For nearly a half-century, when bringing enforcement proceedings for violations of federal securities laws, the U.S. Securities and Exchange Commission has sought “disgorgement”—i.e., a sanction which forces defendants to fork over some or all of their ill-gotten gains—regardless of how long before the initiation of the proceeding the wrongful conduct generating those gains occurred. SEC v. Texas Gulf Sulphur Co., 312 F. Supp. 77, 91 (S.D.N.Y. 1970), aff’d in part and rev’d in part, 446 F.2d 1301 (2d Cir. 1971). But on June 5, in Kokesh v. Securities and Exchange Commission, __ S. Ct. __, No. 16-529 (June 5, 2017), a unanimous U.S. Supreme Court put a stop to the SEC’s end-run around the limitations period otherwise applicable to agency enforcement proceedings. Resolving a circuit split, the court held that disgorgement is a “penalty” within the meaning of 28 U.S.C. §2462, and therefore subject to the five-year limitations period set forth therein.
Kokesh closes the limitations loophole that the SEC has stepped through with increasing frequency since 2013, when the Supreme Court held that the SEC, unlike private litigants, cannot utilize the discovery rule to toll the applicable statute of limitations even when the underlying allegations sound in fraud. Gabelli v. SEC, 568 U.S. 442 (2013). The decision is thus the second big blow the court has dealt to the SEC’s ability to obtain sizeable money judgments in recent years. And reading between the lines, the decision signals that the court might soon be ready to deliver the knock-out punch and divest the SEC of the authority to seek disgorgement altogether.
