On June 5, 2017, the United States Supreme Court unanimously held in Kokesh v. Securities and Exchange Commission [1] that disgorgement in SEC enforcement actions operates as a penalty, and as a result is subject to the federal five-year statute of limitations under 28 U.S.C. §2462. The Kokesh decision resolved a split between the US Court of Appeals for the Tenth Circuit and Eleventh Circuit, and in the process undermined a key source of large recoveries by the SEC in FCPA resolutions, and in SEC proceedings more broadly.

Since the decision was issued last month, countless screen pixels have been dedicated to the possible effects that the time-limiting of the principal remedy the SEC has sought in major enforcement actions – one that has routinely been extended beyond five years before the occurrence of the violations at issue – may have on FCPA and SEC enforcement efforts. While those prognostications may be correct, other aspects of the Kokesh decision, such as how the Supreme Court defined the nature of the disgorgement remedy, how disgorgement amounts are typically calculated, and in particular the breadth of the Kokesh decision, raise questions likely to have important ramifications for SEC and possibly other federal agencies’ enforcement programs going forward.


The issue addressed by the Kokesh court was a relatively simple one: whether 28 U.S.C. §2462, which provides for a five-year statute of limitations on any “action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise” applied to disgorgement sought by the SEC in enforcement actions brought in federal district court. In a 2013 decision, Gabelli v. SEC, the Supreme Court had previously held that §2462 applied to civil penalties levied by the SEC, where those civil penalties were expressly provided for by statute, and that the limitations period begins to run when the conduct occurs (as opposed to when it is discovered by the SEC).[2] Gabelli did not, however, address whether the disgorgement remedy as applied in SEC enforcement actions, which is not provided for in statute but has its roots in equity, was subject to the same limitation.

As noted in our 2016 FCPA Year in Review, a circuit split developed on this issue in 2016. The Eleventh Circuit held in a rather cursory opinion in SEC v. Graham that disgorgement was akin to a forfeiture and thus subject to §2462 and the five-year statute of limitations.[3] At the same time, the lower courts found in the Kokesh dispute[4] that disgorgement, at least as applied to the facts in question, was equitable in nature and therefore not time-barred after five years.[5]

The SEC originally brought a 2009 action alleging that Charles Kokesh, owner of two investment-adviser firms, violated various securities laws in misappropriating $34.9 million between 1995 and 2009. After a jury found him liable for the offenses in question, it ordered him to pay civil penalties of approximately $2.35 million, and $34.9 million in disgorgement and $18.1 million in prejudgment interest. The court applied the §2462 5-year statute of limitations to the civil penalties, but did not do so to the disgorgement and interest amounts because it found that disgorgement was not a “penalty,” and was therefore outside the scope of §2462. Kokesh appealed the court’s disgorgement order, arguing that the five-year limitations period applied and that the disgorgement and prejudgment interest amounts should be greatly reduced. The Tenth Circuit nevertheless affirmed the trial court’s initial ruling, and the Supreme Court subsequently granted certiorari in January 2017 to resolve the split.

In a relatively brief opinion, the Court analyzed the SEC’s use of the disgorgement remedy in this case and historically, and issued an uncharacteristically broad ruling clearly intended to circumscribe the SEC’s enforcement powers by defining disgorgement as used by the SEC generally as a “penalty,” rather than an equitable remedy. The Court based its conclusion on the following three attributes of the remedy as generally applied by the SEC:

  • Drawing on century-plus-old Huntington v. Attrill,[6] that the “wrong sought to be redressed [by a disgorgement order from SEC in a law enforcement case] is a wrong to the public,” rather than a private wrong against an individual;
  • The principal purpose of SEC’s seeking disgorgement is “inherently punitive,” because the remedy is sought principally “… to deter others from offending in like manner,”[7] and
  • Disgorged funds were not typically used by courts to compensate private victims, but rather were deposited in the US Treasury.

On these factors, the Court reached the blanket conclusion that “[w]hen an individual is made to pay a noncompensatory sanction to the government as a consequence of a legal violation, the payment operates as a penalty.”

The Court rejected the SEC’s argument that disgorgement was “remedial” in that it was intended to “restore the status quo.”[8] In reaching its decision, the Court noted that disgorgement, as applied in the SEC enforcement, context does not “simply return[] the defendant to the place he would have occupied had he not broken the law,” but often goes further, such as where an insider trader may be forced to turn over profits earned by others trading on information provided by the tipper, or where the SEC does not deduct all expenses and costs associated with generating the illicit gain. The Court found that the fact that disgorgement could also have compensatory or restitutive goals in the abstract did not detract from the fact that SEC disgorgement orders typically “go beyond compensation, are intended to punish, and label defendants wrongdoers as a consequence of violating public laws.”[9]

As a result, the Court held “[d]isgorgement, as it is applied in SEC enforcement proceedings, operates as a penalty under §2462 …[and]… any claim for disgorgement in an SEC enforcement action must be commenced within five years of the date the claim accrued.”[10]

