Should individuals sued by the SEC have to give up, or “disgorge,” corporate gains resulting from a fraud, or just their own direct gains? In an Aug. 29 summary order, SEC v. Metter,1 the U.S. Court of Appeals for the Second Circuit avoided wrestling with this question, but it may be one of the next major battles in the wake of the Supreme Court’s June 5, 2017 decision in Kokesh v. SEC, 137 S. Ct. 1635. Kokesh held that the disgorgement remedy in SEC enforcement actions is a “penalty” for purposes of the five-year limitations period for the “enforcement of any civil fine, penalty, or forfeiture.” 28 U.S.C. §2462. Many have assumed, on the basis of a footnote in the decision, that courts will soon be considering whether they have authority to order disgorgement at all in SEC enforcement actions. That issue certainly lurks, but I suspect that courts first will revisit the proper scope of the remedy, including whether a court may force a defendant to “disgorge” ill-gotten gains that the defendant did not personally receive but that went to third parties, such as individuals and entities associated with the defendant.
Background
Kokesh arose from Charles Kokesh’s use of investment-adviser firms he owned to misappropriate funds from clients. 137 S. Ct. at 1641. Kokesh himself did not pocket all the proceeds from this scheme, some of which were paid to other officers of the firms and to a landlord for office rent. SEC v. Kokesh, 834 F.3d 1159, 1161 (10th Cir. 2016); SEC v. Kokesh, 2015 WL 11142470, at *9-10 (D.N.M. March 30, 2015). Kokesh was nevertheless ordered to pay the government, as disgorgement of ill-gotten gains, the full amount of the misappropriated funds (about $35 million) plus prejudgment interest of about $18 million. Most of the money was misappropriated more than five years before the SEC filed suit. 137 S. Ct. at 1641.
