SUPREME COURT UNANIMOUSLY RULES THAT SEC SOUGHT DISGORGEMENT IS A “PENALTY” SUBJECT TO A FIVE-YEAR STATUTE OF LIMITATIONS

Originally published by Carrington Coleman.

In Kokesh v. SEC, the Supreme Court determined that the five-year statute of limitations for any “action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise” in 28 U.S.C. § 2462 applies to claims for disgorgement sought by the SEC as a sanction for violations of the federal securities laws. On October 4, 2009, the SEC brought an enforcement action against Kokesh based on his alleged violations of the securities laws between 1995 and 2009. After a jury found Kokesh liable, the district court imposed a civil penalty based solely on Kokesh’s conduct after October 4, 2004, concluding that the five-year statute of limitations in 28 U.S.C. § 2462 precluded any civil penalty based on Kokesh’s conduct five years before the SEC brought suit. The district court, however, ordered Kokesh to disgorge $34.4 million based on violations going all the way back to 1995—with $29.9 million of that amount resulting from violations before October 4, 2004—because the district court reasoned that disgorgement is not a penalty to which 28 U.S.C. § 2462 applied. The Tenth Circuit affirmed, and the Supreme Court granted certiorari.

Justice Sotomayor, writing for a unanimous court, concluded otherwise. She relied on a 1892 Supreme Court case that defined “penalty” as “punishment, whether corporal or pecuniary, imposed and enforced by the State, for a crime or offen[s]e against its laws.” Huntington v. Attrill, 146 U.S. 657, 667 (1892). From this definition, Justice Sotomayor distilled two principles. First, a penalty redresses a wrong to the public. Second, a penalty is intended to punish and to deter others from committing similar offenses, as opposed to compensating the victim. The Supreme Court reasoned that the disgorgement sought by the SEC is a remedy for violations of public laws against the United States, as opposed to violations against the aggrieved individual. Furthermore, disgorgement is punitive because it is primarily intended to deter violations of the federal securities laws “by depriving violators of their ill-gotten gains.” The Supreme Court noted that in many instances the disgorged funds do not compensate the victims, such as instances when it is not feasible to identify them. Based on the two principles distilled from the definition of penalty, the Supreme Court concluded that SEC sought disgorgement falls within the five-year statute of limitations in 28 U.S.C. § 2462 because disgorgement goes beyond compensation and is intended to punish wrongdoers for violating public laws. Kokesh v. SEC, No. 16-529, 2017 WL 2407471 (2017).

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