Source: https://wlflegalpulse.com/2017/06/07/supreme-court-observations-kokesh-v-securities-and-exchange-commission/
Timestamp: 2019-05-21 14:57:30
Document Index: 741957203

Matched Legal Cases: ['§ 2462', '§ 2462', '§ 2462', '§ 2462', '§ 2462', '§2462']

Supreme Court Observations: Kokesh v. Securities & Exchange Commission – The WLF Legal Pulse
Supreme Court Observations: Kokesh v. Securities & Exchange Commission
On June 7, 2017 June 8, 2017 By The WLF Legal PulseIn Securities/Corporate Governance, U.S. Supreme Court
In a unanimous June 5, 2017, opinion by Justice Sotomayor, however, the Supreme Court held that disgorgement imposed in SEC actions constitutes a penalty and, accordingly, that such suits are subject to the § 2462 limitations period. Kokesh v. SEC, 581 U.S. ___ (2017). [Editor’s Note: Washington Legal Foundation filed an amicus brief in the Court in support of the Petitioner].
The bulk of the decision is definitional in nature, seeking the meaning of the word “penalty” as used by § 2462. The Court concluded that disgorgement is a penalty for three reasons:
In cases brought by SEC, as opposed to those brought by private parties, disgorgement is intended to remedy a harm to the public at large rather than to recompense specific victims.
The primary purpose of SEC-initiated disgorgement proceedings is to deter securities fraud rather than to compensate injured parties.
The proceeds of SEC-initiated disgorgement proceedings often go to the government, as a result of which they operate as a penalty.
The Court’s analysis is not a particularly impressive example of legal reasoning. First, the Court’s three announced reasons for treating disgorgement as a penalty basically amount to repeating the point that disgorgement is not always compensatory. Yet, as it admitted, the proceeds of many disgorgement proceedings in fact are ultimately paid over to the victims of the fraud rather than the US Treasury. Second, the Court failed utterly to grapple with the considerable body of law—including important authorities such as the Restatement (Third) of Restitution and Unjust Enrichment—upon which the US Court of Appeals for the Tenth Circuit had relied in finding that disgorgement is not a penalty within the meaning of § 2462.
In addition, the Court’s opinion wholly ignored the much stronger argument that disgorgement in this context operates as a forfeiture, which would also subject such proceedings to § 2462. In the lower court, the Tenth Circuit had been forced to acknowledge that, as a matter of plain English, the two words “capture similar concepts.” Id. at 1165. It also acknowledged the Eleventh Circuit recently had concluded that disgorgement was a forfeiture within the meaning of § 2462. This approach to the problem thus offered a much more plausible solution.
Having said that, however, at least the Supreme Court reached the right result. SEC brings hundreds of cases a year in which it seeks disgorgement, many of which involve conduct running more than five years in the past. Because the Tenth Circuit decision in Kokesh allowed the SEC disgorgement action to reach conduct in that case that had occurred as much as 14 years before SEC filed suit, defendants in those hundreds of cases faced unlimited exposure for disgorgement.
As I pointed out in a previous WLF Legal Pulse blog post, that result would have offended “the basic policies behind statutes of limitation”:
Civil statutes of limitations such as those at issue in Kokesh are supported by precisely the same principle.
In Kokesh, the Supreme Court nodded in passing to this concern:
Statutes of limitations ‘se[t] a fixed date when exposure to the specified Government enforcement efforts en[d].’ Gabelli, 568 U. S., at 448. Such limits are ‘vital to the welfare of society’ and rest on the principle that ‘even wrongdoers are entitled to assume that their sins may be forgotten.’ Id. at 449.
But now we come to the wild card Kokesh introduces into the game. As I noted in that earlier blog post, “at least three justices [at oral argument] questioned whether SEC even has authority to seek disgorgement.” I predicted that that issue would not end up in the opinion, arguing that “[d]isgorgement has been around for a long time and, moreover, the issue was not briefed by any of the parties.”
Interestingly, however, Justice Sotomayor went out of her way to note that disgorgement is a relatively new penalty that was created by judicial fiat at SEC’s behest:
Initially, the only statutory remedy available to the SEC in an enforcement action was an injunction barring future violations of securities laws. … In the absence of statutory authorization for monetary remedies, the Commission urged courts to order disgorgement as an exercise of their ‘inherent equity power to grant relief ancillary to an injunction.’
And then came footnote 3, in which she noted that:
Nothing in this opinion should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings or on whether courts have properly applied disgorgement principles in this context. The sole question presented in this case is whether disgorgement, as applied in SEC enforcement actions, is subject to §2462’s limitations period.
That looks a lot like an open invitation for some future disgorgement defendant to challenge SEC’s authority to seek disgorgement.
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