Kokesh on Remand: Applying the Statute of Limitations
In Kokesh the Supreme Court rejected the SEC’s claim that disgorgement is equitable, concluding that as used in agency enforcement actions it is in fact a penalty. The Court also reserved the questions of whether the Commission is entitled to seek disgorgement since there is no statutory predicate for the remedy and if permitted, how it should be calculated. The Court then remanded the case for reconsideration. On remand the question was not either of those reserved by the High Court but rather what amount of disgorgement the investment adviser must pay. SEC v. Kokesh, No. 15-2087 (10th Cir. Decided March 5, 2018).
Charles Kokesh owned two Commission registered investment advisory firms. Each was the managing partner of, and provided investment advice to, several registered business development companies or BDCs. The contracts between the advisers and the BDCs prohibited payments by the BDCs to the advisers not specified in the contracts. Mr. Kokesh directed the treasurer for the advisers to take substantial sums from the BDCs for payments to him, others and to cover certain expenses. These items were not specified in the contracts. A 2000 amendment to the contracts, however, added a provision that permitted the BDCs to reimburse the salaries of the advisers’ controlling persons. It was approved using a misleading proxy.
Between 1995 and 2006 it is alleged in the SEC’s complaint, filed October 27, 2009, that $34.9 million was improperly taken from the BDCs. Following a jury verdict in favor of the SEC the district court imposed a penalty and disgorgement of the full $34.9 million. The question on remand, in view of the Supreme Court’s ruling, was how Section 2462 applies and what amount, if any, Mr. Kokesh must pay in disgorgement.
Under the statute a suit by the government “for a fine, penalty or forfeiture shall not be entertained unless commenced within five years from the date when the claim first accrued.” Defendant argued that the “first accrued” language means that the limitation period began as early and 1995 and no later than 2001. Under either approach the disgorgement claim is time barred. The SEC claimed, however, that a new limitation period began with each payment. Under this approach the disgorgement should include all payments after October 27, 2004 in view of the date on which the complaint was filed. That amount is $5,004,773.
In resolving the question of when the statute begins to run the Court focused on the phrase “first accrues” from the statute. In view of this language section 2462 “begins only once, when a claim first accrues.” (emphasis original). In view of these words the statute cannot reset each day because the concept of “first” would “have no operative” force, the Court found. Thus the application of the “statute-of-limitations issue in this case . . . turns on whether Defendant’s misappropriations of funds from the BDCs are properly viewed as a continuing violation or as a number of discrete wrongs,” the Court held.
In some instances a claim might well be viewed as one continuing violation. For example, where there is a claim for medical malpractice based on a course of negligent treatment, the cause of action stems from the continuous course of treatment. On the other hand, where the claim is for conversion it does not depend on a continuing course of conduct except perhaps to increase the amount of damages, the Court found.
In this case the “Defendant’s misconduct was not a continuing omission to act in compliance with a duty . . .” Here “the SEC’s claim did not depend on the cumulative nature of . . . the acts.” Rather, “the gist of Defendant’s misconduct was taking funds without proper authority, without consent.” Viewed in this context the misappropriations constituted “a series of repeated violations . . .” (internal quotations omitted).
The Court concluded by noting that “To hold that Defendant’s misappropriations constituted only one continuing violation would do much more than provide repose for ancient misdeeds; it would confer immunity for ongoing repeated misconduct. . . Defendant could take $100 a year for five years and then misappropriate tens of thousands without fear of liability. We cannot countenance such a result, nor do we think that a proper interpretation of §2462 requires us to.”