Supreme Court to hear financial adviser case involving disgorgement

Charles Kokesh is appealing a lower court's decision siding with the SEC that gains reaped through securities-law infractions do not fall under the five-year statute of limitations

Apr 17, 2017 @ 2:39 pm

By Mark Schoeff Jr.

The Supreme Court will hear arguments Tuesday in a case brought by a financial adviser that could determine whether there are limits on how much advisers have to pay the Securities and Exchange Commission in disgorgements.

The case, Kokesh v. SEC, involves Charles Kokesh, an adviser who was convicted by a jury in November 2014 for misappropriating funds from four business development companies for his personal use. The U.S. district court in New Mexico ordered Mr. Kokesh to pay disgorgement of $34.9 million, prejudment interest of $18.1 million and a civil penalty of $2.4 million.

Mr. Kokesh appealed the decision, arguing that the disgorgement for activities that occurred between 1995 and 2006 was subject to a five-year statute of limitations that applies to civil fines, penalties or forfeitures under Section 2462 of the U.S. code. If the limitation applied, the amount of disgorgement the SEC could collect in the case would be about $5 million, the agency indicated during the trial. The SEC was seeking disgorgement for violations that occurred as long as 14 years before it filed suit against Mr. Kokesh in 2009.

The SEC argues that disgorgement, which targets the "ill-gotten gain" reaped through a securities-law infraction, does not fall under the five-year statute of limitations because it is "remedial" rather than "punitive."

The Supreme Court has taken up the case because there is a split at the circuit level, with the 10th, 1st and D.C. circuits siding with the SEC, and the 11th Circuit holding that a five-year statute of limitations should be applied to disgorgement. Mr. Kokesh is appealing the 10th Circuit ruling.

Disgorgement is a key factor in SEC enforcement cases. In fiscal 2016, the agency obtained more than $4 billion in disgorgement and other penalties.

"If the SEC's view is upheld, it gives [the agency] a massive weapon in settlements with investment advisers," said Jack Yoskowitz, a partner at Seward & Kissel. "It's a case with huge implications."

The SEC did not respond to a question about the amount of money it stands to give up if disgorgement is limited to a five-year look back. But the agency has used aggressive time lines, according to Michael Dell, a partner at Kramer Levin.

"It's an important [case] because the SEC has been seeking disgorgement, particularly large ones, that go back many years," Mr. Dell said. Disgorgement "influences a lot of negotiations, a lot of resolutions."

If the Supreme Court decides in favor of Mr. Kokesh, it will help the financial industry, according to Ron Betman, counsel at Ulmer & Berne.

"They'll know that the SEC can't seek a disgorgement after five years," he said. "That's good for the marketplace because it gives certainty. Everyone knows the rules."

In 2013, the Supreme Court held that the five-year statute of limitations applied to SEC civil monetary penalties, but it is did not address disgorgements. Now it will take up that question at full strength with nine justices on the bench following the recent Senate confirmation of Justice Neil Gorsuch.

Mr. Gorsuch arrived just in time to make a difference in Kokesh v. SEC.

"He's going to look at it without giving any great deference to the SEC's views, and that could help [Mr.] Kokesh," Mr. Dell said, based on Mr. Gorsuch's past jurisprudence and exchanges given during his confirmation hearing.

The Supreme Court is expected to rule on the case by the end of its term in July.


What do you think?

View comments

Recommended next


Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting It'll help us continue to serve you.

Yes, show me how to whitelist

Ad blocker detected. Please whitelist us or give premium a try.


Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print