Circuits Further Split Regarding Statute of Limitations for Disgorgement in SEC Enforcement Actions
The Securities and Exchange Commission (SEC) typically has five years from the date a claim accrues to bring “an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise” pursuant to 28 U.S.C. § 2462. This has led courts to different conclusions as to whether this statute of limitations applies to equitable or quasi-equitable remedies, including the remedy of disgorgement. In the summer of 2016, the Eleventh Circuit held that Section 2462 applies to disgorgement, but the Tenth Circuit shortly thereafter reached the opposite conclusion.
The Eleventh Circuit decided Securities and Exchange Commission v. Graham on May 26, 2016, in which the SEC appealed a district court ruling that Section 2462 applied to its request for disgorgement, among other remedies. 823 F.3d 1357 (11th Cir. 2016). The district court found that disgorgement would require the defendants to relinquish money and property and was thus the same as forfeiture, to which Section 2462 expressly applies. The Eleventh Circuit agreed, looking to the ordinary meanings of “disgorgement” and “forfeiture” and concluded that “for the purposes of § 2462 the remedy of disgorgement is a ‘forfeiture,’ and § 2462’s statute of limitation applies.” Id. at 1363. It declined to find that “technical” differences between the two terms were meaningful. Id. at 1363-64. Therefore, the Court found that Section 2462 barred the SEC’s request for disgorgement.
Less than three months later, the Tenth Circuit came to the opposite conclusion in Securities and Exchange Commission v. Kokesh, 20016 WL 443785, No. 15-2087 (10th Cir. August 23, 2016). In prior cases, the Tenth Circuit found disgorgement was remedial, not punitive. Id. at *4 (citing United States v. Telluride Co., 146 F.3d 1241, 1247 (10th Cir. 1998)). Under the Tenth Circuit’s approach, disgorgement does not punish a defendant; it merely puts the defendant in the same position he would have been in had he not engaged in the wrongful acts. Id. at *4. Even when the defendant was required to disgorge more than he personally gained or benefitted from the wrongdoing, disgorgement was nonetheless not punitive. Id. at 4-5. The Court compared an SEC enforcement action to a personal injury claim wherein courts do not consider it punitive to require the defendant to pay for all damages caused, even where the defendant has not personally gained. Id. at *5. The Tenth Circuit explained that forfeiture, as listed in Section 2462, must be viewed historically to mean a taking of “tangible property used in criminal activity.” Id. at *5. The non-punitive remedy of disgorgement does not fit within this type of forfeiture, and therefore Section 2462 does not apply.
The effect of Graham and Kokesh remains to be seen, but it seems likely that until the Supreme Court resolves the issue, the remaining circuits will have to choose sides. Prior to Graham, the D.C. Circuit weighed in on the issue, most recently finding that disgorgement orders are not penalties and therefore are not subject to the five-year statute of limitations in Section 2462. See Riordan v. Securities and Exchange Commission, 627 F.3d 1230 (D.C. Cir. 2010). In circuits that adopt the view of the Tenth and D.C. Circuits, the SEC is permitted to seek disgorgement of funds associated with wrongdoing that occurred more than five years prior to the accrual of the claim, which could significantly increase a defendant’s exposure. In comparison, the application of the statute of limitations in the Eleventh Circuit provides defendants facing disgorgement with more predictable and limited exposure. Until the Supreme Court resolves this split, defendants in undecided circuits must grapple with the risk of the additional exposure that would come with their circuit’s adoption of the Tenth and D.C. Circuit’s approach.
Jessica Pixler is a member of the firm's Business Litigation division. Ms. Pixler is located in the Kansas City office. For more information, please contact Ms. Pixler or your usual Stinson Leonard Street contact.
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