# Petition for Writ of Certiorari — Kokesh v. Sec. & Exch. Comm'n, 137 S. Ct. 1635 (2017) (No. 16-529)

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 2017

## Text

No. __

IN THE

Supreme Court of the Hnited States

CHARLES R. KOKESH,
Petitioner,
Vv.

SECURITIES AND EXCHANGE COMMISSION,
Respondent.

On Petition for a Writ of Certiorari
to the United States Court of Appeals
for the Tenth Circuit

PETITION FOR A WRIT OF CERTIORARI

CLINTON W. MARRS ADAM G. UNIKOWSKY
MARRS GRIEBEL LAW, LTD. Counsel of Record
1000 Gold Ave, SW ZACHARY C. SCHAUF
Albuquerque, NM 87102 JENNER & BLOCK LLP
(505) 433-3926 1099 New York Ave., NW,
clinton@marrslegal.com Suite 900
Washington, DC 20001
(202) 639-6000

aunikowsky@jenner.com

1
QUESTION PRESENTED

Under 28 U.S.C. § 2462, any “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.”

The question presented is:

Does the five-year statute of limitations in 28 U.S.C.
§ 2462 apply to claims for “disgorgement”?

i

TABLE OF CONTENTS
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PETITION FOR WRIT OF CERTIORARI ................. 1
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STATUTORY PROVISIONS INVOLVED .................. 1
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A. Petitioner’s Securities-Law
San cisrotnnienesctcinaiaidinabecubiibebininesscnenesss 3

SS ALE 5
C. The Tenth Circuit’s Opinion ..............000-+ 7
REASONS FOR GRANTING THE WRIT................... i)

I. THERE IS AN ACKNOWLEDGED
CIRCUIT SPLIT ON THE QUESTION
a TITITTT US. Dep’t of Justice, Press Release, Siemens AG and Three
Subsidiaries Plead Guilty to Foreign Corrupt Practices Act
Violations and Agree to Pay $450 Million in Combined Criminal
Fines (Dee. 15, 2008), https://www.justice.gov/
archive/opa/pr/2008/December/08-crm-1105.htm}; see Richard L.
Cassin, VimpelCom FCPA disgorgement is third biggest ever,
FCPA Blog (Feb. 23, 2016, 7:28 a.m.),
http://www.fcpablog.com/blog/2016/2/23/vimpelcom-fepa-
disgorgement-is-third-biggest-ever.html.

18

limitations for disgorgement actions, then this
sweeping liability will also be limitless in time.
Statutes of limitations aim to provide “security and
stability to human affairs,” reflecting the settled
wisdom that it would be “utterly repugnant to the
genius of our laws” if actions “could ‘be brought at any
distance of time.” Gabelli, 133 S. Ct. at 1221, 1228
(quoting Adams v. Woods, 6U.S. (2 Cranch) 336, 342
(1805)). But if § 2462 does not apply to claims that the
SEC denominates “disgorgement,” this promise will be
hollow. Every participant in the securities industry
will be eternally at risk of being confronted with “stale
claims” brought by the SEC decades after the alleged
misconduct. /d. at 1221.

Such indefinite liability not only deprives
participants of repose, but also risks inflicting grave
unfairness on individuals whose ability to defend
themselves may deteriorate with each passing year.
Statutes of limitations “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.” Gabelli, 133 S. Ct. at 1221 (quoting #.R.
Telegraphers v. Ry. Express Agency, Inc., 321 U.S. 342,
848-49 (1944)). After a decade or more, the targets of
the SEC’s disgorgement claims may struggle to
develop the evidence necessary to defend against the
sweeping, but stale, liability the SEC seeks to impose.
The potential for unfairness is particularly great given
the SEC’s penchant for condemning, after the fact,
market practices that were widespread and even

19
known to the SEC at the time.®

The SEC’s increasing post-Gabelli reliance on
disgorgement calls out for this Court’s review to
determine whether disgorgement claims are exempt
from the statute of limitations that applied in Gabelli,
as the First, Tenth, and D.C. Circuits have held, or
subject to that same limit, as the Eleventh Circuit has
concluded.

B. This Court Should Resolve the Circuit Split.

This case merits the Court’s review. The question
presented is not just substantively important, but
arises frequently: Since the start of 2015 alone, ten
eases have addressed the question of whether § 2462
applies to disgorgement.?

6 See, e.g., Mary Jo White, Chair, SEC, Speech at Sandler O’Neill
Partners, L.P. Global Exchange and Brokerage Conference:
Enhancing Our Equity Market Structure (June 5, 2014), http://
www.sec.gov/N ews/Speech/ Detail/Speech/13705420043 12
(promising stricter scrutiny of use of technology, high-speed
trading, and alternative trading systems); cf. Upton v. SEC, 75
F.3d 92, 98 (2d Cir. 1996) (vacating censure because SEC knew
about the practice in question before it occurred and did not
condemn it).

7 Pet. App. 16a-17a; Saltsman, 2016 WL 4136829, at *24; Graham,
823 F.3d at 1364; SEC v. Amerindo Inv. Advisors, 639 F. App’x
752, 754 (2d Cir. 2016); SEC v. Batioo, 158 F. Supp. 3d 676, 691
(N.D. Ill. 2016); SEC v. Jones, 155 F. Supp. 3d 1180, 1187 (D. Utah
2015); Collyard, 154 F. Supp. 3d at 791; SEC v. Stoecklien, No.
15CV0532 JAH WVG, 2015 WL 6455602, at *3 (S.D. Cal. Oct. 26,
2015); SEC v. Strebinger, 114 F. Supp. 3d 1321. 1328 n.6 (N.D. Ga.
2015); SEC v. Wealth Strategy Partners, LC, No. 8:14-CV-02427-T,
2015 WL 3603621, at *9 (M.D. Fila. June 5, 2015).

20

Only this Court can resolve the conflict of authority
between the Eleventh Circuit and its sister circuits.
There is no realistic possibility of the Eleventh Circuit
reconsidering Graiam: The unanimous panel decision
in Graham. came after the SEC appealed from a district
court decision that also applied § 2462 to disgorgement,
and after the SEC expressly urged the Eleventh
Circuit to follow the D.C. Circuit’s decision in Riordan.
See Br. of SEC at 36-87, Graham, 2014 WL 6844558
(No. 14-13562-E). The SEC then declined to file a
petition for rehearing en banc or a petition for
certiorari. See generally, Docket, SEC v. Graham, No.
14-13562-E (11th Cir.). Thus, the circuit split will
persist until this Court grants certiorari to resolve it.

