Supreme Court Curbs SEC’s Disgorgement Power: Holds That The SEC Can’t Escape The SOL

8 Min Read By: Jessica S. Mussallem, Matthew J. Jacobs, Erica Connolly

On June 5, 2017, in Kokesh v. SEC, the Supreme Court held that disgorgement by the Securities and Exchange Commission (SEC) is subject to the five-year limitations period of 18 U.S.C. § 2462, severely restricting the commission’s ability to force companies to disgorge profits prior to five years before an action is brought. The decision could also impact attempts by the Department of Justice (DOJ) to force companies to disgorge profits from allegedly illegal conduct.

In Kokesh, the court considered the SEC’s efforts to disgorge $34.9 million from defendant Charles Kokesh, $29.9 million of which resulted from violations before the five-year limit imposed by Section 2462. Kokesh, 581 U.S. —, 2017 WL 2407471, at *4 (2017). Disgorgement of profits has been a typical remedy sought by the SEC—in addition to civil or criminal fines sought by DOJ—when prosecuting cases, including for alleged violations of the law such as the Foreign Corrupt Practices Act (FCPA). Kokesh, who ran two investment firms that siphoned off money from investors, argued that Section 2462 limited the SEC’s disgorgement request. Section 2462 bars “an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise” that is not “commenced within five years from the date when the claim first accrued.” The SEC countered to the district court and the Tenth Circuit that, as an equitable remedy, disgorgement did not fall under Section 2462. Both courts agreed with the SEC that disgorgement of profits was not a penalty. The Tenth Circuit went further, holding that disgorgement was also not a forfeiture.

Prior to Kokesh, application of Section 2462 to civil disgorgement actions varied by circuit. The First Circuit (SEC v. Tambone, 550 F.3d 106, 148 (1st Cir. 2008)) and the D.C. Circuit (Riordan v. SEC, 627 F.3d 1230, 1234 (D.C. Cir. 2010)) held that Section 2462 applies only to penalties sought by the SEC, not to disgorgement. In 2016, prior to the Tenth Circuit’s Kokesh decision, the Eleventh Circuit disagreed with the First Circuit and D.C. Circuit and found that Section 2462 applies to disgorgement, which created a circuit split. SEC v. Graham, 823 F.3d 1357, 1363-64 (11th Cir. 2016). Despite acknowledging the Eleventh Circuit’s decision, the Tenth Circuit nevertheless departed from the Eleventh Circuit’s reasoning in holding that Section 2462 did not apply to SEC disgorgement. With its Kokesh decision, the Supreme Court resolved the split.

In an unanimous opinion penned by Justice Sotomayor, the Supreme Court held that the SEC’s disgorgements amount to a penalty and are subject to Section 2462. In so holding, the court looked to two factors: (1) whether the “‘wrong sought to be redressed is a wrong to the public, or a wrong to the individual’” and (2) whether the sanction is sought “‘for the purpose of punishment, and to deter others from offending in like manner’—as opposed to compensating a victim for his loss.” Kokesh, 2017 WL 2407471, at *5 (quoting Huntington v. Attrill, 146 U.S. 657, 667-68 (1892)).

The Supreme Court held that the SEC’s disgorgement sanction qualified as a penalty under both factors. The court observed that the SEC imposed disgorgement as “a consequence for violating what [the Court] described … as public laws”—meaning that the money collected goes to the U.S. Treasury rather than to victims as a restitution payment might. As the court pointed out, violations of the securities laws—for which the SEC seeks disgorgement—are committed “against the United States rather than an aggrieved individual.” The court further found that under the second prong—the purpose of the sanction—disgorgement can be punitive in nature. The court rejected the SEC’s argument that disgorgement puts defendants into the same position they would have been absent violations and therefore is only remedial, rather than punitive. The court observed that in many cases “disgorgement does not simply restore the status quo; it leaves the defendant worse off” because SEC disgorgement is at times ordered without consideration of expenses that may reduce the illegal profit.

