In January 2017, the United States Supreme Court granted certiorari in SEC v. Kokesh (834 F.3d 1158 (10th Cir. 2016)) to determine whether claims for disgorgement by the Securities and Exchange Commission (the “SEC”) are subject to 28 U.S.C. § 2462’s five-year statute of limitations, an issue that has recently divided the circuit courts. Several circuit courts, including most recently the Tenth Circuit Court of Appeals in Kokesh, have concluded that a disgorgement claim is not a penalty or a forfeiture within the meaning of § 2462, but rather is a nonpunitive equitable remedy that does not fall within the statute’s purview. See, e.g., Riordan v. SEC, 627 F.3d 1230 (D.C. Cir. 2010); SEC v. Tambone, 550 F.3d 106 (1st Cir. 2008). Last May, however, the Eleventh Circuit Court of Appeals reached a contrary result in SEC v. Graham. See 823 F.3d 1357 (11th Cir. 2016). The Eleventh Circuit, finding “no meaningful difference in the definitions of disgorgement and forfeiture,” held that “the remedy of disgorgement is a forfeiture,” and, therefore, § 2462’s five-year limitations period applies.1 Graham, 823 F.3d at 1363. The Supreme Court’s decision later this year in Kokesh v. SEC (No. 16-259) will resolve this split among the circuits.
In October 2009, the SEC brought a civil enforcement action against Charles R. Kokesh, alleging that from 1995 to 2006 he violated federal securities laws by misappropriating funds from four SEC-registered business development companies (the “Funds”). See Kokesh, 834 F.3d at 1160. Following a jury trial in the SEC’s favor, the district court ordered, inter alia, $34.9 million in disgorgement, finding that the sum reasonably approximated the ill-gotten gains Kokesh misappropriated from the Funds during this 11-year period. See id. at 1164. On appeal to the Tenth Circuit, Kokesh contended that the SEC’s disgorgement claim “must be set aside because the claim accrued more than five years before the SEC brought its action and [is] therefore barred under the five-year statute of limitations in 28 U.S.C. § 2462 for government suits seeking penalties and forfeitures.” Id. at 1162. The Tenth Circuit disagreed, affirming the order of the district court.
Under § 2462, “an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture . . . shall not be entertained unless commenced within five years from the date when the claim first accrued.” 18 U.S.C. § 2462 (emphasis added). The Tenth Circuit, however, held that § 2462 did not apply to the disgorgement order sought by the SEC because it was neither a penalty nor a forfeiture within the meaning of this statute. See 834 F.3d at 1164.
In rejecting Kokesh’s claims on appeal, the Tenth Circuit first observed that “disgorgement is not a penalty under § 2462 because it is remedial.” See id.; see also Riordan, 627 F.3d at 1234 (“[D]isgorgement orders are not penalties, at least so long as the disgorged amount is causally related to the wrongdoing.”). Stated differently, the Court noted that the object of disgorgement is not to “inflict punishment,” but rather is to “‘eliminate profit from wrongdoing while avoiding, so far as possible, the imposition of a penalty.’” Kokesh, 834 F.3d at 1164 (quoting Restatement (Third) of Restitution & Unjust Enrichment § 51(4) (Am. Law Inst. 2010)). Although the Tenth Circuit acknowledged that disgorgement acts as a deterrent, it does so not by serving as a punitive function, but merely “by depriving the wrongdoer the benefits of wrongdoing.” Id.; see also SEC v. Contorinis, 743 F.3d 296, 301 (2d Cir. 2014).