There is no need for additional percolation. Four
circuits, as well as numerous district courts, have
considered whether § 2462 applies to claims for
disgorgement, and the arguments on both sides of the
split have been fully aired. Although the majority of
circuits have sided with the government, the Eleventh
Circuit’s opinion rejecting the government’s position is
eareful and correct. Indeed, this case is an even
stronger certiorari candidate than Gabelli itself, in
which only one circuit had adopted the position that
this Court ultimately endorsed, and in an unpublished
decision after the filing of the petition for certiorari.
See Br. for SEC at 23-24, Gabelli, 2012 WL 613633 (No.
11-1274) (citing SEC v. Bartek, No. 11-10594, 2012 WL
3205446, at *3-6 (5th Cir. Aug. 7, 2012)). The Court
routinely grants review in cases presenting 1-1 or 2-1
splits;’ the Court should resolve the 3-1 split presented

8 See, e.g., Ocasio v. United States, 136 S. Ct. 1423 (2016) (1-1 split);

2]
here as well, especially in light of the substantive
importance of the question presented.

Finally, this Court’s review is especially warranted
because the circuit split creates the prospect of venue
manipulation by the government. In securities cases,
the SEC routinely has a choice of venue, which can be
proper anywhere that the defendant resides or
transacts business, or where the act or transaction
constituting the violation occurred, or—in some cases—
where any offer or sale linked to the violation took
place. SEC v. Johnson, 650 F.3d 710, 714 (D.C. Cir.
2011); see, e.g., 15 U.S.C. § 77v(a) (Securities Act); id. §
78aa (Securities Exchange Act); id. § 80b-14(a)
(Investment Adviser Act). So, for example, if an
alleged securities-law violator resides in Georgia, does
business in the District of Columbia, and makes a sale
constituting a violation of the securities laws in Denver,
the SEC can avoid any statute of limitations by
choosing to bring an action that would be governed by
the more pro-government law of the D.C. or Tenth

‘rcuits. The time for bringing a disgorgement claim,
with the vast liability it can entail, should not turn on
different interpretations of federal law in different
jurisdictions. The Court should grant certiorari and
resolve the issue nationwide.

C. This Case Is a Perfect Vehicle.

This case is an ideal vehicle. The Tenth Circuit

Nichols v. United States, 136 S. Ct. 1113 (2016) (1-1 split); Luis v.
United States, 136 8. Ct. 1083 (2016) (1-1 split); Molina-Martinez v.
United States, 136 8. Ct. 1338 (2016) (2-1 split); Taylor v. United
States, 136 S. Ct. 2074 (2016) (2-1 split).

22

expressly considered and rejected the Eleventh
Cireuit’s holding that § 2462 applies to claims for
disgorgement. Pet. App. 18a. And it is undisputed
that, if $2462 applied, the $34.9 million disgorgement
judgment against Petitioner could not stand: In the
SEC’s request for a money penalty concededly
governed by § 2462’s five-year limitations period, the
SEC admitted that at most $5 million reflected
securities-law violations arising “during the limitations
period, i.e., on or after October 27, 2004.” Pet. App.
26a—-27a; Dkt. 181 at 2 (SEC’s concession that the
remaining $29.9 million reflected violations “[blefore
the limitations period”). Thus, the Tenth Circuit’s
holding regarding § 2462 was plainly outcome-
determinative.

Moreover, this case is a strong vehicle because it is
characteristic of the aggressive disgorgement claims
that the SEC regularly pursues. For instance, courts
have held that the SEC is not required to “trace[]”
“specific assets ... back to a violation.” SEC v. Quan,
817 F.3d 583, 594 (8th Cir. 2016); see SEC v. Rosenthal,
426 F. App’x 1, 3 (2d Cir. 2011). That principle applies
in this case: the SEC cannot “trace” these funds to any
funds still in Petitioner’s possession, because those
funds Lave been spent. Pet. App. 12a—13a; Dkt. 180 at
3, ¥ 11. Likewise, courts have held that a defendant
may be liable to disgorge assets he never personally
received. See, e.g., Contorinis, 743 F.3d at 300, 307
(affirming disgorgement of $7.2 million despite
“personal profit” of only $427,875). Again, this case
illustrates that principle: the amount that Petitioner
has been ordered to disgorge far exceeds any amount

23

that Petitioner ever received, and instead reflects
payments to separate corporations, unrelated officers
of those corporations, and even iandlords. Pet. App.
3a-4a, lla—12a, 22a-23a, 42a—483a; Dkt. 180 at 2, 4 7;
Dkt. 181 at 2. The straightforward facts of this case
well illustrate the potency of the disgorgement remedy
and provide a strong vehicle for this Court’s review.

Ill. THE TENTH CIRCUIT’S OPINION IS
WRONG.

The Tenth Circuit erred in holding that § 2462 does
not apply to disgorgement claims.

Disgorgement qualifies as “forfeiture” under § 2462.
As the Eleventh Circuit persuasively explained in
Graham, “forfeiture and disgorgement are effectively
synonyms.” 823 F.3d at 1363. The court pointed out
that “Black’s Law Dictionary defines disgorgement as
{tlhe act of giving up something (such as profits
illegally obtained) on demand or by legal compulsion,”
and provides “a very similar definition for forfeiture,”
which Black’s defines as “t]he loss of a right, privilege,
or property because of a crime, breach of obligation, or
neglect of duty.” Id. (quoting Disgorgement,
Forfeiture, Black’s Law Dictionary (10th ed. 2014)).
And even this Court has equated the two terms: In
United States v. Ursery, 518 U.S. 267 (1996), this Court
explained that forfeitures “are designed primarily to
confiscate property used in violation of the law, and to
require disgorgement of the fruits of illegal conduct.”
Id. at 284.

In rejecting Graham’s reasoning, the Tenth Circuit
concluded that the term “forfeiture” referred only to in

24

rem forfeiture actions, and excluded remedies imposed
as part of in personan: government enforcement
actions. Pet. App. l4a-—l5a. But nothing in the
statutory text supports this artificial narrowing
construction, especially given that the other two
statutory terms in § 2462—‘“fine” and “penalty”—are
remedies that are typically imposed in the context of in
personam government enforcement actions.

