(Article from Securities Law Alert, June 2017)
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On June 5, 2017, the Supreme Court unanimously held that disgorgement in an SEC enforcement action for violation of the securities laws is a “penalty” subject to Section 2462’s five-year statute of limitations. Kokesh v. SEC, 2017 WL 2407471 (2017) (Sotomayor, J.).
Section 2462 provides that SEC claims for civil monetary penalties must be brought within five years of the date the claim accrues. Gabelli v. SEC, 568 U.S. 442 (2013). Section 2462 states: “Except as otherwise provided by Act of Congress, an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued.”
The Court began its analysis by noting the history of the remedies sought by the SEC and the lack of statutory authorization for claims for disgorgement.[1] The Court then turned to Section 2462’s text and determined what constitutes a “penalty.” The Court defined a “penalty” as “a ‘punishment, whether corporal or pecuniary, imposed and enforced by the State, for a crime or offen[s]e against its laws.’” Id. (quoting Huntington v. Attrill, 146 U.S. 657 (1892)). Applying this definition, the Court reasoned that a remedy’s status as a penalty depends on two factors: first, whether the wrong it redresses is a public or private wrong and, second, whether the remedy is imposed to punish and deter, rather than to compensate a victim for his or her loss.
The Court found that disgorgement redresses a public wrong—a violation against the United States, not a particular individual. The Court also concluded that disgorgement is imposed primarily as a deterrent. The Court observed that there is no statutory requirement that courts distribute disgorged funds to a defendant’s victims and courts infrequently do so. Accordingly, the Court held that disgorgement “bears all the hallmarks of a penalty” and “[t]he 5-year statute of limitations in § 2462 therefore applies when the SEC seeks disgorgement.”
Finally, the Court responded directly to the U.S. Government’s argument that disgorgement is “remedial” rather than “punitive” because it merely restores the defendant to his or her position before the violation occurred. The Court noted that disgorgement sometimes leaves a defendant worse off than if he or she had not violated the securities laws and is therefore punitive.
[1] Congress has authorized disgorgement in the SEC’s own administrative proceedings, 15 U.S.C. § 78u–2(e), and monetary penalties in civil suits, 15 U.S.C. § 77t(d). However, it has never specifically authorized disgorgement as a remedy in enforcement actions by the SEC. Disgorgement remains an implied equitable remedy to be defined and applied by the courts.