Earlier this month the U.S. Supreme Court unanimously held, in Kokesh v. SEC1, that disgorgement in Securities and Exchange Commission (SEC) enforcement proceedings operates as a "penalty" within the meaning of 28
U.S.C. § 2462, the general five-year statute of limitations for federal government
actions seeking a "civil fine, penalty, or forfeiture, pecuniary or otherwise." The
Court's opinion, authored by Justice Sotomayor, stated that a government sanction
will be considered a penalty for purposes of the statute if it redresses a violation of
a public law, is designed to deter similar misconduct by others, and is not imposed
for the purpose of compensating victims. The high court concluded that SEC
disgorgement, as it has been applied by the agency and the courts, easily meets
that test. In holding that disgorgement operates as a penalty, the Court rejected
the longstanding contrary opinions of the SEC and many lower courts (including
the views of the district and circuit court below) that disgorgement constituted
"equitable" or "remedial" relief, not a penalty.
The decision represents the second time in recent years that the SEC's legal
position on an important statute of limitations issue has been flatly rejected by the
Supreme Court. In 2013 the high court unanimously held, in Gabe/Ii v. SEC,
government claim based on fraud accrues, and thus the five-year limitations period
in § 2462 begins, when a defendant's allegedly fraudulent conduct occurs - not, as
the SEC had argued, when the government discovered (or reasonably should have
discovered) the conduct.
As discussed below, the
decision will have significant impact on the
government, practitioners and the courts, for several reasons. First, it will increase
pressure on the SEC and other agencies to bring cases within five years of the
alleged misconduct, though that pressure will likely lead to an increase in requests
for tolling agreements. Second, in combination with Gabe/Ii, it underscores the
Court's view that statutory limitations periods are critical safeguards against
government overreach and likely presages further time
bar rulings by courts in favor of defendants in
Third, the broad definition of
penalty articulated in Kokesh should foreclose any
argument that re-crafting disgorgement to be purely
"compensatory" or "remedial" would bring the remedy
outside the purview of§ 2462. Finally, the Kokesh
penalty analysis will undoubtedly be applied to non
monetary remedies: in addition to confirming the
consensus of lower courts that suspensions and bars
operate as penalties in most cases, it should bolster the
argument that injunctions also operate as penalties.
PRESSURE TO BRING CASES WITHIN
The Kokesh decision, even more so than Gabe/Ii, will put
pressure on the SEC and other agencies to open
investigations promptly, conduct them swiftly, and bring
cases within five years of the alleged misconduct.
Gabe/Ii created some time pressure because, with the
elimination of the "discovery rule," agencies could no
longer argue that the limitations period did not begin to
run until the staff could have reasonably discovered a
fraud. But Kokesh has a broader impact, as for decades
the government, and indeed many members of the
defense bar, believed that there was no limitations
period applicable to agency claims for disgorgement.
Thus the SEC, for example, has historically operated on
the assumption that even if money penalties were
unavailable because an enforcement action could not be
commenced within five years, the agency could pursue
claims for disgorgement of illegal profits - often a very
significant amount of money - at any point in time. Now
that disgorgement is on the same footing as traditional
money penalties, the SEC will need to bring cases within
five years if it wants the ability to get a monetary
recovery - unless potential defendants agree to toll the
statute of limitations.
Thus another likely impact of Kokesh is that the SEC will
ask for tolling agreements more frequently and sooner.
And the agency's ever-present resource constraints will
only increase the incentive to seek tolling agreements to
gain more time to investigate. On the other hand, an
over-reliance on tolling agreements can fairly be viewed
as undermining the important policies underlying
limitations periods (discussed in the next section) that
were forcefully articulated in Kokesh and Gabe/Ii, and
the agency might want to avoid such criticism. It is
worth noting in that regard that the Court in Gabe/Ii, in
discussing reasons why a discovery rule should not be
implied in statutes of limitations applicable to the
government, remarked that a "central mission" of the
SEC is to investigate potential securities law violations
and that the agency has "many legal tools," including
subpoena power, to do so.
