5-Year Statute of Limitations Applies to SEC Disgorgement

On June 5, 2017, the Supreme Court issued a unanimous opinion in Kokesh v. Securities and Exchange Commission, resolving a circuit split and holding that the 5-year statute of limitations for civil penalties applies to SEC disgorgement.

The Supreme Court previously held that 28 U.S.C. §2462, which establishes a 5-year statute of limitations for “an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture,” applies to monetary civil penalties sought by the SEC. See Gabelli v. SEC, 568 U.S. 442, 454 (2013). Its application to disgorgement sought by the SEC, however, has remained a subject of debate, with some, including the SEC, taking the position that disgorgement is a remedial relief and is not a fine, penalty, or forfeiture within the meaning of §2462.

The Court, in an opinion written by Justice Sotomayer, has finally resolved this issue. The Court held that “[d]isgorgement in the securities-enforcement context is a ‘penalty’ within the meaning of §2462, and so disgorgement actions must be commenced within five years of the date the claim accrues.” It “bears all the hallmarks of a penalty: It is imposed as a consequence of violating a public law and it is intended to deter, not to compensate. The 5-year statute of limitations in §2462 therefore applies when the SEC seeks disgorgement.”

While this opinion represents a significant restriction to one of the SEC’s enforcement tools, it also seems to have left open the possibility of a further challenge to SEC disgorgement. In a footnote, the Court commented that “[n]othing in this opinion should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings or on whether courts have properly applied disgorgement principles in this context.”