Is Disgorgement a “Forfeiture” for Statute of Limitations Purposes?

Jonathan N. Eisenberg is partner in the Government Enforcement practice at K&L Gates LLP. This post is based on a K&L Gates publication by Mr. Eisenberg.

In Gabelli v. SEC, 133 S.Ct. 1216 (2013), the Supreme Court held that the five-year statute of limitations in 28 U.S.C. §2462, which applies to actions for penalties, fines and forfeitures, begins to run when a violation is complete rather than when it is later discovered. The Court quoted Chief Justice Marshall’s statement from more than two centuries ago that it “would be utterly repugnant to the genius of our laws” if actions for penalties could “be brought at any distance of time,” id. at 1223 (internal citation omitted), and it described the important policies served by statutes of limitations as follows:

repose, elimination of stale claims, and certainty about a plaintiff’s opportunity for recovery and a defendant’s potential liabilities. Statutes of limitations are intended to promote justice by preventing surprises through the revival of claims that have been allowed to slumber until evidence has been lost, memories have faded, and witnesses have disappeared. They provide security and stability to human affairs. We have deemed the vital to the welfare of society, and concluded that even wrongdoers are entitled to assume that their sins may be forgotten.

Id. at 1221 (internal citations and quotations omitted).

This term the Supreme Court granted certiorari to resolve a circuit court split on whether the same statute of limitations applies to SEC actions for disgorgement, a remedy in which a defendant forfeits the gains caused by an alleged violation. SEC v. Kokesh, 834 F.3d 1158 (10th Cir. 2016), cert granted, No. 16-529 (Jan. 13, 2017). The issue is of obvious importance. In the last three fiscal years combined, the SEC obtained disgorgement orders for more than $8.6 billion, far more than it obtained in fines. [1] In terms of its financial impact on defendants, the failure to apply a statute of limitations to SEC disgorgement actions would be far more damaging than the failure to apply it to actions seeking fines.

The reasons 28 U.S.C. §2462 should be applied to SEC disgorgement actions are discussed below. To summarize, the ordinary meaning of the word “forfeiture,” the policies underlying statutes of limitations, the common-sense result that when courts imply remedies those remedies should not be unbounded, the punitive effects of disgorgement on defendants, and even a reasonable definition of “penalty” support the application of §2462 to SEC claims for disgorgement. The government’s argument to the contrary—that it should have an unlimited amount of time to bring an action seeking disgorgement because disgorgement is often described as “equitable” and “remedial” for certain purposes—gives far too narrow a definition to the word forfeiture and far too little weight to the compelling reasons that statutes of limitations exist.

I. A Short History of the Securities Exchange Act and the Courts’ Creation of a Disgorgement Remedy Nowhere Referenced in the Act

 A. The Remedies Provided by Congress in the Securities Exchange Act of 1934

When Congress passed the Securities Exchange Act in 1934, it provided a highly integrated scheme of enforcement that included a combination of equitable, criminal, and compensatory remedies. Section 21 of the Securities Exchange Act, titled “Investigations; Injunctions and Prosecution of Offenses,” provided in paragraph (e) that whenever it appeared to the Securities and Exchange Commission that a person “is engaged or about to engage” in acts prohibited by the Securities Exchange Act, it could, upon a proper showing, obtain a “permanent or temporary injunction or restraining order….” [2] Section 32, entitled “Penalties,” authorized courts to impose fines and imprisonment on persons convicted of “willfully and knowingly” making false or misleading statements in violation of the Act. With regard to requiring defendants to compensate investors for their losses, Congress provided express private rights of action in favor of investors in Section 9, entitled “Prohibition Against Manipulation of Security Prices,” and in Section 18, entitled “Liability for Misleading Statements.” Both sections required investors to bring their claims within the earlier of one year after the discovery of the facts constituting the cause of action and within three years after such cause of action accrued.

As the author of an article chronicling the history of SEC disgorgement actions observed, “Nowhere within the statutory framework of the federal securities laws did Congress provide that the SEC would have the power to make a violator of the anti-fraud provisions disgorge tainted profits.” [3] Nor was there any reference to such a remedy in the legislative history. [4] The most natural reading of the statute is that it created the remedies that Congress said it was creating: nothing more, nothing less.

B. The Creation of a Disgorgement Remedy by Courts Rather than Congress

Today, it is axiomatic that “[i]f the statutory language is plain,” a court “must enforce it according to its terms.” King v. Burwell, 135 S.Ct. 2480, 2489 (2015). “Statutory construction must begin with the language employed by Congress and the assumption that the ordinary meaning of that language accurately expresses the legislative purpose.” Park ‘N Fly, Inc. v. Dollar Park & Fly, Inc., 469 U.S. 189, 194 (1985).

That, however, was not the approach that courts took in the decades immediately following the enactment of the Securities Exchange Act. At that time, the Supreme Court and lower courts often gave little weight to the language employed by Congress and, instead, tried to improve upon the statute by providing far broader judicially-created remedies than the remedies Congress expressly authorized.

