Disgorgement is a legal remedy requiring defendants to pay back unlawful gains, which the SEC often seeks in addition to civil penalties. On June 5, 2017, the Supreme Court held that disgorgement is a penalty, not an equitable remedy, and thus is subject to the five-year statute of limitations under 28 USC § 2462. Justice Sotomayor delivered the opinion for the unanimous Court in Kokesh v. SEC, which significantly restricts the SEC’s power.
Under 28 USC § 2462, the federal government has five years to bring any “action, suit, or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise.” However, the SEC has long maintained that disgorgement is not a “penalty” within the meaning of the statute and therefore is not subject to the statute of limitations. The Court disagreed.
In Kokesh, the SEC commenced an enforcement action against the owner of two investment-advisor firms alleging that between 1995 and 2009, Kokesh misappropriated approximately $35 million from four companies and filed misleading SEC reports to conceal the misappropriation. A jury found Kokesh guilty of multiple violations of the federal securities laws. The trial court ordered him to pay a civil penalty of $2.4 million and $34.9 million in disgorgement, of which $29.9 million resulted from violations outside the five-year statute of limitations.
Kokesh appealed the disgorgement penalty to the Court of Appeals for the Tenth Circuit, which affirmed the lower court’s order and found that disgorgement is neither a penalty nor forfeiture. The Tenth Circuit’s ruling created a clear split with the Eleventh Circuit, which in May 2016 held that the statute of limitations applies to SEC claims for disgorgement.
Reviewing its precedents back to 1892, the Court elucidated the contours of a penalty. The Court explained that disgorgement is (1) a remedy sought for violations committed against the United States, rather than an individual seeking compensation and (2) imposed for punitive purposes to deter violations of the securities laws. The Court was not impressed with the SEC’s argument that disgorgement is a “remedial” remedy sought in an attempt to restore the status quo. Ruling in favor of Kokesh, the Court stated that disgorgement “as it is applied in SEC enforcement proceedings, operates as a penalty” and therefore “any claim for disgorgement in an SEC enforcement action must be commenced within five years of the date the claim accrued.”
This ruling is a victory for Wall Street, which has long-urged the Court to limit the SEC’s authority. The Supreme Court’s ruling will have wide-ranging impact beyond traditional securities law enforcement actions. For instance, disgorgement represents a major portion of almost every Foreign Corrupt Practices Act (FCPA) settlement, in which the total disgorgement amount for the ten highest FCPA cases totals $1.47 billion. The SEC will now need to pay closer attention to the statute of limitations before determining whether to bring an enforcement action where disgorgement plays a large part of the financial justification for the action.