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SCOTUS May Limit SEC’s Power to Recoup Illegal Gains

April 19, 2017

The U.S. Supreme Court may take away a lot of the SEC’s power to collect billions of dollars in payments for illegal gains, Bloomberg writes.

In oral arguments Tuesday, several justices took issue with the SEC’s assertion that a five-year statute of limitations written into the SEC’s rules on collecting fines, penalties and forfeitures doesn’t apply when the regulator seeks disgorgements, according to the newswire.

The issue has made it to the Supreme Court via Kokesh v. SEC – a case concerning Charles Kokesh, a New Mexico investment advisor ordered to pay $35 million in disgorgement on top of a $2.4 million civil penalty after a jury found that he had misappropriated funds from several investment companies, Bloomberg writes.

Kokesh claims he should only have to pay $5 million in disgorgement, which would cover the five-year period preceding the SEC’s 2009 claim, according to Kokesh’s reply to the SEC’s petition.

The SEC, meanwhile, argues that Kokesh should have to pay all of the money he had misappropriated since 1995 because the legal provision regarding the five-year statute of limitations only applies to civil fines, penalties or forfeiture and doesn’t address disgorgement, filings with the court show.

Disgorgement payments have been a major tool in the SEC’s arsenal. In 2015 the regulator collected $3 billion in disgorgement payments – more than double what it took in from other penalties – according to the Bloomberg.

U.S. Supreme Court (Getty)

A ruling against the SEC could drastically impact cases the SEC is currently pursuing and then some, Reuters writes. Defendants who had already disgorged profits outside of five years may push for a reopening of their cases, according to the newswire.

The case also leaves uncertainty about what’s supposed to happen in SEC enforcements that, unlike this particular case, do seek disgorgement for victims, Theresa Gabaldon, professor of law at George Washington University School of Law, writes on SCOTUSblog. If these compensatory disgorgements were exempt while non-compensatory disgorgements were not, it may lead to some confusion because the court — and not the SEC — rules on the fate of the disgorgements, she writes. Such a disparity could lead to waste and “litigation gamesmanship,” according to Gabaldon.

By Alex Padalka
  • To read the Reuters article cited in this story, click here.
  • To read the SCOTUSblog article cited in this story, click here.
  • To read the Bloomberg article cited in this story, click here.