What Remains of Kokesh After Liu?

Abstract

This paper addresses two questions that emerge from Liu v. SEC, 2020 WL 3405845 (U.S.). The first concerns the status of a disgorgement order in an SEC enforcement case that fails to satisfy the equitable limitations the Court discussed in the opinion. The second concerns the application of the five-year limitations period in 28 U.S.C. § 2462 to a disgorgement order complying with the Liu requirements. First, a disgorgement order that does not comply with the equitable restrictions described in the opinion would not be valid because courts do not have power to issue a disgorgement order in an SEC case unless the terms of the order meet those limitations. The question before the Court was whether a statute authorizing equitable relief in SEC cases allowed disgorgement orders, and the Court found that it did but only if the disgorgement order stays within the bounds of three traditional principles of equity. An award that does not comply is not equitable relief and lacks statutory authorization. Second, Liu nullified Kokesh v. SEC, 137 S. Ct. 1635 (2017), where the Court held that disgorgement in an SEC enforcement case imposed a penalty for purposes of applying the five-year limitations period in 28 U.S.C. § 2462. Liu found equitable relief to be incompatible with a penalty. Because a properly limited disgorgement award is equitable relief, equity does not enforce a penalty, and section 2462 applies only to claims for a fine, penalty, or forfeiture, the limitations period does not govern a disgorgement order that conforms to the equitable principles in Liu. The SEC may seek and a court may order disgorgement in a case commenced more than five years after the enforcement claim first accrued. Freeing a government enforcement claim from any limitations period is not the preferred policy outcome, but it appears to be the better reading of Liu.