Porter v. Warner Holding Co., 328 U.S. 395 (1946) illustrates the Supreme Court’s one-time expansive approach to implying remedies not expressly provided by Congress. That case addressed the remedies available under the Emergency Price Control Act of 1942. As authorized by the Act, the Administrator of the Office of Price Administration established maximum rent prices and was given authority to seek injunctive relief or an “other order” when firms charged prices in excess of those ceilings. Tenants, but not the Administrator, were given the right to seek refunds, subject to a statute of limitations that Congress provided in the Act. When Warner Holding Company failed to comply with the maximum rent prices prescribed by the Administrator, the Administrator brought an action seeking to enjoin it from continuing to exceed the rent ceilings and later filed an amended complaint seeking an order requiring it to refund the excess amounts already collected. Since Congress had only authorized tenants, not the Administrator, to bring actions for refunds, both the district court and court of appeals held that they had no authority to order refunds in an action brought by the Administrator.

The Supreme Court reversed, and held that by authorizing courts to grant an injunction, which is an “equitable” as opposed to a “legal” remedy, “all the inherent equitable powers of the District Court are available for the proper and complete exercise of that jurisdiction.” 328 U.S. at 398. In fact, “the court may go beyond the matters immediately underlying its equitable jurisdiction and decide whatever other issues and give whatever other relief may be necessary under the circumstances.” Id. As a result, even though Congress made no reference to the possibility of a disgorgement remedy in an action brought by the Administrator, the Supreme Court held that “a decree compelling one to disgorge profits, rents or property acquired … may properly be entered by a District Court once its equity jurisdiction has been invoked….”Id. at 398-99.

Another case illustrating the expansive approach the Supreme Court applied to remedies not authorized by Congress is J.I. Case Co. v. Borak, 377 U.S. 426 (1964). There, the Supreme Court considered whether investors could bring a private right of action under the proxy provisions in Section 14(a) of the Securities Exchange Act even though that section, unlike Sections 9 and 18 of the Securities Exchange Act, contains no provision authorizing investors to bring a private right of action. In language that would be anathema to the Supreme Court’s current approach overwhelmingly refusing to imply private rights of action, the Court stated, “While this language makes no specific reference to a private right of action, among its chief purposes is ‘the protection of investors,’ which certainly implies the availability of judicial relief where necessary to achieve that result.” Id. at 432. [5] The Court went on to hold that investors could bring a private right of action under Section 14(a) despite the fact that Congress authorized private rights of action under some provisions of the Act, but did not authorize a private right of action under Section 14 of the Act.

Given the expansive approach to remedies taken by the Supreme Court in Warner Holding Co., Borak, and other cases, it is not surprising that nearly four decades after the Securities Exchange Act was signed into law, the Second Circuit, in SEC v. Texas Gulf Sulphur Co., 446 F.2d 1301 (2d Cir.), cert. denied, 404 U.S. 1005 (1971), became the first appellate court to hold that Congress’s grant of authority in the Securities Exchange Act for courts to issue an injunction meant that “the SEC may seek other than injunctive relief in order to effectuate the purposes of the Act, so long as such relief is remedial relief and is not a penalty assessment.” Id. at 1308. It included disgorgement of profits as falling within such “remedial relief.” Id.

Three years after the Second Circuit first recognized a right of the SEC to seek disgorgement in Texas Gulf Sulphur, the Second Circuit further explained that Congress’s grant of authority in the Securities Exchange Act for courts to issue an injunction “confer[s] general equity powers upon the district courts” and “[o]nce the equity jurisdiction of the district court has been properly invoked by a showing of a securities law violation, the court possesses the necessary power to fashion an appropriate remedy”—including “disgorging of proceeds received” in connection with a securities law violation. SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082, 1103 (2d Cir. 1974).

The SEC now seeks disgorgement in nearly every case in which it alleges a defendant profited from an alleged violation. Disgorgement is said to “force[] the defendant to give up … the amount by which he was unjustly enriched.” SEC v. Blatt, 583 F.2d 1325, 1335 (5th Cir. 1978). The amount of disgorgement ordered “need only be a reasonable approximation of profits causally connected to the violation.” SEC v. Patel, 61 F.3d 137, 139 (2d Cir. 1995). Where, as is often the case, there is uncertainty regarding the amount of profits caused by a violation, courts routinely resolve the uncertainty against the defendant on the ground that “any risk of uncertainty should fall on the wrongdoer whose illegal conduct created that uncertainty.” Id. at 140. It has long been recognized that a central purpose of disgorgement is not to compensate investors, even though disgorged funds are often used for that purpose, but “to deter others from violating the securities laws.” SEC v. First City Financial Corp., Ltd., 890 F.2d 1215, 1230 (D.C. Cir. 1989). “By forcing wrongdoers to give back the fruits of their illegal conduct, disgorgement also ‘has the effect of deterring subsequent fraud.’” SEC v. Contorinis, 743 F.3d 296, 301 (2d Cir. 2014) (internal citation omitted). “The primary purpose of disgorgement orders is to deter violations of the securities laws by depriving violators of their ill-gotten gains.” SEC v. Fischbach Corp., 133 F.3d 170, 175 (2d Cir. 1997).