Also, the SEC's current
internal policy requiring staff lawyers to get approval
from the Director of the Division of Enforcement before
asking targets to toll the statute of limitations should
provide an institutional check on excessive use of tolling
On balance, while the SEC will undoubtedly try to avoid
the perception that it is shirking its investigatory
responsibilities, it seems likely that Kokesh will lead to an
uptick in tolling requests.
THE IMPORTANCE OF TIME LIMITS ON
Like Gabe/Ii, the Kokesh decision demonstrates that all
members of the Court view statutes of limitations as
critical safeguards against government overreach. The
Court in Kokesh began its analysis with a summary of the
policies, also articulated in Gabe/Ii, underlying
limitations periods applicable to the government:
"Statutes of limitations 'se[t] a fixed date when exposure
to the specified Government enforcement efforts en[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."'
the Gabe/Ii Court remarked on '"the basic policies of all
limitations provisions: repose, elimination of stale
claims, and certainty about a plaintiff's opportunity for
recovery and a defendant's potential liabilities."'
decision also noted that statutes of limitations are
intended to '"promote justice by preventing surprises
through the revival of claims that have been allowed to
slumber until evidence has been lost, memories have
faded, and witnesses have disappeared."'
principles plainly apply to government enforcement in
both the civil and criminal arenas.
The Court recognizes that, although the government has
a legitimate desire to right wrongs, impose punishment,
and deter others from similar misconduct, potential
defendants have an equally legitimate desire for repose,
certainty, and freedom from stale claims after an
appropriate period of time. Importantly, the Court has
made clear that this balancing is not just important to
the government and the parties in question, but is
important to society as a whole and indeed helps
These principles, coupled with the results in Gabe/Ii and
Kokesh, will give targets of government enforcement
efforts a strong basis to argue that statutes of limitations
should be construed in their favor in close or unclear
cases. Notably, the opinion in Kokesh ignored the SEC's
argument in its brief that the Court had frequently
applied an "interpretative rule" providing that
"[s]tatutes of limitation sought to be applied to bar
rights of the Government, must receive a strict
construction in favor of the Government. "
Based on the
decisions in Gabe/Ii and Kokesh, it appears that the
Court is inclined to abandon or severely limit any such
pro-government doctrine and replace it with a pro
defendant rule of construction.
"PENALTY," BROADLY CONSTRUED
The Kokesh penalty analysis is instructive both in the
context of the remedy in question - disgorgement - and
in the broader context of how the Court analyzes
whether a sanction represents a penalty within the
meaning of§ 2462. According to the Court, this
question turns on two principles: (1) whether the wrong
sought to be redressed is a "wrong to the public" or an
"offense committed against the State," as opposed to a
wrong to particular parties; and (2) whether the sanction
is sought primarily "for the purpose of punishment, and
to deter others from offending in like manner," as
opposed to compensating victims for their losses.'?
connection with the second principle the Court also
opined that the purposes of punishment include, in
addition to deterrence, the intent to '"label defendants
Applying the first principle, the Court concluded that
SEC disgorgement is imposed by courts "as a
consequence for violating ... public laws," regardless of
the views or claims of victims.
In reaching this
conclusion the Court relied in part on the SEC's own
words from its brief: '"[w]hen the SEC seeks
disgorgement, it acts in the public interest, to remedy
harm to the public at large, rather than standing in the
shoes of particular injured parties."'
Of course, given
the nature of federal law and the role of government
agencies, it would appear that almost all SEC and other
agency enforcement actions would meet this "public
law/public interest" test.
Deterrence, Not Compensation
Applying the second principle, the Court concluded that
SEC disgorgement is "imposed for punitive purposes"
because (a) courts have consistently held that '"[t]he
primary purpose of disgorgement orders is to deter
violations of the securities laws by depriving violators of
their ill-gotten gains,"'
and (b) in many cases
disgorgement is "not compensatory" because the
disgorged funds are paid to the U.S. Treasury, not to
victims as restitution.
Notably, in discussing deterrence, the Court held that
"sanctions imposed for the purpose of deterring
infractions of public laws are inherently punitive."
deterrence is plainly an important goal of most agency
enforcement actions, this principle will be helpful to
defendants and potential defendants in arguing that
particular non-monetary remedies operate as a penalty.
