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Supreme Court Disgorges SEC

June 5, 2017

by Howard Haykin


Court ruling is victory for Wall Street firms.


The Supreme Court dealt a body blow to the SEC’s enforcement powers. In a unanimous 9-0 ruling (!!) on Monday, the High Court ruled that the Agency’s recovery method - disgorgement – is subject to a 5-year statute of limitations. Back in 2013, the Supreme Court ruled that civil monetary penalties are subject to a 5-year time bar.


The court decision was issued in the SEC’s case against former RIA Charles Kokesh.


KOKESH V. SEC.    In 2009, the SEC filed suit against Charles Kokesh, a New Mexico investment adviser, on charges he misappropriated funds from 4 companies. A jury convicted Kokesh in 2014, and the federal judge ordered him to pay $55.4 million – including $34.9 million in disgorgement.


Kokesh appealed the decision, arguing that disgorgement for activities that occurred between 1995 and 2006 should be subject to the same 5-year statute of limitations that applies to civil fines, penalties or forfeitures under Section 2462 of the U.S. code. If such a limitation was applied, disgorgement in this case would only amount to about $5 million – not $34.9 million.


The SEC countered that disgorgement, which targets the "ill-gotten gain" reaped through a securities-law infraction, does not fall under the 5-year statute of limitations because it is "remedial" rather than "punitive."  [See, 4/18/17]


SUPREME COURT OPINION.    Justice Sonia Sotomayor, who wrote the opinion for the Court, said that the SEC disgorgement process "bears all the hallmarks of penalty: It is imposed as a consequence of violating a public law and is intended to deter, not to compensate." On that basis, the amount of disgorgement must be bound by the 5-year statute of limitations that already applies to "any civil fine, penalty or forfeiture." 


[Click here for Supreme Court Opinion.]