Supreme Court Rules on SEC Disgorgement Statute of Limitations
The U.S. Supreme Court unanimously voted to reverse a Tenth Circuit ruling and held that the 5-year statute of limitations applies to punitive disgorgement sanctions collected by the Securities and Exchange Commission. Justice Sonia Sotomayor delivered the opinion of the court.
The case involved financial advisor Charles Kokesh who was found guilty of securities fraud in November 2014 for misappropriating and misusing tens of millions of dollars at four business development companies he controlled from at least 1995 through July 2007. He was ordered to pay disgorgement of approximately $35 million, plus an additional $18 million in prejudgment interest, and a $2.4 million civil penalty.
The Tenth Circuit ruling, from which Kokesh appealed, held that disgorgement is traditionally treated as an “equitable” remedy that it is “remedial” in nature and not a “penalty.” The D.C. and First Circuit Courts also agreed that disgorgement was not subject to the five-year statute of limitations.
However, the Eleventh Circuit held that the five-year limitations period applies because disgorgement is a considered a “forfeiture.” Due to the split in the circuit courts’ rulings, the case was heard by the Supreme Court.
“SEC disgorgement bears all the hallmarks of a penalty: It is imposed as a consequence of violating a public law and it is intended to deter, not to compensate,” said Justice Sotomayor in the opinion. “The 5-year statute of limitations in §2462 therefore applies when the SEC seeks disgorgement.”
As previously reported by The DI Wire, had the 5-year statute of limitations been applied by the lower court, the SEC could only collect approximately $5 million in disgorgement for misconduct occurring on or after October 2004.
