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WASHINGTON The U.S. Supreme Court agreed on
Friday to hear a case involving a New Mexico-based investment
adviser that has the potential to limit the Securities and
Exchange Commission’s powers to recover illegal profits reaped
by fraud or other wrongdoing.
The court will hear an appeal filed by investment adviser
Charles Kokesh, who was sued by the SEC in 2009 for allegedly
misappropriating money from several business-development company
funds to pay for expenses such as salaries and bonuses. He is
seeking to avoid paying $34.9 million in disgorgement, a legal
term for recovering profits made from illegal acts.
The case hinges on whether the SEC has time limits on
seeking disgorgement of ill-gotten gains, a remedy the regulator
often uses to deter wrongdoing and recover funds for harmed
The SEC currently faces a five-year statute of limitations
on collecting civil penalties, a time restriction that the
Supreme Court upheld unanimously in a 2013 ruling in which the
justices found that the five-year clock starts when a fraud
occurs, not when it is discovered.
But that five-year window does not currently apply to
disgorgement, which the SEC argues can be recovered at any time
regardless of when the misconduct occurred.
After a jury found Kokesh liable for the violations alleged
by the SEC, which occurred from 1995 through 2006, a federal
judge ordered him to pay $2.4 million in penalties, $34.9
million in disgorgement and $18 million in prejudgment interest.
While the penalties were limited to violations that occurred
within the five-year statute of limitations, the disgorgement
covered conduct that largely exceeded that time frame.
Kokesh appealed the judge’s ruling to the Denver-based 10th
U.S. Circuit Court of Appeals, which said disgorgement is not
covered by the five-year statute of limitations. Kokesh then
appealed that decision to the Supreme Court.
The 10th Circuit ruling conflicted with a prior ruling by
the Atlanta-based 11th U.S. Circuit Court of Appeals in a
different case, which found that it is subject to the time
Attorneys for Kokesh said in court papers that government
data shows the SEC has “increasingly relied on disgorgement” to
maximize recoveries since the Supreme Court’s 2013 ruling.
“Such indefinite liability … risks inflicting grave
unfairness on individuals whose ability to defend themselves may
deteriorate with each passing year,” Kokesh’s attorneys wrote.
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