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From Securities Regulation Daily, March 5, 2018

Kokesh remains liable for individual misappropriations within limitations period

By Amy Leisinger, J.D.

Following the U.S. Supreme Court’s reversal of its decision upholding the imposition of over $53 million in disgorgement and interest against defendant Charles Kokesh, a Tenth Circuit panel remanded the matter to the New Mexico district court with instructions to enter an order requiring Kokesh to disgorge just over $5 million. According to the panel, the defendant’s misappropriations are properly viewed as discrete violations. The Supreme Court held that SEC disgorgement constitutes a penalty subject to the five-year limitations period of 28 U.S.C. § 2462, but the Commission adequately asserts separately accrued conversion claims during the five-year period preceding the commencement of its action, the panel found (SEC v. Kokesh, March 5, 2018, Hartz, H.).

Misappropriations. In 2009, the SEC alleged that, from 1995 through 2006, Charles Kokesh misappropriated funds from four business development companies through his control of two now-defunct investment advisory firms. A jury found that Kokesh committed securities fraud, and the New Mexico district court entered a final judgment permanently enjoining Kokesh from violating the federal securities laws, in addition to ordering him to pay a civil penalty of $2,354,593 plus disgorgement and interest totaling over $53 million.

Disgorgement is penalty. On appeal to the Tenth Circuit, Kokesh argued that the imposition of the disgorgement and injunction was barred by Section 2462, which sets a five-year limitations period for suits "for the enforcement of any civil fine, penalty, or forfeiture."" The circuit panel disagreed, holding that the disgorgement order was neither a penalty nor forfeiture within the meaning of Section 2462 because it is remedial and serves to eliminate the profit from wrongdoing.

Kokesh sought Supreme Court review of the decision, and the Court reversed, holding that SEC disgorgement constitutes a penalty and is thus subject to the five-year limitations period. Writing for a unanimous Court, Justice Sotomayor said that disgorgement "bears all the hallmarks of a penalty: It is imposed as a consequence of violating a public law and it is intended to deter, not to compensate." In addition, according to the Court, SEC disgorgement is not necessarily compensatory; disgorged profits are paid to the district court, which retains the discretion to determine how and to whom the money will be distributed. Because disgorgement orders go beyond compensation and are intended to punish and label defendants as wrongdoers, they represent penalties and fall within the Section 2462 limitations period, the Court concluded.

Separate violations. On remand, the SEC contended that a new limitations period applied to each improper conversion of funds and that Kokesh converted $5,004,773 within the limitations period (after October 27, 2004). The panel noted that recent interpretations have considered the difference between a continuing violation and separately accruing violations. "A single violation continues over an extended period of time when the plaintiff’s claim seeks redress for injuries resulting from a series of separate acts that collectively constitute one unlawful act, as opposed to conduct that is a discrete unlawful act," the panel stated.

However, the panel explained, a person engaging in misconduct over a period of time has not necessarily engaged in a singular continuing violation, as opposed to a series of violations, for the purposes of the statute of limitations. Kokesh’s misappropriations are properly viewed as discrete violations, as the misconduct was not a continuing omission to comply with a duty and the SEC’s claims did not depend on the "cumulative nature" of his acts, the panel found. The misconduct was the taking of funds without authority, and each misappropriation was part of "a series of repeated violations of an identical nature," each actionable for five years after its occurrence.

"To hold that Defendant’s misappropriations constituted only one continuing violation would do much more than provide repose for ancient misdeeds; it would confer immunity for ongoing repeated misconduct … [w]e cannot countenance such a result," the panel concluded.

The case is No. 15-2087.

Attorneys: Sarah Prins and Benjamin Lawrence Schiffrin for the SEC. Charles R. Kokesh, pro se.

Companies: Technology Funding Ltd.; Technology Funding, Inc.

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