06 June, 2017
The Supreme Court is making it tougher for the government to recover ill-gotten gains from people convicted of securities fraud. Lower courts had been divided on the issue.
In 2016, the SEC recovered nearly $3 billion of these type of payments, which was twice as much as the regulators collected in other penalties. For its part, the government argued that disgorgement is a form of equitable relief not on par with a punishment or penalty, and that applying the five-year limitation would complicate cases in which misconduct occurred for years before being discovered and prosecuted.
The case involved New Mexico-based investment adviser Charles Kokesh who was sued by the SEC in 2009 for stealing investors' money.
A conspirator can't be held jointly and severally liable for property acquired by another conspirator, the Supreme Court ruled in a unanimous opinion (PDF) by Justice Sonia Sotomayor.
"Accordingly, any claim for disgorgement in an SEC enforcement action must be commenced within five years of the date the claim accrued". Arguing that the disgorgement order constituted a punitive forfeiture that was time-barred because of the five-year statutory limitation contained in 28 U.S.C. ยง 2462, he appealed to the U.S. Supreme Court after losing in the 10th Circuit Court of Appeals in Denver.
"Because disgorgement orders "go beyond compensation, are meant to punish, and label defendants wrongdoers" as a effect of violating public laws, they represent a penalty and thus fall within the 5-year statute of limitation", Justice Sonia Sotomayor wrote for a unanimous court.
Briefs supporting Kokesh's high court appeal were filed by the Securities Industry and Financial Markets Association, a trade group that represents Wall Street firms, as well as the Cato Institute and Dallas Mavericks owner and TV personality Mark Cuban.
Kokesh's lawyer, Adam Unikowsky, said in an email that the ruling "grants important protection to defendants facing enforcement actions by the SEC and other agencies".
An SEC spokesman declined to comment on the ruling.
The decision in the case, Kokesh v. SEC, further restricts the securities regulator's ability to require the forfeiture of funds, known as disgorgement.
Information for this article was contributed by Robert Schmidt of Bloomberg News and Sam Hananel of The Associated Press.
