In a unanimous decision with significant implications for Securities and Exchange Commission (“SEC”) enforcement, the U.S. Supreme Court in Kokesh v. Securities and Exchange Commission1 held June 5, 2017 that disgorgement in the securities context is a “penalty” under 28 U.S.C. § 2462 and therefore subject to a five-year statute of limitations.

As a result of the Court’s decision, the SEC must commence disgorgement actions within five years of the date a claim accrues. The Kokesh decision will shape the Commission’s investigations going forward and has financial implications for current and prospective defendants.


Under 28 U.S.C. § 2462, a five-year statute of limitations applies to any “action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise.”

In Gabelli v. SEC, 133 S. Ct. 1216 (2013), the Supreme Court held that, in the context of civil penalties, § 2462’s five-year limitations period begins to run when a violation occurs, not when it is discovered.2 But the Court did not address whether the five-year limit would bar disgorgement, an SEC sanction designed to deprive a defendant of his or her ill-gotten gains. Since Gabelli, the SEC has consistently taken the position that § 2462 does not apply to disgorgement.3 The SEC has based its interpretation of § 2462 on pre-Gabelli precedent, which reasoned that disgorgement is an equitable remedy and therefore not subject to the statute.4

The Supreme Court has now resolved the question of whether disgorgement is a “penalty” within the meaning of § 2462 subject to a five-year statute of limitations.

Factual and Procedural History

In 2009, the SEC brought an enforcement action against Charles Kokesh, the owner of two investment-adviser firms, for allegedly misappropriating US$34.9 million from four clients in violation of various federal securities laws.5 The SEC sought monetary civil penalties, disgorgement, and an injunction barring Kokesh from future violations. After a jury found Kokesh liable, the District Court held that § 2462’s five-year limitations period applied to the SEC’s request for civil monetary penalties and precluded any penalties for misappropriation occurring at least five years prior to the date the SEC filed its complaint.6 The District Court also held that because disgorgement did not constitute a “penalty” under § 2462, no limitations period applied to the SEC’s request for a US$34.9 million disgorgement judgment. Of the US$34.9 million, US$29.9 million resulted from violations falling outside the five-year period. The Tenth Circuit affirmed on appeal, yielding a circuit split that the Supreme Court resolved on Monday.

The Decision

The Supreme Court held 9-0 that disgorgement constitutes a “penalty” under § 2462 for three principal reasons.

First, disgorgement is imposed as a sanction for violating “public laws” or offenses against the United States, rather than any particular individual. The Court agreed that “[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.”7

Second, the Court found that “SEC disgorgement is imposed for punitive purposes. . . . [I]t has become clear that deterrence is not simply an incidental effect of disgorgement. Rather, courts have consistently held that the primary purpose of disgorgement orders is to deter violations of the securities laws by depriving violators of their ill-gotten gains. . . . Sanctions imposed for the purpose of deterring infractions of public laws are inherently punitive because deterrence [is] not [a] legitimate nonpunitive governmental objectiv[e].”8

Third, the Court observed that “in many cases, SEC disgorgement is not compensatory.”9 The Court noted that disgorged profits are paid to the district court, and it is a matter of discretion how those profits are distributed; some funds are paid to victims, and others to the U.S. Treasury. The Court also rejected the SEC’s argument that disgorgement is remedial and not punitive, that it effects a return to the status quo ante, before a violation took place.10 The Court rejected that position as factually dubious, noting that “SEC disgorgement sometimes exceeds the profits gained as a result of the violation”—namely, in cases in which benefits accrue to third parties and are disgorged by the defendant—and that “SEC disgorgement sometimes is ordered without consideration of a defendant's expenses that reduced the amount of illegal profit.”11

Key Takeaways

The Court’s decision in Kokesh may have a number of implications for the Commission and defendants in SEC enforcement actions.

  • The SEC may no longer pursue ill-gotten gains obtained more than five years before it commences a disgorgement action.
  • The decision could have significant financial implications for current and prospective defendants in SEC actions. For example, as a result of the Court’s decision Kokesh will have to disgorge only US$5 million of the US$34.9 million originally sought by the SEC, because the remaining US$29.9 million could not be traced to the five-year limitations period. Similarly situated defendants could see similar financial outcomes.
  • The decision may catalyze SEC enforcement activity in the short term, as the Commission recognizes that it has a shorter timeline to complete its investigations and pursue disgorgement claims.
  • The SEC staff will likely request tolling agreements earlier in its investigations, and companies, individuals and their counsel will need to consider carefully whether to grant those requests. The decision may also lead the SEC staff to compress the Wells process and the time available to respond to a Wells notice.12
  • Whistleblowers seeking to obtain rewards under the SEC’s incentive programs may accelerate their disclosures to the government to facilitate enforcement actions within the five-year limitations period.
  • The SEC may instead seek an increase in monetary penalties attributable to conduct occurring within the five-year limitations period, including in the settlement context where the penalty amount is negotiated.

The Court’s decision to explicitly characterize disgorgement as “punitive” and a “deterrent” may have other formal and informal ramifications beyond just the application of a statute of limitations. For example, are there other statutory protections that defendants may now be able to invoke, now that disgorgement has been deemed a “penalty” in the securities context? Now that disgorgement is punitive, can a defendant in a parallel DOJ/SEC investigation be forced to pay both a criminal fine and disgorgement?13 Will the SEC choose to view disgorgement through a more punitive lens, making less of an effort to equate disgorgement requests to the actual amount of a defendant’s ill-gotten gains?

Finally, it remains to be seen whether the decision in Kokesh reflects broader judicial trends that could fundamentally reshape securities law enforcement. It is notable that the Supreme Court in Kokesh unanimously rejected the SEC’s interpretation of § 2462. The Court’s unanimous rejection of the agency’s proposed interpretation of an enforcement statute may signal, and be consistent with, increased judicial skepticism toward broad agency interpretative authority. Several federal judges (including now-Supreme Court Associate Justice Neil Gorsuch) have expressed skepticism as to the continued viability of Chevron deference14 in the modern administrative and regulatory state.15 Furthermore, other federal courts are considering additional challenges to SEC enforcement on separation of powers grounds.16