In a unanimous verdict, America’s highest court found that the SEC’s recovery remedy, known as disgorgement, is subject to a five-year statute of limitations, reports Reuters.
The ruling has potentially significant repercussions for the SEC’s enforcement capabilities.
Mishandled funds
The SEC sued New Mexico-based investment adviser Charles Kokesh in 2009, alleging that two firms he owned had mishandled client funds.
The US regulator accused Kokesh of stealing $34.9m between 1995 to 2007 to cover operational expenses; including salaries, bonuses, tax distributions and rent.
Some of the money was also used by Kokesh to fund his lavish lifestyle.
A district court found him guilty of “misappropriating” the money and ordered Kokesh to pay a penalty of $2.4m, the sum he personally had taken and spent.
The SEC also sought to recover the full $34.9m plus interest as disgorgement, arguing that the statute of limitations should not apply.
The district court agreed and ordered Kokesh to pay the sum, plus $18m in interest.
Appeal court
On appeal in 2016, the Tenth Circuit Court in Denver agreed with the SEC and district court that the disgorgement was not subject to a statute of limitations.
The case was then elevated to the Supreme Court, where Kokesh’s lawyer argued that a disgorgement in the case constituted a punitive “forfeiture” that is time-barred.
The US Justice Department countered that disgorgement merely restores the defendant to the same position he was in prior to when the misconduct occurred.
Judges agree with Kokesh
The Supreme Court justices sided with Kokesh, stating that the $2.4m penalty related to his actions within the five-year statute of limitations, but the disgorgement covered conduct that largely occurred outside that timeframe.
Writing for the court, justice Sonia Sotomayor said that disgorgement counts as a penalty and is therefore bound by the same statute of limitations that applies to “any civil fine, penalty or forfeiture”.
The SEC disgorgement process “bears all the hallmarks of penalty: It is imposed as a consequence of violating a public law and is intended to deter, not to compensate,” she wrote.
Court documents show that Kokesh is insolvent, meaning that it was unlikely that investors would ever receive any compensation or restitution.
However, the Supreme Court verdict has been described as a “blow” to the SEC’s enforcement powers.
