Featured Expert Contributor — Corporate Governance/Securities Law

bainbridgeStephen M. Bainbridge, William D. Warren Distinguished Professor of Law, UCLA School of Law.

Disgorgement of ill-gotten gains long has been a basic tool in the Securities and Exchange Commission’s (SEC) penalty toolkit, despite a paucity of statutory authorization.1 The equitable nature of disgorgement has meant courts have had to resolve many questions without the benefit of statutory guidance. In Kokesh v. SEC,2 the US Supreme Court took up the seemingly technical—but surprisingly important—question of what statute of limitations applies to SEC disgorgement actions.

Appellant Charles Kokesh owned and controlled a pair of investment adviser firms that, in turn, managed four business development corporations (BDCs). Both the investment advisers and the BDCs were registered with SEC. SEC alleged that Kokesh misappropriated almost $35  million from the BDCs for the benefit of himself and the investment adviser firms. After a civil trial, a jury agreed that Kokesh had fraudulently misappropriated the funds. The trial judge ordered Kokesh to disgorge $34.9 million, which it found “reasonably approximates the ill-gotten gains causally connected to Defendant’s violations.”

Because there is no statute of limitations explicitly applicable to disgorgement proceedings, the defendant argued that the generic federal five-year statute of limitations under 28 U.S.C. § 2462 applied. That statute provides that:

Except as otherwise provided by Act of Congress, an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued if, within the same period, the offender or the property is found within the United States in order that proper service may be made thereon. [Emphasis supplied.]

According to Kokesh, disgorgement is a penalty or forfeiture within the meaning of § 2462 and, because the events in question had taken place more than five years previously, the statute time barred the SEC action.3

The Tenth Circuit rejected that argument, holding that disgorgement is a remedy rather than a penalty, explaining:

Properly applied, the disgorgement remedy does not inflict punishment. “The object of restitution [in the disgorgement context] … is to eliminate profit from wrongdoing while avoiding, so far as possible, the imposition of a penalty.” Restatement (Third) of Restitution and Unjust Enrichment § 51(4) (Am. Law Inst. 2010). Disgorgement just leaves the wrongdoer “in the position he would have occupied had there been no misconduct.” Id. § 51 cmt. k; see id. (“Disgorgement of wrongful gain is not a punitive remedy.”). To be sure, disgorgement serves a deterrent purpose, but it does so only by depriving the wrongdoer of the benefits of wrongdoing.

 Kokesh, 834 F.3d at 1164.

The fact that not all of the $34.9 million went directly into Kokesh’s pocket was irrelevant, because “there is nothing punitive about requiring a wrongdoer to pay for all the funds he caused to be improperly diverted to others as well as to himself.” Id. at 1164-65.

The Tenth Circuit had somewhat more difficulty with Kokesh’s argument that disgorgement is a forfeiture. It acknowledged that, as a matter of plain English, the two words “capture similar concepts.” Id. at 1165. It also acknowledged the Eleventh Circuit recently had concluded that disgorgement was a forfeiture within the meaning of § 2462. See SEC v. Graham, 823 F.3d 1357, 1363–64 (11th Cir. 2016). Looking at the history of forfeiture actions and the content within which the word is used in § 2462, however, the Tenth Circuit concluded that forfeiture is a punitive action and that it therefore did not encompass the “nonpunitive remedy of disgorgement.” Kokesh, 834 F.2d at 1166.

The Supreme Court granted Kokesh’s petition for a writ of certiorari, presumably to resolve the split between the two circuits. The Supreme Court had expressly reserved the question in its 2013 in Gabelli v. SEC, which held that § 2462 governed SEC actions seeking “civil penalties.” Gabelli v. SEC, 133 S. Ct. 1216, 1219 (2013).

All of this probably seems mind-numbingly boring to most Supreme Court watchers. Indeed, Kokesh was one of three cases argued on new Supreme Court Justice Neil Gorsuch’s first day on the bench, all of which were dismissed in the media as dog cases; i.e., “boring, technical disputes that excite no one but require resolution for the legal system to function consistently.”4

In fact, however, the outcome of the case will considerably affect the liability exposure of many financial institutions subject to SEC regulation. SEC brings hundreds of cases a year in which it seeks disgorgement, many of which involve conduct running more than five years in the past. Because Kokesh allowed the SEC disgorgement action to reach conduct that had occurred as much as 14 years before SEC filed suit, defendants In those hundreds of cases now face unlimited exposure for disgorgement.

