Kokesh costs SEC nearly $1 Billion; DOJ and Congress React
In 2017, the SEC’s enforcement power faced a setback when, in Kokesh v. SEC,1 the Supreme Court curtailed its ability to seek disgorgement outside the five-year statute of limitations period for civil penalties.2 This was a blow to the agency because its Enforcement Division had relied heavily on its disgorgement power as a means to deter companies from wrongdoing by reclaiming all ill-gotten profits that result from it. Now, ill-gotten profits made outside the five-year period are beyond the SEC’s reach. Since Kokesh, there have been numerous attempts to erode the SEC’s disgorgement authority even more but with little success. Still, the SEC has reported the agency has foregone up to $900 million in disgorgement.3 DOJ appears to have begun scooping up the leftover disgorgement amounts—at least in the FCPA context where both agencies have jurisdiction—that are beyond the SEC’s now limited reach. One could argue that the reasoning behind Kokesh could be expanded to preclude DOJ or other enforcement agencies from seeking disgorgement beyond the applicable limitations period, as well. However, such an extension remains unclear, and there are several reasons it is unlikely that DOJ will be similarly hamstrung by Kokesh-style limitations. Congress may also step in to assist the SEC with its disgorgement powers, limiting Kokesh’s long-term effects.
The Kokesh Ruling
The SEC possesses no explicit statutory authority to collect disgorgement but federal district courts have allowed the SEC to seek disgorgement as an equitable remedy since the 1970s.4 The Court in Kokesh left open the question of whether the SEC has the legal authority to seek disgorgement at all, noting in a footnote that it was declining to comment on this broader question.5 As an “equitable” remedy, disgorgement had long been treated as outside the scope of the general civil penalty statute of limitations—28 U.S.C. § 2462. The Kokesh Court found, however, that—whether or not the SEC has the legal authority to seek disgorgement—the manner in which it was being used by the SEC clearly constitutes a “penalty” because (1) it is imposed as a consequence of violating a public law, (2) it is intended to deter, not to compensate, and (3) it is paid to the U.S. Treasury rather than to compensate victims.6 As such, it is limited by 28 U.S.C. § 2462, which states that any “action, suit, or proceeding for the enforcement of any civil fine, penalty, or forfeiture … shall not be entertained unless commenced within five years from when the claim accrued…”7
The Kokesh Effect
Attempts to Expand its Scope
Prior to Kokesh, courts had engaged in similar fact-intensive inquiries to determine if other non-monetary equitable relief constituted a “penalty” within the bounds of § 2462.8 In the months following Kokesh, that type of inquiry continued, using Kokesh as additional support.9 However, attempts to extend Kokesh in other ways have been largely unsuccessful.
The challenges with the greatest potential impact latched on to the Supreme Court’s footnote, seeking a finding that the SEC indeed lacks the power to seek disgorgement at all.10 Those challenges have been unsuccessful at the district court level. For example, in SEC v. Ahmed, the District of Connecticut rejected the argument that Kokesh defined disgorgement as a “penalty for all purposes,” and therefore it was entirely outside the SEC’s authority to seek as an equitable remedy. Rather, the Ahmed court pointed to the limiting language of the Supreme Court’s ruling as clarifying the scope of the limitations statute (28 U.S.C. § 2462), rather than “redefining the essential attributes of disgorgement.”11
Attempts to extend Kokesh’s ruling to other federal agencies have been largely unsuccessful, as well. For example, in FTC v. Dantuma, the court ordered the company to pay equitable monetary relief under Section 13(b) of the Federal Trade Commission (“FTC”) Act for a deceptive telemarketing scheme lasting from 2004 to 2008.12 On appeal to the Ninth Circuit, the company argued that this equitable relief was unavailable based on Kokesh.13 In rejecting the company’s argument, the Ninth Circuit reasoned that Kokesh’s holding was expressly limited to the SEC’s disgorgement power, and did not abrogate long-standing precedent that the FTC Act allows the FTC to seek equitable remedies. In another example, a company brought a challenge to a unique feature of limitations periods in the energy space whereby the statute of limitations does not even begin to run until the Federal Energy Commission (“FERC”) brings an adjudicative administrative proceeding. The court rejected the argument that Kokesh overrules that precedent.14 Although the court held that the five-year statute of limitations applied to the FERC enforcement action, it held that Kokesh addressed what actions were subject to the five-year statute of limitations rather than when the five years begin to accrue.15
