Finally: A Statute of Limitations on FTC Disgorgement Actions?

The Long Arm of Disgorgement Claims

FTC Disgorgement ChangeOne of the most unfair effects of being targeted by the FTC is that it may seek “disgorgement” going back years, even decades.  Until now, the FTC has successfully argued that there is no statute of limitations on disgorgement claims.  A ruling released last week by the U.S. Supreme Court in an SEC case may finally end this abuse.

In a unanimous vote, the U.S. Supreme Court held that a disgorgement action pursued by another governmental agency is subject to a five-year statute of limitations, beginning on the date the claim accrued. Disgorgement is a type of remedy that allegedly prevents unjust enrichment by requiring a party to give up all revenue obtained from illegal or wrongful acts.  The Court’s decision in Kokesh v. SEC means that these types of actions will be subject to the same statute of limitations requirements as other civil monetary penalties.

A Penalty By Any Other Name

The decision overturned a 10th Circuit Court decision from earlier this year that upheld the government’s disgorgement claims without applying a statute of limitations.  The SEC sought $34.9 million in a disgorgement action against Charles Kokesh for misappropriating investor funds between 1995 and 2006.  During that time, Kokesh caused unearned bonuses and salaries to be paid to himself, and to other officers.  Although the SEC did not start a disgorgement action until 2009, the 10th Circuit Court held that action was not barred by the statute of limitations because it did not believe that disgorgement was a “civil fine, penalty or forfeiture” under 28 USC § 2462.

The SEC maintained on appeal that the disgorgement was not a penalty but merely a return of the defendant to the status quo.  This despite the fact that the investors in this case were not receiving compensation and Kokesh was required to disgorge the full $34.9 million (even when some of that amount actually ended up with other officers).  Both of these facts were explicitly considered by Justice Sonia Sotomayor in the unanimous opinion overturning the 10th Circuit’s decision.

The Supreme Court has clearly indicated that the statute of limitations and § 2462 apply to SEC disgorgement actions.  However, the decision may have an even broader reach.  SEC disgorgement matters are civil matters seeking money which the Supreme Court has decided are a penalty and thereby subject to the § 2462 statute of limitations.  This could mean that disgorgement should be subject to statutory limitations on other civil monetary penalties and could even go as far as to prevent recovery of disgorgement on top of other civil monetary penalties, such as in FTC cases.