Supreme Court Puts Limit on SEC “Disgorgement” Collection

On Monday, the Untied States Supreme Court scaled back the power held by the Securities and Exchange Commission to recover profits received through misconduct. This is a notable victory for several Wall Street firms involved with dealings over the US regulators actual powers of enforcement.

In an uncontested 9-0 ruling, the Supreme Court found that the recovery method known as “disgorgement” can only have a five-year statute of limitations. The Supreme Court justices took the side of New Mexico-based investment adviser Charles Kokesh. Kokesh had, earlier, been ordered by a different judge to pay $2.4 million in penalties as well as $34.9 million in disgorgement of illegal profits following a suit originally brought by the SEC.

This decision is now the second time since 2013 that the US Supreme Court has pulled back tight on the enforcement powers of the SEC. In the first case—Gabelli v SEC—the Supreme Court justices had unanimously ruled a similar five-year time bar on civil monetary penalties.

In a statement made by the court, Justice Sonia Sotomayro remarked that disgorgement counts as a penalty and should, therefore, be bound to a five-year statute of limitations: the very same statute which already applies to “any civil fine, penalty, or forfeiture.”

The statement argues that 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.”

In addition to the official statement, Kokesh legal team member Adam Unikowsky comments, “We are pleased with the Supreme Court’s opinion today, which grants important protection to defendants facing enforcement actions by the SEC and other agencies.”

This sounds like a win; and to be sure of it you need to know that the SEC has already taken roughly $3 billion in these “disgorgement” payments—and that was in 2016 alone. As a matter of fact, these amount is roughly twice what the company collected than any other type of penalty.

Los Angeles-based lawyer, Nick Morgan—of the Paul Hastings law firm, which represents clients who are under investigation by the SEC—comments that this ruling will certainly affect even more complicated cases. He says, “For the more complex cases, this will be a sea change for them, they will have to move more quickly.”


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