June 5, 2017
On June 5, 2017, the Supreme Court of the United States issued a significant decision holding that "[d]isgorgement in the securities-enforcement context is a ‘penalty’ within the meaning of" 28 U.S.C. § 2462, and so SEC enforcement actions seeking disgorgement "must be commenced within five years of the date the claim accrues." Kokesh v. SEC, No. 16-529, slip op. 1.
The Court’s unanimous decision is important because it prohibits the SEC from continuing its longstanding practice of seeking disgorgement based on conduct that occurred more than five years earlier, and also rejects the SEC’s long-held position that its claims for so-called equitable relief are not subject to any limitations period. The Court’s decision in Kokesh follows its earlier unanimous decision applying § 2462 to SEC claims for civil money penalties, Gabelli v. SEC, 133 S. Ct. 1216 (2013), and continues the trend of holding the SEC to the strictures of § 2462 regardless of the type of relief the SEC seeks. And because the Kokesh decision’s reasoning appears to apply equally to SEC claims for other relief that may operate as a penalty—such as associational or practice bars, obey-the-law injunctions, and declaratory judgments that securities laws were violated—the decision may have implications beyond disgorgement claims.
In October 2009, the SEC brought a civil enforcement action against Charles R. Kokesh alleging that he had violated federal securities laws from 1995 to 2006. As relief, the Commission sought (1) disgorgement of all funds and benefits obtained illegally, plus prejudgment interest; (2) a civil monetary penalty; and (3) a permanent injunction from future securities laws violations. Applying Gabelli, the district court limited the civil penalty to $2.35 million, "which represented ‘the amount of funds that [Kokesh] himself received during the limitations period.’" Slip op. 4 (citation omitted). But the district court "agreed with the Commission that because disgorgement is not a ‘penalty’ within the meaning of § 2462, no limitations period applied" to that relief, and so ordered Kokesh to disgorge $34.9 million—the full amount of all funds illegally obtained from 1995 to 2006. Id. The Tenth Circuit affirmed, holding that § 2462 did not apply to disgorgement because it was neither a penalty nor a forfeiture. Id. In so holding, the Tenth Circuit disagreed with the Eleventh Circuit’s decision in SEC v. Graham, 823 F.3d 1357 (11th Cir. 2016), which held that § 2462 applied to SEC disgorgement claims.
The Supreme Court reversed the Tenth Circuit and adopted the Eleventh Circuit’s position in Graham. Specifically, the Court held that SEC disgorgement "bears all the hallmarks of a penalty: It is imposed as a consequence of violating a public law and it is intended to deter, not to compensate. The 5-year statute of limitations in §2462 therefore applies when the SEC seeks disgorgement." Slip op. 9.
Kokesh represents a significant victory for securities market participants and targets of government enforcement actions. It emphasizes that the Government may not pursue stale claims whenever it wishes, and that statutes of limitations further critical interests in finality and certainty.
It remains to be seen how the SEC will respond to this latest limitation on its ability to seek relief based on conduct that occurred more than five years in the past. The SEC may accept that § 2462 applies when it seeks to punish, as Gabelli and Kokesh make clear, regardless of whether the agency denominates the relief as equitable or otherwise. Or the SEC may continue to assert that supposedly equitable bars, injunctions and declaratory relief based on stale conduct are categorically not subject to § 2462, on the ground that neither Gabelli nor Kokesh directly addressed such sanctions. See, e.g., Timbervest, LLC, SEC Admin. Proc. File No. 3-15519 at 25-26 & n.71 (Sept. 17, 2015). If the Commission chooses the latter course, the Supreme Court might well have to weigh in once again.
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Gibson Dunn partner Mark A. Perry and associate Gabriel K. Gillett represented the Cato Institute as amicus curiae, at the Supreme Court, in Kokesh v. SEC. They also represented the Securities Industry and Financial Markets Association (SIFMA) as amicus curiae, in the Eleventh Circuit, in Graham v. SEC, and Mr. Perry represented SIFMA in the Supreme Court, in Gabelli v. SEC.
Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these developments. Please contact the Gibson Dunn lawyer with whom you usually work, or the authors of this alert:
Appellate and Constitutional Law Group:
Mark A. Perry – Washington, D.C. (+1 202-887-3667, [email protected])
James C. Ho – Dallas (+1 214-698-3264, [email protected])
Caitlin J. Halligan – New York (+1 212-351-4000, [email protected])
Securities Enforcement Group:
Barry R. Goldsmith – New York (+1 212-351-2440, [email protected])
Mark K. Schonfeld – New York (+1 212-351-2433, [email protected])
Richard W. Grime – Washington, D.C. (+1 202-955-8219, [email protected])
Marc J. Fagel – San Francisco (+1 415-393-8332, [email protected])
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