Kokesh v. SEC, Docket No. 16-529 (oral argument date April 18,
2017) – Implications for the Statute of Limitations for Missouri State
Securities Enforcement Actions.
By John R. Phillips, Counsel for Cosgrove Law Group, LLC and former
Director of Enforcement for the Missouri Securities Division, Office of the
Secretary of State.
Kokesh
v. SEC is an appeal to the U.S. Supreme Court from the 10th
Circuit Court of Appeals, in which the Court will be asked to decide whether a
disgorgement award in favor of the SEC constitutes a penalty or forfeiture
within the meaning of 28 U.S.C. § 2462, which therefore must be brought within
that section’s five year statute of limitations. This verdict from New Mexico, affirmed on
appeal by the 10th Circuit, awarded the Securities and Exchange
Commission (“SEC”) a disgorgement award of $34.9 million, plus $18.1 million in
prejudgment interest, and a penalty of $2.4 million for Charles R. Kokesh’s (“Kokesh”)
misappropriation of funds from four SEC-registered business development
companies (“BDC”). The BDCs raised
money from investors through public securities offering and invested in private
start-up companies that focused on technology, biotechnology, and medical
diagnostics. From 1995 through 2006,
Kokesh directed the BDCs to take $23.8 million to pay salaries and bonuses to
BDC Advisers, including Kokesh himself, and to take $5 million to cover office
rent. In 2000, Kokesh also had the BDCs
distribute $6.1 million in payments described as “tax distributions.” See SEC
v. Kokesh, 834 F.3d 1158, 1160-61 (10th Cir. 2016). The jury found “(1) that Defendant knowingly
and willfully converted the Funds’ assets to his own use or to the use of
another and (2) that he knowingly and substantially assisted the Advisers in
defrauding the [BDCs], in filing false and misleading reports with the SEC, and
in soliciting proxies using false and misleading proxy statements.” Id.
at 1161. The trial court held that disgorgement
of $34.9 million “reasonably approximates the ill-gotten gains causally
connected to Defendant’s violations.” Id.
The Tenth Circuit: Disgorgement Is Remedial, Not a Penalty or
Forfeiture
The 10th Circuit held that
disgorgement is not “a penalty or forfeiture within the meaning of § 2462.” Id.
at 1167. First the 10th
Circuit held that “disgorgement is not a penalty under 2462 because” it “does
not inflict punishment” but rather “is remedial.” Id. at 1164. “[I]t does
so…by depriving the wrongdoer of the benefits of wrongdoing.” Id.
(citing SEC v. Contorinis, 743 F.3d
296, 301 (2d Cir. 2014)). However, the
10th Circuit acknowledged that “in common English the words forfeit
and disgorge…capture similar concepts,” and that the “definitions in the
leading legal dictionary…also have similarities”: Black’s defines
“disgorgement” as a “legal compulsion” to “giv[e] up something (such as profits
illegally obtained),’” and “forfeiture” as the “’loss of…property because of a
crime, breach of obligation, or neglect of duty.’” The 10th Circuit believed that § 2462
used “forfeiture” in a narrow historical sense—as “an in rem procedure to take
‘tangible property used in criminal activity.’” Id. at 1165 (citing U.S. v.
92 Buena Vista Ave., 507 U.S. 111, 118 (1993)). In end, the 10th Circuit affirmed
the disgorgement award.
Petitioner’s Argument: Circuit Split and Consequences of No Statute of
Limitations for Disgorgement
Kokesh appealed to the U.S. Supreme
Court, presenting the question of whether: “[u]nder 28 U.S.C. § 2462, any ‘action,
suit or proceeding for the enforcement of any civil fine, penalty, or
forfeiture, pecuniary or otherwise, shall not be entertained unless commenced
within five years from the date when the claim first accrued.’ Does the five-year statute of limitations in
28 U.S.C. § 2462 apply to claims for “disgorgement?’” Pet. Brief at i, Docket No. 16-529 (2016).
28 U.S.C. § 2462 sets a five-year
limitations period for claims seeking certain sanctions and states:
Except as otherwise provided by Act
of Congress, an action, suit or proceeding for the enforcement of any
civil fine, 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.
