Since the 1970s, courts have regularly ordered disgorgement of ill-gotten gains in SEC enforcement proceedings. According to the SEC, this was done as a means to both “deprive . . . defendants of their profits in order to remove any monetary reward for violating” securities laws and “protect the investing public by providing an effective deterrent to future violations.” Disgorgement has been one of the SEC’s most powerful tools in recent years. Yesterday, the Supreme Court issued an opinion that significantly limits the SEC’s ability to disgorge ill-gotten gains.
The question before the Supreme Court in Kosesh v. SEC was whether disgorgement, as it has been used by the SEC, constitutes a “penalty.” Under federal law, a 5-year statute of limitations applies to any “action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise.” The SEC has long argued that disgorgement does not constitute a “penalty” and, therefore, is not subject to a 5-year statute of limitations. The Supreme Court unanimously rejected the SEC’s position by holding that disgorgement constitutes a “penalty.” As a result, the SEC will be precluded from collecting ill-gotten gains obtained by the defendant more than five years before the date on which the SEC files its complaint.
In the Koskesh case, he Supreme Court’s decision means that the defendant may retain $29.9 million of the $34.9 million of the allegedly ill-gotten gains because that amount was received outside of the 5-year state of limitations. The Kokesh decision is also likely to have a significant long-term impact on SEC enforcement proceedings by reducing the leverage the SEC can apply while negotiating settlements.