When the SEC goes after an individual or entity for securities violations, it has long had the ability to pursue civil fines as well as disgorgements. The civil fines are intended to penalize an alleged offender’s wrongdoing while the disgorgement is ostensibly intended to retrieve the ill-gotten gains of that wrongdoing. Of course both act to penalize the defendant in an SEC enforcement action, and the leverage that the SEC has in waiving the threat of huge disgorgement extractions is one of the chief ways in which the agency pressures defendants to reach settlements. In past years, disgorgement has dwarfed civil fines as a weapon in the SEC’s arsenal, with the SEC pulling in $3 billion in disgorgement collections in 2015 alone compared to $1.2 billion in fines, and the total amount of disgorgement collections growing by 60% since 2011. One reason that the SEC has been able to pull in so much in disgorgement collections is that it has essentially been taking the position that it can go back in time as far as it wants in pursuing such funds, way beyond the five-year statute of limitations that applies to the enforcement of civil fines and forfeitures. The Supreme Court, however, has just granted certiorari in SEC v. Kokesh, No. 15-2087, 834 F.3d 1158 (10th Cir. 2016) on a circuit split over this very issue and thus should soon rule on whether disgorgements are indeed subject to the five-year statute of limitations.
The 14-Year Case Against Charles Kokesh
The SEC brought an enforcement action against Charles Kokesh in 2009 for misappropriating funds from four SEC-registered funds he oversaw from the years 1995 to 2006 to pay bonuses to himself and others as well as office expenses. A New Mexico jury sided with the SEC at trial, and the federal district court imposed $2.4 million in civil penalties against Kokesh along with $34.9 million in disgorgement plus $18.1 million in prejudgment interest.
On appeal, Kokesh argued that, by bringing an action in 2009 for actions going back 14 years to 1995, the SEC (and, in turn, the court) was in violation of 28 U.S. Code § 2462, which provides that, “…an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued….” on the grounds that the $34.9 million represented a penalty and/or a forfeiture.
The Tenth Circuit disagreed with Kokesh and upheld the disgorgement, ruling that disgorgement is not a penalty because it is a remedial effort that leaves a wrongdoer in the same position as he would have been had he not committed an offense. It also held that disgorgement was different from a forfeiture, because the purpose of forfeiture is to “take tangible property used in criminal activity” while disgorgement is, again, a non-punitive remedial measure.
Other Circuits Disagree on Disgorgement
The view that there is a meaningful difference between forfeiture and disgorgement is one on which other circuits have gone the opposite way. The First, Eleventh, and DC circuits have all held that disgorgement and forfeiture would appear to be the same concept or at least related enough such that the SEC’s disgorgement efforts should be limited to the five years prior to the date the enforcement action was initiated. The Eleventh Circuit in SEC v. Graham, No. 14-13562 (11th Cir. May 26, 2016) in particular held that there was “no meaningful difference in the definitions of disgorgement and forfeiture” as both relate to the relinquishment of property related to criminal activity to the government.
How the Supreme Court Can Help Stabilize the Situation
By taking up the circuit split, the Supreme Court can at least provide a national uniformity on the question of whether disgorgement is subject to the statute of limitations such that defendants in one part of the country are treated similarly under federal law as those in another. Had Kokesh been operating in the First or Eleventh Circuit, he would be facing only the $2.4 million penalty relative to the time between 2004 and 2006 and whatever fraction of the disgorgement related to those two years, as opposed to $53 million in disgorgement related to all 11 years included in the SEC’s enforcement action.
It is a longstanding principle of both criminal and civil law in this country and throughout much of the world that statutes of limitations are in place so that we can conduct our lives and work without being constantly worried that some mistake far in our past (or in the past of a company we are doing business with or are considering acquiring) will arise and result in legal problems now or in the distant future. Under the SEC’s current thinking and the Tenth Circuit’s approach, the SEC can conceivably seek massive disgorgement and interest collections many decades in the past, which has the potential to disrupt an individual’s or entity’s financial picture indefinitely. Hopefully, the Supreme Court will soon bring clarity and sense to this matter by taking the common sense approach that disgorgements are indeed subject to a five-year statute of limitations.