Supreme Court Rules To Limit SEC Power To Recover Profit From Fraud

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The Supreme Court on Monday unanimously limited the federal government’s power to recover the profits made from illegal behavior.

Justice Sonia Sotomayor wrote that the Securities and Exchange Commission must abide by a five-year statute of limitations in seeking “disgorgement” from those whose fraudulent actions resulted in illegal profits.

It is a favorite tool of the federal government; in recent years, the SEC took in nearly $3 billion in disgorgements, more than double what it received in penalties, according to court filings.

The question for the Supreme Court was whether disgorgements were a form of a penalty, which is subject to the statute of limitations, or a remedy for unjust enrichment that simply restores the offender to the situation he would have been in if he had not acted illegally, as the government claimed.

It appeared not to be a close call to the justices.

“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,” wrote Sotomayor, who noted that the money received often goes to the government rather than victims of the fraud. “The 5-year statute of limitations . . . therefore applies when the SEC seeks disgorgement.”

It was one of the first cases heard by new Justice Neil Gorsuch after he was sworn in in April, and he joined his new colleagues in overturning a decision from his old court, the U.S. Court of Appeals for the 10th Circuit in Denver.

The case was brought by Charles Kokesh, a Santa Fe, New Mexico, businessman who was convicted of misappropriating money from four investment companies he controlled from 1995 through 2009 and using the proceeds for a lavish lifestyle.

A judge in 2015 ordered him to pay a $2.4 million civil penalty. But because the SEC has interpreted disgorgement to have no time restraint, the judge said Kokesh must also pay $35 million, the calculated amount of illegal profits dating back to the initiation of his illegal behavior.

With a five-year limit, Kokesh’s disgorgement would be reduced to about $5 million.

Dixie Johnson, a securities enforcement lawyer in Washington, said the ruling “shatters” the SEC’s view of disgorgement.

“Those who previously paid disgorgement purportedly for ill-gotten gains more than five years after the relevant violation will be reviewing their situations against this case to determine whether the disgorgement award should have been allowed,” she said in a statement.

The case is Kokesh v. Securities and Exchange Commission.

(c) 2017, The Washington Post · Robert Barnes

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