In discussing the non-compensatory aspect of SEC
disgorgement, the Court cited the fact that individuals
who might be victims of a defendant's misconduct are
sometimes '"too dispersed for feasible identification and
And although district courts have the
power to distribute disgorged funds to victims, the
Court noted that there is no "statutory command" that
they do so, and that '"such compensation is a distinctly
These comments obviously beg the
question of whether the SEC and/or Congress could
reconstitute the disgorgement remedy to make it fully,
or primarily, compensatory and whether such changes
would alter the result under the Court's penalty analysis.
But, as the Court found, there are practical obstacles to
compensating victims in many cases. And, more
fundamentally, even compensatory disgorgement would
seem to serve an important deterrent function, making it
unlikely that the result would be any different.
Restoring the Status Ouo?
The Kokesh Court quickly dispensed with the SEC's
primary argument that disgorgement is "not punitive
but 'remedial' in that it 'lessen[s] the effects of a
violation' by 'restor[ing] the status quo."'
remedy "as courts have applied it in the SEC
enforcement context," the Court rejected the premise
that disgorgement "simply returns the defendant to the
place he would have occupied had he not broken the
law" and concluded that in many cases "it leaves the
defendant worse off. "
The Court cited examples from
the insider trading context, including the recent Second
Circuit decision in SEC v. Contorinis, which held that
'"an insider trader may be ordered to disgorge not only
the unlawful gains that accrue to the wrongdoer directly,
but also the benefit that accrues to third parties whose
gains can be attributed to the wrongdoer's conduct."'
The Court also cited the circumstance where
"[i]ndividuals who illegally provide confidential trading
information [are] forced to disgorge profits gained by
individuals who received and traded based on that
information - even though [the tippers] never received
any profits. "
Again, these comments beg the question of whether the
agency and/or Congress could adjust the remedy to
make it fully "remedial" - i.e., defendants give up only
their own gains and are never left "worse off" - and
whether this might make a difference in the Court's
penalty analysis. But, while limiting the remedy in this
way seems easy to do (unlike trying to make
disgorgement fully compensatory to victims), even a
purely "remedial" disgorgement would seem to serve a
significant deterrent function, making it unlikely that the
result would be any different.
Significantly, the Kokesh court, while acknowledging that
SEC disgorgement "serves compensatory goals in some
cases," remarked that "'sanctions frequently serve more
than one purpose"' and held that "'[a] civil sanction that
cannot fairly be said solely to serve a remedial purpose,
but rather can only be explained as also serving either
retributive or deterrent purposes, is punishment as we
have come to understand the term."'
This is an important holding, both with respect to
disgorgement and more broadly. It seems difficult to
say that disgorgement of a wrongdoer's ill-gotten gains
(however limited and however the funds are used) does
not serve any retributive or deterrent purposes. Thus
disgorgement, however fashioned, will likely always be
viewed by the Court, and now by lower courts, as a form
of "penalty." More broadly, as discussed in the next
and final section of this article, this holding is likely to be
the underpinning for arguments that non-monetary
remedies operate as penalties.
NON-MONETARY SANCTIONS AS
The Kokesh penalty analysis will undoubtedly be applied
to non-monetary remedies - such as industry bars and
suspensions, officer and director bars, and court
imposed injunctions against future violations - that the
SEC and other agencies routinely seek. As detailed
above, while the case involves a monetary remedy, the
opinion discusses the concepts of "penalty" and
"punishment" broadly and emphasizes factors that are
clearly relevant to determining whether any type of
sanction or remedy represents a penalty under§ 2462.
Indeed, as discussed further below, the Kokesh penalty
analysis confirms the existing consensus of lower courts
that suspensions and bars operate as penalties in most
cases and will undoubtedly be used to support
arguments that even injunctions operate as penalties in
Historically, courts typically held that suspensions and
bars were "remedial" or "equitable" sanctions,
designed to protect the public from further harm that
might be caused by the defendant, and therefore were
not penalties within the meaning of§ 2462. However,
beginning with the D.C. Circuit's 1996 decision in
Johnson v. SEC,
most courts have held that
suspensions and bars operate as a penalty. In Johnson
the D.C. Circuit held that a supervisory suspension
imposed on a branch manager, based on her alleged
failure reasonably to supervise an account representative
who stole customer money, constituted a penalty and
was therefore subject to the five-year limitations period.
