Kokesh v. Sec: The Supreme Court Redefines an Effective Securities Enforcement Tool

Conor Daly

The Securities and Exchange Commission (“SEC” or “Commission”) possesses expansive powers to enforce the securities laws of the United States. Among those powers is the SEC's ability to disgorge the wrongful profits of those who violate federal securities laws. Despite the Commission's broad powers, the general statute of limitations, Section 2462, restricts the time frame in which the SEC can seek certain civil remedies for misconduct. In Kokesh v. SEC, the Supreme Court of the United States determined whether the five-year statute of limitations for enforcement proceedings applies when the SEC seeks disgorgement of a defendant's ill-gotten profits. The Supreme Court held that disgorgement “operat[ed] as a penalty” under the statute of limitations, and therefore, the SEC must commence an enforcement action within five years of the date of the wrongdoing in order to successfully seek disgorgement.

The Court reached the correct decision in this case because the SEC used the disgorgement remedy to punish defendants for wrongs against the United States and to deter others from committing the same violations. Further, the Supreme Court correctly found that the SEC did not utilize the civil remedy to compensate victims for their losses or merely return defendants to where they were before their misconduct. The Court's decision, however, will likely burden the SEC's enforcement capabilities because the Commission now has less settlement leverage for violations over five years old. Further, while this decision will likely restrain the SEC's Division of Enforcement, it may also lead to substantially larger costs for defendants that are ordered to disgorge their illegal profits, since civil penalties are likely not covered by insurance policies or deductible under the Internal Revenue Code.