Securities Regulation Daily High court receives another petition asking about disgorgement post-Kokesh
Thursday, February 6, 2020

High court receives another petition asking about disgorgement post-Kokesh

By Rodney F. Tonkovic, J.D.

Petition asks: May the SEC obtain disgorgement as an equitable remedy after Kokesh?

A petition for certiorari involves a question already pending before the Court: whether the SEC may seek disgorgement in the courts as an equitable remedy. After Kokesh, the petition argues, lower courts are no longer free to rely on precedent to approve SEC requests for disgorgement. The petitioners recognize that the Court has granted a petition in Liu v. SEC asking the same question, and request that their petition be held pending the decision in Liu (Team Resources Inc. v. SEC, February 3, 2020).

Disgorgement ordered. In 2015, the SEC brought an enforcement action against Team Resources, Inc., alleging that the company raised millions from investors in oil and gas limited partnerships while knowing all along that the leases were not commercially viable. The defendants settled immediately, agreeing to the entry of permanent injunctions. In early 2017, the Commission moved for final judgment, asking for the disgorgement reflecting the defendants' alleged gross pecuniary gain.

While the SEC's motion was pending, the Supreme Court handed down its decision in Kokesh v. SEC, holding that disgorgement is a "penalty" subject to the five-year limitations period. The Commission amended its motion to reflect the five-year limit, and Team Resources pivoted to the argument that post-Kokesh, district courts no longer have authority to order disgorgement in SEC proceedings. The district court granted the requested disgorgement.

The Fifth Circuit affirmed, stating that since Kokesh expressly declined to address the issue of whether disgorgement is an equitable remedy that courts may impose, Fifth Circuit precedent upholding the authority of the district courts to order disgorgement controls. The court explained that Kokesh only decided the Section 2462 issue and did not decide that disgorgement can never be classified as equitable in any context. Absent an intervening change in the law, which Kokesh is not, in this context, the panel concluded that it was bound to follow a line of Fifth Circuit precedent extending back at least 40 years.

Is disgorgement available? The petition notes that the court has granted the Liu petition, which addresses the same issue, and makes many of the same arguments, as in this case: whether the SEC may obtain disgorgement from a federal court as an equitable remedy for securities violations despite the Supreme Court's determination that disgorgement is a penalty. The petitioners ask the Court to hold the petition pending the decision in Liu, which is set for argument on March 3, 2020, and to dispose of the case in a manner consistent with Liu.

Having granted Liu, the petition says that the Court has at least implicitly acknowledged the conflict between Kokesh and the lower courts application of disgorgement as a remedy in equity. Disgorgement, the petition's argument begins, is not among the forms of relief identified by Congress as available to the SEC in civil cases. And, since disgorgement as applied in the enforcement context was created by judicial fiat and functions as a punishment, it does not fit within the three enumerated categories of available remedies (injunctions, equitable relief, and civil penalties). After Kokesh, the petition says, "SEC disgorgement can hardly be regarded as anything other than a 'penalty' assessment."

Next, the petitioners assert that the courts have failed to apply Kokesh consistently and still treat disgorgement as an equitable remedy. The petition notes that the Fifth Circuit's decision here was issued after Liu was granted, a circumstance highlighting the need for further guidance. Lower courts have continued to adhere to pre-Kokesh precedent in affirming SEC disgorgement orders, frequently noting the statute of limitations context of that case, which ignores how disgorgement operates in practice, the petition says. In addition, the petition observes that the SEC, and other agencies, continue to collect billions in "unauthorized" disgorgement. In this case, the petition points out, the disgorgement order effectively doubled the defendants' liability from $15million to $30 million.

Finally, clarifying Kokesh's holding will have an impact beyond disgorgement and beyond the SEC. The petition argues that then-Judge Kavanaugh's concurrence in Saad v. SEC indicated that the reasoning behind Kokesh may apply to other types of equitable relief. For example, the Third Circuit has considered the application of Kokesh to SEC injunctions, and the Ninth has looked at remedies under the FTCA. The petitioners agree here with Liu's statement that with almost 100 statutes empowering the courts to fashion equitable relief, defining the scope of that authority is critical.

The petition is No. 19-978.

Attorneys: Phillip J. Derosier (Dickinson Wright PLLC) for Team Resources Inc., Fossil Energy Corp. and Kevin A. Boyles. Noel J. Francisco, U.S. Department of Justice, for the SEC.

Companies: Team Resources Inc.; Fossil Energy Corp.

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