Written by: Mike Corelli
Facts & Procedural History
In 2009, the Securities and Exchange Commission (SEC) commenced an action against Charles Kokesh for violating federal securities laws by misappropriating funds. After a jury found Kokesh had violated the federal securities laws, the District Court addressed the damages the SEC demanded. Under 28 U.S.C. § 2462, there is a five-year statute of limitations that precludes civil monetary damages from being enforced. Holding that SEC disgorgement damages were not subject to 28 U.S.C. § 2462, the District Court entered a disgorgement judgment of $34.9 million against Kokesh. The Tenth Circuit affirmed. The Supreme Court granted certiorari to determine whether 28 U.S.C. § 2462 applies to SEC disgorgement damages.
Supreme Court Decision
The Supreme Court reversed the Tenth Circuit’s decision holding that SEC disgorgement damages are subject to 28 U.S.C. § 2462. Under 28 U.S.C. § 2462, “an action, suit[,] or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years.” Thus, the Court turned to whether SEC disgorgement damages constitute a “civil fine, penalty, or forfeiture.”
In resolving whether SEC disgorgement damages are subject to 28 U.S.C. § 2462, the Court considered the definition of “penalty.” The Court defined a penalty as a punishment imposed and enforced by the State, for a crime or offense against its laws. Accordingly, this definition establishes two factors that are determinative as to what constitutes a penalty. The first factor as to whether a pecuniary damage is a penalty is whether the wrong being addressed is a wrong against the public, as opposed to a wrong against a private citizen. The second factor is whether the pecuniary damages are sought to penalize and serve as a deterrent, as opposed to compensating a victim.
With these factors guiding its analysis, the Court addressed whether the $34.9 million disgorgement judgment against Kokesh was a penalty and subject to 28 U.S.C. § 2462. First, the Court noted that the lower court’s judgment was imposed for violating public laws. Essentially, disgorgement judgments provide a remedy to the United States, not aggrieved individuals. Moreover, after these judgments are paid, the courts have discretion in how these funds are distributed. Second, the Court noted that disgorgement judgments are intended to put others on notice by serving as a deterrent. Accordingly, the Court held that SEC disgorgement damages are a penalty and are subject to 28 U.S.C. § 2462. Thus, SEC disgorgement judgments must comply with the five-year statute of limitations. The $34.9 million disgorgement judgment against Kokesh was reduced to comply with the five-year statute of limitations enumerated in 28 U.S.C. § 2462.
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Sources Cited
Kokesh v. SEC, 580 U. S. ____ (2017).