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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US Treasury, State, and Commerce - Monetary Penalty Increases Last Two Years

The Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015 (the "Act") required federal agencies to adjust their maximum allowable civil monetary penalties ("CMPs") annually.  The initial "catch-up" adjustments occurred in 2016; and now the first annual adjustments have been finalized by the US Department of Commerce's Bureau of Industry and Security ("BIS"), the US Treasury Department's Office of Foreign Assets Control ("OFAC"), and the US Department of State's Directorate of Defense Trade Control ("DDTC").  The chart below provides a reference for the original, 2016 "catch-up", and 2017 annual adjustment penalty amounts. 

BIS Revises Guidance Regarding EAR Enforcement Cases

On Wednesday, June 22 the Department of Commerce, Bureau of Industry and Security (BIS) published (81 FR 40499-40511) updated guidance (found in Supplement No. 1 to part 766) regarding violations of the Export Administration Regulations (EAR). 

The guidance amends the EAR to make civil penalty decisions more transparent and aligns them with the Treasury Department's Office of Foreign Assets Control (OFAC). 

OFAC criminal penalties can reach 20 years imprisonment and $1 million per violation.  OFAC civil penalties use the transaction value as the starting point and can reach $250,000 or twice the value of the transaction, whichever is greater (Economic Sanctions Enforcement Guidelines). 

The updated guidance does not apply to alleged violations under part 760 of the EAR - Restrictive Trade Practices and Boycotts or to cases that are pending prior to July 22, 2016. 

The effective date of the final rule change is July 22, 2016. 

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