Kokesh
argues that Gabelli v. SEC, 133 S.
Ct. 1216 (2013) mandates that § 2462 applies to disgorgement awards because
disgorgement is a form of penalty or forfeiture. Gabelli
also rejected the SEC’s request for the application of the “discovery rule” to
the § 2462 statute of limitations as that “would leave defendants exposed to
Government enforcement action not only for five years after their misdeeds, but
for an additional uncertain period into the future.” Id.
at 1223. Gabelli expressly reserved the question of whether § 2462 applies
to claims for disgorgement. Id. at 1220 n. 1.
As an initial matter, all parties
agreed that there is a circuit split on the question of whether § 2462 applies
to claims for disgorgement. The 11th
Circuit has held that “§ 2462’s statute of limitations applies to
disgorgement,” finding that disgorgement is a “forfeiture” within the meaning
of the statute. SEC v. Graham, 823 F.3d 1357, 1363 (11th Cir.
2016). The underlying Graham district court held that
“disgorgement…can truly be regarded as nothing other than a forfeiture…, which
remedy is expressly covered by § 2462.”
21 F.Supp.3d at 1310-11. By
contrast, the 1st and D.C. Circuits (and the 10th Cir. in
Kokesh) held that § 2462 does not
apply to actions for disgorgement. SEC v. Tambone, 550 F.3d 106, 148 (1st
Cir. 2008); Riordan v. SEC, 627 F.3d
1230, 1234 (D.C. Cir. 2010)(“there is no statute of limitations for SEC
disgorgement actions”).
In Kokesh, the SEC did not bring its disgorgement claims against
Petitioner until 2009, yet the district court entered a $34.9 million
disgorgement order based on securities-law violations that occurred as far back
as 1995. Pet. Brief at 2. “In the Eleventh Circuit, all the SEC’s
claims that arose before 2004 would be untimely under § 2462, and the SEC has
conceded that this rule would preclude all but $5 million of the disgorgement
order against Petitioner. Id. (citing Pet. App. 26a-27a).
According
to Kokesh, if §2462 does not limit disgorgement actions, then sweeping
disgorgement liability will be limitless in time. Statutes of limitation aim to provide
“security and stability to human affairs,” reflecting the settled wisdom that
it would be “’utterly repugnant to the genius of our laws’” if actions “could
‘be brought at any distance of time.’” Gabelli, 133 S. Ct. at 1223 (quoting Adams v. Woods, 6 U.S. (2 Cranch) 336,
342 (1805)). Moreover, the difference it
would make to recoveries in SEC actions is sizeable. For Kokesh, it would mean at least $29
million in disgorgement liability would be erased. And writ large, in 2015 alone, “the SEC
extracted $3 billion in disgorgement payments.
That amount dwarfs the SEC’s money penalties, which were just $1.2
billion, and is also growing faster:
Disgorgement collections have jumped 60% since 2011, compared with just
a quarter increase in penalties.” Pet.
Br. at 3.
SEC:
There Is No Statute of Limitations For Disgorgement Actions
The SEC’s argument is surprisingly
simple: there is no statute of limitations for disgorgement and § 2462 does not
apply to bar SEC disgorgement actions. See generally, Res. Br. The “equitable relief” power under 15 U.S.C. §
78u(d)(5) includes authority to order disgorgement. Porter
v. Warner Holding Co., 328 U.S. 395, 398-99 (1946); see, e.g., SEC v. Masson, Inc., 465 F.3d 1174,
1179 (10th Cir. 2006), cert. denied, 550 U.S. 905 (2007).
Congress has not specified a statute of limitations for an
SEC enforcement action alleging a violation of the Exchange Act, the Advisers
Act, or the Investment Company Act. Res.
