Business & Financial

U.S. top court mulls time bars for SEC recovery of ill-gotten profits

The seal of the U.S. Securities and Exchange Commission  on the wall at SEC headquarters in Washington

FILE PHOTO – The seal of the U.S. Securities and Exchange Commission hangs on the wall at SEC headquarters in Washington, DC, U.S. on June 24, 2011. REUTERS/Jonathan Ernst/File Photo

By Sarah N. Lynch

WASHINGTON (Reuters) – Conservative U.S. Supreme Court justices raised concerns on Tuesday about whether the Securities and Exchange Commission should be able to order defendants to fork over illegal profits reaped by misconduct that dates back more than five years.

The ruling in the case involving New Mexico-based investment adviser Charles Kokesh, due by the end of June, could have broad consequences for the policing of Wall Street.

The court’s conservative wing peppered the government during a one-hour argument with questions about the SEC’s recovery remedy known as “disgorgement,” how it is applied and whether it is really a type of punishment that should be time-barred.

The court has an “obligation to be concerned” about how far back the government can go, Chief Justice John Roberts said.

Fellow conservative Neil Gorsuch, hearing arguments for a second day after being sworn in as a justice last week, was even more blunt, complaining there was no actual statute governing disgorgement. “We’re just making it up,” Gorsuch said.

Kokesh was sued by the SEC in 2009 for misappropriating investors’ money. He was later ordered to pay $2.4 million in penalties plus $34.9 million in disgorgement of ill-gotten profits.

The penalties covered conduct within the five-year statute of limitations, but the disgorgement covered conduct that largely occurred outside that time frame.

Kokesh appealed to the Supreme Court after losing at a federal appeals court.

The law applies a five-year statute of limitations to penalties, forfeitures and other punitive remedies sought in civil enforcement matters, a time bar that the Supreme Court upheld unanimously in its 2013 Gabelli v. SEC ruling.

Kokesh’s attorney argued that a disgorgement in the case constituted a punitive “forfeiture” that is time-barred.

The Justice Department, on the SEC’s behalf, argued that disgorgement is equitable relief that is not considered a punishment, but merely restores the defendant to the same position he was in prior to when the misconduct occurred.

A loss for the SEC could impact negotiations in its current pipeline of investigations. Defendants that already disgorged profits dating back more than five years could potentially seek to have their cases re-opened.

Wall Street attorneys will be closely watching to see how the court rules.

(Reporting by Sarah N. Lynch; Editing by Will Dunham)

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