Public Enforcement after Kokesh: Evidence from SEC Actions

Abstract

Disgorgement of ill-gotten gain, similar to an unjust enrichment claim, is a common remedy in United States Securities and Exchange Commission (SEC) enforcement. In June 2017, the Supreme Court held in Kokesh v. SEC that disgorgement is a penalty. As such, the statute of limitations in section 28 U.S.C. § 2462 for any “fine, penalty, or forfeiture” bars the SEC from seeking disgorgement for any violation committed more than five years before suit. The Kokesh decision has reverberated through federal enforcement. Most directly, it bars SEC disgorgement claims for long-running frauds, costing the Agency $1.1 billion to date. As is typical for Supreme Court decisions, Kokesh also raised more questions than it answered. If disgorgement is a penalty, then most other enforcement remedies are also penalties and are thus time limited to five years. Moreover, disgorgement in SEC civil actions is not expressly authorized in any statute. If disgorgement is a penalty, then perhaps the SEC cannot seek disgorgement in court actions at all. More than two years after the Kokesh decision, its impact remains uncertain. Using a unique dataset of over eight thousand SEC enforcement actions filed between 2010 and 2018, this Article unravels the impacts of Kokesh. Depending on how broadly lower courts interpret Kokesh, anywhere between twenty and eighty percent of SEC disgorgement is at risk. At the same time, and contrary to claims advanced by SEC leadership, Kokesh does not substantially undermine the Agency’s abilities to compensate investors or to deter misconduct, but it will certainly change the incentives at work during settlement negotiations. However Kokesh is interpreted, one group of defendants—individuals running long-standing frauds targeting small-scale investors—clearly benefits. Many of them will be able to fleece ordinary people of their nest eggs and then keep the money they stole. Even if such defendants cannot be deterred, the result is corrosive because it offends basic notions of fairness and thus undermines the rule of law.