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Supreme Court to Hear Financial Advisor’s Case Challenging Disgorgement Penalties Today

The U.S. Supreme Court will hear argument today in the case of financial advisor Charles Kokesh, which questions whether a 5-year statute of limitations applies to punitive disgorgement sanctions collected by the Securities and Exchange Commission.

A group of industry trade groups, as well as Dallas Mavericks owner and Shark Tank personality Mark Cuban, have filed amicus briefs with the court, detailing their opposition to the SEC imposing disgorgement years, and sometimes decades, after alleged misconduct has taken place.

In November 2014, a jury found Kokesh guilty of securities fraud 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 BDCs from which Kokesh allegedly misappropriated funds were Technology Funding Medical Partners I L.P., Technology Funding Partners III L.P., Technology Funding Venture Partners IV, and Technology Funding Venture Partners V. The funds raised money from 21,000 investors through public securities offerings and invested in private start-up companies that focused on technology, biotechnology, and medical diagnostics.

Kokesh argues that SEC enforcement actions seeking disgorgement are governed by Title 28 of U.S. code section 2462, which provides for a five-year limitations period. Had this statute of limitations been applied by the lower court, the SEC could only collect $5 million in disgorgement for misconduct occurring on or after October 2004.

The Tenth Circuit ruling, from which Kokesh appeals, 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 agree that disgorgement is 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 Supreme Court will decide if disgorgement sanctions fall within the 5-year statute of limitations.

Amicus briefs in support of Kokesh’s case were filed by Securities Industry and Financial Markets Association, American Investment Council, Chamber of Commerce of the United States of America, American Petroleum Institute, The Cato Institute, Washington Legal Foundation, The Independent Executor of the Will and Estate of Charles J. Wyly, Jr., Americans for Forfeiture Reform, and Mark Cuban.

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