Other arguments based on Kokesh have been more creative, yet equally ineffective. In U.S. v. Dyer, the defendant was criminally sentenced for securities fraud violations and required to pay civil disgorgement of the funds obtained.16 He argued that because civil disgorgement is a penalty under Kokesh, his criminal sentencing enhancement of 18 levels (calculated using the same loss amount) subjected him to Double Jeopardy.17 In rejecting this challenge, the Sixth Circuit held that Kokesh defined SEC disgorgement as a civil penalty rather than a criminal penalty, so the Double Jeopardy clause of the constitution does not apply.18
While further judicial inroads have been largely unsuccessful, the SEC has indeed altered its enforcement practices to be in accordance with Kokesh. And according to the SEC, Kokesh has had a significant impact on its enforcement campaign.19 In the FCPA context, various enforcement actions have shown the SEC’s willingness to self-police with respect to the Kokesh five-year limitations period even during settlement negotiations. For example, in the SEC’s settlement with Polycom, Inc., it only sought $10.7 million in disgorgement for conduct between September 2012 and July 2014 even though it noted that the scheme spanned from 2006 through July 2014.
In addition to the $900 million in foregone disgorgement the SEC reported at year end, the SEC stated that Kokesh is likely to affect which matters the SEC investigates and enforces. In its year-end report, the SEC Office of the Investor Advocate echoed concerns raised by the broader legal community (including former SEC chair Mary Jo White) that the Kokesh ruling could result in reduced leverage for the SEC in settlement negotiations, fewer investigations involving aged conduct, and earlier requests for tolling agreements with investigative targets.20
That said, it seems clear from some recent cases that the federal enforcement agencies have started to work together to overcome Kokesh’s restrictions. In the Polycom settlement, the SEC and DOJ, Treasury Department, and Postal Inspection Service each received a piece of the pie. The settlement specifically stated that the SEC’s share of the ill-gotten gains were earned within the 28 U.S.C. § 2462 statute of limitations. The larger slice of the pie, approximately $20 million, went to DOJ, and presumably covered the earlier years of the 2006-2014 scheme that the SEC could not reach.
Earlier this year, in a settlement with DOJ and the SEC of an FCPA investigation, Cognizant received a declination but was required to pay $19.4 million to DOJ and $16.4 million to the SEC. Though neither agency stated that the SEC was limited by Kokesh, DOJ’s additional amount may relate to conduct outside the five-year limitations period.21
While it may seem like an unfair workaround to have DOJ collect what the SEC cannot, DOJ’s power is unlikely to be limited by Kokesh for a few reasons. First, Kokesh applies to SEC disgorgement under 28 U.S.C. § 2462, the statute of limitations for civil penalties, and courts have hesitated to extend Kokesh beyond § 2462.22 Second, DOJ’s power to collect “ill-gotten gains” is criminal in nature. Although there is a general five-year statute of limitations on criminal prosecutions as well,23 the criminal conspiracy statute, 18 U.S.C. § 371, allows DOJ to sweep in older conduct as long as it can show it is part of an ongoing conspiracy with at least one overt act occurring during the limitations period. Third, in a criminal sentencing proceeding—where disgorgement-like penalties, fines, and forfeitures are determined—a district judge is permitted by sentencing guidelines to consider a broader range of related conduct, even conduct outside the statute of limitations period. Fourth, unlike the SEC’s civil disgorgement power, which is equitable and created by the courts, DOJ has statutory authority to seek criminal restitution and forfeiture from convicted defendants.24 Finally, DOJ often seeks disgorgement in declination/deferred prosecution agreements that act as settlements (as was the case with Polycom and Cognizant), where the companies agree to disgorgement figures without the opportunity for judicial review.