Further, as the Tenth Circuit recognized, there are
multiple federal statutes requiring illicit assets to be
turned over to the government—and in those statutes,
the turnover orders are referred to as orders of
“forfeiture.” Pet. App. 15-16a. The Tenth Circuit
held that those statutes were irrelevant because they
were enacted many years after the enactment of § 2462,
Pet. App. 16a, but that reasoning is not persuasive.
Congress referred to the turnover of illicit assets as
“forfeiture” because it recognized that such turnovers
were a species of “forfeiture” under the well-settled
meaning of that term. For the same reason, the
disgorgement order imposed by the District Court falls
comfortably within the statutory definition of
forfeiture.

The Tenth Circuit also held that § 2462 does not
apply to disgorgement because it applies only to
“punitive” remedies. According to the Tenth Circuit,
disgorgement is not a “penalty” under § 2462 because
“penalties” are punitive remedies, whereas
disgorgement is not. Pet. App. 10a-13a. The Tenth
Circuit then inferred that the term “forfeiture,” too,
applies only to punitive remedies, and that “[tlhe
nonpunitive remedy of disgorgement” therefore does

25
not qualify as a forfeiture. Pet. App. 14a—l5a.

Even assuming § 2462 applies only to punitive
remedies, disgorgement is a punitive remedy. As such,
it amply qualifies as a “penalty,” as well as a
“forfeiture” even under the Tenth Circuit’s restrictive
definition of that term.

Disgorgement judgments are monetary judgments,
payable to the government, imposed as a result of a
judicial finding of wrongdoing. Disgorgement is not a
compensatory remedy. The SEC is not “required to
make any particular effort to compensate ... victims,”
FTC v. Bronson Partners, LLC, 654 F.3d 359, 373 (2d
Cir. 2011); see Official Comm. of Unsecured Creditors
of WorldCom, Inc. v. SEC, 467 F.3d 73, 81 (2d Cir.
2006) (compensation is at best a “secondary goal”).
Rather, the “primary purpose of disgorgement orders
is to deter violations of the securities laws’”—a classic
characteristic of a punitive remedy. SEC v. Fischbach
Corp., 133 F.3d 170, 175 (2d Cir. 1997).

The Tenth Circuit characterized disgorgement as a
nonpunitive remedy that “leaves the wrongdoer in the
position he would have occupied had there been no
misconduct.” Pet. App. 11a (quotation marks omitted).
But disgorgement is not merely a matter of the
defendant returning a tainted asset that does not
belong to him. As noted above, the SEC can obtain
disgorgement of assets that are not traceable to a
violation. Supra at 15; see Quan, 817 F.3d at 594.
Thus, disgorgement constitutes the punitive
“imposition of personal liability.” Great-W. Life &
Annuity Ins. Co. v. Knudson, 534 U.S. 204, 221 (2002).
It is a money judgment, payable to the government,

26

that is premised on a judicial finding that the law was
violated: a quintessentially punitive remedy.
Moreover, the SEC can obtain disgorgement of assets
that the defendant never personally received. Supra at
15; see Contorinis, 743 F.3d at 300, 307. Thus,
disgorgement may leave a defendant worse off than the
position he would have occupied without any
misconduct—further underscoring that it is a punitive

remedy.

Finally, the government’s position is inconsistent
with the longstanding American legal tradition of
applying statutes of limitations to government
enforcement actions seeking money judgments. In
Gabelli, this Court, quoting Chief Justice Marshall,
observed that it “would be utterly repugnant to the
genius of our laws’ if actions for penalties could ‘be
brought at any distance of time.” 133 S. Ct. at 1223
(quoting Adams, 6 U.S. (2 Cranch) 336, 342 (1805)).
Thus, the Court rejected an interpretation of § 2462
that would leave defendants “exposed to Government
enforcement action” for an indefinite “period into the
future,” and that eliminates the “security and stability
to human affairs” that statutes of limitation aim to
provide. J/d. at 1221, 1223 (internal quotation marks
omitted). Yet, under the government’s interpretation
of § 2462, that is precisely what will occur: enforcement
actions seeking disgorgement may reach back forever.
The Court should not contort the definition of
“forfeiture” to reach this extraordinary outcome.

27
CONCLUSION

The petition for a writ of certiorari should be
granted.

Respectfully submitted,
CLINTON W. MARRS ADAM G. UNIKOWSKY
MARRS GRIEBEL LAW, LTD. Counsel of Record
1000 Gold Ave, SW ZACHARY C. SCHAUF
Albuquerque, NM 87102 JENNER & BLock LLP
(505) 433-3926 1099 New York Ave., NW
clinton@marrslegal.com Suite 900

Washington, DC 20001

(202) 639-6000

aunikowsky@jenner.com

APPENDIX

la

Appendix A

UNITED STATES COURT OF APPEALS
FOR THE TENTH CIRCUIT

SECURITIES AND EXCHANGE
COMMISSION

Plaintiff-Appellee,

v. No. 15-2087

CHARLES R. KOKESH,

Defendant-Appellant.

FILED August 23, 2016
Elisabeth A. Shumaker
Clerk of Court

Appeal from the United States District Court
for the District of New Mexico
(D.C. No. 1:09-CV-01021-SMV-LAM)

Before HARTZ, PHILLIPS, and McHUGH, Circuit
Judges.
The Securities and Exchange Commission (SEC)

brought an enforcement action against Defendant
Charles Kokesh for misappropriating funds from four

Za

SEC-registered business development companies
(BDCs) in violation of federal securities laws. After a
jury returned a verdict in favor of the SEC, the United
States District Court for the District of New Mexico
entered a final judgment permanently enjoining
Defendant from violating certain provisions of federal
securities laws, ordering disgorgement of $34.9 million
plus prejudgment interest of $18.1 million, and
imposing a civil penalty of $2.4 million. Defendant
appeals, asserting that the court’s imposition of the
disgorgement and permanent injunction was barred by
28 U.S.C. § 2462, which sets a five-year limitations
period for suits “for the enforcement of any civil fine,
penalty, or forfeiture.” He also argues that the district
court erred by precluding him from presenting
evidence of attorney and accountant participation to
show his lack of knowledge of the misconduct.
Exercising jurisdiction under 28 U.S.C. § 1291, we
affirm. We hold that both the permanent injunction and
the disgorgement order are remedial and not subject to
§ 2462. And we reject the evidentiary claim.

