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When the SEC seeks disgorgement, is it asking for a fine, a forfeiture, or an equitable remedy outside the reach of the current statute of limitations? On Friday, 13 January 2017, the Supreme Court in Kokesh v. SEC, No. 16-529, granted review of the Tenth Circuit’s ruling in that an SEC disgorgement order is equitable, and not punitive in nature. The Supreme Court’s ruling in this case will likely resolve a conflict among the circuit courts about how far back the SEC can pursue disgorgement remedies — a legal question that has been pending for at least 20 years. We expect an answer this term.

The SEC has long used disgorgement as a basis for securing the return of “ill-gotten gains” or improperly obtained profits earned by wrongdoers as a result of federal securities laws violations. Unlike restitution, which focuses on making the victims of a crime whole, disgorgement’s focus is on depriving the wrongdoer of gains it would not have had but for the illegal conduct. The SEC’s position is that disgorgement is an “equitable” remedy, not subject to the applicable statute of limitations in 28 U.S.C. §2462, which states: any “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 [. . .].”  For years, Federal courts and SEC Administrative Law Judges largely agreed with this proposition, although tellingly, starting about 20 years ago, tribunals began to strictly scrutinize the SEC’s characterization of certain of its remedies as equitable, including industry suspensions, bars and censures, which certain tribunals characterized as punitive, and not equitable. Johnson v. S.E.C., 87 F.3d 484, 491–92 (D.C. Cir. 1996) (holding that the limitations period in §2462 applies to SEC proceedings under section 15(b) of the Securities and Exchange Act of 1934 which seek to censure and suspend a securities supervisor). For groups in the securities industry and for SEC enforcement practitioners, notwithstanding the court’s acquiescence to the concept that disgorgement was equitable in nature, the court’s ruling in Johnson begged the question: could this logic be extended, in certain instances, to disgorgement cases? For years, the SEC was only able to obtain monetary sanctions in the form of disgorgement, pursuant to its ability to petition a court to award equitable relief. However, after Congress granted the SEC the ability to obtain civil penalties in 1984, the SEC is now armed with both disgorgement and civil penalty power.

However, as disgorgement amounts grew, and the SEC disgorgement orders reached the hundreds of millions of dollars range, some began to question whether disgorgement was, in all cases, a truly equitable remedy, especially in cases where the disgorgement amount moved far afield from any rational profit calculation. These doubts grew as a result of the SEC resisting any sensible economic and financial offsets of reasonable business expenses and overhead to the disgorgement amount. This question came to a head recently in SEC v Graham, 823 F.3d 1357, 1363 (11th Cir. 2016), where the Eleventh Circuit concluded that disgorgement is in economic reality a forfeiture within the meaning of 28 U.S.C. §2462. Thus the court applied the general statute of limitations applicable to fines and penalties to limit the disgorgement remedy.1

Shortly thereafter, the Tenth Circuit came to the opposite conclusion, making this issue ripe for the Supreme Court to weigh in. SEC v. Kokesh, 834 F.3d 1158 (10th Cir. 2016). In Kokesh, a jury found that defendant, a registered investment adviser, had violated and aided and abetted violations of the Investment Company Act, Investment Advisers Act and disclosure requirements in the 1934 Act, by making undisclosed payments to fund salaries and bonuses to insiders, including himself, and paying other improper expenses. The SEC sought disgorgement from the defendant of all improper payments for a period of more than 11 years, and the court ordered disgorgement of USD 34.9 million, plus prejudgment interest of USD 18 million. Of that amount, USD 29.9 million of the disgorgement involved payments prior to the 5-year limitations period in 28 U.S.C. §2462. In addition, the court ordered a civil fine of USD 2.4 million, representing the amount of funds the defendant received during the limitations period. The Tenth Circuit affirmed, declining to follow Graham and expand the meaning of “forfeiture” to include disgorgement. Instead, the Tenth Circuit relied on decisions from the DC Circuit and the First Circuit, which also declined to apply the statute of limitations to disgorgement claims.

Kokesh petitioned for a writ of certiorari to review the decision not to apply the statute of limitations to cut off disgorgement remedies. The Government also asked the Court to review the case to resolve the conflict in circuits. The facts of Kokesh present a stark case for the Supreme Court to address this conflict. As applied, the remedy of disgorgement looks remarkably like a forfeiture in fact. Particularly worth watching is how the Supreme Court addresses Kokesh’s argument that the SEC’s disgorgement order was punitive, because he is being forced to disgorge more than he actually personally received (as others also received some of the misappropriated money in the form of bonuses). As the goal of disgorgement is to deprive a wrongdoer of the proceeds of its wrongdoing and place that defendant back in a position it would have been without committing the violation, forcing the defendant here to pay more than he actually received would seem to serve as a punishment, especially since the SEC is fully able to name the other recipients of the ill-gotten gains as relief defendants.


