sotomayorOn June 5, 2017, in an opinion written by Justice Sonia Sotomayor for a unanimous court, the U.S. Supreme Court held that the five-year statute of limitations applies to claims for disgorgement imposed as a sanction for violation the federal securities laws. The Court rejected the SEC’s argument that the statute of limitations was not applicable to claims for disgorgement. The decision provides greater certainty about the scope of potential liability for parties facing SEC liability. The decision is also important in light of the other securities law statute of limitations case that remains pending on the Court’s docket. The U.S. Supreme Court’s June 5, 2017 opinion can be found here.



In 2009, the SEC launched an enforcement action against Charles Kokesh, alleging that between 1995 and 2006, Kokesh misappropriated $34.9 million in investors’ funds. The enforcement action resulted in civil penalties against Kokesh of $2.4 million, as well as an order requiring Kokesh to disgorge the entire amount misappropriated amount going all the way back to 1995.


Kokesh sought to argue at the district court that the disgorgement amount was subject to a five-year statute of limitations period, in reliance on 28 U.S.C. § 2462, which provides that the “enforcement of any civil fine, penalty, or forfeiture” should be “commenced within five years from the date when the claim first occurred.” The district court agreed with the SEC that because disgorgement is not a “penalty” within the meaning of Section 2462, no limitations period applied. Kokesh appealed to the Tenth Circuit, which upheld the entire disgorgement award as not time barred, agreeing with the district court that disgorgement is not a penalty, and adding the further finding that a disgorgement is not a forfeiture. Kokesh filed a petition for a writ of certiorari with the U.S. Supreme Court.


On January 13, 2017, the Supreme Court granted the cert petition and took up the case in order to address a split in the circuits on the issue of the issue of the applicability of the five-year statute of limitations to disgorgement claims. In contrast to the Tenth Circuit in the Kokesh case, the Eleventh Circuit held in 2016 in Securities and Exchange Commission v. Graham (here) that there is “no meaningful difference in the definitions of disgorgement and forfeiture” and added that disgorgement can be “considered a subset of forfeiture.”


The June 5, 2017 Opinion

In her June 5, 2016 opinion for a unanimous court, Judge Sotomayor wrote that disgorgement “in the securities enforcement context is a ‘penalty’ within the meaning of Section 2462, and so disgorgement actions must be commenced within five years of the date the claim accrues.”


Justice Sotomayor cited three factors in support of the conclusion that disgorgement is a penalty. First, disgorgement is imposed by the courts as a consequence for violating the public laws. Second, disgorgement is imposed for punitive purposes; the primary purpose of disgorgement orders is to deter violations of the securities laws by depriving violators of their ill-gotten gains. Third, in many cases, disgorgement is not compensatory. Disgorged profits are paid to the district court, and it is within the court’s discretion to determine how and to whom the money will be distributed.



Therefore, Justice Sotomayor concluded, because disgorgement is “imposed as a consequence of violating a public law and it is intended to deter, not compensate,” it “bears all the hallmarks of a penalty,” and therefore the five-year statute of limitations under Section 2462 applies.



A number of amici curiae filed briefs in support of Kokesh’s position, among others the U.S. Chamber of Commerce and even Mark Cuban. The briefs sought to argue that in the absence of any limitations period, individuals and companies could find themselves subject to potentially ruinous disgorgement claims based upon conduct that had taken place, in many cases, decades in the past. Among other concerns, the amici argued, is that this might permit government agencies to seek recoveries for long past conduct that may have been acceptable at the time, and it subjected defendants to the burdens of fading memories and long-forgotten decisions and actions.


The Court’s unanimous decision should provide future defendants with greater certainty about the scope of their potential liability and spare them having to litigate issues relating to long-past conduct. The Court’s ruling should also reduce the potential monetary recoveries available to the SEC through its use of disgorgement claims. In some instances, the operation of the statute of limitations could make the availability of the disgorgement remedy entirely unavailable.


The Court’s decision arguably was not unexpected, but it is still interesting in at least two respects. First, it represents the first securities law decision in which Justice Neil Gorsuch, the Court’s newest member, fully participated. Justice Gorsuch was present for the April 18, 2017 oral arguments in this case and was one of the members of the Court that joined the unanimous opinion.


This case is actually only one of two securities law statutes of limitations cases that the Court took up this term. As discussed here, the U.S. Supreme Court also granted cert this term in California Public Employees’ Retirement System v. ANZ Securities Inc. to take up the question of whether or not under principles known as the “American Pipe doctrine,” the filing of a securities class action lawsuit tolls the Securities Act’s statute of repose.


Although the ANZ Securities case has to do with a statute of repose rather than a statute of limitations, both the Kokesh case and the ANZ Securities case deal with the question of how limitations periods operate in the securities law context. Though these issues can seem arcane, they can have very significant practical implications and can be determinative in specific cases. The Court’s decision in the Kokesh case reveals little that may be relevant to the ANZ Securities case, except to the extent that both cases show that the Court seems interested in and willing to take up relatively narrow procedural cases.


The Paul Weiss law firm’s memo about the Supreme Court’s decision in Kokesh can be found here.