Kokesh v. Sec. & Exch. Comm'n

• Decision Date: 05 June 2017
• Docket Number: No. 16–529.,16–529.
• Citation: 137 S.Ct. 1635,198 L.Ed.2d 86
• Parties: Charles R. KOKESH, Petitioner v. SECURITIES AND EXCHANGE COMMISSION.
• Court: U.S. Supreme Court

137 S.Ct. 1635

198 L.Ed.2d 86

Charles R. KOKESH, Petitioner

v.SECURITIES AND EXCHANGE COMMISSION.

No. 16–529.

Supreme Court of the United States

Argued April 18, 2017.

Decided June 5, 2017.

Adam Unikowsky, Washington, DC, for Petitioner.

Elaine J. Goldenberg, Washington, DC, for Respondent.

Clinton W. Marrs, Marrs Griebel Law, Ltd., Albuquerque, NM, David A. Strauss, Sarah M. Konsky, Jenner & Block Supreme Court and Appellate Clinic at the University of Chicago Law School, Chicago, IL, Adam G. Unikowsky, Zachary C. Schauf, Jenner & Block LLP, Washington, DC, James Dawson, Jenner & Block LLP, Chicago, IL, for Petitioner.

Sanket J. Bulsara, Acting General Counsel, Michael A. Conley, Solicitor, Jacob H. Stillman, Senior Advisor to the Solicitor, Hope Hall Augustini, Daniel Staroselsky, Senior Litigation Counsels, Sarah R. Prins, Senior Counsel, Securities and Exchange Commission, Washington, DC, Jeffrey B. Wall, Acting Solicitor General, Malcolm L. Stewart, Deputy Solicitor General, Elaine J. Goldenberg, Assistant to the Solicitor General, Department of Justice, Washington, DC, for Respondent.

Justice SOTOMAYOR delivered the opinion of the Court.

A 5–year statute of limitations applies to any "action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise." 28 U.S.C. § 2462. This case presents the question whether § 2462 applies to claims for disgorgement imposed as a sanction for violating a federal securities law. The Court holds that it does. Disgorgement in the securities-enforcement context is a "penalty" within the meaning of § 2462, and so disgorgement actions must be commenced within five years of the date the claim accrues.

I

A

After rampant abuses in the securities industry led to the 1929 stock market crash and the Great Depression, Congress enacted a series of laws to ensure that "the highest ethical standards prevail in every facet of the securities industry."¹ SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 186–187, 84 S.Ct. 275, 11 L.Ed.2d 237 (1963) (internal quotation marks omitted). The second in the series—the Securities Exchange Act of 1934—established the Securities and Exchange Commission (SEC or Commission) to enforce federal securities laws. Congress granted the Commission power to prescribe " ‘rules and regulations ... as necessary or appropriate in the public interest or for the protection of investors.’ " Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 728, 95 S.Ct. 1917, 44 L.Ed.2d 539 (1975). In addition to rulemaking, Congress vested the Commission with "broad authority to conduct investigations into possible violations of the federal securities laws." SEC v. Jerry T. O'Brien, Inc., 467 U.S. 735, 741, 104 S.Ct. 2720, 81 L.Ed.2d 615 (1984). If an investigation uncovers evidence of wrongdoing, the Commission may initiate enforcement actions in federal district court.

Initially, the only statutory remedy available to the SEC in an enforcement action was an injunction barring future violations of securities laws. See 1 T. Hazen, Law of Securities Regulation § 1:37 (7th ed., rev. 2016). In the absence of statutory authorization for monetary remedies, the Commission urged courts to order disgorgement as an exercise of their "inherent equity power to grant relief ancillary to an injunction." SEC v. Texas Gulf Sulphur Co., 312 F.Supp. 77, 91 (S.D.N.Y.1970), aff'd in part and rev'd in part, 446 F.2d 1301 (C.A.2 1971). Generally, disgorgement is a form of "[r]estitution measured by the defendant's wrongful gain." Restatement (Third) of Restitution and Unjust Enrichment § 51, Comment a, p. 204 (2010) (Restatement (Third)). Disgorgement requires that the defendant give up "those gains ... properly attributable to the defendant's interference with the claimant's legally protected rights." Ibid . Beginning in the 1970's, courts ordered disgorgement in SEC enforcement proceedings in order to "deprive ... defendants of their profits in order to remove any monetary reward for violating" securities laws and to "protect the investing public by providing an effective deterrent to future violations." Texas Gulf, 312 F.Supp., at 92.

In 1990, as part of the Securities Enforcement Remedies and Penny Stock Reform Act, Congress authorized the Commission to seek monetary civil penalties. 104 Stat. 932, codified at 15 U.S.C. § 77t(d). The Act left the Commission with a full panoply of enforcement tools: It may promulgate rules, investigate violations of those rules and the securities laws generally, and seek monetary penalties and injunctive relief for those violations. In the years since the Act, however, the Commission has continued its practice of seeking disgorgement in enforcement proceedings.

