. The SEC sought monetary penalties, an injunction, and disgorgement. After a jury found in the SEC’s favor, the district court determined that the five-year statute of limitations from 28 U.S.C. § 2462 applied to the civil monetary penalties but not to the $34.9 million disgorgement judgment on the basis that disgorgement was not a “penalty” within the statute’s meaning. The Tenth Circuit affirmed.

The Supreme Court reversed. 

The statute of limitations provision in Section 2462 states that the five-year period applies to “an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture,” but does not address disgorgement. To determine whether the term “penalty” in Section 2462 encompassed disgorgement required the application of two principles. First, the Court had to ask whether the sanction sought to redress a wrong against the public or an individual. And second, a sanction operates as a penalty if it is sought to punish and deter rather than to compensate victims. 

The Court readily found that SEC disgorgement operated as a penalty within the meaning of Section 2462. Courts impose disgorgement for violation of public laws against the United States rather than to redress a wrong against a particular aggrieved individual. Courts also impose disgorgement as a punishment to deter future violations of those public laws. Finally, disgorgement by the SEC may not necessarily compensate victims; defendants make payments to district courts that have discretion to determine the distribution of the money.

The Court rejected the SEC’s argument that disgorgement operated as a remedial sanction to restore the status quo. Sometimes disgorgement exceeds the profits reaped as a result of the violation. And at times (as was the case in Kokesh) disgorgement is ordered without consideration of the defendant’s expenses that reduce the illegal profits. In such cases, disgorgement leaves defendants worse off than they were before the securities violation.

Because disgorgement goes beyond compensation and is intended to punish and label defendants as wrongdoers, the Court deemed disgorgement orders penalties and thus subject to Section 2462’s five-year statute of limitations.

Justice Sotomayor delivered the opinion for a unanimous Court.

Download Opinion of the Court

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