Kokesh v. SEC
The Supreme Court ruled that when the SEC makes wrongdoers give up profits they gained through securities violations, that remedy counts as a penalty, so it must be sought within five years of the violation.
The unanimous decision cut off tens of millions of dollars the SEC had sought to claw back from an investment adviser for decades-old misconduct, and it limits how far back the agency can reach in future cases.
“When an individual is made to pay a noncompensatory sanction to the Government as a consequence of a legal violation, the payment operates as a penalty.”
The Court's core reasoning for why giving up illegal profits to the government counts as a penalty.
How it got here: A jury found Kokesh liable; the trial court ordered him to give up $34.9 million; the Tenth Circuit affirmed, and Kokesh asked the Supreme Court to review the deadline question.
The Case in Depth
What happened
Charles Kokesh ran investment-adviser firms that gave advice to business-development companies. The SEC accused him of secretly taking $34.9 million from four of those companies between 1995 and 2009, and of hiding it by filing false reports and proxy statements with regulators. The SEC sued him seeking penalties, an order to give up the misappropriated money, and an injunction.
The question before the Court
When the SEC sues someone years after the alleged wrongdoing and demands they hand over their ill-gotten gains, does a five-year deadline apply?
The Court's answer
Yes — the Court ruled that when the SEC forces someone to give up profits gained from violating securities laws, that remedy counts as a "penalty," so the government must seek it within five years of the violation, just like it must for ordinary civil fines. The Court reasoned that this remedy punishes a wrong against the public rather than compensating a specific victim, and its main purpose is deterrence rather than restoring anyone to their earlier position.
Because the SEC had waited too long to pursue much of the $34.9 million it sought from Kokesh, that portion of the judgment could not stand under the five-year deadline. The Court did not decide whether the SEC can use this remedy at all — only that, whenever it is used, the same deadline that applies to other penalties applies here too.
Curious how the Court got there? See the step-by-step legal reasoning →
Why it matters
The SEC frequently uses this profit-clawback tool against people who commit securities fraud, sometimes covering violations from many years earlier. This ruling means the agency can now only recover profits from violations within the last five years, shrinking the total amount it can collect in long-running fraud schemes and pushing it to act faster.
What changes now
The case is sent back with the disgorgement order reversed to the extent it covered conduct outside the five-year window. Going forward, the SEC must seek this profit-giveback remedy within five years of the violation, just as it must for civil monetary penalties, which will limit how much money the agency can recover in cases involving older misconduct. The Court noted it was not deciding whether courts have authority to order this remedy at all.
What this does not decide
The Court explicitly said it was not deciding whether courts have the power to order this profit-giveback remedy in SEC cases at all, or whether courts have been applying its underlying principles correctly — only that, whatever it is, it must be sought within five years.
How the Court got there
The legal reasoning, step by step
- The Court looked to a longstanding definition of 'penalty' as punishment imposed by the government for an offense against the public, which breaks into two questions: is the wrong being redressed a wrong to the public rather than to a specific victim, and is the sanction meant to punish and deter rather than simply to compensate someone for a loss?
- Applying the first question, the Court found that when the SEC forces someone to give up illegal profits, it is punishing a violation of public securities laws committed against the government, not standing in for any particular injured investor, since these cases proceed even without victim support.
- Applying the second question, the Court found that courts and the SEC itself have long described this profit-giveback remedy as existing mainly to deter future violations by stripping wrongdoers of their gains, and deterrence has traditionally been treated as a form of punishment rather than a legitimate non-punitive goal.
- The Court also found the remedy often is not compensatory in practice: the money is paid to the court, which has discretion over who receives it, some of it goes to the U.S. Treasury rather than victims, and no law requires it to go to victims at all.
- The Court rejected the government's argument that the remedy merely restores wrongdoers to where they started, noting it can exceed actual profits gained, ignore a defendant's costs, and require giving up gains that flowed to other people entirely.
- Because the remedy goes beyond compensation, is meant to punish, and labels the defendant a wrongdoer for violating public law, the Court concluded it fits the legal definition of a penalty and is therefore subject to the five-year filing deadline.
Doctrinal impact
Cases affected by this decision
Reaffirms Gabelli v. SEC (568 U. S. 442)
Relies on this earlier ruling that the same five-year deadline applies to SEC monetary penalties.
Reaffirms Meeker v. Lehigh Valley R. Co. (236 U. S. 412)
Uses this older case's test for distinguishing punitive penalties from compensation for private harm.