Charles R. Kokesh v. Securities and Exchange Commission

DO DISGORGEMENT CLAIMS CONSTITUTE “FORFEITURES”?

Kokesh argues that the five-year statute of limitations in 28 U.S.C. § 2462 applies to Securities and Exchange Commission (“SEC”) disgorgement claims because these claims fall within the term “forfeiture” in the statute. Kokesh first contends that, based on precedent, the Supreme Court should interpret the term “forfeiture” by looking at its ordinary meaning at the time that Congress enacted § 2462. Kokesh accordingly invokes the 1828 dictionary definition of forfeiture—“the losing of some right . . . or effects, by an offense, crime, breach of condition or other act”—and argues that this definition includes SEC disgorgement orders because they are losses of effects due to an offense, breach of condition, or other act. Kokesh also invokes Congress’s use of “forfeiture” in other statutes it enacted around the same time as § 2462 to argue that legislators had this definition in mind when they legislated. Kokesh contends that although disgorgement did not exist until the 1970s, it is still a form of forfeiture because Congress has called other new remedies “forfeitures” and did not limit § 2462 to the specific forms of forfeiture that existed in 1839, and because early statutes included mechanisms that achieved the same results as SEC disgorgement claims. In addition, Kokesh argues that the Tenth Circuit’s holding—that disgorgement claims do not fall within the term “forfeiture” because it historically only included procedures to take tangible property—is incorrect because the U.S. Code section immediately preceding § 2462 discusses forfeitures of money rather than tangible property. Further, Kokesh asserts that the Tenth Circuit was incorrect when it reasoned that § 2462 only covers sanctions meant to punish a wrongdoer and that disgorgement actions are not such a sanction. Instead, Kokesh contends that the statute of limitations in § 2462 covers sanctions meant to both punish or remedy wrongdoing, and thus it covers SEC disgorgement claims even if disgorgement is remedial, not punitive.

The SEC counters that the statute of limitations does not apply to disgorgement claims because they are not “forfeitures” under § 2462. The SEC first argues that the Supreme Court has already interpreted “forfeiture” for purposes of § 2462 to mean a punishment. Thus, the SEC asserts that disgorgement is not a forfeiture for the same reasons that it is not a penalty, as discussed below. The SEC also contends that when Congress enacted what would become § 2462, “forfeiture” would have been a procedure to take tangible property because this was the only kind of forfeiture that the United States adopted from English law. Further, the SEC argues that Kokesh’s broad definition of “forfeiture” does not withstand scrutiny because the statutes that he relies upon are better understood as either penalties or liquidated damages. Lastly, the SEC maintains that, because disgorgement did not exist until the 1970s, the word “forfeiture” in § 2462 would not have included a remedy like disgorgement.

DO DISGORGEMENT CLAIMS CONSTITUTE “PENALTIES”?

Kokesh argues that, in addition to falling within the term “forfeiture” in § 2462, SEC disgorgement claims also fall within the term “penalty.” To support this argument, Kokesh first notes that the Supreme Court has held that if a sanction “serv[es] in part to punish,” it is a penalty. Kokesh asserts that disgorgement claims clearly serve in part to punish, and are thus penalties. Kokesh further maintains that disgorgement claims are penalties because they fit the dictionary definition of the term at the time that Congress included it in § 2462, and because they deter wrongdoing, which is a hallmark of punishment. In addition, Kokesh notes that many Supreme Court cases have held that sanctions that are not meant to compensate victims are penalties. Thus, Kokesh contends that disgorgement claims are penalties because, according to the SEC, courts, and Congress, the purpose of disgorgement claims is not to compensate victims. Kokesh also maintains that three features of disgorgement claims reinforce the fact that they are penalties—the wrongdoer must disgorge gains that third parties incurred as well as gains that the wrongdoer incurred, the wrongdoer may not deduct any expenses from their gains to reduce the disgorgement, and disgorgement is not subject to the causation principles that apply to sanctions meant to compensate victims. Lastly, Kokesh notes that the SEC has argued that disgorgement claims are penalties in other contexts.

The SEC argues, however, that disgorgement claims do not fall within the term “penalty.” The SEC asserts that the Supreme Court has interpreted “penalty” to mean a punishment, and this interpretation is consistent with nineteenth-century understandings of the term. Under this interpretation, the SEC contends that disgorgement does not punish wrongdoers because it does not make them worse off financially than they would have been if they did not violate the law. Instead, the SEC argues that disgorgement merely returns the wrongdoer to their position before the wrongdoing. The SEC maintains that this is not a punishment because it does not deprive the wrongdoer of anything to which they were rightfully entitled. In addition, the SEC asserts that Congress did not think of disgorgement as a penalty. To support this assertion, the SEC cites legislative reports stating that Congress expanded the SEC’s power to collect civil penalties from wrongdoers because disgorgement “does not result in any actual economic penalty.” The SEC counters Kokesh’s argument that disgorgement is not a remedy to compensate victims by asserting that, in a disgorgement action, the wrongdoer surrenders illegally-obtained funds to a district court, which may distribute the funds to the victims of the wrongdoing. The SEC also notes that district courts order distribution of disgorged funds to victims in a significant percentage of cases. Additionally, the SEC claims that Kokesh’s conclusion that non-compensatory remedies are penalties is logically flawed because Kokesh relies solely on cases establishing only that compensatory remedies are not penalties, not necessarily the inverse. Further, the SEC attempts to distinguish previous instances where the government has argued that disgorgement claims are penalties by asserting that those cases did not involve § 2462 and were governed by principles that do not apply in this case.