Action Item: Last week’s Supreme Court of the United States decision in Kokesh v. SEC will significantly limit the Securities and Exchange Commission’s (“SEC”) ability to collect disgorgement for violations of the Foreign Corrupt Practices Act (“FCPA”), potentially resulting in substantial relief for companies facing violations of the Act and trying to reach a settlement with the SEC.

On June 5, 2017, the Supreme Court of the United States issued a unanimous decision in Kokesh v. SEC, holding that a SEC claim for disgorgement is a “penalty.” In Kokesh, defendant Charles Kokesh was found guilty of violating the Investment Company Act, Investment Advisers Act, and the Securities Exchange Act, and was ordered by the U.S. District Court for the District of New Mexico to disgorge $34.9 million that he misappropriated between 1995 and 2009. The Tenth Circuit affirmed, holding that disgorgement orders are remedial and not subject to the five-year statute of limitations under § 2462. The Tenth Circuit held that SEC claims for disgorgement are an equitable remedy, not a penalty, and the SEC could therefore seek disgorgement of assets related to conduct occurring outside the five-year limitations period. In Kokesh, the Supreme Court reversed the Tenth Circuit, unanimously holding that disgorgement is a “penalty” under § 2462. The Court reasoned that “SEC disgorgement is imposed by the courts as a consequence for violating public laws,” i.e., a violation committed against the United States rather than an aggrieved individual, and also that “SEC disgorgement is imposed for punitive purposes.”

The Kokesh decision has far reaching implications for SEC actions, including for violations of the Foreign Corrupt Practices Act. The FCPA, which prohibits the paying of bribes to foreign officials to obtain or retain business, is enforced by the SEC as well as the Department of Justice. Historically, the SEC has sought to make disgorgement claims against assets acquired as a result of a FCPA violation outside the five-year statute of limitations. In the Resource Guide to the FCPA, the Department of Justice and SEC jointly stated that the five-year limitations period applies to SEC actions seeking civil penalties but does not prevent SEC from seeking disgorgement of ill-gotten gains for conduct pre-dating the five-year period. Often, conduct that the SEC alleges violates the FCPA spans well beyond a five-year period. For example, in 2016, a Massachusetts-based technology firm agreed to pay $11.85 million in disgorgement as part of a settlement for improper payments to foreign officials dating from at least 2006 to 2011. Likewise in 2015, an infant formula manufacturing company agreed to pay $9 million in disgorgement for bribes that were made to healthcare professionals as far as seven years prior to the settlement. These matters reflect that disgorgement beyond the prescribed five-year period has likely contributed to the substantial growth in settlements relating to FCPA violations. Yet, the Kokesh decision may allow savvy practitioners to limit that growth, as the SEC is now barred from reaching beyond the five-year period to disgorge allegedly ill-gotten assets resulting from an FCPA violation.

It is too early to hypothesize as to the magnitude of the impact this decision will have for FCPA settlements with the SEC. But, undoubtedly, it is already clear that the Kokesh ruling hands corporations a rare victory as to FCPA actions by the SEC.