S E C U R I T I E S L AW

May the Federal Administrative State Seek Disgorgement

Unrestrained by Any Statute of Limitation?

CASE AT A GLANCE
The United States Securities and Exchange Commission (SEC) alleged that New Mexico investment adviser
Charles R. Kokesh committed federal securities fraud. In 2009, the SEC led a complaint against Kokesh.
The SEC claimed that from 1995 through 2007, Kokesh misappropriated $35 million from four business
development companies, led fraudulent SEC reports, and executed illegal contracts. A federal jury in
the District of New Mexico issued a verdict for the SEC on all ve counts of the complaint. Over Kokeshs
objection, the district court entered nal judgment and ordered Kokesh to disgorge $35 million in ill-gotten
gains. Kokesh appealed the disgorgement amount and argued the district court calculated the amount in
violation of 28 U.S.C. 2462, a federal statute of limitations on any ne, penalty, or forfeiture. The United
States Court of Appeals for the Tenth Circuit afrmed the judgment of the district court. Consistent with the
First and D.C. Circuits, the Tenth Circuit determined 2462 does not apply to SEC disgorgement actions. A
circuit split exists, as the Eleventh Circuit ruled that 2462 sets a statute of limitations on disgorgement.
Cases seeking time limitations on disgorgement are pending in the Second and Eighth Circuits.

Kokesh v. SEC
Docket No. 16-529

Argument Date: April 18, 2017

From: The Tenth Circuit

by Rachel K. Paulose
DLA Piper LLP, Minneapolis, MN

ISSUE
Does the statute of limitations under 28 U.S.C. 2462 apply to
disgorgement actions initiated by the federal government?
FACTS
Charles R. Kokesh owned two investment advisers (Advisers)
registered with the SEC. In turn, the Advisers operated four
business development companies (Funds) that invested in private
start-up corporations with money raised from private investors
through public securities offerings. Kokesh drafted contracts that
governed the Advisers relationships with the Funds. In violation of
his fiduciary duties to investors, contractual terms, and pertinent
SEC statutes, Kokesh engaged in repeated acts of self-dealing.
The SEC alleged Kokesh ordered the Advisers treasurer to take
$24 million from the Funds to pay salaries and bonuses to Kokesh
and other officers from 1995 through 2006; use $5 million to pay
Advisers office rent from 1995 through 2006; and obtain another
$6 million to give to employees including Kokesh in 2000. The SEC
claimed Kokesh tried to hide his unlawful activity by distributing
false materials to investors, concealing the use of money from Fund
directors, and filing false reports with the SEC until 2007. During
that same period, the Funds lost about $85 million in value.
After a lengthy investigation, the SEC filed a civil suit against
Kokesh, alleging violations of the Securities Exchange Act of 1934
(Exchange Act), the Investment Advisers Act of 1940 (Advisers Act),
and the Investment Company Act of 1940 (Company Act). After
five days of trial, the jury returned a verdict against Kokesh on all
counts, finding he knowingly and willfully committed fraud.
The district court entered final judgment against Kokesh. Kokesh
asserted he possessed no assets, and even the SEC agreed Kokesh
dissipated vast sums on his extravagant lifestyle. Nevertheless,
the court ordered Kokesh to pay $35 million in disgorgement,
$18 million in prejudgment interest, and $2.5 million in
penalties. Among other objections, Kokesh challenged the courts
disgorgement order, which sought to reverse Kokeshs alleged
ill-gotten gains from 1995 through 2007. Kokesh characterized
the disgorgement as a penalty. Citing a provision of the federal
code imposing a time bar on penalties, Kokesh argued that any
disgorgement penalty ought to be limited by a five-year statute of
limitations. Application of the statute of limitations in 28 U.S.C.
2462 would reduce Kokeshs disgorgement payment to $5 million.
The relevant statute reads:
Except as otherwise provided by Act of Congress, an action,
suit or proceeding for the enforcement of any civil fine,