I, BACKGROUND

The BDCs from which Defendant misappropriated
funds were Technology Funding Medical Partners I,
L.P.; Technology Funding Partners III, L.P.;
Technology Funding Venture Partners IV, An
Aggressive Growth Fund, L.P.; and Technology
Funding Venture Partners V, An Aggressive Growth
Fund, L.P. (collectively, the Funds). The Funds raised
money from investors through public securities
offerings and invested in private start-up companies

3a

that focused on technology, biotechnology, and medica]
diagnostics.

As a limited partnership, each Fund was governed
by a written agreement. Each agreement provided for
the election of three individual general partners and
two managing general partners. The managing general
partners conducted day-to-day operations and made
investment recommendations, subject to supervision by
the governance committee of each Fund, which was
composed of the individual general partners or the
individual general partners and two representatives of
the managing general partners.

Technology Funding Ltd. and Technology Funding,
Ine. (collectively, the Advisers), which were
SEC-registered investment advisers, were the
managing general partners for each Fund. The
Advisers were owned and controlled by Defendant.
They had contracts with the Funds—which were
signed by Defendant—that described how they would
be compensated. The contracts prohibited any
payments to the Advisers that were not expressly

specified.

From 1995 through 2006, Defendant directed the
Advisers’ treasurer to take $23.8 million from the
Funds to pay salaries and bonuses to officers of the
Advisers (which included Defendant himself) and to
take $5 million to cover the Advisers’ office rent. In
2000 he also caused the Advisers to take $6.1 million in
payments described as “tax distributions” in SEC
reports that he signed. Defendant received over 90% of
these “tax distributions,” despite paying only $10,304 in
federal taxes that year.

4a

These paymenis violated the contracts between the
Advisers and the Funds. First, until 2000 the contracts
prohibited payments for salaries of the Advisers’
controlling persons, including Defendant and other
officers. Although the contracts were amended in 2000
to permit reimbursement for controlling-person
salaries, the amendment was based on a misleading
proxy statement (signed by Defendant) which falsely
identified him as the only controlling person and
grossly underreported his annual salary. Second, the
contracts did not provide for bonus payments and
Defendant did not disclose the bonuses to the Funds’
directors or in SEC filings that he signed on the Funds’
behalf. Third, the contracts specifically prohibited rent
reimbursement, yet he failed to disclose the rent
payments to the Funds’ directors. Fourth, although the
contracts allowed for payment of tax obligations if
certain conditions were met, the 2000 payment did not
satisfy these conditions.

Before trial the SEC filed a motion in limine to
preclude Defendant from offering evidence that he
reasonably relied on the advice of his counsel and his
accountants. The district court granted this motion
under Fed. R. Evid. 403, finding that any probative
value of such evidence was outweighed by the danger
of confusing the issues and misleading the jury. The
court acknowledged, however, that such evidence could
be presented if Defendant met the test for an
advice-of-counsel defense under United States v.
Wenger, 427 F.3d 840 (10th Cir. 2005).

The case was tried to a jury, which found (1) that
Defendant knowingly and willfully converted the

5a

Funds’ assets to his own use or to the use of another
and (2) that he knowingly and substantially assisted the
Advisers in defrauding the Funds, in filing false and
misleading reports with the SEC, and in soliciting
proxies using false and misleading proxy statements.
The court found that disgorgement of $34.9 million
“reasonably approximates the ill-gotten gains causally
connected to Defendant’s violations,” Aplt. App., Vol. 2
at 1880 (order granting SEC’s motion for entry of final
judgment), and that an order enjoining him from
violating certain provisions of federal securities laws
was warranted because “there is a reasonable and
substantial likelihood that Defendant will again violate
the securities laws,” id. at 1876.

Il. DISCUSSION

Defendant appeals on two grounds: (1) that the
injunction and disgorgement order, obtained under 15
U.S.C. § 78u(d)(1), (5), must be set aside because the
claims accrued more than five years before the SEC
brought its action and are therefore barred under the
five-year statute of limitations in 28 U.S.C. § 2462 for
government suits seeking penalties or forfeitures; and
(2) that the district court erred in disallowing evidence
of attorney and accountant participation to show his
lack of knowledge of the misconduct. We address each

in turn.
A. Section 2462

Unless another statute specifies otherwise, § 2462
sets a five-year limitations period for claims seeking
certain sanctions. It states:

6a

Except as otherwise provided by Act of
Jongress, 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.

Id. (emphasis added). “The construction and
applicability of a federal statute of limitation is a
question of law we review de novo.” United States v.
Tellumide Co., 146 F.3d 1241, 1244 (10th Cir. 1998).
Statutes of limitation are interpreted narrowly in the
government’s favor “to protect the public from the
negligence of public officers in failing to timely file
claims in favor of the public’s interests.” /d. at 1246 n.7;
see also Guar. Trust Co. of New York v. United States,
304 U.S. 126, 1382-338, 58 S.Ct. 785, 82 L.Ed. 1224 (1938)
(public policy generally supports not imposing laches or
statutes of limitations on the government). And we
have also recognized that equitable claims are usually
not subject to statutes of limitations. See Telluride, 146
F.3d at 1245.

Defendant argues that the injunction (an order to
refrain from future violations of certain provisions of
federal securities laws) is a penalty and _ the
disgorgement order is a penalty or forfeiture within the
meaning of § 2462. We first discuss the injunction.

