In the case of Kokesh v. SEC, decided on June 5, a unanimous U.S. Supreme Court held that the 28 U.S.C. § 2462, which apples to “any action, suit or proceeding for the enforcement of any civil fine, penalty or forfeiture, pecuniary or otherwise,” also applies to Security Exchange Commission (SEC) actions alleging claims for disgorgement imposed as a sanction for violating a federal securities law. At issue is Sections 2462’s five-year statute of limitations. A few years ago, in Gabelli v. SEC, the U.S. Supreme Court held that Section 2462 applies when the SEC seeks statutory monetary penalties. Both decisions may have application to other federal agency enforcement actions where the governing statute does not contain a specific statute of limitations period.

In Kokesh, according to the Court, in 2009, the SEC brought an enforcement action against Charles Koresh, whose investment-adviser firms provided investment advice to business development companies. The SEC alleged that he violated several securities laws for which “disgorgement” was an appropriate remedy. At trial, the jury determined that Kokesh misappropriated $34.9 million, and the trial court agreed that a disgorgement judgment in the amount of $34.9 million was appropriate (as well as a civil penalty and prejudgment interest). $29.9 million of the disgorgement judgment resulted from violations outside of the five-year limitations period. However, the Court agreed with the SEC “that disgorgement is not a ‘penalty” within the meaning of § 2462, no limitations period applied.”

On appeal to the U.S. Supreme Court, Kokesh argued that the disgorgement action was subject to Section 2462’s five-year statute of limitations, and the Court agreed, reversing the U.S. Court of Appeals of the Tenth Circuit. The Court held that: (a) the SEC disgorgement action was a “penalty;” (b) triggering Section 2462; and (c) any claim for disgorgement in an SEC enforcement action must be commenced within five years of the date the claim accrued.

The Court confirmed that a “penalty” is a “punishment, whether corporal or pecuniary, imposed and enforced by the State, for a crime or offen[s]e against its laws.” The Court first noted that “whether a sanction represents a penalty turns in part on ‘whether the wrong sought to be redressed is a wrong to the public, or a wrong to the individual.'” Next, it confirmed that “a pecuniary sanction operates as a penalty only if it is sought ‘for the purpose of punishment, and to deter others from offending in like manner’—as opposed to compensating a victim for his loss.” It then confirmed that “[a]pplication of the foregoing principles readily demonstrates that SEC disgorgement constitutes a penalty within the meaning of §2462” because the SEC was acting “in the public interest, to remedy harm to the public at large, rather than standing in the shoes of particular injured parties.” And, “discouragement profits are paid to the district court and it is ‘within the court’s discretion to determine how and to whom the money will be distributed.”

The Court reversed the judgment of the Court of Appeals. Not only is the entire disgorgement award jeopardized by the Supreme Court’s ruling ,but the prejudgment interest award as well.