This Court has already held that the 5–year statute of limitations set forth in 28 U.S.C. § 2462 applies when the Commission seeks statutory monetary penalties. See Gabelli v. SEC, 568 U.S. 442, 454, 133 S.Ct. 1216, 185 L.Ed.2d 297 (2013). The question here is whether § 2462, which applies to any "action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise," also applies when the SEC seeks disgorgement.

B

Charles Kokesh owned two investment-adviser firms that provided investment advice to business-development companies. In late 2009, the Commission commenced an enforcement action in Federal District Court alleging that between 1995 and 2009, Kokesh, through his firms, misappropriated $34.9 million from four of those development companies. The Commission further alleged that, in order to conceal the misappropriation, Kokesh caused the filing of false and misleading SEC reports and proxy statements. The Commission sought civil monetary penalties, disgorgement, and an injunction barring Kokesh from violating securities laws in the future.

After a 5–day trial, a jury found that Kokesh's actions violated the Investment Company Act of 1940, 15 U.S.C. § 80a–36 ; the Investment Advisers Act of 1940, 15 U.S.C. §§ 80b–5, 80b–6 ; and the Securities Exchange Act of 1934, 15 U.S.C. §§ 78m, 78n. The District Court then turned to the task of imposing penalties sought by the Commission. As to the civil monetary penalties, the District Court determined that § 2462's 5–year limitations period precluded any penalties for misappropriation occurring prior to October 27, 2004—that is, five years prior to the date the Commission filed the complaint. App. to Pet. for Cert. 26a. The court ordered Kokesh to pay a civil penalty of $2,354,593, which represented "the amount of funds that [Kokesh] himself received during the limitations period." Id., at 31a–32a. Regarding the Commission's request for a $34.9 million disgorgement judgment—$29.9 million of which resulted from violations outside the limitations period—the court agreed with the Commission that because disgorgement is not a "penalty" within the meaning of § 2462, no limitations period applied. The court therefore entered a disgorgement judgment in the amount of $34.9 million and ordered Kokesh to pay an additional $18.1 million in prejudgment interest.

The Court of Appeals for the Tenth Circuit affirmed. 834 F.3d 1158 (2016). It agreed with the District Court that disgorgement is not a penalty, and further found that disgorgement is not a forfeiture. Id ., at 1164–1167. The court thus concluded that the statute of limitations in § 2462 does not apply to SEC disgorgement claims.

This Court granted certiorari, 580 U.S. ––––, 137 S.Ct. 810, 196 L.Ed.2d 596 (2017), to resolve disagreement among the Circuits over whether disgorgement claims in SEC proceedings are subject to the 5–year limitations period of § 2462.²

II

Statutes of limitations "se[t] a fixed date when exposure to the specified Government enforcement efforts en[d]." Gabelli, 568 U.S., at 448, 133 S.Ct. 1216. Such limits are " ‘vital to the welfare of society’ " and rest on the principle that " ‘even wrongdoers are entitled to assume that their sins may be forgotten.’ "

Id., at 449, 133 S.Ct. 1216. The statute of limitations at issue here— 28 U.S.C. § 2462 —finds its roots in a law enacted nearly two centuries ago. 568 U.S., at 445, 133 S.Ct. 1216. In its current form, § 2462 establishes a 5–year limitations period for "an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture." This limitations period applies here if SEC disgorgement qualifies as either a fine, penalty, or forfeiture. We hold that SEC disgorgement constitutes a penalty.³

A

A "penalty" is a "punishment, whether corporal or pecuniary, imposed and enforced by the State, for a crime or offen[s]e against its laws." Huntington v. Attrill, 146 U.S. 657, 667, 13 S.Ct. 224, 36 L.Ed. 1123 (1892). This definition gives rise to two principles. First, whether a sanction represents a penalty turns in part on "whether the wrong sought to be redressed is a wrong to the public, or a wrong to the individual." Id ., at 668, 13 S.Ct. 224. Although statutes creating private causes of action against wrongdoers may appear—or even be labeled—penal, in many cases "neither the liability imposed nor the remedy given is strictly penal." Id ., at 667, 13 S.Ct. 224. This is because "[p]enal laws, strictly and properly, are those imposing punishment for an offense committed against the State." Ibid. Second, a pecuniary sanction operates as a penalty only if it is sought "for the purpose of punishment, and to deter others from offending in like manner"—as opposed to compensating a victim for his loss. Id ., at 668, 13 S.Ct. 224.

The Court has applied these principles in construing the term "penalty." In Brady v. Daly, 175 U.S. 148, 20 S.Ct. 62, 44 L.Ed. 109 (1899), for example, a playwright sued a defendant in Federal Circuit Court under a statute providing that copyright infringers " ‘shall be liable for damages ... not less than one hundred dollars for the first [act of infringement], and fifty dollars for every subsequent performance, as to the court...