Congress Takes a Stance
On March 14, two congressmen across the aisle introduced a bill that would address some of the issues raised by Kokesh. The proposed amendment to the Securities Exchange Act of 1934 titled the “Securities Fraud Enforcement and Investor Compensation Act of 2019” was introduced by Senators Mark Warner (D-Va.) and John Kennedy (R-La.) and would specifically authorize the SEC to seek disgorgement and restitution, putting to rest once and for all the question of whether the SEC has the legal authority to seek this remedy. The bill also purports to relax the limitations period, stating that it is within “5 years after the date on which the person against which the claim is brought receives any unjust enrichment as a result of the violation that gives rise to the action or proceeding in which the Commission seeks the claim.” This could provide the SEC more time to bring enforcement actions, as the statute of limitations would run with the receipt of ill-gotten gains, rather than the acts or conduct that caused the claim to originally accrue.
So despite unsuccessful challenges to expand its reach, Kokesh is clearly having an impact. Stay tuned for additional updates on Congressional acts to define the SEC’s disgorgement power and updates on SEC enforcements.
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2 28 U.S.C. § 2462.
3 U.S. SECURITIES AND EXCHANGE COMMISSION, Division of Enforcement, 2018 Annual Report at 11–12, available at https://www.sec.gov/files/enforcement-annual-report-2018.pdf.
4 Kokesh, 137 S. Ct. at 1638.
5 Id. at 1642 n.3.
6 Id. at 1644.
7 28 U.S.C. § 2462.
8 See, e.g., SEC v. Bartek, 484 F. App’x 949, 956–57 (5th Cir. 2012) (holding that a permanent injunction from violating securities laws and an industry bar were penalties under Section 2462 because neither remedy addressed past harm or prevention of future harm).
9 See SEC v. Gentile, 2017 WL 6371301, at *4 (D.N.J. Dec. 13, 2017) (concluding that an “obey-the-law” injunction and penny-stock bar were penalties under Kokesh).
10 See, e.g., SEC v. Ahmed, 343 F. Supp. 3d 16, 26–27 (D. Conn. 2018) (SEC v. Sample, 2017 WL 5569873, at *2 (N.D. Tex. Nov. 20, 2017)); SEC v. Jammin Java Corp., 2017 WL 4286180, at *3 (C.D. Cal. Sept. 14, 2017).
11 SEC v. Ahmed, 343 F. Supp. 3d at 26.
12 See FTC v. Dantuma, 748 F. App’x 735, 737–38 (9th Cir. 2018).
14 FERC v. Silkman, 2019 WL 113782 (D. Maine, Jan. 4 2019)
15 Id. (holding that a claim under FERC only accrues after the agency brings suit).
16 U.S. v. Dyer, 908 F.3d 995, 996–97 (6th Cir. 2018).
17 Id. at 1000.
19 U.S. SECURITIES AND EXCHANGE COMMISSION, Division of Enforcement, 2018 Annual Report at 5, available at https://www.sec.gov/files/enforcement-annual-report-2018.pdf.
20 U.S. SECURITIES AND EXCHANGE COMMISSION, Office of the Investor Advocate, Report on Objectives for Fiscal Year 2019 at 16, available at https://www.sec.gov/sec-office-investor-advocate-report-on-objectives-fy2019_0.pdf.
21 We reported on the Cognizant declination in more detail last month. See https://www.velaw.com/Insights/One-for-You–Two-for-Me-Cognizant-FCPA-Declination-a-Mixed-Bag-for-Companies/.
22 See Kokesh v. SEC, 137 S. Ct. 1635 (2017).
23 18 U.S.C. § 3282(a) (applicable where specific limitations periods are undefined for various criminal acts)
24 See U.S. v. Reed, 908 F.3d 102, 125–26 (5th Cir. 2018) (distinguishing criminal forfeiture from civil forfeiture); U.S. v. Brooks, 872 F.3d 78, 91 (2d Cir. 2017) (distinguishing criminal restitution from civil disgorgement).
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