Supreme Court limits disgorgement in SEC enforcement actions with a five-year statute Of limitations



Global Publication June 13, 2017

On June 5, 2017, the Supreme Court unanimously held in Kokesh v. SEC, No. 16-529, that disgorgement imposed as a sanction in Securities and Exchange Commission enforcement proceedings is a "penalty" subject to the five-year statute of limitations set forth in 28 U.S.C. § 2462. In reaching its decision, the Court resolved a circuit split and rejected the contrary view because disgorgement is intended to deter wrongdoing and enforce violations of public laws, as opposed to compensating victims.


In Kokesh, the Court first described the history of the SEC’s use of disgorgement. Initially, the only available statutory remedy by the SEC in enforcement actions were injunctions barring future violations of securities laws. In the absence of statutory authorization for monetary remedies, the SEC began obtaining disgorgement orders from courts in the 1970s as an exercise of a court’s inherent power to grant equitable relief ancillary to an injunction. In 1990, Congress authorized the SEC to seek monetary civil penalties as part of the Securities Enforcement Remedies and Penny Stock Reform Act. As the Court noted in Kokesh:

The Act left the Commission with a full panoply of enforcement tools: It may promulgate rules, investigate violations of those rules and the securities laws generally, and seek monetary penalties and injunctive relief for those violations. In the years since the Act, however, the Commission has continued its practice of seeking disgorgement in enforcement proceedings.

Notably, in 2013 the Court held in Gabelli v. SEC, 568 U.S. 442, 454 (2013), that the five-year statute of limitations set forth in 28 U.S.C. § 2462 applies when the SEC seeks statutory monetary penalties.

In Kokesh, the Court was confronted with the question of whether disgorgement was subject to the same five-year statute of limitations. A jury had found that Charles Kokesh engaged in wrongdoing in connection with US$34.9 million he misappropriated from several business development companies between 1995 and 2009 in violation of the Investment Company Act of 1940 and the Securities Exchange Act of 1934. The United States District Court for the District of New Mexico limited the civil monetary penalties to the five-year statute of limitations period—for US$2,354,593—but held disgorgement of US$34.9 million (of which US$29.9 million resulted from violations outside the limitations period) was proper because the limitations period did not apply. The court also awarded US$18.1 million in prejudgment interest. The Tenth Circuit affirmed the decision on grounds that disgorgement is neither a penalty nor a forfeiture.

The Supreme Court’s ruling

Justice Sonia Sotomayor wrote the succinct opinion for a unanimous Court reversing the Tenth Circuit.

The opinion first noted that the five-year statute of limitations of 28 U.S.C. § 2462 applies to any "action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise."

The Court then determined that "SEC disgorgement . . . bears all the hallmarks of a penalty." SEC disgorgement is imposed as a consequence of violating "public laws," or violations for wrongs committed against the United States as opposed to an aggrieved individual. It is also imposed for punitive purposes to deter wrongdoing. Finally, the Court noted, SEC disgorgement is not compensatory. As courts and the SEC have applied the remedy, disgorged profits are paid to district courts, and there is no statutory requirement mandating courts distribute funds to victims. In reaching its holding, the Court rejected the SEC’s position that disgorgement was remedial in nature. It noted, for example, that disgorgement may exceed the profits gained as a result of the violation, such as when a tipper is required to disgorge the profits of his tippees.

Based on the Court’s holding, the US$34.9 million disgorgement judgment against Kokesh would be reduced by US$29.9 million to US$5 million—a significant reduction.


Kokesh decision resolves a circuit split and firmly establishes that disgorgement in SEC enforcement proceedings are constrained by the five-year statute of limitations found in 28 U.S.C. § 2462. The SEC’s ability to punish violators of federal securities laws through disgorgement may be substantially limited where the misconduct took place over a long period of time and took many years to uncover and prosecute, and the decision may also encourage the SEC to institute enforcement actions on a faster timetable. In addition, Kokesh may subject disgorgement in certain other government agency enforcement actions similar to SEC enforcement actions, such as those brought by the Commodity Futures Trading Commission, to a five-year statute of limitations under 28 U.S.C. § 2462. Notably, the Court wrote in a footnote that "[n]othing in this opinion should be  interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings or on whether courts have properly applied disgorgement principles in this context." This statement may be an invitation by the Court to examine further whether it is appropriate for courts to order disgorgement in SEC enforcement proceedings.


Our client alerts are for general informational purposes and should not be regarded as legal advice.

Recent publications

Subscribe and stay up to date with the latest legal news, information and events . . .