The Supreme Court Unanimously Holds SEC Disgorgement Constitutes a “Penalty”
On June 5, 2017, the Supreme Court of the United States released its unanimous opinion in Kokesh v. Securities and Exchange Commission and established that “SEC disgorgement constitutes a penalty within the meaning of § 2462” and therefore is restricted by the applicable 5-year statute of limitations. As predicted in our previous blog post, the Court determined that the SEC cannot impose disgorgement fees without regard to statute of limitations.
The Supreme Court determined that SEC disgorgement “bears all the hallmarks of a penalty” and therefore should be subject to the 5-year statute of limitation in § 2462 for three main reasons: (1) “SEC disgorgement is imposed by courts as a consequence for violation” of public laws, i.e. for violations committed against the United States rather than a “aggrieved individual”; (2) “SEC disgorgement is imposed for punitive purposes” such as deterrence, just like other types of penalties; and (3) SEC disgorgement is not compensatory and is often paid directly to the court, which has the discretion to decide where the disgorged funds should be distributed—there is no statutory command that such funds be paid to victims of the defendant’s criminal activities. “It is imposed as a consequence of violating a public law and it is intended to deter, not to compensate. The 5-year statute of limitations in § 2462 therefore applies when the SEC seeks disgorgement.”
This is a huge win for Mr. Kokesh and other potential defendants facing disgorgement orders for amounts well outside the 5-year statute of limitations. Clearly, this will also have an impact on the SEC’s practices and procedures. The SEC took in over $3 billion in disgorgement in 2015 alone. While it is difficult to quantify what percentage of that was from disgorgement outside of the 5-year statute of limitation for prosecution, it is likely that the holding will result in a decrease in the fines paid to the SEC. It is also likely that the SEC will feel some pressure to speed up the time it takes to make charging decisions in investigations and when considering whether to open investigations if the conduct is already outside, or close to the end, of the 5-year statute of limitations. Finally, defense counsel can expect to receive requests for tolling agreements earlier and more often.