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 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.
28 U.S.C. 2462 (1948).
The court calculated that any penalty time limitation should run
five years prior to the date the SEC filed its 2009 complaint, e.g.,
2004. The district court next ruled that 2462 applied only to
Kokeshs penalty of $2.5 million. The court further determined that
disgorgement could not be classified as a 2462 penalty in that the
disgorgement was directly related to the damage Kokesh caused and
the illicit gains he received from his fraud. The district court ruled
the facts of Kokeshs case were egregious, including that because
Kokesh never admitted wrongdoing:
In this case, Defendant was found liable for numerous
knowing violations of securities laws, and the
circumstances were egregious. He misappropriated nearly
$35 million over an 11-year period, abusing his roles in
several adviser and investment firms for his own personal
benefit and to the detriment of investors. He specifically
targeted smaller investors (those investing $5,000 or less)
because they would be less likely to sue if they discovered
his schemes.
The district court overruled Kokeshs objections and entered final
judgment on March 30, 2015. Kokesh appealed to the federal
appellate court, arguing among other claims that disgorgement is
either a penalty or forfeiture subject to the limitations of 2462.
On August 23, 2016, the Tenth Circuit affirmed the judgment of the
district court.
The court held that disgorgement could not be classified as a
penalty within the meaning of the statute. The court characterized
disgorgement as remedial, not punitive because the disgorgement
remedy does not inflict punishment. Rather, disgorgement just
leaves the wrongdoer in the position he would have occupied
had there been no misconduct. Essentially, the court found that
disgorgement prevented a wrongdoer from being unjustly enriched.
The court also held that disgorgement could not be classified as a
forfeiture within the meaning of 2462. While acknowledging the
existence of federal statutes that provided for disgorgement-type
remedies in forfeiture actions, the court characterized this as
a modern evolution. The court stated that the twentieth-century
Congress that enacted 2462 in 1948 would have contemplated the
historical meaning of forfeiture. Traditionally, forfeiture was an
in rem proceeding to seize property used or derived from criminal
activity, regardless of the owners culpability or the propertys value.
Disgorgement as applied against Kokesh, by contrast, simply took
back the value of proceeds derived from fraud by a wrongdoer.
The Tenth Circuit also opined that statutes of limitations should
be construed narrowly and in the governments favor to protect the
public, even when public officials are lax in their duties.
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In separate rulings, the U.S. Court of Appeals for the First Circuit
and the U.S. Court of Appeals for the D.C. Circuit likewise held
disgorgement is not subject to the limitations of 2462. In contrast,
the U.S. Court of Appeals for the Eleventh Circuit ruled that
disgorgement could be classified as a type of forfeiture and as such
was limited by 2462s statute of limitations.
Kokesh filed a petition for certiorari on October 18, 2016. The
United States Supreme Court granted Kokeshs petition on January
13, 2017.
CASE ANALYSIS
Kokesh adopts the reasoning of the Eleventh Circuit in arguing
disgorgement is best characterized as a forfeiture. Kokesh argues
forfeiture should be understood as a general term encompassing
any surrender of money to the government as a result of alleged
bad acts. Recognized as such, forfeiture covers remedies, whether
termed punitive or remedial, directed at money or property
and applied to the guilty or the negligent, according to Kokesh.
Forfeiture orders, including orders to cover what we now would
call disgorgement, may be traced to the mother country, England.
Kokesh argues the early American republic also accepted this broad
definition of forfeiture covering disgorgement.
Kokesh explains that today, statutes running the gamut from
narcotics to racketeering all provide for forfeiture of the proceeds
of crimes. The definitions of forfeiture in those statutes implicate
the same action as disgorgement: the return of unlawfully obtained
funds. This definition should be imported into the reading of 2462,
reasons Kokesh. Kokesh maintains that only by verbally slicing and
dicing its enforcement actions into orders for disgorgement (return
of misappropriated funds) and penalties (additional financial
penalties) can the government evade a practical reading of 2462.
The government contends disgorgement cannot be characterized as
a forfeiture under 2462. The government asks the Court to adopt
the holding of the First, Tenth, and D.C. Circuits in contextualizing
forfeiture based on its history as an in rem mechanism to seize
any property used in or derived from crime. The government
hotly disputes the notion that 2462 should be defined to include
all forms of monetary sanction in government enforcement
proceedings.
Forfeiture historically could not be understood as punitive,
argues the government, when it might impact an innocent owner
and property unrelated in value to the impact of the crime. The
government admits that as a result of reforms of the 1970s,
forfeiture now covers illicit profiteering. However, it was not so at
the time of 2462s adoption, contends the government. Forfeiture
was thought to punish an inanimate object for its role in advancing
a crime. It also could punish an owner for purposely or negligently
allowing his property to be used for criminal purposes, as described
by the government. Fundamentally, the government asks the Court
to embrace the original meaning of forfeiture despite its modern
evolution.