This would seem to offend the basic policies behind statutes of limitation.

Criminal statutes of limitations are laws that limit the time during which a prosecution can be commenced. These statutes have been in operation for over 350 years and are deeply rooted in the American legal system. There are several rationales underlying statutes of limitations. First, they ensure that prosecutions are based upon reasonably fresh evidence—the idea being that over time memories fade, witnesses die or leave the area, and physical evidence becomes more difficult to obtain, identify or preserve. In short, the possibility of erroneous conviction is minimized when prosecution is prompt.5

Civil statutes of limitations such as those at issue in Kokesh are supported by precisely the same principle. Indeed, although the Court did not reach the issue in Gabelli, that earlier decision’s discussion of the importance of repose under statutes of limitations seems directly relevant to the problem at hand. The Court held that statutes of limitation—both criminal and civil—are “vital to the welfare of society.” Gabelli, 133 S. Ct. at 1221 (quoting Wilson v. Garcia, 471 U.S. 261, 271 (1985)).

The lower court decisions also seem inconsistent with the plain English text. When the SEC seeks disgorgement, that is not a remedial action. “A remedy is a means employed to enforce a right or redress an injury.” Bonam v. S. Menhaden Corp., 284 F. 362, 364 (S.D. Fla. 1922). Kokesh did not infringe upon any right of SEC. Likewise, SEC suffered no injury. In many cases, moreover, the monies defendant is obliged to disgorge do not go to reimburse the injured parties, but were paid into the federal treasury, just as a civil fine would have been.

Interestingly, at oral argument, at least three justices questioned whether SEC even has authority to seek disgorgement. Although that’s a perfectly legitimate question, it seems highly unlikely that the issue will end up in the final opinion. Disgorgement has been around for a long time and, moreover, the issue was not briefed by any of the parties.

Instead, it seems much more plausible that the court will draw a distinction between disgorgement actions that are remedial and those that are more punitive in character. A line of questioning by Justice Kennedy, for example, suggested that disgorgement is only remedial when it is used to compensate victims of the wrongdoing.

If so, such an outcome would seem consistent with both plain English and the policies underlying statutes of repose.


  1. See, e.g., SEC v. First City Financial Corp., Ltd., 890 F.2d 1215, 1230 (D.C. Cir. 1989) (holding that “disgorgement is rather routinely ordered for insider trading violations despite a similar lack of specific authorizations for that remedy under the securities law”); SEC v. Henke, 275 F. Supp. 2d 1075, 1083 (N.D. Cal. 2003) (describing disgorgement as one of the SEC’s traditional equitable remedies”).
  2. Petition granted Jan. 13, 2017, 137 S. Ct. 810 (2017).
  3. Kokesh was also subject to a permanent injunction against “directly or indirectly violating Section 206(1) and (2) of the Investment Advisers Act; Section 13(a) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, and 13a-13; Section 14(a) of the Exchange Act and Exchange Act Rule 14a-9; Section 37 of the Investment Company Act, and Section 205(a) of the Investment Advisers Act.” SEC v. Kokesh, 834 F.3d 1158, 1163 (10th Cir. 2016). He claimed that the injunction was also subject to the § 2462 limitation period. The Tenth Circuit dismissed that argument almost out of hand, observing that “[w]e fail to see how an order to obey the law is a penalty.” Ibid. Kokesh did not seek Supreme Court review of that aspect of the case.
  4. Jess Bravin and Brent Kendall, “Justice Neil Gorsuch Is Greeted by Highly Technical Cases,” WSJ.com (Apr. 17, 2017).
  5. Lauren Kerns, “Incorporating Tolling Provisions into Sex Crimes Statute of Limitations,” 13 Temp. Pol. & Civ. Rts. L. Rev., 325, 327 (2004).