In a 9-0 ruling, the United States Supreme Court held that U.S. Securities and Exchange Commission (“SEC”) disgorgement operates as a “penalty” under 28 USC § 2462, which establishes a 5-year limitations period for “an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture.” The Supreme Court’s decision limits the SEC’s use of one of its principal enforcement tools and gives much needed clarification as to whether certain historical conduct may be subject to SEC disgorgement orders.
In Kokesh v. Securities and Exchange Commission, decided on June 5, 2017, the Supreme Court held that any claim for disgorgement in an SEC enforcement action must be commenced within five years of the date the claim accrued. This decision is a blow to the SEC’s view of disgorgement as having no time restraint. To illustrate the foregoing, petitioner Charles Kokesh, who was convicted of misappropriating money from four business development companies he controlled from 1995 through 2009, was ordered to pay $34.9 million in disgorgement, among other penalties, in the lower court ruling. Of the $34.9 million, $29.9 million resulted from violations outside the 5-year window. Mr. Kokesh’s lawyers argued that applying the 5-year limitations period would reduce his disgorgement payment to $5 million.
The Supreme Court overturned the lower court ruling, holding that the SEC is bound by the same 5-year limitations period for disgorgement as for the SEC’s other financial penalties. Going forward, this decision may give greater predictability to the SEC enforcement process.
For a copy of the decision, please click here: https://www.supremecourt.gov/opinions/16pdf/16-529_i426.pdf