But the government also concedes that the term forfeiture might
have different meanings in different contexts. In the context of
2462, forfeiture must be understood as punitive. Because the
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government claims that disgorgement as sought by the SEC is not
punitive, disgorgement cannot be classified as a subset of forfeiture.
Kokesh alternatively argues disgorgement should be treated as
a penalty under 2462. Kokesh insists disgorgement must be
construed as a punitive measure because it imposes negative
consequences on a wrongdoer, fails to reimburse actual victims
consistently, and deters future violations. These characteristics are
consistent with punitive action.
Kokesh urges the Court to reject the governments characterization
of disgorgement as an equitable remedy. Kokesh argues that
although the government stresses disgorgement is needful
to restore the status quo, in fact the government persistently
uses disgorgement funds to buttress its budget rather than to
compensate victims. Kokesh theorizes that a truly equitable remedy
would mandate return of assets to their original owner, whereas
disgorgement mandates payment of funds to the government.
Kokesh also cites other fora in which the government has
characterized disgorgement as a penalty, including in bankruptcy,
tax, and criminal enforcement. Because disgorgement does not
require compensation to victims, Kokesh argues, it is a penalty.
The government asserts disgorgement is not a penalty within the
meaning of 2462. The government again asks the Court to adopt
the rationale of the Tenth Circuit, which found disgorgement
cannot be said to inflict punishment when it simply leaves the
wrongdoer in the position he would have occupied had there been
no misconduct. The government notes that a penalty may be
imposed regardless of financial benefit to a wrongdoer and as such
may leave a wrongdoer in a net negative position vis--vis crime.
Thus, penalties go beyond unjust enrichment and impose further
consequence for wrongful conduct.
By contrast, disgorgement impacts only wrongdoers who realize a
financial benefit from crime to prevent a wrongdoer from taking
the money and running. Better understood, disgorgement is like
restitution or divestiture, neither of which is a penalty, according
to the government. The government also hastens to add that
disgorgement frequently does return funds to victims, at the district
courts discretion.
Moreover, the government argues Kokeshs attempt to label any
strictly noncompensatory payments as penalties would create an
impossible case-by-case analysis of whether disgorgement was in
fact a penalty. In cases where the court distributed disgorgement
proceeds to victims, the matter would be deemed equitable and
therefore free from the time limitations of 2462. In other cases
where the court simply disbursed disgorgement proceeds to the
government, the matter would be deemed punitive and limited
by 2462s statute of limitations. Such a dichotomy would be
unworkable, claims the government.
Kokesh asserts the governments statute of limitations argument
is inconsistent as applied to disgorgement. Kokesh points out the
disparity in enforcement between civil and criminal enforcement.
Traditionally, criminal authorities are vested with greater authority
than civil authorities, notes Kokesh. How can the government place
statutes of limitations on all but the most heinous violent crimes
but assert that civil actions demanding disgorgement for far less
serious wrongdoing may proceed unchecked by time limitations?
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And how, demands Kokesh, can the accused defend themselves from
claims unchecked by time after evidence and witnesses may be lost?
Because 2462 applies to many different federal agencies, Kokesh
warns that endorsing the governments position here would confer
fearsome power upon agencies across the federal government.
The government asserts restricting disgorgement claims to a statute
of limitations would harm the government as well as the public
without just cause. First, the government insists it does bring suits
as quickly as possible. Second, the government challenges Kokesh to
name specific instances of abuse of process. Third, the government
argues that wrongdoers ought not to be able to keep money they
unlawfully took from victims. Such a policy would only incentivize
crime, speculates the government. Here, the government contends
Kokesh ought not be rewarded for his bad conduct.
Kokesh urges the Court to interpret 2462 broadly by its common-
sense application. Kokesh traces the historical roots of 2462 to
1790, when the First Congress proscribed a two-year statute of
limitations on any fine or forfeiture for crimes and offenses. In
1839, Congress enacted the statute that became the forerunner for
the nearly verbatim version Congress codified in 1948. Only in 1990
did Congress specifically authorize the SEC to seek accounting and
disgorgement in enforcement proceedings. Today, Kokesh notes, the
SEC seeks disgorgement in most of its enforcement actions. While
Kokesh acknowledges that the statute he invokes fails to expressly
cite the word disgorgement as within its purview, Kokesh argues
that is because disgorgement was a remedy fashioned decades after
2462s enactment in 1948.
Kokesh claims that under the governments view, 2462 should
be read to include penalties, which are indisputably punitive, as
well as forfeitures, which are unquestionably remedial. Ironically,
the government concludes 2462 leaves no room for the remedy
in the middle: disgorgement orders that the government describes
as remedial and in personam judgments. This construction cannot
withstand the weight of scrutiny, posits Kokesh.
The government urges the Court to interpret 2462 narrowly.
First, the government highlights congressional silence on any