7a
1. Injunction

The district court’s final judgment ordered “that
Defendant is permanently enjoined from directly or
indirectly violating Section 206(1) and (2) of the
Investment Advisers Act; Section 13(a) of the
Exchange Act and Exchange Act Rules 12b-20, 13a-1,
and 13a-13; Section 14(a) of the Exchange Act and
Exchange Act Rule 14a-9; Section 37 of the Investment
Company Act, and Section 205(a) of the Investment
Advisers Act.” Aplt. App., Vol. 2 at 1883 (final
judgment). We fail to see how an order to obey the law
is a penalty. Its purpose is not to penalize Defendant;
after all, everyone has a duty to obey the law. It is to
protect the public by giving Defendant an added
incentive to conduct himself in accordance with the
securities laws: violating the injunction would subject
him to the court’s contempt power, see 18 U.S.C.
§ 401(8) (authorizing courts to punish disobedience of a
lawful order). It has been recognized for some time that
such an order is “purely remedial and preventative,”
and not a penalty or forfeiture. Drath v. F.T.C., 239
F.2d 452, 454 (D.C. Cir. 1956) (internal quotation marks
omitted); see id. (“One is not prosecuted by being told
to desist from illegal conduct, nor does he thereby
suffer the imposition of a penalty or the forfeiture of
any legally-protected right or property.”); Welch Sci.
Co. v. N.L.R.B., 340 F.2d 199, 202-03 (2d Cir. 1965)
(NLRB’: order that “the company should cease and
desist from interrogating the New York employees
concerning their [union] membership” (a violation of
the National Labor Relations Act) was “purely
remedial”); cf. Hecht Co. v. Bowles, 321 U.S. 321, 329, 64

Sa

S.Ct. 587, 88 L.Ed. 754 (1944) (“The historic injunctive
process was designed to deter, not to punish.”). More
recently, the D.C. Circuit applied that proposition to
hold that § 2462 does not apply to an SEC
cease-and-desist order to refrain from violating
securities laws. See Riordan v. S.E.C., 627 F.3d 1230,
1234-35 (D.C. Cir. 2010); In the Matter of Guy P.
Riordan, Release No. 9085, 2009 WL 4731397 (Dec. 11,
2009) (ordering “that Guy P. Riordan cease and desist
from committing or causing any violations or future
violations of Section 17(a) of the Securities Act of 1933,
Section 10(b) of the Securities Exchange Act of 1934,
and Exchange Act Rule 10b-5”). We fully agree with
the D.C. Circuit.

Defendant relies on another decision by that circuit,
Johnson v. S.E.C., 87 F.3d 484, 491-92 (D.C. Cir. 1996),
holding that the SEC injunction in that case did impose
a penalty. But in Johnson the injunction censured the
violator and imposed a_ six-month disciplinary
suspension “from acting in a supervisory capacity with
any broker or dealer.” /d. at 486. The court held that on
the facts of record “it is evident that the sanctions here
were not based on any ... showing of the risk she posed
to the public, but rather were based on [her] alleged
failure reasonably to supervise [a subordinate].” /d. at
489. The court rejected the SEC’s contention that “the
sanctions were imposed not as punishment for past
dereliction, but primarily because of [her] present
danger to the public.” Jd. at 490. We need not assess
whether we agree with that opinion. We need only
point out that there is a qualitative difference between
a disciplinary suspension and being ordered to comply

Ya

with the law. There is no inconsistency between the
circuit’s decision in Johnson and its later decision in
Riordan holding that § 2462 does not apply to an order
requiring compliance with the securities laws.

Finally, Defendant argues that in light of his age,
insolvency (and meager prospects of recovering from
it), and the passage of time since his unlawful conduct,
he is unlikely to engage in the conduct for which he is
liable here, so the injunction must be intended solely to
punish him. He further argues that the SEC did not
allege any wrongdoing by him after the Funds and the
Advisers were dissolved, so he is being punished for
past conduct, as in Johnson. We are not persuaded. If
Defendant is not going to engage in securities-related
activity, the order does not punish him. And the
absence of SEC allegations of recent misconduct did
not preclude the district court from finding that he still
poses a risk to the public. The court found that
Defendant’s occupation would “present opportunities
for future violations” because of his extensive
experience with owning and controlling
investment-adviser firms and operating investment
companies. Also, noting Defendant’s work history, his
extravagant lifestyle, and his demeanor, the court
expressly rejected his statement that he would not
engage in business activity that could present
opportunities for future securities-laws violations.
These are factual matters and the court did not clearly
err in its findings. See Att’y. Gen. of Oklahoma v. Tyson
Foods, Inc., 565 F.3d 769, 775-76 (10th Cir. 2009)
(factual findings underlying injunction are reviewed for

clear error).

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2. Disgorgement

Disgorgement “consists of factfinding by a district
court to determine the amount of money acquired
through wrongdoing—a process sometimes called
‘accounting’—and an order compelling the wrongdoer
to pay that amount plus interest to the court.” United
States v. Badger, 818 F.3d 568, 566 (10th Cir. 2016)
(internal quotation marks omitted). The amount of the
disgorgement is essentially the same whether the relief
is sought in a private cause of action or, as in this case,
by the government. See 15 U.S.C. § T8u(d)(5)
(authorizing court to grant equitable relief sought by
SEC); F.T.C. v. Bronson Partners, LLC, 654 F.3d 359,
969-70 (2d Cir. 2011) (affirming district court’s award
because it “satisfies the requirements of equitable
disgorgement”’).

Defendant, who owned and controlled the Advisers,
misappropriated $34.9 million from the Funds between
1995 and 2006 to pay salaries and bonuses to officers of
the Advisers (including himself), to pay the Advisers’
office rent, and to pay phony “tax distributions.” The
district court ordered him to disgorge this money that
went to him and his subordinate cohorts, finding that
the sum “reasonably approximates the ill-gotten gains
causally connected to [his] violations.” Aplt. App., Vol.
2 at 1880. Defendant claims that the disgorgement
order is a penalty or forfeiture. We disagree. We first
address the claim that it is a penalty.

We have previously said that disgorgement is not a
penalty under § 2462 because it is remedial. See
Telluride, 146 F.8d at 1247 (“[O]ther equitable
remedies, such as disgorgement, which sanction past

lla

conduct, are remedial [rather than _ punitive].”
(emphasis added)). Other circuits have similarly held
that it is not. See Riordan, 627 F.3d at 1234
(“[D\isgorgement orders are not penalties, at least so
long as the disgorged amount is causally related to the
wrongdoing.”); S.E.C. v. Tambone, 550 F.3d 106, 148
(ist Cir. 2008) (“(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, 450 (1st Cir.
2010).

