A unanimous Supreme Court held June 5 that SEC disgorgement is a "penalty" subject to five-year limitations under 28 U.S.C. §2462 and Gabelli v. SEC, 568 U.S. 442 (2013)(5-year limitations applies to civil monetary penalties).
Justice Sotomayor's Opinion started with the premise that a "penalty is a punishment … imposed and enforced by the State," redressing a public wrong for punishment and deterrence, rather than victim compensation. Slip Op. at 5-7. She rejected all three of the SEC's standard arguments.
First, the Court held that deterrence is not a legitimate non-punitive governmental objective.
Second, disgorgement is not truly restitutionary; it often is not compensatory because it is paid to the government without any statutory requirement of distribution to victims. "When an individual is made to pay a non-compensatory sanction to the Government as a consequence of a legal violation, the payment operates as a penalty." Slip Op. at 9.
Third, disgorgement does not merely restore the status quo ante, as SEC argued, because it (a) often exceeds profits (e.g. the SEC's practice requiring tippers to disgorge downstream tippees' profits, too) and (b) does not consider a defendant's expenses that reduce that profit.
The decision is Kokesh v. SEC, No. 16-529 (U.S. June 5, 2017), here.
Thomas K. Potter, III (tpotter@burr.com) is a partner in the Securities Litigation Practice Group at Burr & Forman, LLP. Tom is licensed in Tennessee, Texas and Louisiana. He has over 30 years' experience representing financial institutions in litigation, regulatory and compliance matters. See attorney profile.
© 2017 by Thomas K. Potter, III (all rights reserved).
PartnerTom Potter is a Partner in the firm's Nashville office, and his practice focuses on securities, corporate disputes, and appellate litigation. Tom has over 35 years of experience representing business interests.
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