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Supreme Court Issues Kokesh Opinion Holding that FiveYear SOL Applies to Disgorgement Sought by the SEC

Mon 5 Jun, 2017 | Opinion by Carl Schoeppl   vCard

On June 5, 2017, the Supreme Court issued a unanimous opinion in Kokesh v. SEC,137 S.Ct. 1635 (2017), holding that the five-year statute of limitations for civil penalties applies to disgorgement sought by the SEC in its enforcement actions. In Kokesh, the Supreme Court resolved a circuit split regarding whether 28 U.S.C. § 2462, which establishes a five- year statute of limitations for an “action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture,” applies to disgorgement sought by the SEC in a civil enforcement action. In reaching this conclusion, the Supreme Court held that disgorgement in the securities-enforcement context is a “penalty” within the meaning of § 2462, and so disgorgement actions must be commenced within five years of the date the claim accrues. The Supreme Court concluded that disgorgement bears all the hallmarks of a penalty: It is imposed as a consequence of violating public law and it is intended to deter, not to compensate.

Implications

The Supreme Court’s decision in Kokesh represents a significant restriction upon the use of disgorgement in the SEC’s arsenal of enforcement weapons and eliminates the ability of the SEC to seek disgorgement of ill-gotten gains older than five years in litigated and settled enforcement actions. To combat this restriction in the wake of Kokesh, the SEC’s Division of Enforcement staff has sought tolling agreements in cases where statute of limitations concerns are a potential issue.