Supreme Court Limits SEC Disgorgement

SEC FCPA Enforcement Action Kokesh

On June 5, the Supreme Court ruled in Kokesh v. SEC that the SEC’s authority to disgorge profits from defendants is subject to the five-year statute of limitations applicable to penalties and fines. The Court rejected the SEC’s position that disgorgement is an equitable remedy and not a penalty, resolving a circuit split on the issue. Writing for the unanimous Court, Justice Sotomayor said that disgorgement “bears all the hallmarks of a penalty,” reasoning that it “is intended to deter, not to compensate.” The defendant in Kokesh was an investment adviser who had been ordered to disgorge approximately $35 million for allegedly misappropriating investor funds.

The SEC routinely seeks disgorgement in FCPA enforcement actions. The Kokesh decision may lead the SEC to seek tolling agreements sooner and in more circumstances, particularly where the alleged conduct occurred over a long period of time. The decision may also impact defendants’ ability to claim insurance coverage for disgorgement because insurers might deny coverage for payment of penalties.