II. The Statute of Limitations in 28 U.S.C. §2462 for Actions Involving Fines, Penalties or Forfeitures

In addition to providing statutes of limitations in a number of substantive statutes, Congress has provided default statutes of limitations that apply unless otherwise provided by Congress. One of those is 28 U.S.C. §2462, [6] which provides:

Except as otherwise provided by Act of Congress, an action, suit, or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued if, within the same period, the offender or the property is found within the United States in order that proper service may be made thereon.

The predecessor statutes of limitation, which employed similar but not identical language, preceded the adoption of the Securities Exchange Act by nearly a century. [7]

For many decades, administrative agencies resisted the application of statutes of limitations to their actions, but in 1994 the D.C. Circuit in 3M Co. v. Browner, 17 F.3d 1453, held that §2462 applies to a civil penalty case brought by an administrative agency. Two years later in Johnson v. SEC, 87 F.3d 484, the D.C. Circuit held that an SEC administrative action resulting in a censure and a six-month disciplinary suspension was subject to the same statute of limitations.

By the time the Supreme Court granted certiorari in Gabelli to consider the application of the discovery rule in an SEC action seeking a civil penalty, the SEC was no longer arguing that its actions for civil penalties were outside the reach of §2462. It did and does, however, take the position that disgorgement is not a “forfeiture” (or a penalty) and that, as a result, the Commission has an unlimited amount of time to bring an action seeking disgorgement.

III. Appellate Courts’ Analyses of Whether the Word “Forfeiture” Extends to Disgorgement, and the Failure of Some Courts to Consider the Commonly-Understood Meaning of Forfeiture

To date, appellate courts have reached conflicting results on whether §2462 applies to SEC disgorgement actions, but courts declining to apply §2462 have given surprisingly little attention to the commonly-understood meaning of the word “forfeiture.”

The Eleventh Circuit, in SEC v. Graham, 823 F.3d 1357 (2016), concluded that disgorgement fell within the ordinary meaning of “forfeiture,” as set forth in a number of dictionaries that the court quoted, and that the SEC’s proposed narrower definition of disgorgement “would violate the long-settled principles ‘that words in a statute should be given their ordinary, popular meaning, unless Congress clearly meant the words in some more technical sense.” Id. at 1364 (internal citations omitted). It also expressed a concern that the SEC’s narrow interpretation would leave too many agency actions without any limits: “Particularly because §2462 applies to a wide variety of agency actions and contexts, we are loath to adopt the technical definition that the SEC promotes.” Id. at 1364.

To illustrate the analysis in Graham, consider the following simple hypothetical:

Mr. Jones enters the United States Horseshoe Pitching tournament and wins $5,000 for coming in first. Thirty years later, after a contentious divorce, Mrs. Jones tells the National Horseshoe Pitchers Association that Mr. Jones won the tournament by using a horseshoe that weighed more than the 2 pound, 10-ounce limit. She makes the same allegation to the National Horseshoe Gazette, which publishes a story on her allegations that provokes outrage in the horseshoe community. The Association brings an action seeking an order requiring Mr. Jones to disgorge—to “forfeit”—his $5,000 in winnings. Mr. Jones believes the allegations are meritless, but his winning horseshoe is nowhere to be found and he does not want to incur the cost or uncertainty of litigating with the Association.

No one would look askance at the characterization of the order sought by the Association as an order requiring Mr. Jones to “forfeit” the $5,000 or as potentially leading to the “forfeiture” of the $5,000. In the sense of having to give back an amount allegedly obtained wrongfully, both forfeiture and disgorgement are similar concepts. And whether one calls the return of the $5,000 “disgorgement” or a “forfeiture” or something else entirely, the Association’s likely purpose in demanding the return would be to deprive Mr. Jones of the benefit of his alleged wrongdoing and to deter others from violating their rules in the future. Unfortunately, bringing a proceeding 30 years after the fact to establish Mr. Jones’ allegedly improper conduct would have obvious drawbacks that statutes of limitations are designed to prevent—memories will have faded, evidence will have been lost, potential witnesses may have become unavailable and uncertainty will have been created for Mr. Jones and other tournament winners whose awards might also be challenged decades after the relevant events.

Nevertheless, three other courts of appeal that have considered the issue have followed a different path than the Eleventh Circuit took in Graham. The Tenth Circuit, in the decision now before the Supreme Court, concluded that §2462 does not apply to disgorgement. SEC v. Kokesh, 834 F.3d 1158 (10th Cir. 2016). With regard to whether disgorgement is a “forfeiture,” the Tenth Circuit acknowledged that “in common English” the words forfeiture and disgorgement capture similar concepts and that the leading legal dictionary treats them similarly. But it chose as the definition not the commonly-understood meaning of forfeiture but a highly technical one: an “in rem procedure to take ‘tangible property used in criminal activity.’ (internal citation omitted). It stated, “When the term forfeiture is linked in §2462 to the undoubtedly punitive actions for a civil fine or penalty, it seems apparent that Congress was contemplating the meaning of forfeiture in this historical sense. The nonpunitive remedy of disgorgement does not fit in that company.”

