The United States Supreme Court ruled last week that the Securities and Exchange Commission may only commence enforcement actions seeking disgorgement within five years after the date of the alleged wrongdoing.

The Court grounded its decision on its prior determination in 2013 that enforcement actions brought by the SEC seeking civil penalties are also subject to a five-year statute of limitations. (Click here to access the Court’s decision in Gabelli v. Securities and Exchange Commission.)

According to the Court, disgorgement is a form of civil penalty subject to an applicable catch-all federal statute of limitations that “finds its roots in a law enacted nearly two centuries ago.” This law establishes a five-year statute of limitations for “an action, suit or proceeding for the enforcement of any civil fine, penalty or forfeiture.” (Click here to access 28 USC §2462.)

In an unanimous ruling, the Court found that SEC disgorgement is a form of penalty because it is imposed by courts (1) as a result of violating public laws and (2) for punitive purposes. In reaching this conclusion, the Court rejected the SEC’s view that disgorgement is remedial and not punitive. The Court said this is the case because, among other reasons, SEC disgorgement is sometimes “ordered without consideration of a defendant’s expenses that the reduced the amount of illegal profit.”

The Court issued its decision in an appeal of a disgorgement award assessed against Charles Kokesh. Mr. Kokesh was accused by the SEC in 2009 of misappropriating US $34.9 million in connection with two investment adviser firms he operated from 1995 to 2009. After a jury found that Mr. Kokesh violated applicable law, the federal trial court assessed a disgorgement judgment of US $34.9 million of which US $29.9 million was attributable to violations outside the limitations period. A federal court of appeals upheld the decision of the trial court.

Separately, the Attorney General of the United States prohibited the US Department of Justice from including payments to non-governmental third parties unconnected to the alleged harm as part of any settlement to federal charges of wrongdoing.

Legal Weeds: Although the US Supreme Court in its Kokesh decision and in 2013 explicitly addressed enforcement actions seeking civil penalties and disgorgement brought by the SEC, the logic of the decisions should equally apply to enforcement actions brought by the Commodity Futures Trading Commission and other federal regulatory agencies that do not have their own distinct statutes of limitations. As the Court wrote in its Kokesh opinion (quoting from one of its own prior opinions), statutes of limitations “se[t] a fixed date when exposure to the specified Government enforcement efforts end[d]… Such limits are vital to the welfare of society and rest on the principle that even wrongdoers are entitled to assume that their sins may be forgotten.”