The circuit court found that the suspension was "a form
of punishment imposed by the government for unlawful
or proscribed conduct, which goes beyond remedying
the damage caused to the harmed parties by the
defendant's action. "
The court noted that the
suspension would cause long-term damage to the
defendant's career and emphasized that "[t]his sanction
would less resemble punishment if the SEC had focused
on Johnson's current competence or degree of risk she
posed to the public. "
The court found that, despite
the agency's claims to the contrary, the sanction was
based fundamentally on the defendant's past violation
of the law, not on any evidence of her present unfitness
as a supervisor or danger to the public.
the D.C. Circuit found that a banking
industry bar operated as a penalty, noting that the
agency "based its action solely on Proffitt's long past
conduct and made no attempt to evaluate his present
fitness or competence. "
Kokesh clearly confirms the reasoning of Johnson and
and should lay to rest any argument that they
were wrongly decided. The Supreme Court's key
holding that a sanction "that cannot fairly be said solely
to serve a remedial purpose, but rather can only be
explained as also serving either retributive or deterrent
purposes" represents a penalty, fully supports the D.C.
Circuit's analysis and holdings. As suspensions and bars
serve deterrent or retributive purposes (and usually
both) in almost all agency enforcement cases, they
plainly meet the Kokesh test for a penalty.
A closer question is whether Kokesh dictates that
injunctions against future violations operate as a penalty
- a conclusion that some, but not most, courts have
reached. For example in in SEC v. Bartek the Fifth
Circuit, in an unpublished opinion that relied largely on
Johnson, affirmed the district court's finding that both a
permanent injunction and an officer and director bar
operated as penalties, noting in part that these
remedies "would have a stigmatizing effect and long-
lasting repercussions" and do not "address the
prevention of future harm in light of the minimal
likelihood of similar conduct in the future. "
A judge in
the Southern District of New York reached a similar
In reaching a conclusion that injunctions
are not penalties, other judges in the Southern District of
New York have reasoned that injunctions under the
securities laws require the SEC to prove a reasonable
likelihood of future violations and thus are primarily
intended to protect against future harm to the public.
supports the argument that court-imposed
injunctions operate as penalties in many, if not most,
cases. Even assuming that an injunction serves a
significant (or even primary) remedial purpose, it seems
difficult to argue that, as a practical matter, the remedy
doesn't also serve a deterrent or retributive purpose.
Thus, under the Court's key dual-purpose holding, an
injunction would still be considered a penalty
notwithstanding its remedial purpose. Moreover, in the
securities law context, the punitive aspect of an
injunction is reinforced by the remedy's significant
collateral consequences, which include, among other
things (i) the ability of the SEC to bring a follow-on
administrative proceeding seeking a suspension or bar
of an individual or a revocation of registration of a
registered financial institution;
(ii) the automatic
imposition of a "statutory disqualification," which
requires FINRA to bar an individual from working at a
member firm and allows it to revoke the membership of
and (iii) the presumptive disqualification
of an issuer of securities from certain exemptions from
Indeed, the notion that the SEC must
comply with the statute of limitations if it brings a
proceeding seeking a suspension or bar but need not
comply with the statute of limitations if it brings a
proceeding seeking an injunction - and after the
issuance of such injunction could bring a follow-on
proceeding seeking the same suspension or bar - seems
wrong as a matter of logic and law.
The SEC and other agencies may argue that
not on point because it addressed a backward-looking
pecuniary sanction and did not address the forward
looking remedial aspect of injunctions, and therefore the
Court's dual-purpose holding is only dicta. But, as seen,
the language in question is not thus limited and the
opinion, taken as a whole, appears to set out standards
for determining whether any civil sanction operates as a
penalty within the meaning of§ 2462.
In short, while there will undoubtedly be continuing
debate and litigation on this issue, the
is likely to push more courts to conclude that injunctions
operate as penalties.