Two other courts of appeals also concluded that §2462 does not apply to SEC disgorgement actions, but with no meaningful analysis of whether disgorgement falls within the ordinary meaning of “forfeiture.” In Riordan v. SEC, 627 F.3d 1230, 1234 n. 1 (2010), the D.C. Circuit acknowledged that its prior decision rejecting the application of §2462 to SEC disgorgement actions did not analyze the meaning of “forfeiture” and that “[i]t could be argued that disgorgement is a kind of forfeiture covered by §2462, at least where the sanctioned party is disgorging profits not to make the wronged party whole, but to fill the Federal Government’s coffers.” In SEC v. Tambone, 550 F.3d 106, 148 (1st Cir. 2008), the First Circuit concluded, “[T]he applicable five-year statute of limitations period [the defendant] invokes applies only to penalties sought by the SEC, not its request for injunctive relief or the disgorgement of ill-gotten gains”), withdrawn, 573 F.3d 54 (1st Cir. 2009), reinstated in relevant part, 597 F.3d 436 (1st Cir. 2010). It nowhere mentioned, much less analyzed, the meaning of the word forfeiture in §2462.

IV. The Straightforward Application of §2462 to SEC Disgorgement Actions

The Supreme Court will look primarily to its own precedents to decide whether §2462 applies to disgorgement actions. In recent years the Supreme Court has repeatedly stated that in determining the meaning of a statutory provision, “we look first to its language, giving the words used their ordinary meaning.” Moskal v. United States, 498 U.S. 103, 108 (1990) (citation and internal quotation marks omitted, emphasis added). [8]

A. The Commonly-Understood Meaning of Forfeiture Includes Disgorgement

The 1933 version of Webster’s International Dictionary gives as the first definition of forfeiture “the act of forfeiting,” or “loss of some right, privilege, estate, honor, office, or effects, in consequence of a crime, offense, breach of condition or other act.” This easily covers disgorgement, which may fairly be described as a loss in consequence of an offense or other act. Only the secondary definition (“that which is forfeited; a penalty; a fine or mulct”) contains any reference to a penalty, and even that represents only one alternative among multiple secondary meanings. The 1933 edition of the Oxford English Dictionary defines forfeiture as “[t]he fact of losing or becoming liable to deprivation of (an estate, goods, life, an office, right, etc.) in consequence of a crime, offense, or breach of engagement.” That too easily covers disgorgement. A secondary definition includes “the penalty of the transgression; punishment for an offense,” but the primary definition does not require punishment or a penalty.

Moreover, if §2462 were designed to include only those forfeitures that are also penalties, the word forfeiture in the statute would be redundant because the only forfeitures covered would already be covered by the word “penalty.” While redundancies sometimes occur in statutes, the Supreme Court has stated that a cardinal principle of statutory construction is that “a statute ought, upon the whole, to be so construed that, if it can be prevented, no clause, sentence, or word shall be superfluous, void, or insignificant.” Duncan v. Walker, 533 U.S. 167, 174 (2001), quoting Market Co. v. Hoffman, 101 U.S. 112, 115 (1879). That canon of statutory construction supports a definition of forfeiture that need not be a penalty.

 B. Meeker v. Lehigh Valley Does Not Control

Nevertheless, one of the challenges for those arguing in support of applying §2462 to disgorgement actions is the Supreme Court’s decision in Meeker v. Lehigh Valley R.R. Co., 236 U.S. 412 (1915). Meeker held that the predecessor statute to 28 U.S.C §2462, which also referred to penalties and forfeitures, did not apply to a claim for compensatory damages by a private party. In explaining why a private party’s claim for compensatory damages was not covered, it stated, “The words ‘penalty or forfeiture’ in this section refer to something imposed in a punitive way for an infraction of a public law, and do not include a liability imposed for the purpose of redressing a private injury, even though the wrongful act be a public offense and punishable as such.” Id. at 423.

Meeker is often cited in cases interpreting §2462. [9] The Supreme Court’s characterization of the statute as requiring something that is “punitive” is challenging for defendants arguing that §2462 applies to disgorgement because disgorgement has been characterized as an equitable remedy, [10] and “[i]t is a universal rule in equity never to enforce either a penalty or a forfeiture.” 2 Story, Equity Jurisprudence, 4 ed., § 1319, p. 748. Cases stating that disgorgement is “remedial” rather than “punitive” are legion. [11]