The reasons for this view are clear. Properly
applied, the disgorgement remedy does not inflict
punishment. “The object of restitution [in the
disgorgement context] ... is to eliminate profit from
wrongdoing while avoiding, so far as possible, the
imposition of a penalty.” Restatement (Third) of
Restitution and Unjust Enrichment § 51(4) (Am. Law
Inst. 2010). Disgorgement just leaves the wrongdoer
“in the position he would have occupied had there been
no misconduct.” Jd. § 51 emt. k; see id. (“Disgorgement
of wrongful gain is not a punitive remedy.”). To be sure,
disgorgement serves a deterrent purpose, but it does so
only by depriving the wrongdoer of the benefits of
wrongdoing. See S.E.C. v. Contorinis, 743 F.3d 296, 301
(2d Cir. 2014) (“(Djisgorgement does not serve a
punitive function.... [Its] underlying purpose is to make
lawbreaking unprofitable for the law-breaker....”);
S.E.C. v. First City Fin. Corp., 890 F.2d 1215, 1231
(D.C. Cir. 1989) (“[D]isgorgement primarily serves to

12a

prevent unjust enrichment....”). Indeed, if punishment
is required, disgorgement can be supplemented with
exemplary damages. See Restatement (Third) § 51
emt. k.

Defendant complains that the disgorgement order is
punitive because he is being required to disgorge more
than he actually gained himself (some of the
misappropriated money went to others). But there is
nothing punitive about requiring a wrongdoer to pay
for all the funds he caused to be improperly diverted to
others as well as to himself. See Contorinis, 743 F.3d at
307 (“{WIhen third parties have benefitted from illegal
activity, it is possible to seek disgorgement from the
violator, even if that violator never controlled the
funds. The Jogic of this ... is that to fail to impose
disgorgement on such violators would allow them to
unjustly enrich their affiliates.”); S.4.C. v. Platforms
Wireless Int’l Corp., 617 F.3d 1072, 1098 (9th Cir. 2010)
(“A person who controls the distribution of illegally
obtained funds is liable for the funds he or she
dissipated as well as the funds he or she retained.”);
S.E.C. v. JT Wallenbrock & Assocs., 440 F.3d 1109,
1114-15 (9th Cir. 2006) (defendant was not entitled to
deduct business and operating expenses from the
amount of his disgorgement because “it would be
unjust to permit the defendants to offset against the
investor dollars they received the expenses of running
the very business they created to defraud those
investors into giving the defendants the money in the
first place”); S.E.C. v. Banner Fund Int'l, 211 F.3d 602,
617 (D.C. Cir. 2000) (“[A]n order to disgorge establishes
a personal liability, which the defendant must satisfy

l3a
regardless whether he retains the selfsame proceeds of
his wrongdoing.”). After all, we do not consider it
punitive to require a personal-injury tortfeasor to pay
for all damages caused by his tort (say, a motor-vehicle
accident) even if he gained nothing thereby.

Defendant also argues that the disgorgement order
is punitive because in light of his age (late sixties) and
insolvency, there is no prospect of his restoring the
gains he received. But the likelihood of the
government’s recovery is irrelevant to determining
whether his disgorgement order is punitive or remedial
because it does not change the nature of the sanction.
The disgorgement order does not require Defendant to
do more than he is capable of.

Defendant next contends that disgorgement is a
“forfeiture.” To be sure, in common English the words
forfeit and disgorge (as well as relinquish) capture
similar concepts; one subject to formal forfeiture could
be said to “disgorge” what is forfeited. The definitions
in the leading legal dictionary, although different, also
have similarities. See Black’s Law Dictionary 568, 765
(10th ed. 2014) (defining disgorgement as “(t]he act of
giving up something (such as profits illegally obtained)
on demand or by legal compulsion,” and forfeiture as
“(t]he loss of a right, privilege, or property because of a
crime, breach of obligation, or neglect of duty”).
Because of these similarities the Eleventh Circuit
recently held that disgorgement is a forfeiture under
§ 2462. See S.E.C. v. Graham, 823 F.3d 1357, 1363-64
(11th Cir. 2016).

Other circuits have a different view. See Riordan,
627 F.3d at 1234; Tambone, 550 F.3d at 148 (§ 2462 does

14a

not apply to disgorgement); see also S.H.C. v.
Saltsman, No. 07-CV-4370 (NGG) (RML), 2016 WL
4136829, at *25-29 (E.D.N.Y. Aug. 2, 2016) (rejecting
Graham and citing three other district courts sharing
that view). Respectfully, we also see things a bit
differently. The word forfeiture in § 2462 must be read
in the context of government causes of action—‘“an
action, suit or proceeding,” 28 U.S.C. § 2462.
Government forfeiture actions date back to the early
days of the Republic, and for most of the time since
then have had a narrow focus. Forfeiture was an in rem
procedure to take “tangible property used in criminal
activity.” United States v. 92 Buena Vista Ave., 507
U.S. 111, 118, 113 S.Ct. 1126, 122 L.Ed.2d 469 (1993).
Indeed, Black’s Law Dictionary defines civil
forfeiture—which, in our view, is the relevant definition
here—as “[ajn in rem proceeding brought by the
government against property that either facilitated a
crime or was acquired as a result of criminal activity.”
As the Supreme Court has summarized: “The First
Congress enacted legislation authorizing the seizure
and forfeiture of ships and cargos involved in customs
offenses. Other statutes authorized the seizure of ships
engaged in piracy.... Later statutes involved the seizure
and forfeiture of distilleries and other property used to
defraud the United States of tax revenues from the sale
of alcoholic beverages.” Jd. at 119-20, 113 S.Ct. 1126.
The owner of the seized property could be completely
innocent of any wrongdoing, and the value of the
property taken have no necessary relation to any loss
to others or gain to the owner. A modern-day example
makes the point. In Calero-Toledo v. Pearson Yacht
Leasing Co., 416 U.S. 668, 94 S.Ct. 2080, 40 L.Ed.2d 452

lda
(1974), the Supreme Court affirmed a forfeiture
proceeding in which a yacht was seized from an
innocent owner after government officers apparently
found only one marijuana cigarette on the yacht while it
was under the control of the lessee, see id. at 693, 94
S.Ct. 2080 (Douglas, J., dissenting).

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 forfeitwre in this historical sense. The
nonpunitive remedy of disgorgement does not fit in
that company. See Antonin Scalia & Bryan A. Garner,
Reading Law: The Interpretation of Legal Texts ch. 31,
195-98 (2012) (“Associated words bear on one another’s
meaning (noscitur a sociis).”). In fact, construing a
predecessor to § 2462, which imposed a five-year
limitations period for a “suit or prosecution for any
penalty or forfeiture,” the Supreme Court said that
“(t]he words ‘penalty or forfeiture’ in this section refer
to something imposed in a punitive way for an
infraction of a public law.” Meeker v. Lehigh Valley
R.R. Co., 236 U.S. 412, 423, 35 S.Ct. 328, 59 L.Ed. 644

(1915).

