Sec. & Exch. Comm'n v. Kokesh

Citation834 F.3d 1158
Decision Date23 August 2016
Docket NumberNo. 15-2087,15-2087
Parties Securities and Exchange Commission, Plaintiff-Appellee, v. Charles R. Kokesh, Defendant-Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (10th Circuit)

Clinton W. Marrs, Marrs Griebel Law, Ltd., Albuquerque, New Mexico for Defendant-Appellant.

Sarah R. Prins, Attorney (Anne K. Small, General Counsel, Sanket J. Bulsara, Deputy General Counsel, Michael A. Conley, Solicitor, and Benjamin L. Schiffrin, Senior Litigation Counsel, with her on the brief), Securities and Exchange Commission, Washington, D.C., for Plaintiff-Appellee.

Before HARTZ, PHILLIPS, and McHUGH, Circuit Judges.

HARTZ

, Circuit Judge.

The Securities and Exchange Commission (SEC) brought an enforcement action against Defendant Charles Kokesh for misappropriating funds from four SEC-registered business development companies (BDCs) in violation of federal securities laws. After a jury returned a verdict in favor of the SEC, the United States District Court for the District of New Mexico entered a final judgment permanently enjoining Defendant from violating certain provisions of federal securities laws, ordering disgorgement of $34.9 million plus prejudgment interest of $18.1 million, and imposing a civil penalty of $2.4 million. Defendant appeals, asserting that the court's imposition of the disgorgement and permanent injunction was barred by 28 U.S.C. § 2462

, which sets a five-year limitations period for suits “for the enforcement of any civil fine, penalty, or forfeiture.” He also argues that the district court erred by precluding him from presenting evidence of attorney and accountant participation to show his lack of knowledge of the misconduct. Exercising jurisdiction under 28 U.S.C. § 1291, we affirm. We hold that both the permanent injunction and the disgorgement order are remedial and not subject to § 2462. And we reject the evidentiary claim.

I. BACKGROUND

The BDCs from which Defendant misappropriated funds were Technology Funding Medical Partners I, L.P.; Technology Funding Partners III, L.P.; Technology Funding Venture Partners IV, An Aggressive Growth Fund, L.P.; and Technology Funding Venture Partners V, An Aggressive Growth Fund, L.P. (collectively, the Funds). The Funds raised money from investors through public securities offerings and invested in private start-up companies that focused on technology, biotechnology, and medical diagnostics.

As a limited partnership, each Fund was governed by a written agreement. Each agreement provided for the election of three individual general partners and two managing general partners. The managing general partners conducted day-to-day operations and made investment recommendations, subject to supervision by the governance committee of each Fund, which was composed of the individual general partners or the individual general partners and two representatives of the managing general partners.

Technology Funding Ltd. and Technology Funding, Inc. (collectively, the Advisers), which were SEC-registered investment advisers, were the managing general partners for each Fund. The Advisers were owned and controlled by Defendant. They had contracts with the Funds—which were signed by Defendant—that described how they would be compensated. The contracts prohibited any payments to the Advisers that were not expressly specified.

From 1995 through 2006, Defendant directed the Advisers' treasurer to take $23.8 million from the Funds to pay salaries and bonuses to officers of the Advisers (which included Defendant himself) and to take $5 million to cover the Advisers' office rent. In 2000 he also caused the Advisers to take $6.1 million in payments described as “tax distributions” in SEC reports that he signed. Defendant received over 90% of these “tax distributions,” despite paying only $10,304 in federal taxes that year.

These payments violated the contracts between the Advisers and the Funds. First, until 2000 the contracts prohibited payments for salaries of the Advisers' controlling persons, including Defendant and other officers. Although the contracts were amended in 2000 to permit reimbursement for controlling-person salaries, the amendment was based on a misleading proxy statement (signed by Defendant) which falsely identified him as the only controlling person and grossly underreported his annual salary. Second, the contracts did not provide for bonus payments and Defendant did not disclose the bonuses to the Funds' directors or in SEC filings that he signed on the Funds' behalf. Third, the contracts specifically prohibited rent reimbursement, yet he failed to disclose the rent payments to the Funds' directors. Fourth, although the contracts allowed for payment of tax obligations if certain conditions were met, the 2000 payment did not satisfy these conditions.