On the other hand, the actual holding in Meeker is merely that a private party’s claim for compensatory damages is not a penalty or forfeiture, and disgorgement is clearly not a claim either by a private party or for damages. Moreover, when courts state that disgorgement may not operate as a penalty because it is an equitable remedy, they almost always mean that the disgorged amounts should not go above and beyond amounts causally related to the wrongdoing. [12] For other purposes, even the SEC has taken the position that disgorgement is a “fine, penalty, or forfeiture” because one of its principal purposes is deterrence. In In re Telsey, 144 B.R. 563 (Bankr. S.D. Fla. 1992), a bankruptcy court agreed with the SEC’s position that the slightest penal purpose behind a disgorgement order justifies characterizing it as a “fine, penalty, or forfeiture,” that SEC disgorgement orders “serve[] the purpose of deterrence,” and that “the deterrence purpose of the disgorgement order [is] sufficiently penal to characterize the resulting debt as a ‘fine, penalty, or forfeiture within the meaning of §523(a)(7)” and thus not dischargeable in a Chapter 7 bankruptcy proceeding. Similarly, the Supreme Court in Kelly v. Robinson, 479 U.S. 36 (1986) held that a restitution order in a criminal case was a “fine, penalty, or forfeiture” within the meaning of §523(a)(7) in part because, as in the case of disgorgement, it was not assessed to compensate the victim. Id. at 53.

Clearly, words may have different meanings when used for different purposes. E.g., Yates v. United States, 135 S.Ct. 1074, 1082 (2015) (“We have several times affirmed that identical language may convey varying content when used in different statutes, sometimes even in different provisions of the same statute”). There is no reason to insist that when the word forfeiture is used in a statute of limitations, it must have the same meaning that it has in certain other contexts.

Moreover, while not necessary to conclude that 28 U.S.C. §2462 applies to disgorgement actions (because it is enough that disgorgement is a forfeiture), even the word “penalty” may be used to describe the impact on a defendant from an order of disgorgement. More than a century ago, the Supreme Court, in Huntington v. Attrill, 146 U.S. 657 (1892), observed that “’penal’ and ‘penalty’ have been used in various senses,” that they are “so elastic in meaning” as even to be applied to cases of private contracts, and that “[a]ll damages for neglect or breach of duty operate to a certain extent as punishment.” Id. at 668. The 1933 Webster’s New International Dictionary defines penalty as “penal retribution,” but also includes “[t]he suffering, or the sum to be forfeited, to which a person subjects himself by covenant or agreement in case of nonfulfillment of stipulations” and “disadvantage, loss, or hardship due to some action, esp. to a transgression or error.” The latter definitions would include disgorgement. The 1933 Oxford English Dictionary defines penalty as “[a] punishment imposed for breach of law, rule, or contract,” but also includes “a loss, disability, or disadvantage of some kind, either ordained by law to be inflicted for some offence, or agreed upon to be undergone in case of violation of a contract….” Disgorgement could easily be deemed to be a loss or disadvantage inflicted for an offense.

C. The Importance of Limiting Remedies First Implied by Courts

Another challenge for defendants arguing for the application of §2462 to disgorgement is the Supreme Court’s long-stated principle that when the language of a statute of limitations asserted against the government is ambiguous, the statute should be construed narrowly in favor of the government. E.I. Du Pont De Nemours & Co. v. Davis, 264 U.S. 456 (1924). In BP America Production Co. v. Burton, 549 U.S. 84 (2006), in holding that administrative assessments of royalty underpayments imposed by the Department of Interior were not subject to the statute of limitations in 28 U.S.C. § 2415(a), the Supreme Court stated,

This canon is rooted in the traditional rule quod nullum tempus occurrit regi—time does not run against the King. Guaranty Trust Co. v. United States, 304 U.S. 126, 132, 58 S.Ct. 785, 82 L.Ed. 1224 (1938). A corollary of this rule is that when the sovereign elects to subject itself to a statute of limitations, the sovereign is given the benefit of the doubt if the scope of the statute is ambiguous.

On the other hand, that maxim did not carry the day in Gabelli and it appears to be in tension with the Court’s description of the strong public policies supporting statutes of limitations, as well as with Chief Justice Marshall’s statement, quoted in Gabelli, that it would be utterly repugnant to the genius of our laws if actions for penalties could be brought at any distance of time. It is hard to believe that the writer of those words, if disgorgement actions had been common at the time, would have qualified the Court’s assertion by stating it would be “not repugnant to the genius of our laws for the government to bring actions seeking billions of dollars in disgorgement at any distance in time.”

There are other compelling reasons that the notion that time does not run against a King should not prevent the application of §2462 to disgorgement. First, to the extent that the principle makes sense, it is only in the context of a remedy that Congress expressly created and considered at or before the time courts recognized it. When Congress passes a statute in which it creates remedies in favor of the government and provides a statute of limitations for some of those remedies but not others, it may in some cases be reasonable to infer that Congress intended no statute of limitations to apply to the remedy for which it omitted a statute of limitations. But when courts create a remedy under a statute that provided no such remedy, the absence of a Congressionally-created statute of limitations for that judicially-created remedy is most likely due to the fact that Congress did not contemplate the remedy. Indeed, it took courts several decades after Congress enacted the Securities Exchange Act of 1934 for the SEC and the courts to conclude that the SEC had authority to seek disgorgement under an Act that nowhere referenced such a remedy.

Second, the approach that the Supreme Court takes to the implication of remedies not provided by Congress is different today than it was at the time of the Supreme Court’s decision in Warner Holding and the Second Circuit’s decision in Texas Gulf Sulphur. While the Court has not overturned Porter, in more recent times it has cautioned that “certain basic principles … limit the power of every federal court,” among which is that “[f]ederal courts are not courts of general jurisdiction; they have only the power that is authorized by Article III of the Constitution and the statutes enacted by Congress pursuant thereto.” Bender v. Williamsport Area School Dist., 475 U.S. 534, 541 (1986). See also, e.g., Kokkonen v. Guardian Life Ins. Co. of America, 511 U.S. 375, 377 (1994) (federal courts “possess only that power authorized by Constitution and statute”). Limitations on court-created remedies are most compelling when the statutory scheme, like the Securities Exchange Act of 1934, created some remedies but made no mention of the ones created by a court. In National Railroad Passenger Corporation v. National Assn. of Railroad Passengers, 414 U.S. 453, 458 (1974), the Supreme Court explained:

A frequently stated principle of statutory construction is that when legislation provides a particular remedy or remedies, courts should not expand the coverage of the statute to subsume other remedies. “When a statute limits a thing to be done in a particular mode, it includes the negative of any other mode.” [citation omitted] This principle of statutory construction reflects an ancient maxim—expressio unius est exclusio alterius…. [T]his maxim would clearly compel the conclusion that the remedies created in [the statute] are the exclusive means to enforce the duties and obligations imposed by the Act.

It is fair to say that if the current Supreme Court were writing on a blank slate, it would likely have adopted the approach of the dissenting opinion of Justices Rutledge, Frankfurter and Reed in Warner Holding, which stated that “where Congress is explicit in the remedies it affords…, even courts of equity may not grant relief in disregard of the remedies specifically defined by Congress.” 328 U.S.at 408. The dissenting opinion also highlighted the incongruity in permitting the Administrator to obtain a refund for the benefit of tenants at a time when the statute of limitations that Congress expressly provided for the tenants to bring such claims directly had expired. Id. at 407-08.

When the Supreme Court revised its approach to implied private rights of action, and shifted the central inquiry to one of Congressional intent, it did not un-imply private rights of action recognized under its prior approach. But it confined the reach of the principal implied right of action—an action under Section 10(b) of the Securities Exchange Act—by attaching a statute of limitations (Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350 (1991)); limiting it to purchasers and sellers (Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975)); requiring proof of scienter (Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976)); finding no cause of action for aiding and abetting (Cent. Bank of Denver v. First Interstate Bank of Denver, 511 U.S. 164 (1994)); narrowly defining primary liability (Janus Capital Group v. First Derivative Traders, 564 U.S. 135 (2011)); limiting “scheme” liability (Stoneridge Inv. Partners v. Scientific-Atl., 552 U.S. 148 (2008)); and requiring manipulation or deception rather than mere unfairness (Santa Fe Indus.v. Green, 430 U.S. 462 (1977)). When courts create a remedy, whether in favor of the government or a private party, the remedy ought not to be unbounded merely because Congress did not consider the limitations the way it would have if it were creating the remedy in the first instance. Indeed, leaving a judicially-created remedy without any statute of limitations compounds the problem of courts creating such remedies in the first place.

In the case of implied remedies for the benefit of private parties, courts routinely “borrow” a statute of limitations that exists for the most analogous cause of action if there is not one that directly applies. E.g., Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350 (1991). In addition, in actions brought by private parties seeking equitable relief, courts apply the doctrine of laches or apply the “concurrent legal remedy” doctrine to prevent stale claims from proceeding. As stated in Cope v. Anderson, 331 U.S. 461, 464 (1947), “[E]quity will withhold its relief in such a case where the applicable statute of limitations would bar the concurrent legal remedy.” These cases ensure that when courts take it upon themselves to provide a remedy that Congress did not, the remedy is limited. There is no sound reason why a different result should obtain when courts create a remedy in favor of the government.

D. The Purposes Underlying Statutes of Limitations Apply Equally to Fines and Disgorgement

In terms of the purposes underlying statutes of limitations, an action seeking a million dollars in disgorgement triggers exactly the same concerns that an action seeking a million dollars in fines triggers. The fact that courts describe disgorgement as an equitable remedy or limit the amounts disgorged in litigated cases to amounts causally related to alleged violations has absolutely nothing to do with any of the reasons statutes of limitations exist—to ensure that actions are not brought long after memories have faded, evidence has been lost, and witnesses are no longer available, and to afford certainty about when a defendant’s potential liabilities come to an end. E.g., Railroad Telegraphers v. Railway Express Agency, Inc., 321 U.S. 342, 348-49 (1944). As long as disgorgement falls within the commonly-understood meaning of forfeiture, which it does, the strong policies underlying statutes of limitations support the application of §2462 to disgorgement actions regardless of whether the word forfeiture might have a different meaning in a different context.

