Do Agencies Have to Follow the Law?

The Supremes hear a bellwether statute of limitations case.



There’s nothing like an unappealing plaintiff to make bad law, and on Tuesday the Supreme Court will hear arguments in a classic of the genre. The Justices will consider whether a government agency can force someone to disgorge ill-gotten gains long after the statute of limitations has lapsed.

Charles Kokesh was found guilty in 2014 of skimming and misusing $34.9 million from the investment funds he managed between 1995 and 2006. Among other things, the jury in the civil enforcement action ruled that Mr. Kokesh had filed false statements with the Securities and Exchange Commission and defrauded the funds.

The SEC demanded that Mr. Kokesh disgorge the illegal gains and interest and pay a more than $2.3 million monetary penalty (Kokesh v. SEC). The district court granted the judgment and the Tenth Circuit Court of Appeals upheld the verdict, ruling that the disgorgement was proper despite being outside the statute of limitations because it didn’t count as a punishment or penalty under the law. 

Under 28 U.S.C. §2462, “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.” Typically, forfeiture describes when the government seizes assets that are part of a crime, a description that would seem to include the disgorgement applied to Mr. Kokesh.

But the Tenth Circuit ruled that disgorgement didn’t fit under the definition of forfeiture because the practice of disgorgement began in the 1970s and didn’t exist when section 2462 was written. Some $30 million of the money demanded by the SEC was for actions outside the five-year mark and some as long as 14 years before the suit was filed.

That’s the kind of loophole government agencies love, and in recent years federal agencies have adopted disgorgement as a money machine, typically bringing sums much higher than statutory penalties. In 2015 the SEC collected some $3 billion in disgorgement cash compared to a mere $1.2 billion in civil penalties. The Federal Trade Commission and Consumer Financial Protection Bureau have also become disgorgement experts to defeat statutes of limitations.

The SEC says disgorgement sends a “clear message” that wrongdoers face monetary consequences. But that sure sounds like it’s a “penalty” under the law and thus should be subject to the statute of limitations. As it happens, disgorgement funds typically go to the coffers of the enforcement agency, not to the victims of fraud.

The feds are watching this case closely because an SEC victory will mean they could bring disgorgement claims against defendants without time limit, with billions of dollars at stake even as older evidence makes it harder for the accused to defend themselves. Mr. Kokesh isn’t a model citizen, but if the government can use lawless tactics against him, he won’t be the only target.

Appeared in the Apr. 18, 2017, print edition.

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