On 5 June 2017, in Kokesh v. SEC, the US Supreme Court held unanimously that the ability of the SEC to seek disgorgement for violations of the federal securities laws is subject to a five-year statute of limitations. Disgorgement actions by the SEC generally seek to recover a violator's ill-gotten gains. The Court's conclusion that the five-year statute of limitations applies to those actions was based on its assessment that disgorgement orders qualify as "penalties" under the statute of limitations.

The petitioner here was the owner of several investment advisory firms. In late 2009, the SEC began an enforcement action against him, alleging that he had, through his firms, misappropriated $34.9 million between 1995 and 2009. Following the jury's verdict that he was liable for those wrongs, at the SEC's request, the United States District Court for the District of New Mexico ordered that he disgorge $34.9 million, plus an additional $18.1 million in prejudgment interest. Most of the disgorgement amount ($29.9 million) related to conduct that occurred more than five years prior to commencement of the SEC's action.

Under 28 U.S.C. § 2462, a five-year statute of limitations applies to any "action, suit or proceeding [brought by the SEC] for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise." Until the Supreme Court decided this case, the federal appeals courts around the country were split as to whether Section 2462's statute of limitations applies to disgorgement actions brought by the SEC. The Supreme Court determined that disgorgement orders achieved by the SEC contain several characteristics that qualify them as "penalties" under the statute.

First, SEC disgorgement actions seek to redress violations of "public laws" that are "committed against the United States rather than an aggrieved individual." Second, SEC disgorgement actions are intended to deter future violations based on similar conduct. Third, SEC disgorgement actions do not play a compensatory function because "disgorged profits are paid to the district court," which then exercises its discretion over how the disgorged funds will be distributed. Although in some instances disgorged funds compensate private parties for their losses, that is not always so. The Court rejected the SEC's argument that disgorgement actions are not punitive, but "remedial", because they seek to restore the status quo prior to the violation. Rather, the Court explained, in order to achieve a deterrent effect, "disgorgement does not [always] restore the status quo; it [sometimes] leaves the defendant worse off" than he or she was before the violation.

This case provides greater certainty in an important area of SEC enforcement law. It also puts a temporal limit on the SEC's ability to bring disgorgement actions. On the other hand, the SEC already often seeks tolling agreements with potential subjects of investigations to suspend the applicable statute of limitations while it investigates potential violations. It seems likely in light of the Kokesh decision that the SEC will now seek such agreements earlier and more reflexively in the future.

For more information on the Kokesh case, our related client note is available at:

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