Tenth Circuit Holds That Disgorgement Is Not Subject to A Five-Year Limitations Period
On August 23, 2016, the United States Court of Appeals for the Tenth Circuit rejected an appeal by Charles Kokesh that contested, among other things, an order that he pay $34.9 million in disgorgement on statute of limitations grounds. S.E.C. v. Kokesh, No. 15-2087, slip op. at 2 (10th Cir. Aug. 23, 2016). Kokesh had claimed that the disgorgement order should have been barred by the five-year limitations period in 28 U.S.C. § 2462, citing the recent Eleventh Circuit decision S.E.C. v. Graham, 823 F.3d 1357 (11th Cir. 2016), which held that § 2462 applied to disgorgement. The Tenth Circuit, however, rejected the Eleventh Circuit’s analysis and held that the disgorgement order was not subject to § 2462 because it was neither a penalty nor forfeiture.
At trial, a jury found that Kokesh caused two investment adviser entities to pay bonuses and salaries to the advisers’ officers, including Kokesh, from 1995 through 2006. According to the SEC, these payments, as well as additional payments for office rent and phony tax distributions, came from the funds under the advisers’ management and were made in violation of the contracts between the advisers and the funds. In total, the jury concluded that Kokesh misappropriated $34.9 million from the funds, and although this sum included money that Kokesh paid to other individuals, Kokesh was ordered to disgorge the full amount.
In explaining why 28 U.S.C. § 2462 did not impose a five-year limitations period on the disgorgement remedy against Kokesh, the Tenth Circuit held that there was “nothing punitive” about requiring Kokesh to disgorge the money he misappropriated, even the money that Kokesh diverted directly to other individuals. In addition, the Court held that disgorgement was not forfeiture, at least within the meaning of § 2462, because it was not akin to a punitive taking of property that facilitated a crime. Thus, disgorgement did not constitute “any civil fine, penalty, or forfeiture” within the meaning of § 2462.
While the Tenth Circuit reached a different conclusion from the Eleventh Circuit, its approach aligns with the D.C. and First Circuits’ approaches to the issue, see Riordan v. S.E.C., 627 F.3d 1230, 1234 (D.C. Cir. 2010); S.E.C. v. Tambone, 550 F.3d 106, 148 (1st Cir. 2008), withdrawn, 573 F.3d 54 (1st Cir. 2009). Given that few circuits have decided the question, the law on whether disgorgement is subject to a five-year statute of limitations is still unclear. The potential split between Kokesh and Graham, though, could put the question before the Supreme Court as early as next term.