The high court has decided that there should be a five-year statute of limitations upon the regulator’s ability to retrieve funds for ill-gotten gains.
The U.S. Supreme Court has unanimously ruled that the SEC must rein in its disgorgement policy and apply a new, five-year statute of limitations upon its efforts to retrieve restitution for alleged ill-gotten gains.
The disgorgement process is the repayment of money allegedly obtained via illegal activity. In cases large and small, the SEC has been able to levy fines and penalties that are often accompanied by disgorgement requirements. The regulator has argued that disgorgement is necessary in these cases as they are a way to give back the money that was taken from investors and counterparties to transactions and financial strategies that stretch over many years, often surpassing five years.
The high court took on the issue of the SEC’s disgorgement policy as a result of the SEC’s legal action against Charles R. Kokesh, which began in October 2009.
At that time, SEC officials “brought an enforcement action, alleging that petitioner Charles Kokesh violated various securities laws by concealing the misappropriation of $34.9 million from four business development companies from 1995 to 2009,” according to the opinion handed down from the high court.
The SEC had charged that Kokesh illegally took $45 million from his investment efforts and used the money for bonuses, rent and salaries.
In response to the SEC’s efforts, which included a jury trial, Kokesh and his legal team argued that there should be a statute of limitations upon the SEC’s abilities to levy disgorgements.
“The Commission sought monetary civil penalties, disgorgement, and an injunction barring Kokesh from future violations,” according to the Supreme Court document. “After a jury found that Kokesh’s actions violated several securities laws, the District Court determined that [federal statute] §2462’s 5-year limitations period applied to the monetary civil penalties.”
The federal statute 2462 specifies that civil fines, penalties and forfeitures have to be imposed within a five-year period from the date of the allegedly illegal activity.
The SEC won its case via the Tenth Circuit court but Kokesh appealed the case to the Supreme Court.
“With respect to the $34.9 million disgorgement judgment, however, the court concluded that §2462 did not apply because disgorgement is not a ‘penalty’ within the meaning of the statute. The Tenth Circuit affirmed, holding that disgorgement was neither a penalty nor a forfeiture,” according to the Supreme Court.
However, the Supreme Court justices reached a different conclusion than the Tenth Circuit court.
“Disgorgement, as it is applied in SEC enforcement proceedings, operates as a penalty under §2462,” according to the Supreme Court. “Accordingly, any claim for disgorgement in an SEC enforcement action must be commenced within five years of the date the claim accrued. The judgment of the Court of Appeals for the Tenth Circuit is reversed.”
SEC officials decline to comment to FTF News about the court’s decision.
Need a Reprint?