Supreme Court Decision limits SEC Disgorgement Powers

The Supreme Court ruled that the Securities and Exchange Commission’s power to require the disgorgement of illegally obtained profits can only be applied to funds obtained up to five years before the SEC files its claim. SIFMA supported the plaintiff in an amicus brief, calling on the court to limit the SEC’s powers to make enforcement more certain and predictable. Read SIFMA’s amicus brief.

The U.S. Supreme Court had agreed to review whether the U.S. Securities and Exchange Commission is subject to time limits when seeking disgorgement of ill-gotten gains, taking up a New Mexico investment adviser’s appeal of an issue that has split the state circuit courts.  The Supreme Court permitted investment adviser Charles R. Kokesh’s petition over a Tenth Circuit decision finding the five-year statute of limitations on civil penalties doesn’t apply to an order requiring Kokesh to disgorge $35 million in interest.

Both Kokesh and the SEC itself encouraged the Supreme Court to consider the issue. A decision in the case will resolve a split created last May by the Eleventh Circuit, which  ruled that the agency can’t seek disgorgement for conduct older than five years.

Although the SEC and Kokesh differ on whether the statute applies to disgorgement, the agency was supportive of Kokesh’s petition. In a response brief filed with the Supreme Court in mid-December, the SEC said that “the question presented is important and warrants resolution by this court.”

The agency added that the Eleventh Circuit’s conflicting opinion “stands as a significant obstacle to national uniformity in administration of the securities laws.” That opinion prevents the agency from seeking disgorgement in cases filed in Florida, Alabama and Georgia.

The agency won a jury verdict against Kokesh in 2014, and U.S. Magistrate Judge Stephan M. Vidmar signed off on a final judgment that ordered Kokesh to disgorge nearly $35 million, plus more than $18 million in prejudgment interest, and pay a $2.4 million penalty. The penalty applied only to Kokesh’s conduct in the five years before the SEC filed the suit, while the disgorgement constituted all of Kokesh’s ill-gotten gains from the entirety of the scheme.

Kokesh appealed to the Tenth Circuit, arguing he shouldn’t have been ordered to cough up money he was paid prior to 2004 because of the five-year statute of limitations. The Tenth Circuit rejected Kokesh’s arguments in August 2016, finding neither his disgorgement nor an injunction warning him not to violate securities laws to be penalties because neither remedy was a punishment.

In so finding, the Tenth Circuit sided with the D.C. Circuit and the First Circuit, which had also said the two types of recovery are different. But the decision widened a gulf with the Eleventh Circuit, which ruled in May that the SEC couldn’t seek disgorgement from former real estate executives alleged to have run a $300 million Ponzi scheme. While the Eleventh Circuit agreed the statute of limitations doesn’t cover injunctions, it found disgorgement is effectively the same as “forfeiture,” which is also limited to five years.

In a short response brief, the SEC disputed that the statute of limitations applies to disgorgement but agreed with Kokesh that the Supreme Court should take up the issue to resolve the split, which has prevented the agency from collecting disgorgement for conduct more than five years old in Florida, Alabama and Georgia.

The case also garnered support from the U.S. Chamber of Commerce, which said in a November amicus brief that extended liability periods “hamper business and investment activity” and that “long-belated enforcement actions are less likely to protect or help market participants.”