E. The Punitive Effect of Disgorgement on Defendants and the Unfairness of Permitting Disgorgement Actions to be Unbounded by Any Time Limits

Disgorgement, though often characterized as equitable and remedial, may have a very onerous effect on a defendant. For example, in SEC v. Contorinis, 743 F.3d 296 (2014), the Second Circuit held that an investment manager who made $427,875 by trading on material nonpublic information had to disgorge over $7 million that he did not receive but that the fund that he managed made. The majority rejected the dissenting judge’s view that requiring the defendant to disgorge profits he never received was inconsistent with the equitable nature of disgorgement. It ordered disgorgement even though it held in a companion criminal case that under a criminal forfeiture statute he could only be required to forfeit the proceeds that he actually received or controlled. U.S. v. Contorinis, 692 F.3d 136 (2d Cir. 2012).

Likewise, in SEC disgorgement cases, courts routinely allow the SEC to offer any measure that is a “reasonable approximation” of profits causally connected to the violation, and then shift the burden to the defendant to show which gains were unaffected by the alleged offense. That burden is often impossible to meet because courts also hold that “any risk of uncertainty in calculating disgorgement should fall upon the wrongdoer whose illegal conduct created that uncertainty,” SEC v. Patel, 61 F.3d 137, 139-40 (2d Cir. 1995. Given the high burden placed on defendants to disprove causation, it is especially unfair to allow actions to proceed long after memories have faded, evidence has been lost, and witnesses may no longer be available.

A Recent Case Illustrating that Disgorgement Should Be Subject to a Statute of Limitations

Whether government disgorgement actions should be subject to a statute of limitations recently came up in PHH Corp. v. Consumer Financial Protection Bureau, 839 F.3d 1, 50 (D.C. Cir. 2016), pet. for rehearing granted on other grounds, even though the issue there was not the meaning of 28 U.S.C. §2462. In that case, the Consumer Financial Protection Bureau argued that no statute of limitations applied to a CFPB administrative action awarding over $100 million of disgorgement against a financial institution for alleged violations of the Real Estate Settlement Procedures Act. In rejecting the CFPB’s position on the statute of limitations issue, the D.C. Circuit described the CFPB’s argument as “absurd.” It stated:

The absurdity of the CFPB’s position is illustrated by its response to a hypothetical question about the CFPB’s bringing an administrative enforcement action 100 years after the allegedly unlawful conduct. Presented with that question, the CFPB referenced its prosecutorial discretion. But “trust us” is ordinarily not good enough…We need not wait for an enforcement action 100 years after the fact. This Court looks askance now at the idea that the CFPB is free to pursue an administrative enforcement action for an indefinite period of time after the relevant conduct took place.

Id. at 55. It added: “The general working presumption in federal civil and criminal cases is that a federal civil cause of action or criminal offense must have some statute of limitations and must not allow suits to be brought forever and ever after the acts in question.” Although the D.C. Circuit recently granted the CFPB’s request for rehearing (in part on the issue of whether it is constitutional to prevent the President from removing the CFPB’s Director without cause), the request for rehearing did not challenge the court’s holding that the CFPB’s action for disgorgement is subject to a statute of limitations.

* * *

In short, the commonly-understood meaning of “forfeiture,” the importance of the policies underlying statutes of limitations, the absence of any basis for distinguishing between fines and disgorgement in terms of the policies underlying statutes of limitations, the compelling reasons to limit remedies first created by courts rather than Congress, the punitive effects of disgorgement on defendants, and even a reasonable definition of “penalty” support applying §2462 to SEC disgorgement actions. The alternative—giving the government an indefinite period of time to seek billions of dollars in disgorgement against any defendant for any type of alleged securities law violation occurring at any time—gives too little weight to the commonly-understood meaning of forfeiture and is too dismissive of the important reasons that statutes of limitations exist.

Endnotes:

1See “Select SEC and Market Data Fiscal 2016,” Table 1; “Select SEC and Market Data Fiscal 2015,” Table 1; “Select SEC and Market Data Fiscal 2014,” Table 1.(go back)

2A copy of the Securities Exchange Act as passed in 1934 may be found on the SEC Historical Society webpage here.(go back)

3John D. Ellsworth, “Disgorgement in Securities Fraud Actions Brought by the SEC,” 1977 Duke L. J. 641, 642 (1977).(go back)

4Id.(go back)

5The change in the Supreme Court’s approach to implied private rights of action after Borak is described in James D. Gordon III, “Acorns and Oaks: Implied Rights of Action Under the Securities Acts,” 10 Stan. J.L. Bus. & Fin. 62 (2004-2005). The Court shifted to an approach focused on Congressional intent, and under the current approach the Court has rarely found Congressional intent to imply remedies not specifically set forth in a statute.(go back)

6Other default statute of limitations adopted by Congress include 28 U.S.C. §2415, which applies to government actions for damages based in contract or tort law; and 28 U.S.C. §1658, which applies to civil suits based on federal laws enacted after December 1, 1990. In addition, 18 U.S.C. § 3282 provides a five-year statute of limitations for non-capital criminal offenses. Far from suggesting a Congressional intent that the government have an unlimited amount of time to bring actions, they suggest a Congressional intent that government actions generally be subject to time limits.(go back)