Br. at 2. But Congress has enacted a
statute of limitations (28 U.S.C. § 2462) that governs “penalty provisions
throughout the U.S. Code.” Gabelli, 133 S. Ct. at 1219. The purpose of disgorgement is “not to
inflict punishment but to prevent an unjust enrichment.” Res. Br. at 8 (citing Sheldon v. Metro-Goldwyn Pictures Corp., 309 U.S. 390, 399 (1940)). Disgorgement “differs greatly from…damages
and penalties,” because it has a quintessential remedial nature. Id.,
(citing Porter, 328 U.S. 402).
Apart from that general recitation
of the purpose of disgorgement and the implications of the Circuit split, the
SEC’s argument was very simple, if only by implication: there is no statute of limitations for the
disgorgement remedy and the SEC should be able to reach back as far as
disgorgement can be “reasonably approximate[d].” SEC v.
Kokesh, 834 F.3d at 1161.
Reply and Amicus (Chamber of
Commerce): Disgorgement to Injured Victims Is Distinguishable Because That is
Remedial And “Forever Liability” Could Result in Potentially Crippling Monetary
Awards
Kokesh’s
reply focuses primarily on the nature of disgorgement that the SEC routinely
seeks, as it is “a legal obligation to pay money to the government, imposed as
a consequence of wrongdoing—a classic form of punishment.” Pet. Reply at 1. Kokesh then also distinguishes Porter and Sheldon as cases where the disgorgement went to injured victims:
rents to tenants in Porter and
profits from copyright infringement in Sheldon. Id.
at 1-2. “In those cases restitution
order had the remedial effect of restoring property to its rightful owner,”
whereas in Kokesh’s case the disgorgement money goes to the SEC. Id.
at 2.
The Chamber
of Commerce’s amicus brief took head
on the SEC’s argument that there was no statute of limitations for
disgorgement:
a defendant in an agency
enforcement action is forever liable for potentially crippling monetary awards
that may never be discharged. This is an
extraordinary position. Statutes of
limitation “promote justice by preventing surprises through the revival of
claims that have been allowed to slumber until evidence has been lost, memories
have faded, and witnesses have disappeared,”
Order of Railroad Telegraphers v. Railway Express Agency, Inc., 321 U.S.
342, 348-349 (1944), and provide “certainty about…a defendant’s potential
liabilities,” Rotella v. Wood, 528
U.S. 549, 555 (2000).
Amicus Br. at 3.
The Chamber proceeded to argue that
disgorgement is a penalty because it “goes beyond remedying the damage caused
to the harmed parties by the defendant’s actions.” Amicus Br. at 5 (quoting Johnson v. SEC, 87 F.3d 484, 488 (D.C. Cir. 1996)). Disgorgement is animated by a deterrent
purpose, which is a hallmark of punitive remedies. Id.
(citing SEC v. Rind, 991 F.2d 1486,
1490 (9th Cir. 1993)(“The theory behind the remedy is deterrence and
not compensation.”)). The SEC’s “public
statements about its enforcement actions” confirm this deterrent purpose by
highlighting the “deterrent and retributive effect of its disgorgement
orders.” Id. at 6 (citing SEC, Press Release No. 2005-93 (June 28,
2005)).
The Chamber argued further that disgorgement
is particularly punitive when the defendant has not retained the benefit of all
the ill-gotten gains—where for instance those monies were expended on
rent/salaries. Amicus Br. at 6-7.
Moreover, a disgorgement claim that cannot be ascertained with
sufficient certainty “takes on the character of a plea for punitive relief.” Id.
at 7 (citing SEC v. Wills, 472
F.Supp. 1250, 1276 (D.D.C. 1978)). The
SEC is only required to provide a “reasonable approximation” for
disgorgement. Id. (citing SEC v. Teo,
746 F.3d 90, 107 (3d Cir. 2014). Finally, the disgorgement awards go to the
U.S., not victims, and therefore are by nature punitive. Id.
at 8 (citing SEC v. Cavanagh, 445
F.3d 105, 117 (2d Cir. 2006)).
