Under the new Administration, we have been promised a new tone regarding how Government interfaces with the market. This “change” is of particular interest to those who defend matters before the SEC. Will we see a change from “broken windows” enforcement where everything matters to a more traditional, and possibly, more friendly regulatory environment? Winding its way through the courts is an SEC life-altering moment: does the SEC concede that there is a five-year statute of limitations on enforcement cases including disgorgement? As far as penalties and fines are concerned, the Supreme Court has already ruled on that issue and said it does. The SEC lost that one. The question remaining is whether the Supreme Court will apply the same limitation to disgorgement and how the new SEC leadership will respond. The short answer is that such a limitation should apply.

To be specific, an upcoming case before the U.S. Supreme Court regarding the applicability of a five-year statute of limitations to disgorgement collections could substantially restrict one of the SEC’s most important enforcement tools. On August 23, 2016, in S.E.C. v. Charles Kokesh, 834 F.3d 1158 (10th Cir. 2016), the U.S. Court of Appeals for the Tenth Circuit concluded that disgorgement actions by the SEC were not “penalties” and, as such, were not subject to a five-year statute of limitations. The Tenth Circuit reasoned that because disgorgement only deprived the wrongdoer of the benefits of wrongdoing, it did not inflict punishment and, thus, could not be considered a penalty.

While the Tenth Circuit’s decision in Kokesh finds company in the decisions of other circuit courts which have also distinguished disgorgement from other civil penalties, the circuits are not all in agreement. Indeed, only three months before the Kokesh decision was issued, the U.S. Court of Appeals for the Eleventh Circuit took a wholly different position on the matter. In S.E.C. v. Barry Graham, et al, 823 F.3d 1357 (11th Cir. 2016), the Eleventh Circuit concluded that disgorgement was a subset of government forfeiture and, as such, was subject to a five-year statute of limitations. Interestingly, the Eleventh Circuit did not reach the question of whether disgorgement is a penalty per se. Instead, the court decided the question by defining disgorgement as a subset of forfeiture, which, as with other forfeiture actions, makes disgorgement actions subject to a five-year statute of limitations.

The contrasting decisions in Kokesh and Graham have set the stage for a far-reaching case before the Supreme Court. Of course, the question concerning statutes of limitations on SEC enforcement actions is not a new one for the Supreme Court. In Gabelli v. S.E.C., 133 S.Ct. 1216 (2013), the Court was tasked with determining the appropriate tolling date for civil penalties sought by the SEC in an enforcement action. There, the Supreme Court determined that the five-year limitations period begins to run on the event or occurrence giving rise to the misconduct, not the discovery of wrongdoing by the SEC. Now, the Supreme Court will have to decide whether disgorgement is a penalty rather than an equitable remedy, which given the strict tolling date for civil penalties announced in Gabelli, could significantly impact the SEC’s enforcement practices going forward.

Forfeiture actions are undoubtedly an important weapon in the SEC’s enforcement arsenal. For the 2016 fiscal year, the SEC obtained judgments and orders totaling more than $4 billion in disgorgement and penalties. Thus, the stakes are quite high as the Kokesh case goes before the Supreme Court. An adverse ruling for the SEC could dramatically change the SEC’s disgorgement practices, especially in light of the tolling period imposed by Gabelli. In fact, the five-year statute of limitations has already prevented the SEC from collecting disgorgement in the states comprising the Eleventh Circuit, one of the reasons the SEC proffered to the Supreme Court to hear the Kokesh appeal.

Our best guess is that the SEC is locked into the position of opposing the applicability of the statute of limitations to disgorgement, but it is likely the SEC will lose before the Supreme Court. The basic reason has to be that there ought to be a temporal limit to the SEC’s power.

Now, does this change how cases are defended forever? In many cases it will not but in some cases it will. Here is why: the SEC is going to ask for more tolling agreements. While there are no empirical surveys on this question, we suspect that 80% to 99% of publicly traded companies under investigation will sign tolling agreements for many good reasons. Our best guess is that for privately held companies the percentages are, we guess, materially discounted.

There may be significant changes to individuals. Presently, we are not inclined to sign tolling agreements for individuals – period. However, we know that there are mixed views on that among the SEC defense bar. We suspect that may change. It is likely that there will be a reluctance to enter into tolling agreements related to individuals. While each case and each defense attorney is different, the choice of not signing a tolling agreement may be to force the SEC to choose between filing charges based on poorly investigated matters or walk away. While risks remain for individuals, it does present a very intriguing set of strategic choices that the most skilled and experienced SEC defense attorneys will attempt to exploit.