January 13, 2017 / 7:44 PM / 6 months ago

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

4 Min Read

The headquarters of the U.S. Securities and Exchange Commission (SEC) are seen in Washington, July 6, 2009.Jim Bourg

WASHINGTON (Reuters) - 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 limit.

    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.

Reporting by Sarah N. Lynch and Lawrence Hurley; Editing by Will Dunham and David Gregorio

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