By John Durrant
On June 5, 2017, the U.S. Supreme Court unanimously ruled that claims by the Securities and Exchange Commission seeking disgorgement must be commenced within five years of accrual. The ruling, which resolved a circuit split, represents a very important curtailment of the SEC’s enforcement authority. The SEC had previously argued that there was effectively no limitations period that applied to disgorgement and accordingly sought to disgorge purportedly ill-gotten gains going back, in some cases, decades. Justice Sotomayor’s lucid opinion categorically rejected the SEC’s position. Potentially more disconcerting for the SEC, language in the decision suggests the Court may look at further limitations on the judicially created disgorgement remedy in the future.
The sole question posed in Kokesh v. SEC, case number 16-529, 581 U.S. ___ (2017), was whether 28 U.S.C. § 2462 applied to claims by the SEC for disgorgement. Section 2462 sets forth a 5-year statute of limitations for “an action, suit or proceeding for the enforcement of any civil fine, penalty or forfeiture” brought by the Government. The SEC argued that its claims for disgorgement did not fit this definition – that a disgorging defendant was merely giving up that to which he or she was not entitled and that disgorgement was an “equitable remedy” not a “penalty.” The Court rejected this argument, holding that disgorgement “bears all the hallmarks of a penalty” (i.e., a Government-imposed “punishment”) in two regards: (i) it seeks to redress a wrong to the public (not an individual); and (ii) it seeks to punish wrongdoers and deter similar wrongdoing by others. (more…)