For the second time since 2013, the U.S. Supreme Court made a decision
that effectively limits the Securities and Exchange Commission's power
to bring a lawsuit against financial firms or individuals. In the prior
case, Gabelli v. SEC, the court held that "the five-year statute
of limitations for the SEC to bring a civil suit seeking penalties for
securities fraud against investment advisers begins to tick when the fraud
occurs, and not when it is discovered."
Here, in a 9-0 ruling, the Court found the SEC's "disgorgement"
remedy is also subject to the five-year statute of limitations. The SEC
uses disgorgement as a way to recover fraudulent gains from financial
firms that have violated securities law. Initially, a judge ordered Charles
Kokesh to pay $2.4 million in penalties plus $34.9 million in disgorgement
of illegal profits after the SEC sued the New Mexico-based investment
advisor in 2009.
Justice Sonia Sotomayor writes, "it has become clear that deterrence
is not simply an incidental effect of disgorgement. Rather, courts have
consistently held that '[t]he primary purpose of disgorgement orders
is to deter violations of the securities laws by depriving violators of
their ill-gotten gains.' SEC v. Fischbach Corp., 133 F. 3d 170, 175
The SEC brought an action alleging Kokesh concealed the misappropriation
of $34.9 million from four business development companies beginning in
1995. Although this continued into 2009, approximately $29.9 million was
gained from actions before 2004 and therefore outside the statute of limitation.
The case was brought before the Court of Appeals for the 10th District
Court in Denver; the court agreed that disgorgement is not a penalty and
further found that disgorgement is not a forfeiture, thereby concluding
that the time bar in §2462 does not apply to SEC disgorgement claims.
An attorney for Kokesh argued that this case did represent a punishment
and should fall within the statute.
In writing the opinion of the Court, Justice Sotomayor states, "In
its current form, §2462 establishes a 5-year limitations period for
'an action, suit or proceeding for the enforcement of any civil fine,
penalty, or forfeiture.' This limitations period applies here if SEC
disgorgement qualifies as either a fine, penalty, or forfeiture."
The Court concluded that "disgorgement, as it is applied in SEC enforcement
proceedings, operates as a penalty under §2462. We hold that SEC
disgorgement constitutes a penalty.
Accordingly, any claim for disgorgement in a SEC enforcement action must
be commenced within five years from the date the claim accrued."
The Supreme Court's ruling does prevent the SEC from enforcing their
remedy but will increase pressure to move their investigations toward
a quicker legal resolution.