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Supreme Court Clips the Wings of SEC Enforcement.

Summary: The U.S. Supreme Court on Monday reined in a Securities and Exchange Commission enforcement tool that the commission wanted to use to exact billions in ...

The U.S. Supreme Court on Monday reined in a Securities and Exchange Commission enforcement tool that the commission wanted to use to exact billions in fines for long-ago fraudulent acts.

A unanimous court ruled in Kokesh v. United States that the commission's "disgorgement" orders imposed on fraudsters amounted to a penalty and as such, must meet a five-year statute of limitations.

"This limitations period applies here if SEC disgorgement qualifies as either a fine, penalty, or forfeiture," Justice Sonia Sotomayor wrote for the court. "We hold that SEC disgorgement constitutes a penalty."

She added that "SEC disgorgement is imposed for punitive purposes," not just to put the defendant back in the same financial position he or she was in before the fraud occurred.

The ruling is a win for Wall Street, whose advocates argued that placing disgorgement into a different category, as urged by the government, would give the commission too much power to go after "stale" claims.

The ruling "shatters the SEC's long-standing view that the disgorgement remedy is equitable, and therefore not subject to any statute of limitations," King & Spalding partner Dixie Johnson said Monday. "Those who previously paid disgorgement purportedly for ill-gotten gains more than five years after the relevant violation will be reviewing their situations against this case to determine whether the disgorgement award should have been allowed."

A brief filed in the case by the Securities Industry and Financial Markets Association asserted that uncertainty over the issue, heightened by the ruling by the U.S. Court of Appeals for the Tenth Circuit in the Kokesh case, would "create uncertainty and instability in the financial markets" if the government could "seek disgorgement in perpetuity."

Charles Kokesh, who operated two investment firms, was found guilty of misappropriating $35 million of clients' money, most of which dated back before the five-year limit. The government issued a disgorgement order for the entire amount.

Jenner & Block partner Adam Unikowsky, who argued and won for Kokesh, told the high court in April that the order was "based on conduct dating back forever."

Critics of expansive SEC power sided with Kokesh in several friend of the court briefs, including one from celebrity businessman Mark Cuban, who has had run-ins with the commission in the past. "When the SEC usurps power that has not been expressly delegated to it by Congress, capital formation is impeded," Cuban stated in a brief by Stephen Best of Brown Rudnick.

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Publication:Inside Counsel
Date:Jun 6, 2017
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