1] Jerome Tomas, Peter P. Tomczak, Spencer Churchill, and Eileen Theresa Flynn, Eleventh Circuit Decision Curtails SEC’s Ability, June 2016, http://www.bakermckenzie.com/en/insight/publications/2016/06/eleventh-circuit-decision-curtails-secs-ability/.

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Elizabeth L. Yingling is a securities litigator, defending clients in SEC investigations and enforcement actions, as well as in securities class action and derivative suits. She assists broker dealers with regulatory and compliance issues, including inspections, investigations and enforcement actions instituted by the SEC, FINRA and other self-regulatory organizations. She also counsels non-U.S. based clients on U.S. securities litigation risks and risk avoidance.

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Graham R. Cronogue is a litigation associate in Baker & McKenzie's Washington D.C. office.

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Jerome Tomas is Chair of the Firm's SEC and Financial Institutions Enforcement Group and has been recognized by Chambers for White Collar Crime & Government Investigations. He represents multinational companies faced with government investigations and conducts internal investigations to assess and remediate legal and compliance concerns in domestic and global operations. With his experience as a former member of the SEC Division of Enforcement’s Cyberforce, the agency’s internet and cyber fraud unit, Jerome regularly advises companies involved in data security breaches and incident response. Jerome now leads teams of lawyers to address government law enforcement perspectives and where necessary, meet and refute government legal theories of corporate and individual liability head-on, while also being pragmatic and business-oriented for management and boards to compete internationally.

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Laura K. Clinton is a partner in Baker & McKenzie’s Washington, DC office. She assists clients involved in securities litigation and complex commercial disputes. She has significant court experience, having conducted civil and felony jury trials, bench trials, and a wide variety of administrative hearings and arbitrations. She represents clients before all levels of the Washington state courts and in federal courts throughout the country. Currently, Ms. Clinton represents numerous victims of the Madoff Ponzi scheme in adversary proceedings brought by the trustee for the bankruptcy estate of Bernard L. Madoff Investment Securities. Ms. Clinton focuses her pro bono work on issues affecting survivors of domestic violence, and has counseled in domestic violence cases for agencies including the Northwest Immigrant Rights Project, the King County Domestic Violence Revision Squad, and DV LEAP. In fact, she was repeatedly recognized by the Washington State Bar Association for her pro bono legal work. She argued the Washington Supreme Court case that set standards for the protection of domestic violence victims, and has authored several recent amicus briefs on legal issues affecting survivors of violence.

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Laura J. O’Rourke practices complex commercial litigation, with a focus on franchise and securities-related disputes. In the securities context, she zealously defends public companies and their officers and directors in SEC- and state-enforcement, class-action, and individual securities-based litigation matters, in addition to shareholder derivative suits, investigations, and other investment-related disputes for both public and private companies. She also litigates and advocates on behalf of companies in connection with franchise-related litigation, from franchisor-franchisee disputes to third-party and customer-based claims. She also actively participates in pro bono work and has served on the Dallas Office Pro Bono Committee since she joined the Baker & McKenzie.

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Richard A. Kirby is a partner in the Litigation Practice Group at Baker McKenzie, Washington, DC. Mr. Kirby litigates complex corporate, securities, bankruptcy and administrative law issues. Mr. Kirby also represents clients in SEC, Justice Department, state and self-regulatory organization law enforcement investigations and in parallel private securities fraud and derivative actions. He has participated on behalf of clients in most of the major recent broker-dealer liquidations under the Securities Investor Protection Act, including Lehman Bros., and Bernard L. Madoff Investments Securities, LLC. He specializes in representing victims of Ponzi schemes.

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Widge Devaney is a partner in the Firm's North America Litigation group in New York, Chair of the North American Government Enforcement Practice and Co-Chair of the Global Compliance and Investigations Group. Since 2011, Mr. Devaney has been listed in New York Metro Super Lawyers in the Criminal Defense: White Collar category. Mr. Devaney is co-chair of the ABA's Transnational Crime Subcommittee, and an officer of the IBA's Business Crime Committee. He previously served on the Criminal Justice Act Panel for the Southern District of New York, representing indigent clients in federal criminal matters. Mr. Devaney served as law clerk to the Honorable Oliver Gasch on the US District Court for the District of Columbia from 1993 to 1994.