A five-year statute of limitations applies to actions by the Securities and Exchange Commission for disgorgement, the U.S. Supreme Court ruled today. The decision imposes a significant new limit on the SEC’s ability to seek recoupment of defendants’ profits in enforcement actions.
The decision brings an end to a regulatory regime in which the SEC has applied separate time limits to its claims to monetary recovery depending on the theory of recovery, with SEC actions for “civil penalties” subject to the five-year statute of limitations of 28 U.S.C. § 2462, but its actions for “disgorgement” of profits not subject to any time limit.
This unlimited look-back made disgorgement a powerful tool for the SEC’s enforcement division. In 2015, for example, it obtained $3 billion in disgorgement payments, more than two times its collection from other kinds of actions.
At issue in today’s decision is a five-year statute of limitations that by its terms applies to actions for “civil fine, penalty, or forfeiture.” The SEC and many courts have treated actions for disgorgement, a common-law form of restitution measured by a defendant’s wrongful gain, as claims for “equitable relief,” as distinct from a fine, penalty, or forfeiture. But after an appellate court last year rejected the SEC’s approach, creating a split in the circuit courts of appeal, the Supreme Court agreed to address the issue in Kokesh v. SEC, No. 16-529.
In its decision today in Kokesh, the Court unanimously rejected the SEC’s position, holding that based on its prior decisions interpreting the word penalty, “SEC disgorgement constitutes a penalty within the meaning of §2462.” The decision by Justice Sonia Sotomayor noted that disgorgement is imposed as a consequence for violating “public laws,” and that it is imposed for “punitive purposes.” The Court further rejected the proposition that disgorgement is not a penalty because its purpose is to compensate the victim, since while “[s]ome disgorged funds are paid to victims; other funds are dispersed to the United States Treasury.” While acknowledging that disgorgement serves compensatory goals in some cases, the Court held that since disgorgement is, at least in part, used to punish, it should be treated as a penalty for statute of limitations analysis.
Recounting the history of the case, the Court also noted that initially there was no statute authorizing the SEC to seek monetary relief in addition to injunctions. In the 1970’s, courts began ordering disgorgement of profits as a remedy in enforcement proceedings. In 1990, Congress passed the Securities Enforcement Remedies and Penny Stock Reform Act, which authorized the SEC to seek civil penalties. Thereafter, the SEC continued seeking disgorgement in enforcement proceedings while also seeking monetary penalties under the new statutory power to do so. The Supreme Court had previously held that the five-year statute of §2462 applies to SEC actions for statutory monetary penalties.
Intriguingly, in a footnote, the Court stated that “[n]othing in this opinion should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings or on whether courts have properly applied disgorgement principles in this context.” The note suggests that at least some members of the Court may have questions about this remedy, and may prompt defendants’ lawyers in the future to consider challenging courts’ authority to award disgorgement.