Battle on Time Limits Vexes Supreme Court

WASHINGTON (CN) – The acting U.S. solicitor general faced an uphill battle while arguing Tuesday at the Supreme Court that there is no time limit to make securities fraudsters disgorge ill-gotten gains.

While forfeiture proceeds usually benefit people who lost their money, the government tends to put disgorgement money into the federal treasury.

Justice Sonia Sotomayor seemed skeptical of the government’s arguments to keep disgorgement from facing the five-year statute of limitations that covers forfeiture.

“If it looks like a forfeiture, then why don’t we treat it like a forfeiture?” she asked.

Tuesday’s oral argument stems from the prosecution of Charles Kokesh after investment funds run by his firms lost $85 million between 1995 to 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.

Though a court ultimately ordered Kokesh to turn over $35 million in disgorgement as well as a $2.5 million penalty, it withdrew the smaller penalty for having exceeded the statute of limitations.

Kokesh argued that the disgorgement should have faced the same fate and appealed to the Supreme Court after the 10th Circuit ruled against him.

Arguing for Kokesh, Jenner Block attorney Adam Unikowsky told the justices to look at how the SEC uses disgorgement to divine the term’s definition.

Whenever a remedy at least in part punishes someone, courts consider that remedy a punishment, even if it has other, remedial purposes as well, Unikowsky argued. As the SEC has used disgorgement for the past several decades, he said that it is clearly meant to discourage people from committing fraud and is therefore a penalty.

“The question is whether it has some penal component,” Unikowsky argued. “I think the answer is yes, because when one defines the purpose of the disgorgement remedy, it’s to ensure that someone doesn’t benefit from wrongdoing. But when you say that, you are talking about wrongdoing; in other words, the purpose of the remedy is to impose unpleasant legal consequences of wrongdoing.”

But Assistant to the Solicitor General Elaine Goldenberg argued that disgorgement merely sets back the clock to a time before the people caught up in a securities fraud scheme lost their money. It is not meant to punish bad behavior, but rather to make it seem like the bad behavior never happened in the first place.

“Disgorgement is not a punishment because it doesn’t take away anything that anyone was rightfully entitled to in the first place,” Goldenberg said. “It just remedies unjust enrichment and it takes the defendant back into the position the defendant would have been in if the defendant hadn’t engaged in a securities law violation in the first instance.”

Unikowsky seemed to strike a chord with his point that oftentimes the money the government gets in disgorgement goes straight into the federal treasury rather than back to the victims, making it appear very much like a penalty rather than like restitution or other recoveries for victims.

Sotomayor also questioned how asking people to turn over a fixed amount of money rather than a physical object like property is not a penalty.

“You are in traditional forfeiture saying, give back that pot,” Sotomayor said. “In this situation we’re not asking for that pot. We don’t care where the money comes from. We’re saying you’re liable for a fixed money judgment that you’re going to give up. So how is that not the same as a penalty?”

Justice Neil Gorsuch pointed out to both Unikowksy and Goldenberg that disgorgement looks very similar to the money that criminals often pay to their victims, and nobody would consider that anything but a penalty.

“Why does the form, whether this is civil versus criminal, make all the difference?” Gorsuch asked. “And how do we ever know? I mean, goodness gracious, the difference between civil and criminal has vexed this court for many years.”

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