In a final piquant point, the
Chamber points out that the SEC has taken the position that disgorgement orders
are non-dischargeable in bankruptcy because they fit within the “fine, penalty,
or forfeiture” language of the discharge exception. Id.
at 11-12 (citing In re Telsey, 144
B.R. 563 (Bankr. S.D. Fla. 1992); see
also IRS, Office of Chief Counsel, Memorandum, No. 201619008, at p. 9 (May
6, 2016)).
Implications for Missouri and Other States Which Do Not Have an Express
Statute of Limitations for Administrative or Civil Securities Enforcement
Actions
Current Statute of Limitations for Missouri State Securities
Enforcement Actions
The Missouri Securities Act of 2003
(“MSA”) was based on the Uniform Securities Act of 2002. It contains provisions for administrative,
civil, and criminal enforcement, as well as a private cause of action. Section 409.5-509, RSMo. is the private cause
of action under the MSA and has very clear statutes of limitation: one year for the violation of the provision prohibiting
the offer and/or sale of an unregistered security (§409.3-301, RSMo.); two years
after discovery of the facts for any other violations of the Act, with a five
year statute of repose. See § 409.5-509(j), RSMo. However, administrative, civil, and criminal
actions do not carry specific statutes of limitation under the Act.
Clearly, a
statute of limitation would apply to criminal actions under Section 409.5-508,
RSMo., likely Mo. Rev. Stat. § 556.036.2 (three years for any felony). However, without a specific provision, the
statutes of limitations for civil and administrative enforcement actions are not
clear. Section 409.5-509(j), RSMo., does
not apply, leaving a series of possible candidates in the general civil
statutes of limitations. And it is in
this context that Kokesh may be
relevant to interpreting civil and/or administrative enforcement actions under
the Act.
Sections 409.6-603 and 409.6-604, RSMo.,
address the SEC enforcement action corollary for the state of Missouri,
allowing the Commissioner, through the Attorney General, or the Commissioner
him/herself administratively, to pursue penalties and/or an order of rescission,
restitution, or disgorgement for violations of the Act. However, the Act is “remedial” in nature and
court decisions interpreting the securities laws have construed these acts to
achieve broad investor protection. See Uniform Securities Act (Last Revised
or Amended in 2005), § 608(b), and Official Comment 5 (citing SEC v. W.J. Howey Co., 328 U.S. 293,
299, 301 (1946).
Hence, it is likely that the
several Missouri statutes of limitation that apply to “penal statutes” would not
apply to actions under Sections 409.6-603 and 409.6-604, RSMo. See
Mo. Rev. Stat. §§ 516.380 (1 year from violation), 516.390 (2 years from
violation), and 516.400 (3 years from commission of offense). Indeed, precedent suggests that those
statutes of limitation are for actions where the primary focus is penalties,
such as for clean water act violations, rather than for enforcement actions
where a broad penumbra of remedies are available. See State
ex rel. Nixon v. Summit Inv. Co., LLC, 186 S.W.3d 428 (Mo. App. S.D. 2006).
A better analog for assessing the
proper statute of limitations would be the Missouri Merchandising Practices Act
(“MMPA”), section 407 et seq., as it
likewise is a remedial statute with multiple remedies in enforcement actions
brought by the Missouri Attorney General, as well for private rights of action. For the MMPA, courts have applied one of two
statutes of limitation:
(1) Mo. Rev. Stat. §516.120.2 (5 years) for
“[a]n action upon a liability created by a statute other than a penalty or
forfeiture;” or
(2) Mo. Rev. Stat. §516.130.5 (3 years) for
“[a]n action upon a statute for a penalty or forfeiture, where the action is
given to the aggrieved, or to such party and the state…”
There is a
general consensus in courts that section 516.120.2, RSMo., applies for all
actions under the MMPA. Huffman v. Credit Union of Texas, 758
F.3d 963, 967 (8th Cir. 2014)(citing Ullrich v. CADCO, Inc., 244 S.W.3d 772, 778 n. 3 (Mo. App. 2008); Owen v. Gen. Motors Corp., 533 F.3d 913,
921 n.6 (8th Cir. 2008)). However,
there has been discussion that section 516.130.5, RSMo., may apply. Huffman,
758 F.3d at 966; Schuchmann v. Air
Services Heating & Air Conditioning, Inc., 199 S.W.3d 228 (Mo. App.
