Supreme Court Casts Doubts on a Potent S.E.C. Weapon

The Securities and Exchange Commission routinely seeks an order in an enforcement action to require a defendant to repay any ill-gotten gains, a remedy called disgorgement.

The notion is that a thief should not be able to keep what was stolen, but instead should be required to account for the misconduct by turning over the proceeds to the government.

A recent Supreme Court decision will now require that a case seeking disgorgement be filed within five years of the violation, pushing the regulator to complete its investigation more quickly or risk losing that remedy. More ominously, although disgorgement is so well established that is it rarely challenged, the court raised a question about whether it was even available for a violation of the securities laws, which may lead to reconsideration of one of the Securities and Exchange Commission’s most potent weapons.

In Kokesh v. S.E.C., the justices decided that disgorgement comes under a statute of limitations provision that requires filing a case to collect “any civil fine, penalty or forfeiture” within five years “from when the claim first accrued.” The court pointed out that the limitations period was “vital to the welfare of society” because it embodied the principle that “even wrongdoers are entitled to assume that their sins may be forgotten” — if not necessarily forgiven.

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