Practical Implications and Open Questions

Most obviously, the decision immediately reduces SEC’s ability to seek disgorgement of illicit gains which accrued more than five years before the SEC’s claims against the company in question arose. While significant, in particular in light of the importance of disgorgement orders in some of the largest FCPA settlements over the past decade stretching back significantly more than five years after a claim might have accrued,[11] the practical impact of this development on SEC enforcement proceedings may be less pronounced than popular wisdom may suspect. Most enforcement actions the SEC brings from year-to-year target conduct that is well within the standard five-year statute of limitations. Where the decision may cause the SEC to modify its practices is in connection with long-running, complex matters such as large FCPA investigations which can take more time to investigate and by definition usually require retrieval of evidence from abroad. The SEC may be forced to ask for tolling agreements earlier in such matters, to press the company for faster investigation schedules, or even to issue subpoenas where it might not otherwise have done so.

More interesting and likely more important than the timing issues are a number of questions the Supreme Court (presumably deliberately) left unanswered. First, the broad scope of the opinion raises the question of whether the SEC – and potentially the DOJ and other federal agencies – may seek disgorgement as a remedy at all in enforcement actions absent specific statutory authority to do so. As the Court expressed in a footnote:

Nothing in this opinion should be interpreted as an opinion as to whether courts possess authority to order disgorgement in SEC enforcement proceedings or on whether courts have properly applied disgorgement principles in this context.[12]

Litigants may already relish the opportunity to challenge the SEC’s authority to seek (and federal courts to order) disgorgement in federal court proceedings in the face of what amounts to an invitation to do so from the Supreme Court itself. Because the Exchange Act of 1934 (as amended) expressly authorizes SEC to seek disgorgement in administrative proceedings,[13] the SEC may now opt to bring even more contested proceedings forward in its administrative forum in light of the greater uncertainty surrounding the remedy’s availability in civil proceedings within the federal courts. Moreover, the breadth of the Supreme Court’s holding raises questions about its potential application to other situations in which a federal law enforcement agency seeks disgorgement in federal district court. The US Department of Justice’s FCPA Pilot Program (see our alert describing the Pilot Program here) is a notable example.[14]

The Kokesh opinion also leaves open the question of how the SEC should be calculating disgorgement in the enforcement actions where it is available to the agency. The Supreme Court seems to have gone out of its way (in obiter dicta) to emphasize that disgorgement, as applied by the SEC generally, does not simply return the defendant to the status quo ante (as the SEC argued), but instead fails to take into account the costs and expenses associated with generating the alleged ill-gotten gains in the first place. As any company (and their outside counsel) which has been through an FCPA enforcement action will recount, the SEC’s (and DOJ’s) method of calculating “gains” to a company is not one that is consistent with any accepted accounting standards, is inherently punitive in nature, and, as the Court noted, “does not simply restore the status quo…[but] … leaves the defendant worse off.”[15] Where the SEC seeks to impose disgorgement calculated in this way as well as civil monetary sanctions that collectively would exceed the statutory maximum civil penalty amount, as has often been the SEC’s practice, we expect defendants to vigorously argue that the SEC does not have the power to do so.

Kokesh also appears to bring the SEC’s disgorgement practice in line with the Internal Revenue Service’s (IRS) own treatment of disgorgement amounts in FCPA cases for tax purposes. As we noted in our 2016 FCPA Year in Review, the Internal Revenue Code generally allows deductions from taxable income for ordinary and necessary business expenses, and generally treats court judgements as deductible items. Section 162(f) of the Internal Revenue Code, however, specifically excludes “fine[s] or … penalt[ies] paid to the government” for legal violations from deductible expenses, and the IRS Chief Counsel issued an opinion in May 2016 specifically finding that in the event a company had paid disgorgement to the SEC in connection with an FCPA settlement, where the amount made up principally of punitive, rather than remedial elements, no deduction for the disgorgement amount was available.


How the SEC (and possibly DOJ) will react to Kokesh remains to be seen. The FCPA Pilot Program has been continued by the DOJ pending its review by the new administration; if it is not continued, the principal arena in which it has resorted to the disgorgement remedy (especially in cases not involving a US “issuer”) could be mooted. Since Kokesh, two declinations under the Pilot Program have been issued, both of which included an element of disgorgement, signaling that the DOJ has not backed off its policy to date. On the SEC side, especially with the change in administration, it will likely be some time before the impact of the decision is truly visible. We believe, however, that at least for a subset of the larger, more complex and longer-running investigations, the SEC (and possibly the DOJ) will be quicker to seek tolling agreements with cooperating companies and will manage timetables more aggressively, while at the same time will be under pressure to develop legal theories that will withstand arguments from defendants designed to use the decision to avoid the often enormous monetary sanctions SEC has succeeded in securing as “disgorgement” in the past.