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10th Circuit Rules Investment Manager Still Owes $5 Million Penalty

The 10th Circuit Court of Appeals has ruled that while a former investment manager may not need to pay nearly $50 million in fines which the Supreme Court found to be time-barred, he still owes just over $5 million in disgorgement funds.

(CN) - The 10th Circuit Court of Appeals ruled Monday that while a former investment manager may not need to pay nearly $50 million in fines which the Supreme Court found to be time-barred, he still owes just over $5 million in disgorgement funds.

In August 2016, the 10th Circuit upheld a federal judge’s order that Albuquerque-based Charles Kokesh cough up $34.9 million in misappropriated funds, plus $18 million in interest and a $2.4 million civil penalty.

Investment funds run by Kokesh’s firms lost $85 million between 1995 and 2006, in no small part because Kokesh redirected almost $35 million to pay rent for his firm’s offices as well as salaries and bonuses for himself and other executives.

Kokesh had argued the SEC’s case fell outside the federal statute of limitations for enforcement of the fine and forfeiture, and that he was improperly barred from presenting evidence that he didn’t know anything about the misappropriation.

The 10th Circuit found the disgorgement order was remedial and therefore the federal limitations period did not apply. The appeals court also noted that “evidence of reliance on professionals such as attorneys and accountants is significantly restricted in this circuit” and Kokesh failed to point to any specific potential testimony that would have helped him.

The U.S. Supreme Court agreed to take up Kokesh’s case in January 2017, and it heard oral arguments in April of last year.

Arguing for Kokesh, Jenner Block attorney Adam Unikowsky said that disgorgement is clearly meant to discourage people from committing fraud and is therefore a penalty.

In June 2017, the Supreme Court sided with Kokesh and unanimously reversed the 10th Circuit’s ruling.

The justices found that SEC disgorgement is a penalty and therefore any disgorgement claim in an SEC action must be within the five-year statute of limitations.

Writing for the high court, Justice Sonia Sotomayor noted that SEC disgorgement is imposed by courts as a consequence for violating laws and for punitive purposes, and is paid to the court, not directly to victims.

“SEC disgorgement thus 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. The 5-year statute of limitations in [28 U. S. C.] §2462 therefore ap­plies when the SEC seeks disgorgement,” Justice Sonia Sotomayor wrote at the time.

The case before the 10th Circuit had to do with over $5 million in converted funds that the SEC claimed fell within the five-year statute of limitations. Kokesh’s attorneys argued that the misappropriation began more than five years ago and thus were outside the time limit.

At the core of the dispute was whether the conversion could be considered a single, continuing breach of duty or a series of discrete acts. In an opinion penned by Judge Harris Hartz, the three-judge panel consisting of Hartz, Judge Carolyn McHugh, and Judge Gregory Phillips, found that the misappropriation was a series of individual acts.

“[T]he gist of Defendant’s misconduct was taking funds without proper authority, without consent,” the ruling said. "Some misappropriations were contrary to the terms of the contracts between the BDCs and the Advisers. Some were authorized by the 2000 amendment to the contracts, but the amendment was approved by the investors only because they were defrauded by the proxy statements, so there was no valid consent… [T]he misappropriations constituted ‘a series of repeated violations of an identical nature,’… with each unlawful taking being actionable for five years after its occurrence.”

The opinion concluded, “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… Defendant could take $100 a year for five years and then misappropriate tens of thousands without fear of liability. We cannot countenance such a result, nor do we think that a proper interpretation of § 2462 requires us to.”

Accordingly, the case was reversed and remanded with an order for Kokesh to pay the just over $5 million penalty.

Categories / Appeals, Law

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