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Pepper Hamilton: Supreme Court Provides New Leverage For Defendants In Sec Enforcement Actions

The Kokesh decision has the potential to significantly limit the financial sanctions at issue in SEC enforcement actions, especially in the context of the SEC’s enforcement of the Foreign Corrupt Practices Act.

For many years, the U.S. Securities and Exchange Commission (SEC) has sought both civil monetary penalties and disgorgement of unlawful gains from those alleged to have violated federal securities laws. While civil monetary penalties are subject to a five-year statute of limitations under the Supreme Court’s 2013 decision in Gabelli v. SEC, the SEC could seek disgorgement of a defendant’s wrongful gains regardless of timing. For example, in 2015, Goodyear Tire & Rubber Company was ordered to disgorge more than $14 million based on actions that took place between 2007 and 2011. Indeed, in 2015, the SEC obtained more in disgorgement payments than it did in civil monetary penalties.1 But SEC claims for disgorgement will no longer be able to reach so far back in time.

On June 5, the U.S. Supreme Court issued a unanimous decision in Kokesh v. SEC, holding that disgorgement sought by the SEC is subject to the five-year statute of limitations set forth in 28 U.S.C. § 2462. This decision will limit the monetary sanctions available to the SEC and will likely impact the way it approaches investigations going forward.

The Kokesh Decision

Charles Kokesh was the owner of investment adviser firms that provided advice to a number of business development companies. In 2009, the SEC filed a complaint against Kokesh, seeking monetary penalties, disgorgement and injunctive relief for his alleged misappropriation of $34.9 million from several of those companies between 1995 and 2009. Following a five-day trial, a jury found that Kokesh violated various securities laws. The district court then imposed a $2.3 million penalty on Kokesh for the misappropriation that occurred between 2004 and 2009, that is, during the five-year statute of limitations imposed by 28 U.S.C. § 2462. Kokesh was also ordered to disgorge $34.9 million, even though $29.9 million resulted from conduct before 2004, because the district court concluded that no limitations period applied to disgorgement. The U.S. Court of Appeals for the Tenth Circuit affirmed.

Prior to the Supreme Court’s Kokesh decision, circuit courts had been split on whether disgorgement fell under § 2462’s five-year limitation period for actions seeking “any civil fine, penalty, or forfeiture.” The First, Tenth and D.C. Circuits held that disgorgement was not subject to the statute of limitations because it is not a “penalty” within the meaning of § 2462. The Eleventh Circuit held that disgorgement is effectively the same as “forfeiture” and thus § 2462 applied.

In Kokesh, the Supreme Court resolved this split by holding disgorgement is a “penalty” under § 2462, and therefore any claim for disgorgement made by the SEC “must be commenced within five years of the date the claim accrues.” The Court based its definition of “penalty” on two principles. First, penal laws are those “imposing punishment for an offense committed against the State.” In SEC enforcement actions, disgorgement is imposed as a consequence for violating “public laws.” The Court focused on the government’s admission that “[w]hen the SEC seeks disgorgement, it acts in the public interest, to remedy harm to the public at large, rather than standing in the shoes of particular injured parties.” Second, a monetary sanction operates as a penalty if it is sought “to deter others” as opposed to “compensating a victim for his loss.” The Court explained that deterrence has often been cited by courts as the “primary purpose of disgorgement orders.” Moreover, disgorged profits are paid to district courts, and, although the monies may go to securities fraud victims, compensation is a “distinctly secondary goal.” Thus, the Court held SEC disgorgement “bears all the hallmarks of a penalty” and the limitations of § 2462 apply.

Remarkably, subjecting disgorgement to the five-year statute of limitations period may not be the most significant piece of the Court’s opinion. In a footnote, the Court clarified that it was not providing an opinion on whether courts actually possess the authority to order disgorgement in SEC enforcement proceedings. Thus, we may see future challenges to a court’s ability to even order disgorgement in SEC enforcement proceedings, which would be a major blow to SEC enforcement.

Implications of Kokesh

The Kokesh decision has the potential to significantly limit the financial sanctions at issue in SEC enforcement actions, especially in the context of the SEC’s enforcement of the Foreign Corrupt Practices Act (FCPA). Disgorgement in FCPA cases tends to be large, and the underlying conduct often spans a number of years — often beyond the five-year statute of limitations. In light of this decision, we may begin to see a decrease in the length of time that the SEC takes to resolve actions. Moreover, defendants negotiating settlements will now have more leverage and should keep the Court’s ruling in mind when considering requests for tolling agreements.


1 Specifically, $3 billion in disgorgement versus $1.2 billion in civil monetary penalties. See SEC, Select SEC and Market Data: Fiscal 2015 at 2 (2016), available at

The material in this publication was created as of the date set forth above and is based on laws, court decisions, administrative rulings and congressional materials that existed at that time, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship.