Will the SEC be ordered to
disgorge its disgorgement
In Kokesh, the Court expressly disclaimed opining on the
availability of disgorgement generally: “Nothing in this
opinion should be interpreted as an opinion on whether
courts possess authority to order disgorgement in SEC
enforcement proceedings or on whether courts have
properly applied disgorgement principles in this context.” 10
This comment may signify a potential challenge to the
long-held assumption that courts have the power to order
disgorgement in SEC enforcement cases. The loss of
disgorgement would prove significant: in fiscal year 2016,
the SEC obtained judgments and orders totaling nearly
$3 billion in disgorgement. 11
While the SEC is statutorily authorized to pursue a wide
range of remedies against securities law violators in district
court proceedings, including injunctions, Congress has
never expressly included disgorgement among them.
But disgorgement has been an element of the SEC’s
enforcement arsenal since 1970, when it first sought and
obtained disgorgement in SEC v. Texas Gulf Sulphur Co.
There, the court held that “the SEC may seek other than
injunctive relief in order to effectuate the purposes of [the
Exchange Act], so long as such relief is remedial relief and
is not a penalty assessment.” 12 The SEC has obtained
disgorgement countless times since.
Despite this initial limitation, courts have often rejected
defendants’ assertions that disgorgement is a penalty,
even when it goes beyond the sole purpose of depriving
wrongdoers of their ill-gotten gains. 13 The SEC’s argument
that disgorgement is “remedial” in that it “lessen[s] the
effects of a violation” by “‘restor[ing] the status quo’” has
typically prevailed. 14 But in Kokesh, the Supreme Court
rejected the SEC’s argument. It held that disgorgement is
punitive because it “cannot fairly be said solely to serve a
remedial purpose, but rather can only be explained as also
serving either retributive or deterrent purposes.” 15 Because
of this language, the time may have come to reevaluate
courts’ authority to order disgorgement in SEC cases.
10 137 S. Ct. at 1642 n. 3.
11 Select SEC and Market Data Fiscal 2016, https://www.sec.gov/files/2017-03/secstats2016.pdf.
12 SEC v. Texas Gulf Sulphur Co., 446 F.2d 1301, 1308 (2d Cir. 1971) (emphasis added).
13 SEC v. First City Fin. Corp., 890 F.2d 1215, 1230-31 (D.C. Cir. 1989) (classifying disgorgement as an equitable
remedy that serves the goals of depriving wrongdoers of their profits as well as deterrent, but not punitive,
14 137 S. Ct. at 1644 (quoting Brief for Respondent 17).
15 Id. at 1645 (emphasis in original).
When courts first ordered disgorgement, there was no statutory
authorization for monetary remedies. Simply put, the SEC had
no way to impose financial sanctions on wrongdoers. As a
result, the SEC argued that courts had the inherent ancillary
authority to order equitable relief in the form of disgorgement
to strip wrongdoers of their ill-gotten gains. The SEC’s entire
enforcement regime changed dramatically in 1990 when for
the first time Congress authorized the Commission to seek civil
monetary penalties for violations of federal securities laws. 16
Over time, Congress authorized the SEC to seek additional
sanctions but repeatedly chose not to expressly provide for
disgorgement in district court proceedings. 17
The enforcement tools at the SEC’s disposal to combat
violations of federal securities laws have expanded
significantly since it sought and obtained its first order for
disgorgement. There has also been an increasing emphasis
on the punitive and deterrent aspects of its remedies.
Kokesh and Gabelli place limits on the SEC’s remedial
regime insofar as the remedies imposed are principally
viewed as punitive.
The immediate repercussion of the Supreme Court’s
Kokesh decision was profound even if straightforward: SEC
disgorgement is subject to the five-year statute of limitations
for civil penalties. Yet the Court’s rationale could disturb decades-long practices at the Commission regarding the use of
injunctions and its access to disgorgement generally.
Recently, for example, following the SEC’s decision to drop
claims for disgorgement based on Kokesh, a defendant moved
for complete dismissal as time-barred, asserting that the
injunctive relief sought was punitive not equitable. 18 Over the
coming months and years, defendants in SEC enforcement
actions will likely continue to challenge these remedies and
other previously well-accepted remedies, in particular for
conduct outside the five-year statute of limitations. Thus, there
is likely to be increasing uncertainty regarding the range and
applicability of certain previously well-accepted SEC remedies.
16 15 U. S.C. § 77t(d).
17 See, e.g., Sarbanes-Oxley Act § 305(b) (codified at 15 U.S.C. § 78u(d)( 5)); Dodd-Frank Wall Street Reform
and Consumer Protection Act, Pub. L. No. 111-203, § 929P(a), 124 Stat. 1376, 1862 (2012) (codified at
15 U. S.C. § 77h- 1).
18 SEC v. Gentile, No. 2:16-cv-01619, Reply Memorandum of Law in Support of Defendant’s Motion to
Dismiss, Dkt. No. 39 (D.N.J. Aug. 3, 2017).
This holding prohibits the SEC from bringing
an action seeking disgorgement more than
five years after the underlying conduct has
Courts might apply the same principles
from Kokesh in determining whether an
injunction is a penalty subject to the five-year statute of limitations.