US Supreme Court extends interpretation of statute of limitations to SEC injunctions.

In a case that perhaps is not directly related in a commercial litigation context, but nevertheless has implications on the United States Supreme Court’s statutory interpretation of the distinction between civil penalties, the Court has held in Kokesh v. SEC that disgorgement would be considered a penalty and thus, subject to the five year statute of limitations under 28 USC § 2462. The opinion extends Cebelli v. SEC, 568 U.S. 442 (2013) which considered the statutory limitations in a monetary penalty context.

The defendant, Charles Kokesh, misappropriated funds between 1995 and 2009 for approximately $34.9 million dollars and inter alia filed misleading statements with the SEC. In 2009, the District Court found him guilty for the misappropriation for all events prior to 2004. The defendant was order to pay a civil penalty of $2,354,593 and initially for the conduct outside the five year period, $29.9 million dollars since in the District Court’s opinion, this was not a penalty, but disgorgement. The Tenth Circuit upheld the District Court’s judgment that the $29.9 million disgorgement was not a penalty and thus, not subject to the statute of limitations.

A unanimous Supreme Court has reversed the Tenth Circuit’s decision. The Court began with the definition of a “penalty” which under Huntington is a “punishment, whether corporal or pecuniary, imposed and enforced by the state”. The Court made a distinction between a sanction, which is a penalty to an individual or public and pecuniary sanction which is acts as a punishment or deference. Under Brady v. Daly (1899), compensation for a private wrong is not a penalty. Furthermore, in Mecker v. Lehigh, a “penalty is imposed for something punitive for an infraction of a public law”.

Thus, applying the above principles, the Supreme Court held that disgorgement would be a penalty under § 2462. The Court delineated between three purposes of a penalty: (1) public interest, where the remedy sought is committed against the United States and where the victim’s views are not of paramount consideration; (2) punitive, where the emphasis is to prevent future violations, and (3) compensatory, where the damages paid are to the District Court directly. In the third purpose, the District Court determines the payout to the victims and the U.S. Treasury, if applicable.

The SEC argues that the penalty is strictly remedial. However, the Supreme Court had a skeptical view if the penalty is truly remedial since in many cases the defendants are not simply being returned to the original position had the violation not occurred, but in some cases asked to pay much more than the profit gained.

Interestingly, the Court took an example of insider trading where the tippee’s gains has been attributed to the tipper. Even in instances where the tipper has not personally profited from the tippee’s gains, nevertheless, tippee’s actions are imputable to the tipper and have to disgorge the tippee’s profits. Thus, the Court had observed that the SEC sanctions were beyond compensatory and had a retributive aspect to the sanctions.


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