Kokesh v. Securities and Exchange Commission: A New Limitation to the Government’s Enforcement Power?


Posted on April 21, 2017, by Mary P. Hansen and Mira E. Baylson in Disgorgement, Statute of Limitations. Comments Off on Kokesh v. Securities and Exchange Commission: A New Limitation to the Government’s Enforcement Power?

The United States Supreme Court will soon decide whether the SEC can continue to impose disgorgement fees without regard to any statute of limitations. Based on the oral argument in Kokesh v. Securities and Exchange Commission, held on Tuesday, April 18, 2017, it appears likely that the Court will determine that the SEC does not have the wide power it claims in pursuing disgorgement, or the return of profits made from illegal actions.

Background

The petitioner, Charles Kokesh, was the owner of two registered investment advisers. Between 1995 and 2006, he misappropriated $34.9 million from the business development companies operated by the investment advisers. The SEC pursued civil enforcement actions against him in 2009 and the jury found he violated the Securities Exchange Act, the Investment Advisers Act and the Investment Company Act. The United States District Court for the District of New Mexico ordered non-compensatory disgorgement of $34,927,329 as the full amount misappropriated since 1995. The District Court and then the 10th Circuit concluded that the disgorgement was not a penalty subject to a statute of limitations because it was remedial, not punitive.

The issue before the Court, therefore, is whether SEC disgorgement is subject to 28 U.S.C. § 2462, a five-year statute of limitations for the enforcement of any civil fine, penalty, or forfeiture. There is a federal circuit split on whether the order to return money falls under this penalty statute (and its statute of limitations) with the United States Court of Appeals for the 11th Circuit stating it does, while the 1st, 10th and District of Columbia Circuits believe it does not.

The SEC makes frequent use of disgorgement, taking in over $3 billion in disgorgement in 2015 alone. Of that money, some went to victims and others went to the federal treasury. Complicating the issue is that Congress never authorized the SEC to have the power to order such disgorgement. Rather, it has just been a policy of the SEC for at least thirty years to seek disgorgement, though it is not rooted in statutory authority.

Oral Argument

All of the Justices appeared to be skeptical of the SEC’s claim that it was not bound by any statute of limitations when it came to disgorgement. The SEC argued that its policy on recouping money lost from investors was not a penalty or forfeiture. Instead, the SEC, represented by Department of Justice attorney Elaine Goldenberg, stated that disgorgement “remedies unjust enrichment and just takes the person back to where they would have been” if they had not been involved in illegal activities. Yet, as Kokesh’s attorney, Adam Unikowsky, pointed out, disgorgement acted just like forfeiture, which fell under § 2462. Furthermore, as Unikowksy pointed out, in recent years, disgorgement goes first to the government and only then to the victims, if at all. To support his position, he cited that disgorgement comprised approximately 90% of the SEC recovery in Foreign Corrupt Practices Act enforcement actions and that money does not go to victims, but simply into the United States treasury. As Justice Sotomayor stated “if it looks like forfeiture, why don’t we treat it like a forfeiture?”

Part of the Court’s stumbling block in this case is the silence of Congress. As Justice Alito stated, “in order to decide whether this thing is a penalty or a forfeiture, we need to understand what this thing is. And in order to understand what it is, it would be certainly helpful and maybe essential to know what the authority for it is.” Chief Judge Roberts quoted his predecessor, Chief Justice John Marshall, saying it was “utterly repugnant to the genius of our laws to have a penalty remedy without a limit.” He then touched upon the lack of statutory authority for disgorgement: “The concern, it seems to me, is multiplied when it’s not only no limitation, but it’s something that the government kind of devised on its own.” The Justices commented on the fact that not only is Congress is silent on the disgorgement, but the SEC is as well. In fact, as Justice Kagan pointed out, it is “unusual that the SEC has not given some guidance to its enforcement department or — or that the Department of Justice hasn’t become involved in some way; that — that everything is just sort of up to the particular person at the SEC who decides to bring such a case.”

In the end, it seemed the government could point to no solid statutory basis for SEC’s disgorgement remedy. And the Justices appeared flummoxed by the task in front of them to define disgorgement separately from a penalty or forfeiture. It was clear that the Justices did not seem to whole-heartedly agree with either side of the case but did not appear comfortable with the government’s position that it had basically no statutory limitations to its power of disgorgement. In line with the McDonnell case, it would appear that this case will bring some limits to the federal government’s enforcement power.





Comments are closed.



From the Blog:

7th Circuit Affirms 1st Conviction For Spoofing

Spoofing is not going away after all. Last week, the U.S. Court of Appeals for the Seventh Circuit unanimously upheld the first-ever criminal conviction...

The CFTC Settles Another Spoofing Case

On July 26, 2017, the U.S. Commodity Futures Trading Commission (“CFTC”) issued an order finding that Simon Posen engaged in the “disruptive practice of...

The Future of Futures: High-Speed Trading and CFTC Regulation & Enforcement

The future is now.

On June 29, 2017, the U.S. Senate Committee on Agriculture, Nutrition, and Forestry voted overwhelmingly to confirm the nomination of J....