Risk & Compliance

High Court Limits Scope of SEC Disgorgement

The court hands Wall Street firms a major victory by finding disgorgement is a penalty subject to a five-year statute of limitations.
Matthew HellerJune 5, 2017
High Court Limits Scope of SEC Disgorgement

In a major victory for Wall Street firms, the U.S. Supreme Court has narrowed the reach of the Securities and Exchange Commission’s “disgorgement” remedy, its principal enforcement tool.

The high court on Monday sided with a New Mexico-based investment adviser in ruling that disgorgement is subject to the same five-year statute of limitations as civil monetary penalties, precluding the SEC from reaching further into the past to recover ill-gotten pains.

“Because disgorge­ment orders ‘go beyond compensation, are intended to punish, and label defendants wrongdoers’ as a conse­quence of violating public laws, they represent a penalty and thus fall within the 5-­year statute of limitation,” Justice Sonia Sotomayor wrote for a unanimous court.

The government had argued that disgorgement is merely “remedial” and not punitive because it “lessen[s] the effects of a violation” by “‘restor[ing] the status quo.”

According to Reuters, the decision is a major victory for Wall Street firms, which had urged the justices to curb the SEC’s powers in order to provide more certainty and predictability to the enforcement process.

“We are pleased with the Supreme Court’s opinion today, which grants important protection to defendants facing enforcement actions by the SEC and other agencies,” said Adam Unikowsky, one of the attorneys for investment adviser Charles Kokesh.

The SEC began an enforcement action against Kokesh in 2009, alleging he misappropriated $34.9 million from four of his firms between 1995 and 2009. After he was convicted in a jury trial, the judge granted the commission’s request for $34.9 million in disgorgement, $29.9 million of which resulted from violations before the five-year statute began running in October 2004.

Kokesh lost his appeal to the 10th U.S. Circuit Court of Appeals but Justice Sotomayor agreed that the disgorgement was a punitive “forfeiture” subject to the time bar.

“It is not clear that disgorgement … simply returns the defendant to the place he would have occupied had he not broken the law,” she said, noting that it sometimes exceeds the profits gained as a result of a violation.