7See 5 Stat. 322 (1839) and R.S. § 1047 (1874). Much of the language appears to have been based on a statute going back to 1790 entitled “An Act for the Punishment of Certain Crimes Against the United States.” 1 Stat. 112, 119.(go back)

8See also, e.g., Sebelius v. Cloer, 133 S.Ct. 1886, 1893 (2013)(“Unless otherwise defined, statutory terms are generally interpreted in accordance with their ordinary meaning”); Bilski v. Kappos, 130 S.Ct. 3218, 3226 (2010) “Unless otherwise defined, words will be interpreted as taking their ordinary, contemporary, common meaning”); FCC v. AT&T Inc., 131 S.Ct. 1177, 1182 (2011) (“When a statute does not define a term, we typically give the phrase its ordinary meaning”); Hardt v. Reliance Standard life Ins. Co., 130 S.Ct. 2149, 2156 (2010) (“As in all such cases, we begin by analyzing the statutory language, assuming that the ordinary meaning of that language accurately expresses the legislative purpose”); Taniguchi v. Kan Pacific Saipan, Ltd., 132 S.Ct. 1997, 2002 (1997) “When a term goes undefined in a statute, we give the term its ordinary meaning”); Asgrow Seed Co. v. Winterboer, 513 U.S. 179, 187 (1995) (“When terms used in a statute are undefined, we given them their ordinary meaning”); Perrin v. United States, 444 U.S. 37, 42 (1979) (“A fundamental canon of statutory construction is that, unless otherwise defined, words will be interpreted as taking their ordinary, contemporary, common meaning”) (internal quotations and citations omitted).(go back)

9In Gabelli v. SEC, the Supreme Court cited Meeker for the proposition that “a penalty covered by the predecessor to §2462 is ‘something imposed in a punitive way for an infraction of public law’” and cited Tull v. United States, 481 U.S. 412, 422 (1987) for the proposition that “penalties are ‘intended to punish culpable individuals, not ‘to extract compensation or restore the status quo.” The Eleventh Circuit, in SEC v. Graham, 823 F.3d 1357, 1361 (2016), which concluded that disgorgement is covered 28 U.S.C §2462, cited Meeker for the proposition that a “penalty” is “something imposed in a punitive way for an infraction of a public law.” The Tenth Circuit, in SEC v. Kokesh, 834 F.3d 1158, 1166 (2016), quoted Meeker for the proposition that “the words penalty or forfeiture in this section refer to something imposed in a punitive way for an infraction of a public law.” The D.C. Circuit, in Johnson v. SEC, 87 F.3d 484, 487 (1996), which held that an SEC supervisory suspension and censure were covered by 28 U.S.C §2462, cited Meeker for the proposition that “where a legal action is essentially private in nature, seeking only compensation for the damages suffered, it is not an action for a penalty.”(go back)

10When courts state disgorgement is an equitable remedy, they mean that it is the type of relief afforded by the High Court of Chancery in England at the time of the adoption of the Constitution. Grupo Mexicana De Desarrollo, S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308, 318 (1999).(go back)

11E.g., SEC v. Contorinis, 743 F.3d 296, 301 (2d Cir. 2014) (“Because disgorgement does not serve a punitive function, the disgorgement amount may not exceed the amount obtained through the wrongdoing”); SEC v. Brown, 658 F.3d 858, 861 (8th Cir. 2011) (“[E]ven when the remedy is intended to deter misconduct by members of the securities industry in general, it must be remedial, not punitive”); SEC v. Seghers, No. 10-10029 (5th Cir. Dec. 13, 2010) (per curiam) (“”Because [disgorgement] is remedial rather than punitive, it is limited to property causally related to the wrongdoing at issue”); SEC v. Maxxon, Inc., 465 F.3d 1174, 1179 (10th Cir. 2006) (“Disgorgement being remedial rather than punitive…, some end-date determination is certainly necessary so that the defendant is not required to disgorge profits not ‘­­causally connected to the violation”); SEC v. Cavanagh, 445 F.3d 105, 116 & n. 25 (2d Cir. 2006); “Because the remedy is remedial rather than punitive, the court may not order disgorgement above this amount”); SEC v. First City Fin. Corp., 890 F.2d 1215, 1231 (D.C. Cir. 1989) (“The remedy may well be a key to the SEC’s efforts to deter others from violating the securities laws, but disgorgement may not be used punitively”); SEC v. Blatt, 583 F.2d 1325, 1335 (2d Cir. 1978) (“Disgorgement is remedial and not punitive”).(go back)

12 See cases cited in footnote 11 supra.(go back)

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One Comment

  1. Phillip Goldstein
    Posted Sunday, April 30, 2017 at 8:06 am | Permalink

    Superb article. The notion that in adopting a statute of limitations for imposing “any civil fine, penalty, or forfeiture,” Congress intended to exclude disgorgement from this expansive list is incredible. Hopefully, the Supreme Court will soon concur.

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