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Earlier this week, the U.S. Supreme Court (“Supreme Court”) issued its decision in Kokesh v. SEC, No. 16-529, unanimously holding that disgorgement claims brought as part of enforcement actions by the U.S. Securities and Exchange Commission (“SEC” or “Commission”) operate as penalties and, therefore, are subject to the five-year limitations period set forth in 28 U.S.C. § 2462 (Section 2462). In doing so, the Supreme Court resolved a growing circuit split in a ruling that may impact the SEC’s use of one of its common enforcement tools.

The case involved Charles Kokesh (“Kokesh”), the owner of two investment adviser firms providing investment advice to business development companies. The SEC alleged that Kokesh misappropriated $34.9 million from four clients. Kokesh v. SEC, No. 16-529, slip op. at 3, 581 U.S. ___ (2017). The Commission sought civil money penalties, disgorgement and an injunction barring Kokesh from violating securities laws in the future. Id. at 4. Following trial, the jury found Kokesh liable for the violations alleged. Id. In determining appropriate penalties, the District Court held that Section 2462, which imposes a five-year limitations period upon any “action, suit or proceeding for the enforcement of any civil fine, penalty or forfeiture,” applied to the civil penalties sought by the SEC and precluded recovery for any misappropriation occurring more than five years before the Commission filed its complaint. Id. Regarding disgorgement, the District Court agreed with the Commission that disgorgement is not a “penalty” within the meaning of Section 2462 and, thus, no limitations period applied. Id. As a result, the District Court entered a disgorgement judgment in the amount of $34.9 million and ordered Kokesh to pay an additional $18.1 million in prejudgment interest. The Tenth Circuit affirmed, agreeing that disgorgement was neither a penalty nor a forfeiture under Section 2462. Id.; 834 F. 3d 1158 (2016).

Upon review, the Supreme Court reversed, reasoning that disgorgement in the context of an SEC enforcement action operates as a “penalty” within the meaning of Section 2462 for several reasons. First, it is imposed as a consequence for violating public laws committed against the United States rather than a particular victim. Kokesh, No. 16-529, slip op. at 7. In other words, when it seeks disgorgement, the SEC acts in the public interest to remedy harm to the public at large. Id. Second, disgorgement is imposed for punitive purposes, namely deterrence of future violations of the securities laws by depriving violators of ill-gotten gains. Id. at 8. Finally, disgorgement is often not compensatory. Id. At 8 – 9. While disgorged funds can be used to compensate fraud victims for their losses, the final decision of how and to whom to distribute the money is left to the district court’s discretion. Id. at 9.

The Supreme Court rejected the Commission’s argument that disgorgement in this context is not a “penalty,” but rather a “remedial” sanction that lessens the effects of a violation by restoring the status quo. Id. at 10. The Supreme Court stated that it is not at all clear that disgorgement, as courts have applied it in this context, returns the defendant to the place he would have occupied had he not broken the law. Id. In fact, the Supreme Court noted, disgorgement sometimes exceeds the profits gained as a result of the violation and leaves the defendant worse off, further demonstrating the punitive nature of the disgorgement remedy. Id.

The Kokesh decision is likely to have a significant effect on both the timing of SEC enforcement actions and the remedies sought therein. Companies facing such actions should consider these new limitations on disgorgement penalties when negotiating settlements and/or tolling agreements.

If you would like additional information regarding this decision and its potential impact, please contact Joshua Dunn at +1 (212) 407 7791, Thomas P. Cimino, Jr.  at +1 (312) 609 7784, Junaid A. Zubairi  at +1 (312) 609 7720 or any Vedder Price attorney with whom you have worked.


Thomas P. Cimino, Jr.


Joshua A. Dunn


Junaid A. Zubairi