Kokesh v. SEC: A Penalty By Any Other Name

This week, the Supreme Court issued a unanimous opinion finding what should have been obvious from the start.  That when a government agency requires someone to turn over money to the U.S. Treasury as a result of the person being found guilty of wrongdoing, that constitutes a penalty. 

In Kokesh v. SEC, the Securities and Exchange Commission argued that disgorgement is not a penalty or forfeiture and therefore, due to a particular law’s limitations, the SEC is entitled to bring cases that are even decades old.  Disgorgement is a remedy that requires the defendant to pay back something that was obtained through unlawful means.  Under 28 U.S.C. § 2462, the federal government has five years in which to bring any “action, suit, or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise.” The SEC has held that disgorgement falls into none of these categories and therefore there is no limit on how long the agency has to bring a case in which it is seeking disgorgement.

As we argued in our amicus brief filed on behalf of Charles Kokesh, it is a well-established principle in law that cases must be timely to be just.  When actions are fresh, access to evidence will likely be robust.  Witnesses’ memories are more likely to be clear.  Both sides will likely have the relevant documents at hand.  The court will have the best chance of getting to the truth.  But when a case is stale, memories will have faded, documents will have been lost or innocently destroyed, and it will be uncertain whether the existing evidence will present the most accurate picture of what really happened.

In ruling in favor of Mr. Kokesh a unanimous court found that disgorgement is indeed a penalty.  In writing for the Court, Justice Sotomayor announced two factors that determine whether a payment is a penalty.  First, it must be determined whether the payment has been imposed to redress a wrong to the public, or a wrong to an individual.  A penalty is imposed to redress the former, not the latter.  “This is because penal laws, strictly and properly, are those imposing punishment for an offense committed against the State.”  (internal quotations omitted.)  The second question is whether the payment was imposed to deter future wrongdoing.

What is remarkable about disgorgement in SEC cases is the fact that often the defendant is required to pay back more than was even received as a result of wrongdoing.  In the case of insider trading, for example, an insider can be liable for the full amount of profit made by others who traded on the inside information.  This is money that the insider never actually saw.  This means disgorgement does not simply undo the effects of the wrongdoing, making the insider pay back money illicitly earned, it puts the insider in a materially worse position.

Disgorgement in SEC cases, the Court noted, “bears all the hallmarks of a penalty: It is imposed as a consequence of violating a public law and it is intended to deter, not to compensate.”  Because of this, it falls within the confines of 28 U.S.C. § 2462 and therefore the SEC may not bring an action seeking disgorgement more than five years after the events have occurred.  This is the right result, and it is gratifying that the full Court recognized the fact that a penalty by any other name still involves the government punishing a lawbreaker.  Calling it a new name does not change its essential nature.