U.S. top court to weigh time limits on SEC recovery of illegal profits

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By Sarah N. Lynch | WASHINGTON

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 power of the U.S.
Securities and Exchange Commission to recover illegal profits
reaped by fraud or other wrongdoing.

The court will hear an appeal filed by investment adviser
Charles Kokesh, who the SEC sued 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.

The SEC currently faces a five-year statute of limitations
on collecting civil penalties, a time restriction the Supreme
Court upheld unanimously in 2013. In that ruling, 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.

“The purpose of the statute of limitations is to let people
go on with some certainty in their business,” said Robert
Anello, a partner at Morvillo Abramowitz Grand Iason & Anello
PC, a white collar attorney who is following the case but is not
involved in it.

“It is unfair to make people defend ancient conduct.
Memories fade. Documents disappear.”

An SEC spokeswoman declined to comment beyond the Solicitor
General’s filing on the agency’s behalf.

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.

Daniel Nathan, a partner at Morvillo LLP who is also
following the case, said the SEC was often arbitrary in the way
it tries to divide up the pot of money it collects between
disgorgement and penalties.

“Hopefully this decision will increase the rigor they bring
to their sanctions,” he added.

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