Is There a Statute of Limitations on Disgorgement? How long does the Securities and Exchange Commission (SEC) have to bring a lawsuit asking for disgorgement of unlawful gains? The United States Supreme Court will decide that issue this term in Kokesh v. Securities and Exchange Commission.

Under federal law, no “action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise” can be brought more than five years after the claim first accrued. Kokesh will decide whether the five-year statute of limitations in § 2462 applies to SEC actions seeking disgorgement. The federal courts of appeals are split on the issue: The Eleventh Circuit decided last year that disgorgement was a “penalty or forfeiture” subject to § 2462, but the First Circuit, the D.C. Circuit, and most recently the Tenth Circuit in Kokesh decided the question the other way.

The case is likely to turn on how the Supreme Court views the nature of the disgorgement remedy.  Is disgorgement meant to punish illegal acts? The SEC frequently seeks disgorgement in its enforcement actions, and its use of the remedy has resulted in large collections — $3 billion in disgorgement collections in 2015 alone – that surely feel like punishments to defendants. Or is disgorgement meant to prevent wrongdoers from benefiting from breaking the law? The SEC argues – and the First, D.C. and Tenth Circuits agree – that disgorgement puts the defendant back in the position he would have occupied if he had never broken the law, and therefore it is not a “penalty” under § 2462. Or is “disgorgement” really a synonym for “forfeiture,” as the Eleventh Circuit concluded (see SEC v. Graham)? In practice, both remedies seem to involve not being able to keep money as a result of breaking the law.

It may depend on what definition of “forfeiture” the Supreme Court thinks Congress had in mind when drafting § 2462.  Historically, “forfeiture” meant the remedy allowing the seizure of property used in illegal activity, regardless of the property owner’s innocence or guilt. Other definitions, such as those in the Oxford English Dictionary or Black’s Law Dictionary, suggest that both “disgorgement” and “forfeiture” mean turning over ill-gotten property, without much to distinguish the two terms. Kokesh points out that even the Supreme Court has used the terms virtually interchangeably to explain that forfeitures “are designed primarily to confiscate property used in violation of the law, and to require disgorgement of the fruits of illegal conduct” (see United States v. Ursery). The decision in Kokesh should resolve the ambiguity.

If Kokesh prevails, and the five-year statute of limitations in § 2462 applies to SEC actions for disgorgement, a potent enforcement tool now available everywhere but in the Eleventh Circuit will be blunted. The SEC will still be able to seek disgorgement, but will be unable to collect amounts received more than five years before the claim accrued. If the SEC prevails, however, and the Supreme Court rules that § 2462 does not apply to disgorgement actions, wrongdoers on the losing end of an SEC enforcement action will continue to have to disgorge ill-gotten profits going back well beyond the five-year limit.

The case is set for oral argument on April 18, 2017.