Supreme Court Ruling Curbs SEC Disgorgement Power
The U.S. Supreme Court ruled on Monday that the SEC is bound by a five-year limitation period when it seeks disgorgement from those who have been found to violate federal securities laws.
The Court held that “Disgorgement in the securities-enforcement context is a ‘penalty’ within the meaning of §2462 [a five-year statute of limitations,]” and thus, “any claim for disgorgement in an SEC enforcement action must be commenced within five years of the date the claim accrued.”
Section 2462 expressly applies to “an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise” and the Court had already held that the five-year statute applies when the SEC seeks statutory monetary penalties.
The Court’s reasoning included that SEC disgorgement is imposed as a consequence for violating public laws; the violation for which the SEC seeks disgorgement is against the United States rather than an aggrieved individual; SEC disgorgement furthers the policy mission of “protecting investors and safeguarding the integrity of the markets[;]” SEC disgorgement is imposed to deter infractions and, therefore, is “inherently punitive[;]” and SEC disgorgement—“in many cases”—is not compensatory and can be required regardless of whether funds are used as restitution.
While the government argued SEC disgorgement is “remedial” in that it “restor[es] the status quo,” the Court disagreed, citing cases where defendants were ordered to disgorge third-party profits and without consideration of expenses that reduced illegal profits. “In such cases, disgorgement does not simply restore the status quo; it leaves the defendant worse off.”
The Court therefore found that SEC disgorgement operates as a penalty under §2462.
The Court reversed the judgment of the Court of Appeals for the Tenth Circuit. Justice Sonia Sotomayor delivered the opinion of the Court.
For a complete reading of this unanimous opinion, please click here.