Kokesh v. SEC
Headline: Court holds that SEC disgorgement is a penalty and must be sought within a five-year statute of limitations, limiting the agency’s ability to collect money for older securities violations.
Holding: Because SEC disgorgement operates as a penalty under 28 U.S.C. §2462, any disgorgement claim in an SEC enforcement action must be filed within five years of when the claim accrued.
- Limits SEC’s ability to recover disgorgement for conduct older than five years.
- Requires SEC to file disgorgement claims within five years of claim accrual.
- Gives defendants a stronger time-based defense against old enforcement claims.
Summary
Background
The dispute involved the Securities and Exchange Commission and Charles Kokesh, a former investment adviser accused of misappropriating $34.9 million from clients between 1995 and 2009. The SEC sued seeking civil penalties, disgorgement of ill-gotten gains, and an injunction. The District Court applied the five-year limitations period to monetary penalties but allowed a full $34.9 million disgorgement judgement; the Tenth Circuit affirmed and the Supreme Court agreed to decide whether disgorgement is covered by the five-year limit in 28 U.S.C. §2462.
Reasoning
The central question was whether disgorgement counts as a “penalty” under the statute. The Court explained that a penalty addresses public wrongs and is imposed to punish or deter rather than merely to compensate private victims. It found that SEC disgorgement is imposed for violations of public securities laws, is frequently intended to deter wrongdoing, and often operates in ways that are not purely compensatory (for example, funds may go to courts or the Treasury and courts sometimes order amounts exceeding net profits). For those reasons the Court concluded disgorgement functions as a penalty and falls within the five-year limitations period. The Court reversed the Tenth Circuit and emphasized it was deciding only whether the statute of limitations applies, not whether courts always may order disgorgement or how to calculate it.
Real world impact
As a result, the SEC must bring any disgorgement claim within five years of when the claim accrued. That limits the agency’s ability to recover money for older misconduct and gives defendants a stronger time-based defense against stale disgorgement claims. Enforcement timing and remedy choices in SEC cases will be affected moving forward.
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