On June 5, 2017, the U.S. Supreme Court (“Supreme Court”) held that 28 U.S.C. § 2462’s (“Section 2462”) five-year limitations period for the enforcement of penalties applies to claims for disgorgement brought by the U.S. Securities and Exchange Commission (“SEC”). As a result, additional federal agencies, including FERC, may similarly be limited to seeking disgorgement within five years of the date the claim accrued.
In 2009, the SEC brought an enforcement action in federal district court alleging that Charles Kokesh violated various securities laws by concealing the misappropriation of $34.9 million from several businesses from 1995–2009. In doing so, the SEC sought monetary civil penalties, disgorgement, and an injunction barring Kokesh from future violations. After the jury found that Kokesh violated various securities laws, the district court held that the five-year limitations period for the enforcement of civil fines, penalties, or forfeitures established by Section 2462 applied to the monetary civil penalties but not the disgorgement of the $34.9 million. The U.S. Court of Appeals for the Tenth Circuit affirmed the district court’s ruling that disgorgement is not considered a penalty nor a forfeiture under Section 2462. Kokesh then appealed to the Supreme Court.
In its opinion, the Supreme Court explained that Section 2462 applies to “an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture.” The Supreme Court further explained that whether a sanction is a penalty within the meaning of Section 2462 depends on whether (1) the penalty seeks to redress a wrong to the public as opposed to an individual and (2) the monetary sanction is sought for the purpose of punishment and deterrence. Applying these principles to the SEC’s disgorgement, the Supreme Court first found that when the SEC pursues disgorgement, it primarily is acting in the public interest by protecting investors and safeguarding the markets rather than protecting a specific individual. The Supreme Court further noted that the SEC seeks disgorgement “independent of the claims of individual investors” to “promot[e] economic and social policies.” Second, the Supreme Court found that the primary purpose of the SEC’s disgorgement is to deter violations of securities laws by divesting violators of the benefit of their violations. Finally, the Supreme Court noted that courts have required the disgorgement regardless of whether the profits will be refunded to investors.
Additionally, the Supreme Court rejected the SEC’s arguments that disgorgement is not a penalty because it seeks to restore parties to the place they were prior to the violation. Rather, the Supreme Court noted that individuals have been required to disgorge profits made by third parties even though the individuals themselves never received any profits. Moreover, the Supreme Court stated that SEC disgorgement sometimes is ordered without regard of the defendant’s expenses that reduced the amount of profit to disgorge. Accordingly, the Supreme Court held that disgorgement operates as a penalty under Section 2462, and thus claims for disgorgement in an SEC enforcement action must be commenced within five years of the date the claim accrued.
Notably, the Supreme Court’s decision may impact FERC enforcement proceedings because Section 2462 applies to any federal government penalty except as otherwise provided by federal law. Because there are no federal laws excepting FERC enforcement actions from the statute of limitations, if FERC enforcement actions seek disgorgement, then such actions may be required to commence within five years of the date the claim accrued.
A copy of the Supreme Court’s opinion is available here.