High Court doubts SEC’s authority to recoup ill-gotten gains going back two decades


April 18, 2017

In oral argument before the Supreme Court, almost all of the justices expressed some degree of skepticism with the SEC’s position that it is not bound by a five-year statute of limitations when it seeks "disgorgement," or the return of profits under 28 U.S.C. §2462. The SEC contended that venture capitalist Charles Kokesh was required to return $35 million from investor funds he used to pay himself and others at his New Mexico-based company from 1995 to 2006 based on the central premise that its claim was remedial in nature rather than punitive (Kokesh v. SEC, April 18, 2017).

Although the SEC prevailed at the district court and before the Tenth Circuit, the petitioner seemed to have more receptive audience in arguing that the SEC improperly had asserted that it can bring enforcement actions seeking backwards-looking monetary liability based on conduct dating back forever with no statute of limitations at all. Meanwhile, the SEC’s argument that disgorgement was not a penalty but rather a remedy for unjust enrichment sought to take a person back to where they would have been" had they not acted illegally" did not appear to be persuading this tough judicial crowd.

The district court in 2015 ordered Kokesh to pay a $2.4 million civil penalty along with the $35 million disgorgement amount. If the 5-year statute of limitation applies, that amount would be pared down to around $5 million.

A thorough background on the challenges faced by the SEC in the Kokesh case can be found in a Securities Regulation Daily Strategic Perspective written by former SEC enforcement official and current BakerHostetler partner Marc D. Powers.

The case is No. 16-529.

Attorneys: Adam G. Unikowsky (Jenner & Block LLP) for Charles R. Kokesh. Jeffrey B. Wall for the SEC.

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