statute of limitations for violations of the Exchange Act, the
Advisers Act, and the Company Act (with discrete exceptions
inapplicable here). Second, the government notes that while the
Court imposed a statute of limitations for civil penalties in Gabelli
v. SEC, 133 S. Ct. 1216 (2013), the Court did not address whether
a similar limitation should be placed on disgorgement. Third, the
government disputes Kokeshs description of the disgorgement
process, arguing that funds are disbursed as determined by the
district court, including quite possibly to victims. The SEC asserts
it recommends redistribution of disgorgement to victims whenever
feasible. Admittedly, compensation is not the primary goal of
disgorgement, as the SEC acts to vindicate more than simply private
interests. Fourth, the government relies upon the canon of narrow
construction as applied to statutes of limitations, which dates back
to the English maxim that time does not run against the king. The
government claims this canon provides sufficient basis to affirm the
order against Kokesh and embrace the governments interpretation
of its own powers. The government asks the Court to hold that the
sovereign is bound only when it expressly consents to limitations of
power.
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Finally, Kokesh argues that fairness dictates that the Court place
limits upon the federal administrative state. Kokesh claims that
when the government directs disgorgement funds toward the
government treasury, rather than towards victims, the predilection
for abuse will be high. Therefore, government officials are more
likely to use the governments powers inconsistently and unfairly,
without regard to the needs of victims. Kokesh asks the Court to
intercede to limit the SECs power to bring disgorgement actions
without regard to the passage of time.
The government agrees with Kokesh that fairness requires that
the government observe statutes of limitations for all but the most
grievous of crimes. But the government underscores the fairness
argument to insist that a thief ought not be able to retain his loot
provided he evades detection for a sufficient period of time. The
government claims the proper comparison is not between criminal
and civil enforcement, but rather between disgorgement and
other civil remedies the government describes as equitable. These
equitable remedies, claim the government, are often completely
unbounded by any statute of limitations. While a court may take
into account any excessive delay in granting particular remedies,
the government urges the Court to decline to read such restrictions
into the statutory text of 2462. The government urges the Court to
affirm the judgment of the Tenth Circuit; reject the holding of the
Eleventh Circuit, which it describes as unprecedented in 50 years of
SEC enforcement, and resolve the circuit split in favor of the SEC.
SIGNIFICANCE
President Donald J. Trumps administration has prioritized the
rollback of the administrative state, in no small part to encourage
the growth of American businesses. His first Supreme Court
appointment, Judge Neil M. Gorsuch, has expressed some
skepticism about the broad powers claimed by federal agencies,
including by questioning continued deference to the Chevron
doctrine. Chevron U.S.A., Inc. v. Natural Resourses Defense Council,
Inc., 467 U.S. 837 (1984). Sitting justices have likewise questioned
the growth of the administrative state powers, particularly as
exercised in quasi-criminal proceedings.
This case will be an important marker of the extent to which the
Court views the legal landscape as does the president. Kokesh raises
questions of deference to agency interpretation, civil authority that
exceeds that of criminal law enforcement, and the reach of the
administrative state. The Kokesh ruling will be one of the Courts
early signals as to a centerpiece of the presidents agenda in much
the same way that A.L.A. Schechter Poultry Corp. v. United States,
295 U.S. 495 (1935), sent an early distress signal to President
Franklin D. Roosevelt when he sought to unshackle the American
economy in the midst of the Great Depression.
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Even unprompted by any presidential administration, the Court
has in recent Terms set limits on the power of the administrative
state, particularly on the SEC. The federal courts have rejected SEC
interpretations as to statutes of limitations; use of administrative
judges; and expansive theories of fraud (including as to insider
trading), among recent setbacks for the agency. Kokesh will test
one of the agencys more aggressive theories as to its enforcement
powers.
Rachel K. Paulose is a partner of DLA Piper LLP, a former United
States attorney, and a graduate of Yale Law School. She can be
reached at rachel.paulose@dlapiper.com.
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2017 American Bar Association.
ATTORNEYS FOR THE PARTIES
For Petitioner Charles R. Kokesh (Adam G. Unikowsky,
202.639.6000)
For Respondent United States Securities and Exchange
Commission (Jeffrey B. Wall, 202.514.2217)
AMICUS BRIEFS
In Support of Petitioner Charles R. Kokesh
American Investment Council (Lewis J. Liman, 212.225.2000)
Americans for Forfeiture Reform (Mahesha P. Subbaraman,
612.315.9210)
Cato Institute (Mark A. Perry, 202.955.8500)
Chamber of Commerce of the United States of America and
American Petroleum Institute (Matthew T. Martens, 202.663.6000)
Mark Cuban (Stephen A. Best, 202.536.1700)
Donald R. Miller, Jr., In His Capacity as the Independent Executor
of the Will and Estate of Charles J. Wyly, Jr. (Kathleen M. Sullivan,
212.849.7000)
Securities Industry and Financial Markets Association (Michael J.
Dell, 212.715.9100)
Washington Legal Foundation (Richard A. Samp, 202.588.0302)
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