28 U.S.C. § 2462

Changing the Game, Again: Supreme Court Could Limit SEC’s Authority to Seek Disgorgement

This week, the Supreme Court heard argument regarding whether the SEC’s actions to disgorge ill-gotten gains are subject to a five-year statute of limitations for “any civil fine, penalty, or forfeiture.”

The appeal stems from an SEC action alleging that between 1995 and 2006, Charles Kokesh, a New Mexico-based investment adviser, misappropriated a staggering $35 million from two investment advisory companies that he owned and controlled, squandering the money of tens of thousands of small investors. While Kokesh moved into a gated mansion and bought himself a personal polo court (complete with a stable of 50 horses), he allegedly concealed his massive ill-gotten earnings by distributing false proxy statements to investors and filing dozens of false reports with the Securities and Exchange Commission.

In 2009, the SEC brought a civil enforcement action against Kokesh in the District of New Mexico alleging violations of the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, and the Investment Company Act of 1940. The jury found violations of all three acts, and the district court ordered Kokesh to disgorge the $35 million he misappropriated (plus interest) and pay a $2.4 million civil monetary penalty for the “egregious” frauds he committed within the prior five years.  While the district court ordered disgorgement of all of Kokesh’s ill-gotten gains since 1995, the civil monetary penalty it imposed was constrained by the five-year statute of limitations found in 28 U.S.C. § 2462, which applies to claims throughout the U.S. Code for “any civil fine, penalty, or forfeiture.”

Kokesh agreed to pay the civil monetary penalty, but challenged the disgorgement order on appeal before the U.S. Court of Appeals for the Tenth Circuit. Although none of the statutes he was found to have violated have statutes of limitations of their own, Kokesh argued that the SEC’s claim for disgorgement was subject to the five-year limitations period codified in Section 2462.  The Tenth Circuit disagreed, and upheld the disgorgement order on the basis that disgorgement is not a “penalty” or “forfeiture,” as those terms are used in Section 2462.  Unlike a penalty, it found that “the disgorgement remedy does not inflict punishment,” but “leaves the wrongdoer in the position he would have occupied had there been no misconduct.”  The Tenth Circuit also held that disgorgement is different from a “forfeiture,” which it held is used in Section 2462 to narrowly refer to an in rem procedure to seize property regardless of whether the property-owner committed any wrongdoing or whether “the value of the property” had any “relation to any loss to others or gain to the owner.”

The U.S. Supreme Court granted certiorari to decide whether SEC civil enforcement actions seeking disgorgement of ill-gotten gains are subject to Section 2462’s five-year statute of limitations. In his petition for certiorari, Kokesh asked the Supreme Court to rein in the SEC’s increasing use of disgorgement following the Supreme Court’s 2013 decision, Gabelli v. SEC, 133 S. Ct. 1216. Gabelli shortened the limitations period available under Section 2462 by setting the accrual date on the date of the alleged violation, rather than the date of discovery.  (For a discussion on Gabelli and the circuit split it resolved, see here and here).

In a brief filed March 27, 2017, the SEC urged the Supreme Court to affirm the Tenth Circuit’s finding that wrongdoers should not get the benefit of Section 2462’s general five-year limitations period because disgorgement is neither a penalty nor a forfeiture.  Kokesh responded that the Tenth Circuit and the SEC’s view of “penalty” and “forfeiture” are artificially narrow, and disgorgement is a penalty and a forfeiture under Section 2462.  Kokesh’s view has support from the Eleventh Circuit, which decided in SEC v. Graham, 823 F.3d 1357 (11th Cir. 2016) that Section 2462 applies when the SEC seeks disgorgement.

The case has attracted considerable attention from industry-insiders. Amici curiae include Mark Cuban, who submitted a brief arguing that Congress never gave the SEC the authority to order “draconian remedies labeled ‘disgorgement’ that are unbounded by statutes of limitations.”  The Chamber of Commerce and American Petroleum Institute filed a joint amici brief,  in which they asked the Supreme Court to consider the effect its opinion will have on the authority of other government agencies, including the Environmental Protection Agency and Consumer Financial Protection Bureau, to order disgorgement for “long-past conduct that may have been acceptable at the time.”

When Kokesh came up for argument on Tuesday, April 18, it was one of the first cases argued before nine justices in over a year.  During oral argument, several of the justices appeared to reject the contentions of both parties regarding whether disgorgement is categorically a penalty or forfeiture.  Justice Kagan agreed with Justice Ginsburg that the better view may be to consider disgorgement a penalty (subject to a five-year statute of limitations) if the government keeps the proceeds, and a compensatory remedy (not subject to a statute of limitations) if the proceeds are distributed to the victims.  A majority or near-majority of the Bench also expressed discomfort at the fact that no statutory authority expressly authorizes courts to order disgorgement in SEC civil enforcement actions, and that the SEC has not promulgated any formal guidance explaining the circumstances under which it seeks disgorgement or its procedures for distributing the proceeds to victims.  Unable to identify any clear authority defining disgorgement as a penalty, forfeiture, or neither, the Court appeared receptive to Kokesh’s argument that SEC civil enforcement actions seeking disgorgement should be constrained by Section 2462.

A decision is expected by late June.

If the SEC Misses the SOL, It’s SOL (Sorry, Out of Luck) – District Court Holds Statute of Limitations Is Jurisdictional and Applies to SEC Disgorgement and Injunctive Relief Requests

The SEC suffered a blow very recently when Judge James Lawrence King of the U.S. District Court for the Southern District of Florida entered summary judgment  dismissing the entirety of its alleged Ponzi scheme case on statute of limitations grounds.  SEC v. Graham, 2014 WL 1891418 (S.D. Fla. May 12, 2014).  The court’s order is a significant application of last year’s Supreme Court decision in Gabelli v. SEC, 133 S. Ct. 1216 (2013), in that (i) it applies the applicable statute of limitations to sanctions that have usually been considered equitable, rather than punitive, in nature; and (ii) it holds that the applicable statute of limitations is a jurisdictional threshold on which the SEC bears the burden, not an affirmative defense on which the defendant bears the burden.

In Graham, the SEC alleged that five defendants defrauded nearly 1,400 investors of more than $300 million by marketing unregistered securities as real estate investments and guaranteeing an immediate 15% profit and future rental revenue on certain resort properties.  According to the SEC, the defendants were using the new deposits to pay earlier investors in a classic Ponzi-scheme.  After the defendants abandoned their efforts with the collapse of the real estate and credit markets in 2007, the SEC embarked on a seven-year investigation, and ultimately brought suit in January of 2013.  The SEC alleged five counts of violations of federal securities laws, and sought not only civil penalties but also injunctive relief and disgorgement of all ill-gotten gains.  The defendants moved for summary judgment on the ground that the five-year statute of limitations under 28 U.S.C. § 2462 time-barred all of the SEC’s claims.  Section 2462 states, “Except as otherwise provided by Act of Congress, 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 ….”

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