In Two Unanimous Rulings, U.S. Supreme Court Limits Penalties in SEC Enforcement and Criminal Actions

Kramer Levin Naftalis & Frankel LLP

In a pair of decisions issued on June 5, the Supreme Court sharply curtailed the scope of financial sanctions available in civil securities enforcement and criminal drug trafficking cases. In addition to the results, which represent significant setbacks for the government, these cases are notable in that the decisions, each of which reversed rulings below, were rendered by a unanimous court based on relatively straightforward interpretations of the applicable statutory language.

Supreme Court Rules That Five-year Statute of Limitations Applies to SEC Disgorgement Actions

In Kokesh v. SEC1 the Supreme Court unanimously held that SEC claims for disgorgement are subject to the five-year statute of limitations for government actions to enforce “any civil fine, penalty, or forfeiture, pecuniary or otherwise” set forth in 28 U.S.C. § 2462. The Court’s conclusion that disgorgement operates as a “penalty” within the meaning of Section 2462 resolves a circuit split over the issue. Previously, the Eleventh Circuit had concluded that disgorgement is in effect a forfeiture and therefore subject to the five-year statute of limitations, while the Tenth Circuit had joined the First Circuit and District of Columbia Circuit in concluding that disgorgement was neither a penalty nor a forfeiture subject to the limitations period.

Writing for a unanimous court, Justice Sotomayor found that SEC disgorgement “bears all the hallmarks of a penalty: It is imposed as a consequence of violating a public law and it is intended to deter, not to compensate.”2

The Supreme Court’s decision reverses a ruling by the Tenth Circuit, which had affirmed a district court decision ordering Charles R. Kokesh — a New Mexico investment adviser found liable for misappropriating funds from businesses he controlled — to pay $34.9 million in disgorgement, in addition to $18 million in prejudgment interest and a $2.4 million penalty, for conduct that occurred as long as 14 years before the SEC filed suit. Nearly $30 million of the district court’s disgorgement order reflected conduct occurring outside the five-year statute of limitations. The Supreme Court’s decision in Kokesh dramatically reduced the scope of the SEC’s disgorgement order, holding that “any claim for disgorgement in an SEC enforcement action must be commenced within five years of the date the claim accrued.”3

Despite receiving a favorable decision in the Tenth Circuit, the SEC had agreed with petitioner Kokesh that the Supreme Court should take up the case. The Supreme Court, however, rejected the SEC’s contention that disgorgement is a remedial sanction that merely returns a defendant to the status quo prior to any securities law violation. Instead, the Court found, inter alia, that because disgorgement often exceeds the amount of ill-gotten gains and leaves defendants worse off, disgorgement orders constitute a penalty that falls within Section 2462’s five-year limitations period.

In a footnote in the decision, the Court appears to invite even broader challenges to the SEC’s disgorgement authority: “Nothing in this opinion should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings or on whether courts have properly applied disgorgement principles in this context(.) The sole question presented in this case is whether disgorgement, as applied in SEC enforcement actions, is subject to § 2462’s limitations period.”4 Future litigants may well raise issues as to the SEC’s statutory authority to obtain disgorgement when the Supreme Court has held disgorgement is a penalty and Congress has set forth a separate statutory scheme that encompasses civil monetary penalties.

* * * * *

Supreme Court Finds the Comprehensive Forfeiture Act Does Not Permit Joint and Several Liability

In a second decision, Honeycutt v. United States,5 Justice Sotomayor, again writing for a unanimous court (with Justice Gorsuch not participating), held that under the Comprehensive Forfeiture Act of 1984, 21 U.S.C. § 853, co-conspirators may not be held jointly and severally liable for forfeiture judgements in certain drug cases. Rather, forfeiture must be limited to “property the defendant himself actually acquired as a result of the crime.”6

The court’s decision reverses a ruling by the Sixth Circuit holding that co-conspirators are jointly and severally liable for the forfeiture of proceeds of a conspiracy.

Justice Sotomayor concluded that joint and several liability — by which multiple defendants are liable for the full amount of harm caused — is contrary to the language of the statute. The Court noted that, by its terms, the statute limits the property subject to forfeiture to only the tainted property each defendant obtained or used to facilitate a crime. Joint and several liability, however, makes co-conspirators liable for the entire proceeds of a criminal conspiracy, an amount that could far surpass the ill-gotten gains of an individual defendant. Since joint and several liability would require a defendant to forfeit monies equaling the full proceeds of the conspiracy, the forfeiture would potentially exceed their individual tainted earnings to include untainted funds that the defendant did not acquire as the result of the crime, an outcome that exceeds what the statute’s text permits.    

Although Honeycutt concerns 21 U.S.C. § 853, a forfeiture statute for drug conspiracies, the Court’s rationale is likely to apply to other criminal forfeiture statutes that are similarly constructed, including the criminal forfeiture provisions in 18 U.S.C. § 982, which apply to a wide range of crimes, including mail and wire fraud.





1 No. 16-529, 2017 WL 2407471 (U.S. June 5, 2017). As noted previously, on March 3, 2017, Kramer Levin filed an amicus brief in Kokesh v. SEC in the U.S. Supreme Court on behalf of the Securities Industry and Financial Markets Association (SIFMA) supporting the position of the petitioner, Charles R. Kokesh.

2 Id. at *8.

3 Id. at *9.

4 Id. at *5, n.3.

5 No. 16-142, 2017 WL 2407468 (U.S. June 5, 2017).

6 Id. at *9.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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