In a unanimous opinion delivered by Associate Justice Sonia Sotomayor on June 5, 2017, the U.S. Supreme Court cited Restatement of the Law Third, Restitution and Unjust Enrichment § 51 in deciding a case about Securities and Exchange Commission enforcement actions that seek disgorgement.
The case, Kokesh v. SEC, involved an SEC enforcement action against an investment adviser who was convicted of federal securities violations between 1995 and 2009. In determining sanctions, the U.S. District Court for the District of New Mexico determined that, while the five-year statute of limitations contained in 28 U.S.C. § 2462 “precluded any penalties for misappropriation occurring prior to October 27, 2004—that is, five years prior to the date the Commission filed the complaint,” no limitations period applied to an SEC disgorgement claim. The Tenth Circuit affirmed. Reversing, the Supreme Court held that SEC disgorgement bore “all the hallmarks of a penalty” and therefore, the statute of limitations applied to the disgorgement claim.
The opinion cited § 51, Comments a and h, of the Restatement:
In the absence of statutory authorization for monetary remedies, the Commission urged courts to order disgorgement as an exercise of their “inherent equity power to grant relief ancillary to an injunction.” SEC v. Texas Gulf Sulphur Co., 312 F. Supp. 77, 91 (SDNY 1970), aff ’d in part and rev’d in part, 446 F. 2d 1301 (CA2 1971). Generally, disgorgement is a form of “[r]estitution measured by the defendant’s wrongful gain.” Restatement (Third) of Restitution and Unjust Enrichment §51, Comment a, p. 204 (2010) (Restatement (Third)). Disgorgement requires that the defendant give up “those gains . . . properly attributable to the defendant’s interference with the claimant’s legally protected rights.” Ibid.
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And, as demonstrated by this case, SEC disgorgement sometimes is ordered without consideration of a defendant’s expenses that reduced the amount of illegal profit. App. to Pet. For Cert. 43a; see Restatement (Third) §51, Comment h, at 216 (“As a general rule, the defendant is entitled to a deduction for all marginal costs incurred in producing the revenues that are subject to disgorgement. Denial of an otherwise appropriate deduction, by making the defendant liable in excess of net gains, results in a punitive sanction that the law of restitution normally attempts to avoid”).
The opinion concluded:
Disgorgement, as it is applied in SEC enforcement proceedings, operates as a penalty under §2462. Accordingly, any claim for disgorgement in an SEC enforcement action must be commenced within five years of the date the claim accrued.