The Tenth Circuit likewise rejected Kokesh’s claim that disgorgement is a forfeiture. While the circuit court recognized that the words “forfeiture” and “disgorgement” are defined similarly in Black’s Law Dictionary,2 the Tenth Circuit said that the proper inquiry in determining whether a disgorgement claim qualifies as a forfeiture is whether Congress, in enacting § 2462, intended “forfeiture” to be a punitive remedy. See Kokesh, 834 F.3d at 1165-66. The Tenth Circuit approached this analysis by examining forfeitures in the historical context of government actions. See id. at 1165. The Tenth Circuit stated that forfeiture, which “date[s] back to the early days of the Republic . . . was an in rem procedure to take ‘tangible property used in criminal activity.’” Id. (quoting United States v. 92 Buena Vista Ave., 507 U.S. 111, 118 (1993)). The circuit court noted that Congress passed legislation, for example, that authorized “the seizure and forfeiture of ships and cargos involved in customs offenses” and the “seizure and forfeiture of distilleries and other property to defraud the United States of tax revenues from the sale of alcoholic beverages.” Id. at 1166 (internal quotation marks and citation omitted). In these forfeiture proceedings, the Tenth Circuit observed that “[t]he owner of the seized property could be completely innocent of any wrongdoing, and the value of property taken have no necessary relation to any loss to others or gain to the owner.” Id.
Viewed in this historical context, the Tenth Circuit determined that Congress, in enacting § 2462, intended the word “forfeiture,” like “civil fine” and “penalty,” to have a punitive effect. See id. Accordingly, the circuit court held that because disgorgement is a nonpunitive remedy, the five-year limitations period in § 2462 is inapplicable to SEC disgorgement claims. See id. at 1167.
Oral argument has not yet been scheduled by the Supreme Court in Kokesh, but the business community is already paying close attention to the outcome of this appeal. The Chamber of Commerce of the United States has submitted a brief to the Supreme Court at the certiorari stage in Kokesh, urging the high court to reverse the decision of the Tenth Circuit.3 Acknowledging “that the appropriate exercise of enforcement powers by the SEC and other agencies is important for ensuring that financial and other markets function” properly, the Chamber of Commerce cautioned that a rule allowing the SEC to pursue disgorgement claims beyond the five-year limitations period in § 2462 would unduly hurt businesses, exposing them to potential liability “for an additional uncertain period into the future.” 2016 WL 6877081, at *1, *17. Citing the Supreme Court’s decision in Gabelli v. SEC (133 S. Ct. 1216 (2013)) that found the limitations period in § 2462 to apply to statutory penalties in SEC enforcement actions, the Chamber of Commerce pressed the Supreme Court to adopt the same rule, on fairness grounds, for disgorgement claims. See id. at *17; see also United States v. Kubrick, 444 U.S. 111, 117 (1979) (“‘the right to be free of stale claims in time comes to prevail over the right to prosecute them.’”) (quoting Order of R.R. Telegraphers v. Ry. Express Agency, 321 U.S. 342, 349 (1944)).
Disgorgement is a remedy that the SEC vigorously pursues. In 2015 alone, the SEC obtained disgorgement awards totaling approximately $3 billion; this contrasts with the roughly $1 billion that the SEC secured in civil penalties for the same period.4 A decision in Kokesh that does not impose a limitations period to SEC disgorgement claims will not only embolden the SEC to further expand its quest for these types of awards but will make it more difficult for businesses to assess the risk of future SEC enforcement action. Given the potential impact such a holding will have on many of our clients, we will monitor Kokesh closely in the coming months.
1 See http://www.bakerbotts.com/ideas/publications/2016/06/eleventh-circuit-holds-sec.
2 See Black’s Law Dictionary 568, 765 (10th ed. 2014) (defining disgorgement as “[t]he act of giving up something (such as profits illegally obtained) on demand or by legal compulsion,” and forfeiture as “[t]he loss of a right, privilege, or property because of a crime, breach of obligation, or neglect of duty”).
3 See Brief for the Chamber of Commerce of the United States of America as Amicus Curiae in Support of Petitioner, Kokesh v. SEC, No 16-259 (Nov. 18, 2016), 2016 WL 6877081.
4 See https://www.sec.gov/reportspubs/select-sec-and-market-data/secstats2015.pdf (last accessed Feb. 14, 2017).