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Supreme Court Limits Powerful SEC Enforcement Tool, Holding that Disgorgement is Subject to Five-Year Statute of Limitations

By: Iris E. Bennett, Sean J. Hartigan, Erica A. Reed

For going on fifty years, disgorgement of ill-gotten gains has been a powerful enforcement tool for the Securities and Exchange Commission (SEC) in enforcement actions against publicly-traded companies as well as individuals whose business activities subject them to SEC regulation and enforcement jurisdiction.  Thus, disgorgement is routinely employed by the SEC in cases brought under the Foreign Corrupt Practices Act (FCPA), as well as in a variety of other areas governed by the SEC, such as insider trading and other forms of investor fraud.

In FCPA matters, for example, disgorgement amounts – whereby a company has to pay an amount equal to its contract profits or other gains obtained through illicit payments to foreign government officials – often far exceed the amounts imposed through the Securities and Exchange Act’s civil monetary penalties regime.  Moreover, in our experience, the SEC typically seeks disgorgement as a matter of course in such cases, whereas it may or may not seek civil monetary penalties.  The exception to these two patterns typically has been only those cases where there is no gain that can be identified, rendering disgorgement moot.

The SEC’s disgorgement remedy was a product of federal courts agreeing, in the 1970s, with the SEC’s argument that the courts had the discretion to impose disgorgement pursuant to their inherent equitable powers.  Disgorgement was thus not a product of statute.  The SEC, for its part, therefore took the position that the five-year statute of limitations imposed on SEC monetary penalties by the Securities and Exchange Act did not apply to disgorgement.  For companies facing SEC enforcement actions for FCPA or other violations, this meant these companies could face potentially enormous liability, by way of disgorgement, even for very old conduct.  If seeking to settle a case, it would typically mean accepting the SEC’s position as to the lack of a statute of limitations.  If willing to litigate, there would be the risk of not prevailing in the courts.

A circuit split over the statute of limitations issue arose in the wake of a 2013 Supreme Court decision, Gabelli v. Securities and Exchange Commission, 133 S. Ct. 1216 (2013), in which the Court held that enforcement actions seeking civil penalties under § 2462 must be brought within five years from the date when the defendant’s allegedly fraudulent conduct occurs, and not when the fraud is discovered.  See 133 S. Ct. at 1220 n.1.  Gabelli did not address whether claims for disgorgement were subject to the same rule.  The D.C. Circuit and the First Circuit both subsequently held that disgorgement is not a “penalty,” and therefore was not subject to the statute of limitations.  Riordan v. SEC, 627 F.3d 1230, 1234 (D.C. Cir. 2010); SEC v. Tambone, 550 F.3d 106, 148 (1st Cir. 2008).  The Eleventh Circuit, however, concluded that disgorgement is a form of “forfeiture,” and therefore fell within the statute of limitations provision.  SEC v. Graham, 823 F.3d 1357, 1364 (11th Cir. 2016).

In SEC v. Kokesh, the Tenth Circuit disagreed with the Eleventh Circuit, affirming the lower court’s decision that the § 2462 five-year statute of limitations applied to the civil monetary penalties but did not apply to a $34.9 million disgorgement judgment against Kokesh.[1] 

On June 5, 2017, however, the Supreme Court ruled unanimously in Kokesh v. SEC that disgorgement claims in SEC enforcement actions are “penalties” within the meaning of the statutory provision applying a five-year statute of limitations to SEC fines, penalties, or forfeitures.  Writing for the Court, Justice Sonia Sotomayor first summarizes the principles that, in the Supreme Court’s jurisprudence, render an enforcement remedy or sanction a “penalty.”  She explained that penalties are “imposed as a consequence of violating a public law and [are] … intended to deter, not to compensate.”  Kokesh v. SEC, No. 16-529, slip op. at 9 (U.S. June 5, 2017).[2]  The Court concluded that disgorgement “bears all the hallmarks of a penalty,” because it is clearly imposed for violations of public law, not to remedy private wrongs, and because disgorgement, while at times it may have a compensatory purpose, is not limited to that purpose because it is also imposed for its deterrence effect.  Id. at 8.  Justice Sotomayor also noted the fundamental importance of statutes of limitations in our system of law, which is that “even wrongdoers are entitled to assume that their sins may be forgotten” at some point.  Id. at 5.

Disgorgement has been and is a powerful remedy for the SEC.  Given the frequency with which the SEC seeks disgorgement, the Supreme Court’s decision in Kokesh will undoubtedly have a significant impact on corporations and individuals subject to financial penalties in SEC enforcement actions.  The SEC will now be constrained with regard to the period of time in which disgorgement can be sought, which will be particularly important when illegal conduct occurred over time.  For companies and individuals willing to defend against an SEC enforcement action in court, they should now be able to successfully defeat such actions where based on old conduct.  

For those seeking a settlement without litigation, however, it will be no surprise if the SEC now routinely asks for statute of limitations tolling agreements, as DOJ typically does when dealing with companies that are seeking a negotiated resolution to an FCPA or other enforcement action.  Companies that are seeking to resolve an enforcement action as amicably as possible, and without litigation, can face tremendous pressure to agree to such tolling, although whether this makes sense depends very much on the individual circumstances of the case.  In addition, the pressure in an SEC enforcement context may be somewhat less than in the DOJ context, where the alternative to tolling can be that the Department will issue a criminal indictment.  At a minimum, parties facing SEC enforcement actions do now at least have the assurance that disgorgement is subject to a statute of limitations, and that the SEC must either act within that time period, or negotiate a tolling agreement or other settlement terms with which both parties can agree.


[1] In 2009, the SEC filed a civil enforcement action against Charles Kokesh alleging violations of federal securities laws from 1995 through 2006 by misappropriating funds from four business development companies.

[2] Full opinion available at