Disgorgement, one of the SEC’s primary remedies, was the focus of intense debate during arguments before the Supreme Court in Kokesh v. SEC, No. 16-529 (S.Ct.) earlier this week. At issue was whether the remedy is subject to the five year statute of limitations in Section 2462 of 28 U.S.C. If the remedy is time limited it would force the SEC to speed the initiation of its enforcement actions and preclude the agency from reaching back in time for years to increase the amount of money and the corresponding prejudgment interest it usually seeks in enforcement actions. Ultimately the statute would delimit the liability of those charged in SEC enforcement actions.
The facts of the case highlight the potential impact of applying the statute of limitations to SEC disgorgement claims. Petitioner Charles Kokesh owned and controlled two registered investment advisers. In its enforcement action the SEC claimed that Mr. Kokesh improperly withdrew sums of investor money from the two advisers over a period of years. In the District Court Mr. Kokesh was found liable by a jury. The Court ordered him to pay, at the request of the Commission, $34.9 million in disgorgement (much of which was outside the five year time limit) and prejudgment interest. The SEC calculated the amount of disgorgement by reaching back in time over a long period of years. The Court also imposed a penalty of $2.3 million. The amount of that penalty was limited by the same five year statute of limitations at issue in this case – the Supreme Court previously held that the statute applied to SEC penalties despite contrary arguments by the agency. The Tenth Circuit Court of Appeals affirmed the decision of the District Court.
Throughout the oral argument the Justices questioned the predicate for the SEC’s disgorgement claims, probing its contention that the remedy was beyond the reach of the statute of limitations. Much of the debate focused on how to categorize the remedy. Petitioner, citing the language of the statute which specifies that its five year time limit applies to any “civil fine, penalty, or forfeiture” sought by the Government, claimed that disgorgement fit squarely within the language of the statute. The imposition of the remedy takes money away from those found liable and gives it to the SEC, according to Petitioner. The SEC then decides if the money should go to the U.S. Treasury or to repay those who may have suffered losses. Viewed in this context, the remedy is little more than a forfeiture Petitioner claimed and there is no doubt that such payments are penalties within the meaning of the statute. Newly seated Justice Gorsuch, in a series of questions, clearly seemed to agree with this point.
The SEC disagreed. Disgorgement is an equitable remedy designed to deny those who have acted wrongfully “ill-gotten” gains. Stated differently, the remedy is designed to ensure that those who violate the law do not profit from their wrongful conduct. While the Commission has repeatedly advanced this justification for its disgorgement claims over the years, as Petitioner noted and the Court indicated at certain points, the agency has taken inconsistent positions on the nature of the remedy. For example, the SEC has repeatedly stated that it is a penalty for tax purposes and under the bankruptcy code. This is permissible, according to the SEC, because the same word can have different meanings in different contexts.
Throughout the argument the Justices returned to the question of the SEC’s authority for seeking and imposing the remedy. As Justice Alito noted “Well, this case puts us in a rather strange position, because . . . to decide . . . we need to understand what this thing is. . . [and] know what the authority for it is . . .” Yet there is no express, statutory authority for the imposition of disgorgement. Rather, the SEC appears to have implied the remedy from the inherent equitable powers of the federal courts decades ago. The SEC has also failed to offer any guidance on the application of the remedy, as the response to a question from Justice Kagan made clear.
On the other hand, if the agency had not devised the remedy and Congress had passed a statute giving the SEC the authority to seek disgorgement, one would expect that a statute of limitations would have been imposed, Chief Justice Roberts noted. Indeed, “it was utterly repugnant to the genius of our laws to have a penalty remedy without limit . . .” the Chief Justice noted, citing the Chief Justice Marshall, the first Chief Justice of the Court. A decision in the case is expected by the end of the Court Term on June 30, 2017.