Kokesh v SEC – Disgorgement and the Statute of Limitations

By Tegan Valentine

On Monday June 5, 2017 the U.S. Supreme Court issued its ruling on Kokesh v. SEC. In Kokesh the Court was asked to consider whether disgorgement should be held to the standards set out in the United State’s federal statute of limitations law. Ultimately, the Court determined that a five-year statute of limitations will be imposed on any claim for disgorgement in a Securities and Exchange Commission (SEC) enforcement action.

The ruling in Kokesh stems from a 2009 enforcement action against Charles Kokesh. Between 1995 and 2009 Kokesh misappropriated approximately $45 million from four SEC-registered business development companies. In the process, Kokesh received ill-gotten gains totaling $34.9 million. Initially, the SEC sought monetary civil penalties and disgorgement and an injunction barring Kokesh from future violations. The SEC was successful at the district court level, which ordered the defendant to pay an initial $2.4 million civil penalty, in addition to nearly $35 million in disgorgement, and more than $18 million in prejudgement interest. Kokesh appealed the district court’s ruling on the grounds that the disgorgement should be set aside. Kokesh argued that the disgorgement was tied to actions that had occurred more than five-years previously, thus banning them under the statute of limitations. Kokesh’s claim was unsuccessful at the 10th Circuit, which affirmed the lower court’s ruling that disgorgement was not a penalty and, thus, not held to the statute of limitations.

28 U.S.C. § 2462 or the Time for Commending Proceedings Code (the ‘Code’) imposes a 5-year statute of limitations to any “action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise”. To be held to the statute of limitations, a sanction must meet the definition of ‘penalty’ as set out under the Code. In Kokesh, the court indicated that a ‘penalty’ is defined by a two-part test:

  1. Whether a sanction represented a penalty turns in part on ‘whether the wrong sought to be redressed is a wrong to the public, rather than a wrong to an individual; and
  2. A pecuniary sanction operates as a penalty only if it is sought ‘for the purpose of punishment, and to deter others from offending in like manner’ – as opposed to compensating a victim for his loss.

In Kokesh, the Court determined that SEC disgorgement meets both prongs of the test as the SEC sought disgorgement in the public interest, and as a means to punish the offender and deter future conduct.

The short-term impact of the unanimous ruling in Kokesh is clear – the majority of the funds sought by the SEC were obtained outside of the 5-year statute of limitations period. As a result, Kokesh will likely retain all illicit funds obtained outside of the 5-year statute period, which totals approximately $29.9 million. The long-term legacy of the case remains to be seen. Disgorgement remains one of the primary enforcement tools at the SEC’s disposal (indeed, until 1990 the SEC was not authorized to seek civil penalties). As a result, the SEC (and other government enforcement agencies) will be forced to alter their approach as it comes to issuing sanctions against wrongdoers.

Tegan Valentine is an incoming 3L student at The University of Toronto’s Faculty of Law.