The U.S. Supreme Court on Monday reined in a Securities and Exchange Commission enforcement tool that the commission wanted to use to exact billions in fines for long-ago fraudulent acts.
A unanimous court ruled in Kokesh v. United States that the commission’s “disgorgement” orders imposed on fraudsters amounted to a penalty and as such, must meet a five-year statute of limitations.
“This limitations period applies here if SEC disgorgement qualifies as either a fine, penalty or forfeiture,” Justice Sonia Sotomayor wrote for the court. “We hold that SEC disgorgement constitutes a penalty.”
She added that “SEC disgorgement is imposed for punitive purposes,” not just to put the defendant back in the same financial position he or she was in before the fraud occurred.
The ruling is a win for Wall Street, whose advocates argued that placing disgorgement into a different category, as urged by the government, would give the commission too much power to go after “stale” claims.
The ruling “shatters the SEC’s long-standing view that the disgorgement remedy is equitable, and therefore not subject to any statute of limitations,” King & Spalding partner Dixie Johnson said Monday. “Those who previously paid disgorgement purportedly for ill-gotten gains more than five years after the relevant violation will be reviewing their situations against this case to determine whether the disgorgement award should have been allowed.”