Shearman & Sterling LLP | Government Regulatory Enforcement Blog | Supreme Court Grants <em >Certiorari </em >To Resolve Circuit Split Relating To Timing Of SEC Disgorgement Actions<br >  
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  • Supreme Court Grants Certiorari To Resolve Circuit Split Relating To Timing Of SEC Disgorgement Actions
    On January 13, 2017, the United States Supreme Court granted certiorari in the case Kokesh v. SEC, 834 F.3d 1158 (10th Cir. 2016), cert. granted sub nom. Kokesh v. SEC (U.S. Jan. 13, 2017) (Kokesh II), to resolve a circuit split relating to the time in which the SEC must file disgorgement actions. Kokesh, No. 16-529, 2017 WL 125673 (U.S. Jan. 13, 2017).

    At issue is the interpretation of Title 28, United States Code, Section 2462, which states that “[e]xcept as otherwise provided by Act of Congress, an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued[.]”  In Kokesh, the Tenth Circuit held that this statute did not limit the SEC’s ability to pursue a disgorgement action, since  disgorgement is remedial in nature rather than punitive, and also does not qualify as a “forfeiture” under § 2462.  Kokesh II at 1162-64 (2013).  This interpretation is in line with other Circuits to have addressed this issue.  See SEC v. Tambone, 550 F.3d 106 (1st Cir. 2008), rehg en banc granted, opinion withdrawn, 573 F.3d 54 (1st Cir. 2009), and opinion reinstated in part on rehg, 597 F.3d 436 (1st Cir. 2010); Riordan v. SEC, 627 F.3d 1230 (D.C. Cir. 2010).  By contrast, the Eleventh Circuit recently held that § 2462’s statute of limitations did apply to disgorgement.  SEC v. Graham, 823 F.3d 1357, 1363.  Section 2462, the Eleventh Circuit reasoned, applies to any action seeking a “forfeiture,” because “forfeiture and disgorgement are effectively synonyms.” Id. Unlike the Tenth Circuit, which focused on the historical meaning of the word “forfeiture,” the Eleventh Circuit focused on the similarities between the modern definitions of “forfeiture” and “disgorgement,” concluding that they could be used “interchangeably.” Id.
    The Supreme Court recently construed this statute to limit the SEC’s ability to pursue civil monetary penalties, Gabelli v. SEC, 133 S. Ct. 1216, 1220-24 (2013), but expressly left open the issue on which it granted certiorari last week.  Id., at n. 1.
    Resolution of this issue could have a significant impact on the monetary amounts that the SEC seeks to recoup from defendants, and the instant cases is a good example of that.  There, the Securities and Exchange Commission (the “SEC”)  filed a civil enforcement action against Charles Kokesh in 2009, claiming that from 1995 to 2006 Kokesh misappropriated money from four SEC-registered business development companies (“Funds”) in violation of Section 37 of the Investment Company Act of 1940, 15 U.S.C. § 80a-36.  SEC v. Kokesh, No. 09-CV-1021 SMV/LAM, 2015 WL 11142470, at *1 (D.N.M. Mar. 30, 2015), affd, 834 F.3d 1158 (10th Cir. 2016), cert. granted sub nom. Kokesh v. SEC (U.S. Jan. 13, 2017) (Kokesh I). A jury found Kokesh liable, and the District Court ordered disgorgement of $34.9 million plus prejudgment interest of $18.1 million. Id. That amount included alleged ill-gotten gains reaching back to 1995.  Petition for Cert at 5.  Had the District Court found that Section 2462 applied to claims for disgorgement, then Kokesh would have only been liable for approximately $5 million in disgorgement.
    On appeal, Kokesh argued that Section 2462 limits claims for disgorgement, and that the disgorgement order must be set aside because the amount was tied to claims that accrued well beyond the five years prior to the SEC’s filing suit.  Kokesh II at 1164.  The Tenth Circuit rejected this claim, finding that Section 2462 did not apply to claims for disgorgement because (1) disgorgement is remedial, rather than punitive; and (2) disgorgement is not the equivalent of “forfeiture,” as provided in Section 2462.  Regarding the latter, the Tenth Circuit stated that forfeiture historically had been punitive in nature, while disgorgement has always been an equitable remedy.  Id. at 1165-66.  The court acknowledged that “in recent years some federal forfeiture statutes have been expanded to include disgorgement-type remedies,” id. at 1166, but held that “this expansion should not expand the meaning of the word forfeiture in § 2462 to encompass traditional disgorgement remedies outside those forfeiture statutes.  We have said that when interpreting statutory language, ‘words will be interpreted as taking their ordinary, contemporary, common meaning at the time Congress enacted the statute.’” Id. (internal citation omitted).
    As noted above, the impact of the Supreme Court’s decision in Kokesh could be significant in assessing the potential exposure clients face in SEC investigations.  The case has not yet been scheduled for argument.  We will continue to monitor developments in the case.