Before trial the SEC filed a motion in limine to preclude Defendant from offering evidence that he reasonably relied on the advice of his counsel and his accountants. The district court granted this motion under Fed. R. Evid. 403

, finding that any probative value of such evidence was outweighed by the danger of confusing the issues and misleading the jury. The court acknowledged, however, that such evidence could be presented if Defendant met the test for an advice-of-counsel defense under United States v. Wenger , 427 F.3d 840 (10th Cir. 2005).

The case was tried to a jury, which found (1) that Defendant knowingly and willfully converted the Funds' assets to his own use or to the use of another and (2) that he knowingly and substantially assisted the Advisers in defrauding the Funds, in filing false and misleading reports with the SEC, and in soliciting proxies using false and misleading proxy statements. The court found that disgorgement of $34.9 million “reasonably approximates the ill-gotten gains causally connected to Defendant's violations,” Aplt. App., Vol. 2 at 1880 (order granting SEC's motion for entry of final judgment), and that an order enjoining him from violating certain provisions of federal securities laws was warranted because “there is a reasonable and substantial likelihood that Defendant will again violate the securities laws,” id. at 1876.

II. DISCUSSION

Defendant appeals on two grounds: (1) that the injunction and disgorgement order, obtained under 15 U.S.C. § 78u(d)(1), (5)

, must be set aside because the claims accrued more than five years before the SEC brought its action and are therefore barred under the five-year statute of limitations in 28 U.S.C. § 2462 for government suits seeking penalties or forfeitures; and (2) that the district court erred in disallowing evidence of attorney and accountant participation to show his lack of knowledge of the misconduct. We address each in turn.

A. Section 2462

Unless another statute specifies otherwise, § 2462

sets a five-year limitations period for claims seeking certain sanctions. It states:

Except as otherwise provided by Act of Congress, an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture , pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued if, within the same period, the offender or the property is found within the United States in order that proper service may be made thereon.

Id. (emphasis added). “The construction and applicability of a federal statute of limitation is a question of law we review de novo .” United States v. Telluride Co. , 146 F.3d 1241, 1244 (10th Cir. 1998)

. Statutes of limitation are interpreted narrowly in the government's favor “to protect the public from the negligence of public officers in failing to timely file claims in favor of the public's interests.” Id. at 1246 n.7 ; see also

Guar. Trust Co. of New York v. United States , 304 U.S. 126, 132–33, 58 S.Ct. 785, 82 L.Ed. 1224 (1938) (public policy generally supports not imposing laches or statutes of limitations on the government). And we have also recognized that equitable claims are usually not subject to statutes of limitations. See

Telluride , 146 F.3d at 1245.

Defendant argues that the injunction (an order to refrain from future violations of certain provisions of federal securities laws) is a penalty and the disgorgement order is a penalty or forfeiture within the meaning of § 2462

. We first discuss the injunction.

1. Injunction

The district court's final judgment ordered “that Defendant is permanently enjoined from directly or indirectly violating Section 206(1) and (2) of the Investment Advisers Act; Section 13(a) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, and 13a-13; Section 14(a) of the Exchange Act and Exchange Act Rule 14a-9; Section 37 of the Investment Company Act, and Section 205(a) of the Investment Advisers Act.” Aplt. App., Vol. 2 at 1883 (final judgment). We fail to see how an order to obey the law is a penalty. Its purpose is not to penalize Defendant; after all, everyone has a duty to obey the law. It is to protect the public by giving Defendant an added incentive to conduct himself in accordance with the securities laws: violating the injunction would subject him to the court's contempt power, see 18 U.S.C. § 401(3)

(authorizing courts to punish disobedience of a lawful order). It has been recognized for some time that such an order is “purely remedial and preventative,” and not a penalty or forfeiture.

Drath v. F.T.C. , 239 F.2d 452, 454 (D.C. Cir. 1956)

(internal quotation marks omitted); see id. (“One is not prosecuted by being told to desist from illegal conduct, nor does he thereby suffer the imposition of a penalty or the forfeiture of any legally-protected right or property.”); Welch Sci. Co. v. N.L.R.B. , 340 F.2d 199, 202–03 (2d Cir. 1965) (NLRB's order that “the company should cease and desist from interrogating the New York employees concerning their [union] membership” (a violation of the National Labor Relations Act) was “purely remedial”); cf.

Hecht Co. v. Bowles , 321 U.S. 321, 329, 64 S.Ct. 587, 88 L.Ed. 754 (1944)...

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