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(Article from Securities Law Alert, September 2016) 

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Pursuant to 28 U.S.C. § 2462, the SEC and other federal government entities may not bring any “action, suit, or proceeding for the enforcement of any civil fine, penalty, or forfeiture” more than five years after the claim first accrued.

On August 23, 2016, the Tenth Circuit held Section 2462’s limitations period does not apply to SEC claims for disgorgement or injunctive relief. SEC v. Kokesh, 2016 WL 4437585 (10th Cir. 2016) (Hartz, J.). The Tenth Circuit’s decision deepened a circuit split on the question of whether disgorgement is a type of “forfeiture” within the meaning of Section 2462.

Tenth Circuit Holds Disgorgement Is Not a “Forfeiture” for Section 2462 Purposes

The Tenth Circuit stated that “[d]isgorgement consists of factfinding by a district court to determine the amount of money acquired through wrongdoing . . . and an order compelling the wrongdoer to pay that amount plus interest to the court.” Kokesh, 2016 WL 4437585. The Tenth Circuit noted that it has previously held that “disgorgement is not a penalty under § 2462 because it is remedial” in nature. The court observed that when “[p]roperly applied, the disgorgement remedy does not inflict punishment” but instead “leaves the wrongdoer in the position he would have occupied had there been no misconduct.”

The Tenth Circuit determined that disgorgement is also not a “forfeiture” within the meaning of Section 2462. The court acknowledged that “in common English the words forfeit and disgorge . . . capture similar concepts.” However, the Tenth Circuit found “[t]he word forfeiture in § 2462 must be read in the context of government causes of action.” The court explained that historically, “[f]orfeiture was an in rem procedure to take tangible property used in criminal activity.” The Tenth Circuit found that “[w]hen the term forfeiture is linked in § 2462 to the undoubtedly punitive actions for a civil fine or penalty, it seems apparent that Congress was contemplating the meaning of forfeiture in this historical sense.” The court reasoned that “[t]he nonpunitive remedy of disgorgement does not fit in that company.”

The Tenth Circuit “recognize[d] that in recent years some federal forfeiture statutes have been expanded to include disgorgement-type remedies.” However, the court found that “this expansion should not expand the meaning of the word forfeiture in § 2462 to encompass traditional disgorgement remedies outside those forfeiture statutes.” The Tenth Circuit explained that words in statutes must “be interpreted as taking their ordinary, contemporary, common meaning at the time Congress enacted the statute.” Moreover, the court emphasized that statutes of limitation must be “interpreted narrowly in the government’s favor.” The court reasoned that it “should not strain to expand the meaning of [§ 2462’s] language to restrict the government” from bringing suit.

Notably, the Tenth Circuit expressly disagreed with the Eleventh Circuit’s decision in SEC v. Graham, 823 F.3d 1357 (11th Cir. 2016).[1] The Graham court found “no meaningful difference in the definitions of disgorgement and forfeiture,” and concluded that disgorgement is a type of “forfeiture” subject to Section 2462’s limitations period.

Tenth Circuit Finds Injunctive Relief Is Not a “Penalty” Subject to Section 2462’s Limitations Period

The Tenth Circuit further held that an SEC order permanently enjoining a defendant from violating certain provisions of the securities laws is not a “penalty” for purposes of Section 2462’s limitations period. The court reasoned that “an order to obey the law” is not designed to “penalize [a d]efendant” but rather, “to protect the public by giving [the d]efendant an added incentive to conduct himself in accordance with the securities laws.” The Tenth Circuit stated that courts have long recognized that an order to obey the law “is purely remedial and preventative” and not punitive in nature.