We recognize that in recent years some federal
forfeiture statutes have been expanded to include
disgorgement-type remedies, see 18 U.S.C. § 1963(a)(3)
(authorizing forfeiture of proceeds from racketeering
activity); 21 U.S.C. § 881(a)(6) (authorizing forfeiture of
the proceeds of illegal drug transactions). But this is a
recent development, occurring decades after § 2462 was
enacted in 1948. The Supreme Court recently discussed
the development in United States v. 92 Buena Vista

l6a

Ave., 507 U.S. 111, 113 S.Ct. 1126, 122 L.Ed.2d 469
(1993) (addressing scope of innocent-owner exception to
federal forfeiture statute). The introduction of
“disgorgement” features in the forfeiture laws began
with the 1978 amendment to the Comprehensive Drug
Abuse Prevention and Control Act of 1970, which
“authorize[d] the seizure and forfeiture of proceeds of
illega] drug transactions” and continued with the 1984
amendment to the Racketeer Influenced and Corrupt
Organizations Act, which likewise authorized
“forfeiture of ‘proceeds’” from racketeering activity. /d.
at 121 & n.16, 113 S.Ct. 1126. These changes in the
forfeiture statutes “marked an important expansion of
governmental power.” /d. at 121, 113 S.Ct. 1126
(emphasis added). But this expansion should not
expand the meaning of the word forfeitwre in § 2462 to
encompass traditional disgorgement remedies outside
those forfeiture statutes. We have said that when
interpreting statutory language, “words will be
interpreted as taking their ordinary, contemporary,
common meaning at the time Congress enacted the
statute.” Hackwell v. United States, 491 F.3d 1229, 1236
(10th Cir. 2007) (internal quotation marks omitted).

Further, we must not forget that we are to construe
§ 2462 in the government’s favor to avoid a limitations
bar. See Telluride, 146 F.3d at 1246 & n.7. We should
not strain to expand the meaning of the statute’s
language to restrict the government. We conclude that
the disgorgement order in this case is not a forfeiture
within the meaning of § 2462.

Because we hold that the disgorgement order and
injunction in this case are neither penalties nor

17a

forfeitures under § 2462, we need not decide whether
(as requested by the government) the statute is
inapplicable to all equitable remedies; nor need we
decide whether disgorgement remedies in forfeiture
statutes come under § 2462. And for the same reason,
we need not address Defendant’s arguments that the
government’s causes of action accrued more than five
years before it filed suit and that the statute is

jurisdictional.

B. Evidence of the Participation of
Lawyers and Accountants

Defendant argues that the district court erred in
disallowing his proffered evidence of attorney and
accountant participation. He asserts that the evidence
was proper to “show[ ] that, because of his dealings
with the Funds’ lawyers and accountants, he had no
contemporaneous awareness that he was ‘part of an
overall activity that was improper’ and did not
knowingly assist primary violation, of which he was
unaware.” Aplt. Br. at 61.

Evidence of reliance on professionals such as
attorneys and accountants is, however, significantly
restricted in this circuit. Under the standard set forth
in Wenger, ordinarily “the defendant must show (1) a
request for advice of [independent] counsel on the
legality of a proposed action, (2) full disclosure of the
relevant facts to counsel, (3) receipt of advice from
counsel that the action to be taken will be legal, and (4)
reliance in good faith on counsel’s advice,” 427 F.3d at
853 (internal quotation marks omitted); see C.K.
Carlson, Inc. v. S.E.C., 859 F.2d 1429, 1436 (10th Cir.
1988). Defendant does not contend that he satisfied the

18a

Wenger requirements in seeking to put on evidence
regarding his attorneys and accountants. Rather, he
argues that Wenger is inapplicable. As we understand
his position, it is that restrictions on evidence of
reliance on professionals concerns only evidence offered
to negate specific intent such as willfulness or intent to
defraud. Here, in contrast, he claims to be offering the
evidence to negate his knowledge of relevant facts.
That may be a valid distinction. If a defendant contends
that a professional adviser failed to convey historical
facts, Wenger may not apply. But if Defendant is
merely saying that a professional adviser failed to
convey the “fact” that a transaction contravened a
contract or a statute (that is, failed to convey
professional advice), Wenger controls. Unfortunately
for Defendant, his briefs on appeal co not preserve the
issue. Although he cites to the record, we decline to
review his challenge to the exclusion of evidence
because his briefs fail to identify specific items of
testimony that would have been offered and to state
why each would have been relevant. See Reinhart v.
Lincoln County, 482 F.3d 1225, 1228 n.1 (10th Cir.
2007) (citation to record did not preserve issue).
Moreover, even if Defendant’s evidence was somewhat
probative, it could be excluded under Fed. R. Evid. 403
if “its probative value is substantially outweighed by a
danger of ... confusing the issues.” And, as Defendant
acknowledges in his opening brief, the district court
relied on that rule to exclude evidence about his
attorneys and accountants. Yet Defendant’s opening
brief never addresses this basis for excluding his
evidence. This failure waives the issue on appeal. See
SCO Grp., Inc. v. Novell, Inc., 578 F.3d 1201, 1226 (10th

19a

Cir. 2009) (issue is waived when appellant fails to
challenge an “alternative, independently sufficient
basis for the district court’s ruling” in its opening brief);
Bronson v. Swensen, 500 F.3d 1099, 1104 (10th Cir.
2007) (“[Wle routinely have declined to consider
arguments that are not raised, or are inadequately
presented, in an appellant’s opening brief.”). We
therefore affirm exclusion of the evidence.

III. CONCLUSION
We AFFIRM the district court’s final judgment.

20a
Appendix B

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW MEXICO

SECURITIES AND EXCHANGE
COMMISSION,

Plaintiff,

V. No. 09-ev-1021
SMV/LAM
CHARLES R. KOKESH,

Defendant.
March 30, 2015

MEMORANDUM OPINION AND ORDER
GRANTING PLAINTIFF’S MOTION FOR
ENTRY OF FINAL JUDGMENT

THIS MATTER is before the Court on Plaintiffs
Motion for Entry of Final Judgment against Defendant
Charles R. Kokesh [Doec. 176] (“Motion”), filed on
December 2, 2014. Defendant filed his Response and
Declaration on January 7, 2015. [Docs. 179, 180).
Plaintiff replied on January 21, 2015. [Doc. 181). The
Court heard oral argument on March 9, 2015. Having
considered the motion, briefing, oral argument, record,
and relevant law and being otherwise fully advised in
the premises, the Court finds that the Motion is
well-taken and will be GRANTED.

