Tax Day Debate at Supreme Court Over Time for SEC Disgorgement

The Securities and Exchange Commission defended its ability to disgorge illegal profits from wrongdoers before the Supreme Court yesterday in Kokesh v. SEC. It was Justice Neil Gorsuch’s second day of oral arguments.  An opinion is expected by the end of the term in July.

The case is now focused on the question of how long the SEC can seek to recover funds through disgorgement. Disgorgement is one of the primary sources of funds recovered for violations of the federal securities laws. Civil penalties are limited both by the five year statute of limitations, according to the 2013 Supreme Court ruling in Gabelli v. SEC, as well as the Congressional limits. The SEC claims disgorgement is not limited by the five-year statute of limitations in 28 U.S.C. § 2462.

In the case at issue, the lower court ordered Kokesh to pay a civil penalty of $2.4 million, disgorgement of $34.9 million, and prejudgment interest of $18.1 million. Kokesh appealed and argued that the 11 year period for disgorgement used in the case was inappropriate.

The SEC argued that there is no statute of limitations because disgorgement is remedial. It is neither a penalty or a forfeiture under Section 2462 according to statutory construction. Moreover, adoption of the defendant’s position would reduce the likelihood that victims are compensated through the distribution of disgorged funds.

The case implicates possible payouts for SEC whistleblowers. If the Court cuts off disgorgement at five years, Kokesh would only pay $7.4 million in disgorgement and penalties (rather than $37.3 million), as well as a correspondingly smaller amount of prejudgment interest. A projected whistleblower award of between $5 million and $16 million under the current system will be valued under the defendant’s system at between $1 and $3 million.