United States Supreme Court Limits the SEC's Ability to Obtain Disgorgement

This morning, a unanimous United States Supreme Court issued the eagerly anticipated ruling in Kokesh v. Securities and Exchange Commission, and in doing so, severely limited the SEC's ability to seek disgorgement for conduct that goes back beyond five years. Now, the law of the land is that the SEC may not seek disgorgement for conduct that goes back beyond five years.

The SEC has long used disgorgement as a basis for securing the return of "ill-gotten gains" or improperly obtained profits earned by wrongdoers as a result of federal securities laws violations, including in instances where the conduct went back beyond five years. The SEC's position was that disgorgement is "equitable" remedy, not subject to the applicable statute of limitations in 28 U.S.C. §2462, which states: any “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 [. . .].” Unlike restitution, which focuses on making the victims of a crime whole, the SEC's claim had been that disgorgement's focus is on depriving the wrongdoer of gains it would not have had but for the illegal conduct.  Therefore, the SEC claimed, disgorgement is not intended to punish, but rather to return the wrongdoer to the status quo before the violation. This morning, the Supreme Court unanimously rejected that view, noting that "because disgorgement orders 'go beyond compensation [in many cases, the funds are not returned to the harmed individuals and often times actually exceed the amount the defendant actually was enriched], are intended to punish, and label defendants wrongdoers' as a consequence of violating public laws, Gabelli, 568 U. S., at 451– 452, they represent a penalty and thus fall within the 5-year statute of limitations of §2462." 

We will be issuing an alert on this in short order. In addition to cases currently in litigation or settlement discussions, this will likely have a significant impact on SEC enforcement investigations. The SEC staff will likely feel compelled to move investigations along quicker and seek agreements tolling the statute of limitations. The SEC may look to use this case, in the near term, as a part of its cooperation credit assessment, which will need to be considered when adopting a strategy in responding to an SEC investigation.