S.D. 2006). The Missouri Securities Act
carries similar remedies to the MMPA, and likewise would be an “action upon
liability created by a statute other than a penalty or forfeiture.” Thus it is reasonable to assume that whatever
the statute of limitation is for a civil enforcement action by the Attorney
General under the MMPA would also apply to civil and administrative enforcement
actions under the Securities Act.
Missouri Securities Enforcement Actions After Kokesh – Some Statute of Limitations Will Apply
Kokesh
might have application for Missouri state securities enforcement actions by
virtue of the debate between whether the MMPA (and by implication the MSA) has
a 3 or 5 year statute of limitations under sections 516.120 or 516.130, RSMo. If disgorgement is considered a “penalty” for
federal securities enforcement actions, then the MSA itself, or actions for
disgorgement under it, may very well also be considered actions on a “penal
statute,” and therefore fall under the provisions of section 516.130(2), RSMo.[1] The third, less likely scenario, is that
“penalty” actions under the MSA, including for disgorgement if Kokesh find the remedy penal, would be
limited to three years by section 516.130(2), RSMo., while restitution and
other remedies could be brought up to five years after the violation under
section 516.120(5), RSMo. Obviously,
the way in which the SEC makes use of “disgorgement” as a remedy makes that
remedy look quite penal, particularly under the facts of Kokesh. Thus the usage of
disgorgement by the Attorney General or Commissioner in a Missouri enforcement
action may be distinguishable from Kokesh
on its facts.
What is clear irrespective of
whether disgorgement is characterized as “penal” or “remedial,” is that Gabelli is persuasive authority that
some statute of limitations applies to state enforcement actions for violations
of the Missouri Securities Act, even if there is no such specific statutes of
limitation and the existing general statutes of limitation are poor fits. A holding
by the Kokesh Court that disgorgement
is “penal” in nature would be persuasive authority that, notwithstanding precedent
labeling the MSA “remedial,” the MSA is a “penal” statute by virtue of
providing equitable “penalties” such as disgorgement, and therefore subject to
a 3 year SOL under section 516.130 (or the more restrictive limits under other
statutes). At the very least, it would
be persuasive authority that where the Commissioner or Attorney General seeks
disgorgement, he/she can reach back only 3 years, instead of the five
contemplated under section 516.120, RSMo., which would be a hybrid approach
essentially applying two different statutes of limitations to causes of actions
under one statute.
Conversely, if the Supreme Court
finds that the SEC’s disgorgement remedy is not time barred by 28 U.S.C. §2462,
then it is persuasive authority for the proposition that the equitable remedies
under the Missouri Securities Act likewise are not time barred. That seems an unlikely outcome. Gabelli
strongly infers that the Supreme Court would not countenance there being
absolutely no statute of limitations for actions under sections 409.6-603 and
409.6-604, RSMo. On the other hand, the
variety of remedies under the MSA speak to labeling it as a “remedial statute,”
even though the MSA also contains certain penal provisions. Hence the five year statute of limitations
under section 516.120, RSMo., would be most appropriate, even if Kokesh finds that disgorgement is
subject to the statute of limitations for penalties under 28 U.S.C. §2462.
[1]
Because of the hybrid nature of the remedies, it seems unlikely that MSA
enforcement actions would ever be “penal statutes” for the purposes of the
statutes of limitation in sections 516.380, 516.390 and/or 516.400, RSMo. But that also would remain an open
question.
