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U.S. Supreme Court Holds That Disgorgement Claims Must Be Commenced Within Five Years Of The Date The Claim Accrued

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  • Posted on: Jun 7 2017

On June 5, 2017, the U.S. Supreme Court held that claims for disgorgement imposed as a sanction for violation of the federal securities laws must be commenced within five years of the date the claim accrues.  In doing so, the Court rejected the SEC’s argument that the five-year statute of limitations was not applicable to claims for disgorgement. The decision, written by Justice Sonia Sotomayor for a unanimous court, resolves a split among the circuits and provides clarity concerning the scope of potential liability for parties facing SEC liability.

The Court’s opinion in Kokesh v. Securities and Exchange Commission can be found here.


In 2009, the SEC brought an enforcement action in federal court against Charles Kokesh (“Kokesh”), a New Mexico-based investment adviser, alleging that between 1995 and 2006, Kokesh misappropriated $34.9 million from four development companies.  The SEC sought civil monetary penalties, disgorgement, and an injunction barring Kokesh from violating the securities laws in the future. After a 5-day trial, a jury found in favor of the Commission.

Thereafter, the SEC sought civil penalties for conduct that fell within and without the statute of limitations and disgorgement for conduct that fell outside the limitations period. In doing so, the SEC argued that disgorgement is an equitable remedy, not a “penalty” within the meaning of 28 U.S.C. § 2462, which provides that the “enforcement of any civil fine, penalty, or forfeiture” should be “commenced within five years from the date when the claim first occurred” and, therefore, no limitations period applied to the disgorgement remedy. Kokesh argued that disgorgement was barred under the five-year statute of limitations. The district court agreed with the SEC and ordered Kokesh to pay civil penalties of $2.4 million (representing “the amount of funds that [Kokesh] himself received during the limitations period”), plus $34.9 million in disgorgement of the ill-gotten gains (from conduct occurring “outside the limitations period”). (Internal quotation marks omitted.) Kokesh appealed the decision.

The Tenth Circuit affirmed.  In doing so, the court determined that disgorgement is not subject to the five-year statute of limitations in Section 2462, agreeing with the district court that disgorgement is not a penalty, and adding that disgorgement is not a forfeiture. Thereafter, Kokesh filed a petition for a writ of certiorari with the U.S. Supreme Court.

On January 13, 2017, the Supreme Court granted the cert. petition in order to resolve a split in the circuits on the issue. Although the 10th Circuit’s opinion comported with that of other courts of appeals (including the First Circuit and the District of Columbia Circuit), it conflicted with the 11th Circuit, which broke from its sister circuits in Securities and Exchange Commission v. Graham. In Graham, the court held that there is “no meaningful difference in the definitions of disgorgement and forfeiture,” adding that disgorgement can be “considered a subset of forfeiture.”

On April 18, the U.S. Supreme Court heard oral argument in the case. (Discussed here.)

The Court’s June 5, 2017 Opinion

In writing for the Court, Justice Sotomayor concluded that disgorgement “in the securities enforcement context is a ‘penalty’ within the meaning of Section 2462,” and, therefore, “disgorgement actions must be commenced within five years of the date the claim accrues.” In concluding that disgorgement is a penalty, Justice Sotomayor looked at two factors. First, whether the payment had been imposed to redress a wrong to the public, or a wrong to an individual.  A penalty is imposed to redress the former, not the latter.  “This is because penal laws, strictly and properly, are those imposing punishment for an offense committed against the State.”  (Internal quotations omitted.)  Moreover, disgorgement is more like a penalty because, as applied by the courts, it does not necessarily compensate the victims; disgorged profits are paid to the district court, and it is “within the court’s discretion to determine how and to whom the money will be distributed.” (Citation and internal quotation marks omitted.) Second, whether the payment was imposed to deter future wrongdoing by depriving violators of their ill-gotten gains.

In deciding that disgorgement is a penalty, the Court rejected the SEC’s argument that disgorgement was remedial in nature, intended to restore the status quo. Justice Sotomayor noted that sometimes disgorgement exceeds the ill-gotten gains, while at other times (as was the case in Kokesh) disgorgement is ordered “without consideration of a defendant’s expenses” which “reduce[ ] the amount of illegal profit.” In such cases, said Justice Sotomayor, disgorgement leaves defendants in a worse position than they were before the securities violation: “it is not clear that disgorgement, as courts have applied it in the SEC enforcement context, simply returns the defendant to the place he would have occupied had he not broken the law.”

Therefore, “[b]ecause disgorgement orders go beyond compensation, are intended to punish, and label defendants wrongdoers as a consequence of violating public laws, they represent a penalty and thus fall within the 5-year statute of limitations of §2462.” (Internal quotation marks and citation omitted.)


As news outlets noted the Court’s decision represents “a major victory for Wall Street firms,” because it curbs the power of the SEC to seek disgorgement in the “enforcement process.” (Here and here.) Indeed, defendants in SEC proceedings (and arguably other agency proceedings, such as those before the CFTC) will no longer have to litigate issues relating to conduct that exceeds the five-year statute of limitations. In some cases, that would mean disgorgement is a non-issue altogether.

Moreover, aside from the “certainty and predictability” (here) that defendants will have in enforcement proceedings, the Court laid the groundwork in a footnote for a larger question to be resolved on another day: whether the courts should be ordering disgorgement in enforcement actions at all. In that regard Justice Sotomayor cautioned: “Nothing in this opinion should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings or on whether courts have properly applied disgorgement principles in this context.”

Finally, since disgorgement is a penalty, it raises the question whether the SEC will seek disgorgement on top of other penalties generally available to the Commission. The logic of the decision suggests that the SEC will not do so.


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