Although Kokesh answers only the narrow question of whether SEC disgorgement is subject to Section 2462’s five-year limitation, the ripples of the decision may be felt more broadly, particularly with respect to the DOJ’s FCPA Pilot Program. The DOJ traditionally has not pursued disgorgement against companies, leaving that remedy to the SEC. See Daniel Patrick Wendt, “So how does the DOJ calculate disgorgement?” FCPA Blog, (Nov. 30, 2016), available at (last visited June 12, 2017) (Noting that in “nearly 40 years of FCPA history,” the DOJ began using disgorgement only in 2016). If the SEC was not involved, DOJ historically would have sought either just criminal fines, or restitution to victims, plus forfeiture. In 2016, however, the DOJ announced a new policy (called the Pilot Program) designed to encourage companies to self report potential violations of the law by offering to reduce penalties for such self-disclosed violations, and by threatening to punish companies that are aware of conduct but do not self-report. A requirement of participating in the Pilot Program is for companies to “disgorge all profits resulting from the FCPA violation.” U.S. Dept. of Justice, Criminal Division, “The Fraud Section’s Foreign Corrupt Practices Act Enforcement Plan and Guidance,” (Apr. 5, 2016), available at (last visited June 12, 2017). In 2016, DOJ required civil disgorgement from two privately-held companies as conditions to its declinations to prosecute the company criminally. As noted, disgorgement of profits would have been unusual for DOJ historically, but probably occurred here because of the statement about disgorgement in the Pilot Program and the lack of involvement by the SEC in those matters. See HMT LLC, Declination Letter, Sept. 29, 2016, available at (last visited June 12, 2017); NCH Corp., Declination Letter, Sept. 29, 2016, available at (last visited June 12, 2017).

In light of the Supreme Court’s determination that SEC disgorgement is a “penalty,” Section 2462 would on its face also limit any civil disgorgement—even if sought by the DOJ—on the same theory that it constitutes a punishment.

A footnote in Kokesh suggests that the practice of disgorgement could itself be in jeopardy. The court noted 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.” Kokesh, 2017 WL 2407471, at *5 n.3. The court may be inviting a case challenging the entire practice of SEC disgorgement. Combined with two other decisions this term, Nelson v. Colorado and Honeycutt v. United States, which limited state and federal forfeiture, the court has shown a skepticism for such powerful—and often less regulated—government penalties. See Honeycutt v. United States, 581 U.S. —, 2017 WL 2407468, at *5-6 (2017) (Comprehensive Forfeiture Act does not permit joint and several liability for forfeiture of proceeds of crime); Nelson v. Colorado, 581 U.S. —, 137 S. Ct. 1249, 1257 (2017) (state could not require defendant whose criminal conviction is overturned or who is on retrial acquitted of crime to prove innocence in proceeding for return of assets seized pursuant to the wrongful conviction).

It is also interesting to consider where else this decision could lead. For example, a few years ago the court held in Southern Union Co. v. United States that a jury must “find beyond a reasonable doubt facts that determine [a criminal] fine’s maximum amount” to comply with the Sixth Amendment. 567 U.S. 343, 132 S. Ct. 2344, 2351 (2012). Typically sentencing had been handled entirely by the judge, not a jury, and with a lower standard of proof than “proof beyond a reasonable doubt,” which is what is required for the government to obtain a criminal conviction of an individual or company. The application of the Southern Union standard to fines or disgorgement paid by corporations in DOJ and SEC investigations could severely limit the government’s power, considering how difficult it could be for the prosecutors to prove its damage theories to a jury in the context of a corporate malfeasance case.

What This Means For You

This decision continues a trend by the Supreme Court limiting the government’s expansive reading of statutes and the imposition of heavy fines in corporate investigations. By limiting the period during which the SEC can seek disgorgement of illegally obtained profits, Kokesh could put pressure on both the SEC and the DOJ to expedite their investigations (or to seek tolling agreements to extend statutes of limitations earlier in investigations). It should be noted, though, that nothing in this decision would seem to limit the DOJ’s authority to seek heavy criminal fines from corporations, even for conduct that is more than five years old. That is because of conspiracy charges. The law of conspiracy provides that the statute of limitations is based on the last act of a conspiracy. In other words, the criminal law of conspiracy would allow the government to seek damages for the full scope of a conspiracy even if older than five years so long as some act in furtherance of the conspiracy had occurred within the last five years.

Still, the Supreme Court has handed us another effective tool in representing our clients aggressively in investigations brought by one or both government agencies.

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