Source: https://www.kkwc.com/publications/supreme-court-limits-secs-recovery-disgorgement-claims/
Timestamp: 2019-04-19 08:31:53+00:00

Document:
On June 5, 2017, the U.S. Supreme Court rendered a decision of significant consequence to securities industry participants, holding that disgorgement claims under the federal securities laws are “penalties” under 28 U.S.C. § 2462, and therefore are subject to a 5-year statute of limitations. The Supreme Court’s unanimous decision in Kokesh v. Securities and Exchange Commission severely limits the SEC’s potential recovery on the disgorgement claims that are nearly always brought in connection with enforcement actions alleging violations of the securities laws. In enforcement cases involving sustained periods of misconduct, the SEC can now obtain disgorgement only over a period of five years, regardless of the amounts involved. The Supreme Court’s definition of SEC enforcement as a “penalty” may also have broader consequences, affecting, for example, whether insurers will cover such payments, as well as whether disgorgement payments can be counted as income tax deductions.
28 U.S.C. § 2462 is a federal statute that applies a 5-year statute of limitations to any “action, suit or proceeding” by the government “for the enforcement of any civil fine, penalty, or forfeiture[.]” The issue in Kokesh was whether § 2462 applies to a disgorgement judgment in the amount of $34.9 million plus prejudgment interest that had been assessed against the principal of two investment advisory firms that were the subject of an SEC enforcement action alleging violations of the securities laws from 1995 to 2009. In the damages phase of the trial, the government argued that disgorgement is not a “penalty” within the meaning of § 2462, such that the government could obtain disgorgement for acts and omissions taken throughout the entire 15-year period. The defendant Charles Kokesh argued, on the other hand, that the statutory 5-year limitations period precluded disgorgement for wrongdoing that occurred prior to October 27, 2004, five years prior to the date that the Commission filed its complaint against him. The district court sided with the SEC, holding that disgorgement is not a “penalty” under §2462. The Court assessed a disgorgement judgment of $34.9 million and $18.1 million of prejudgment interest, where $29.9 million of the judgment was attributable to violations outside the limitations period. On appeal to the U.S. Court of Appeals for the Tenth Circuit, the district court’s decision and judgment were affirmed.
The Supreme Court’s decision in Kokesh should provide some measure of comfort to investment managers and advisors who may be potentially subject to SEC disgorgement claims. The decision is of particular consequence to market participants in the Second Circuit, where at least two courts have recently held that § 2462 does not apply to disgorgement claims. See, e.g., SEC v. Ahmed, No. 3:15-CV-675 (JBA), 2016 WL 7197359, at *5 (D. Conn. Dec. 8, 2016); SEC v. Saltsman, No. 07-CV-4370 (N GG), 2016 WL 4136829, at *24-29 (E.D.N.Y. Aug. 2, 2016). It remains to be seen whether and to what extent the SEC will adjust its civil enforcement activities, e.g. by bringing cases earlier rather than first engaging in lengthy investigation, in the wake of this stricter limitations period.

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