US Supreme Court limits the SEC to 5-year disgorgement remedy

On Monday, June 5th, the U.S. Supreme Court, in a 9-0 ruling (Kokesh v. SEC), limited the Securities and Exchange Commission's ability to obtain profits from a defendant.  The ruling found that the SEC's "disgorgement" remedy is subject to a five-year statute of limitations.  In 2013, the Supreme Court also ruled (Gabelli v. SEC) that civil monetary penalties are subject to a five-year limitation.


The SEC brought an enforcement action against Charles Kokesh in which they alleged he had violated various securities laws.  The allegation claimed Kokesh violated SEC laws by misappropriating $34.9 million from four businesses from 1995-2009.  As a result the SEC sought civil penalties and a $34.9 million disgorgement. 

A jury found that the defendant had in fact violated securities laws.  The District Court applied the 5-year limitation to the civil penalty, but found that the $34.9 million disgorgement was not a "penalty" and not subject to a five year statute of limitation.  The Tenth Circuit agreed with the District Court and held that disgorgement was neither a penalty nor a forfeiture.


Justice Sotomayer, writing for the unanimous Court said the following:

"Because SEC disgorgement operates as a penalty under §2462, any claim for disgorgement in an SEC enforcement action must be commenced within five years of the date the claim accured."; and

"The application of these principles here readily demonstrates that SEC disgorgement constitutes a penalty within the meaning of §2462.  First, SEC disgorgement is imposed by the courts as a consequence for violating public laws...Second, SEC disgorgement is imposed for punitive purposes."


The ruling provides a little more clarity for companies as to what disgorgement amounts they may have to pay if found guilty of violating a securities law.  As a result of this ruling, the SEC is likely to move more quickly to bring cases to a conclusion.      

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