Kokesh v. Sec. & Exch. Comm'n
198 L. Ed. 2d 86, 137 S. Ct. 1635, 85 U.S.L.W. 4308 (2017)
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Rule of Law:
A claim for disgorgement in a Securities and Exchange Commission (SEC) enforcement action is subject to the five-year statute of limitations in 28 U.S.C. § 2462 because disgorgement, in this context, constitutes a 'penalty.'
Facts:
- Charles Kokesh owned and controlled two investment-adviser firms.
- Between 1995 and 2009, Kokesh, through his firms, misappropriated approximately $34.9 million from business-development companies that his firms advised.
- Kokesh used his control of the companies to cause them to pay his firms fees for services they did not provide.
- To conceal the misappropriation, Kokesh caused the filing of false and misleading reports and proxy statements with the SEC.
Procedural Posture:
- In late 2009, the SEC brought an enforcement action against Charles Kokesh in the U.S. District Court for the District of New Mexico.
- A jury found Kokesh liable for violating multiple federal securities laws.
- The District Court limited the SEC's claim for civil penalties to conduct within the five-year statute of limitations of § 2462.
- However, the District Court held that the statute of limitations did not apply to disgorgement, ordering Kokesh to disgorge the full $34.9 million, much of which was from conduct outside the five-year period.
- Kokesh appealed to the U.S. Court of Appeals for the Tenth Circuit.
- The Tenth Circuit affirmed, holding that disgorgement is neither a 'penalty' nor a 'forfeiture' under § 2462 and is therefore not subject to the five-year statute of limitations.
- The U.S. Supreme Court granted certiorari to resolve a circuit split on the issue.
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Issue:
Does the five-year statute of limitations set forth in 28 U.S.C. § 2462, which governs actions for the enforcement of any 'civil fine, penalty, or forfeiture,' apply to claims for disgorgement sought by the Securities and Exchange Commission?
Opinions:
Majority - Justice Sotomayor
Yes. The five-year statute of limitations under § 2462 applies to SEC disgorgement claims because such disgorgement constitutes a 'penalty.' A sanction is considered a penalty if it is imposed for a wrong against the public and serves punitive purposes, such as deterrence, rather than solely compensatory ones. First, SEC disgorgement actions redress a wrong to the public at large, not to private individuals, as the SEC acts in the public interest to protect market integrity. Second, SEC disgorgement is imposed for punitive purposes, with its primary goal being to deter future violations of securities laws, which is a traditional aim of punishment. Third, the remedy is not purely compensatory, as the disgorged funds are paid to the court and may be sent to the U.S. Treasury rather than being returned to specific victims. Because disgorgement in this context is not solely remedial and serves deterrent purposes, it qualifies as a penalty subject to the five-year limitations period.
Analysis:
This unanimous decision resolves a circuit split and imposes a significant temporal limitation on the SEC's enforcement power. By classifying disgorgement as a 'penalty,' the Court forces the SEC to bring enforcement actions seeking this remedy within five years of the underlying violation. This holding curtails the SEC's ability to recover ill-gotten gains from older fraudulent schemes, potentially reducing the total amount recoverable in some cases. The ruling also clarifies the legal character of disgorgement as punitive, which may influence how this remedy is viewed and applied in other areas of law.
