Jump to Navigation | Jump to Content
American Bar Association

Litigation News

Circuit Split Widens on Application of SEC Statute of Limitations

By Erin Louise Palmer, Litigation News Associate Editor – December 15, 2016

A U.S. Court of Appeals for the Tenth Circuit decision widens a circuit split over whether the five-year statute of limitations in 28 U.S.C. § 2462 applies to orders for injunctive relief and disgorgement in Securities and Exchange Commission (SEC) enforcement actions. The appellate court held such relief is remedial and does not fall within the scope of Section 2462, which sets forth the limitations period "for the enforcement of any civil fine, penalty, or forfeiture." The decision widens a circuit split pointing to the need to know the controlling jurisdictional law, the specific case facts, and the types of relief the SEC is seeking, say ABA Section of Litigation leaders.

District Court Orders Injunction and Disgorgement in SEC Action
The SEC brought an enforcement action against Charles Kokesh on October 27, 2009, for misappropriating funds from four SEC-registered business development companies. Kokesh owned and controlled two SEC-registered investment adviser firms, which were the managing general partners of the business development companies.

From 1995 through 2006, Kokesh directed the investment adviser firms to take $28.8 million from the business development companies to pay salaries and bonuses to the officers of the firms (including Kokesh) and to pay the firms' rent, in violation of contracts between the companies. Additionally, Kokesh caused the investment adviser firms to take $6.1 million in "tax distributions" in SEC reports he signed in 2000, over 90 percent of which went to Kokesh even though he paid only $10,304 in federal taxes that year.

 A jury found Kokesh knowingly and willfully converted the business development companies' funds, and knowingly and substantially assisted in defrauding the companies and filing false and misleading reports with the SEC. The U.S. District Court for the District of New Mexico entered a judgment permanently enjoining Kokesh from violating federal securities laws; ordering disgorgement of $34.9 million, plus prejudgment interest of $18.1 million as a reasonable approximation of "the ill-gotten gains causally connected to [Kokesh's] violations"; and imposing a $2.4 million civil penalty for claims accruing on or after October 27, 2004.

Tenth Circuit Rejects Five-Year Statute of Limitations
Kokesh appealed on the grounds that the injunction and disgorgement were "penalties" subject to the five-year statute of limitations in Section 2462. The Tenth Circuit rejected Kokesh's argument, concluding the injunction and disgorgement were remedial rather than punitive, and therefore not time barred.

The appellate court explained the injunction is not a penalty or forfeiture because it is "remedial and preventative." The purpose of the injunction is "to protect the public by giving [Kokesh] an added incentive to conduct himself in accordance with the securities laws: violating the injunction would subject him to the court's contempt power," the appellate court found. In support of its conclusion that "an order to obey the law is [not] a penalty," the appellate court cited the U.S. Court of Appeals for the D.C. Circuit's decision in Riordan v. SEC, which held that Section 2462 does not apply to an SEC cease-and-desist order to refrain from violating securities laws.

Likewise, the Tenth Circuit explained disgorgement is remedial rather than punitive because it merely "depriv[es] the wrongdoer of the benefits of wrongdoing." Although the Tenth Circuit recognized "the words forfeit and disgorge . . . capture similar concepts," it rejected Kokesh's argument that disgorgement is a "forfeiture" under Section 2462. The Tenth Circuit relied on the historical meaning of forfeiture, which consisted of taking "tangible property used in criminal activity," even where the owner of the seized property is innocent and the value of the property has no relation to any loss to others or gain to the owner, to distinguish forfeiture from the equitable remedy of disgorgement.

In so holding, the Tenth Circuit again cited Riordan, which held that "disgorgement orders are not penalties, at lease so long as the disgorged amount is causally related to the wrongdoing." By contrast, the Tenth Circuit rejected the U.S. Court of Appeals for the Eleventh Circuit's reasoning in SEC v. Graham, which found the five-year statute of limitations under Section 2462 applied to disgorgement in an SEC enforcement action. In Graham, the Eleventh Circuit relied on the ordinary meaning of forfeiture and found "no meaningful difference in the definitions of disgorgement and forfeiture."

Contours of Circuit Split Unclear  
"The circuit split increases the likelihood that the Supreme Court will once again address the meaning of Section 2462," concludes Jeffrey D. Gardner, Phoenix, AZ, cochair of the Section's Trial Practice Committee. "Until then, practitioners must be very aware of the split among circuits and mindful of where your case with the SEC is pending," adds Gardner.

In addition, Section of Litigation leaders urge practitioners to pay careful attention to the facts of their case, particularly with regard to disgorgement. "One issue of note is whether proceeds from disgorgement are going to the government or being used to make the wronged party whole," notes Joshua D. Jones, Birmingham, AL, cochair of the Section's Securities Litigation Committee. "In some courts, there may still be room for an argument that if disgorged funds are not returned to their original owners, then the disgorgement is really a penalty and the limitations period set out in Section 2462 applies," counsels Michele D. Hangley, Philadelphia, PA, cochair of Communications for the Section.

Keywords: Securities and Exchange Commission, SEC, statute of limitations, penalty, injunction, disgorgement, forfeiture

Related Resources

Copyright © 2017, American Bar Association. All rights reserved. This information or any portion thereof may not be copied or disseminated in any form or by any means or downloaded or stored in an electronic database or retrieval system without the express written consent of the American Bar Association. The views expressed in this article are those of the author(s) and do not necessarily reflect the positions or policies of the American Bar Association, the Section of Litigation, this committee, or the employer(s) of the author(s).