Z2la
a BACKGROUND

Defendant owned and controlled two
SEC-registered investment-adviser firms, Technology
Funding Ltd. (“TFL”) and Technology Funding, Inc.
(“TFI”) (collectively, “the Advisers”). TFL and TFI
were contracted to provide investment advice to four
SEC-registered business development companies
(“BDCs” or “Funds”). Plaintiff filed its Complaint [ Doc.
1] on October 27, 2009, alleging that, inter alia, from
1995 through July 2007, Defendant misappropriated
more than $34.9 million from the Funds; caused the
filing of false and misleading SEC reports and proxy
statements to conceal the truth about his
misappropriation scheme; and caused the execution,
renewal, and performance of contracts with illegal
performance-fee provisions. [Doc. 166] at 11-16. The
Court presided over a five-day jury trial that began on
November 38, 2014, [Doc. 168], and concluded with a
jury verdict against Defendant on all claims, [Doc. 174].

A. Direct Violations

The jury rendered a verdict against Defendant,
finding that he “knowingly and willfully” converted
investment-company assets to his own use or to the use
of another, in direct violation of § 37 of the Investment
Company Act of 1940 (“Investment Company Act”), 15
U.S.C. § 80a-86. [Doc. 174] at 2; [Doc. 166] at 30.
Specifically, the evidence established that, through two
investment advisers he owned and controlled, TFL and
TFI, Defendant converted $34,927,329 from the Funds
as follows:

22a

First, from 1995 through 2006, Defendant directed
the Advisers’ treasurer, Charlie Freeman, to take
$23,807,091 from the Funds to pay salaries and bonuses
to Defendant and other officers of the Advisers. The
contracts between the Advisers and the Funds
contained no bonus provision and prohibited payments
to the Advisers that were not expressly specified in the
contracts. Defendant signed the contracts. Defendant
did not disclose the bonus payments to the Funds’
directors or in SEC filings he signed on the Funds’
behalf.

Moreover, until a 2000 amendment, the contracts
specifically prohibited reimbursements to cover
salaries of the Advisers’ “controlling persons,”
including Defendant and the other officers. The 2000
amendment permitted reimbursement for
controlling-person salaries. But it was based on
misleading proxy statements signed by Defendant that
falsely identified him as the only controlling person.
The proxy statements also falsely stated that
Defendant’s average annual salary from 1998 through
2000 was $221,000 when, in fact, it was $771,000.
Following the amendment, Defendant caused TFL and
TFI to take average annual payments more than 15
times greater than the anticipated average annual
payments disclosed in the proxy statements.

Second, from 1995 through 2006, Defendant directed
Freeman to take $5,007,441 from the Funds to cover
the Advisers’ office rent. Defendant knew the contracts
specifically prohibited such rent reimbursement.
Defendant did not disclose the rent payments to the
Funds’ directors.

23a

Third, in 2000, Defendant caused the Advisers to
take $6,112,797 in payments falsely described in SEC
reports he signed as “tax distributions.” The contracts
required several conditions to be met before the
Advisers could be paid a distribution to cover their tax
obligations. But the payments in 2000 did not satisfy
the contracts’ stated conditions for tax distributions
and had nothing to do with any tax obligation.
Defendant personally received more than 90% of the
money. Defendant knew the money he received was not
related to a tax liability, but he did not return the
money to the Funds. Defendant paid only $10,304 in
federal taxes in 2000.

B. Aiding-and-Abetting Violations

From the same misconduct described above, the
jury found that Defendant “knowingly and
substantially assisted” the Advisers to employ a device,
scheme, or artifice to defraud a client and to engage in a
transaction, practice, or course of business that
operated or would operate as a fraud or deceit upon a
client and that, in so doing, Defendant aided and
abetted violations of Sections 206(1) and 206(2) of the
Advisers Act, 15 U.S.C. §§ 80b-6(1) and (2). [Doc. 174]
at 1; [Doc. 166] at 18, 21. The jury further found that he
aided and abetted violations of § 205 of the Advisers
Act, 15 U.S.C. § 80b-5, by knowingly assisting an
investment adviser to perform on a contract that
provided for illegal profit sharing in an investment
company.

The jury also found that Defendant knowingly and
substantially assisted the Funds in filing false and
misleading quarterly and annual reports with the SEC

24a

and in soliciting proxies using false and misleading
proxy statements, thereby aiding and abetting
violations of § 13(a) and 14(a) of the Exchange Act, 15
U.S.C. §§ 78m and 78n, and Exchange Act Rules
12b-20, 13a-1, 13a-13, and 14a-9, 17 C.F.R.
§§ 240.12b-20, 13a-1, 13a-13, and 14a-9.

Under § 209(f) of the Investment Advisers Act of
1940 (“Advisers Act”) and § 20(e) of the Securities
Exchange Act of 1934 (“Exchange Act”), any person
who aids and abets another person’s violation shall be
deemed to be in violation to the same extent as the
person who committed the violation. 15 U.S.C.
$§ 80b-9(f) and 78t(e). Accordingly, having been found
liable of aiding and abetting certain violations of the
securities laws, Defendant is deemed to be in violation
to same extent as the primary violators.

C. Plaintiff's Motion for Entry of
Judgment

Based on the jury’s verdict, Plaintiff filed the
instant Motion seeking entry of final judgment ordering
Defendant: (1) to pay a civil money penalty, (2) to be
permanently enjoined from violating specified
provisions of federal securities laws, and (3) to disgorge
the amounts that Defendant misappropriated — in
violation of securities laws. [Doc. 176] at 1. Defendant
urges the Court to deny all of the requested relief.

Il. ANALYSIS

The statute of limitations at 15 U.S.C. § 2462 applies
to the civil money penalty and, thus, limits the total
amount of penalty that the Court may impose.
However, because some of the claims first accrued

25a

within the limitations period, § 2462 does not bar a civil
money penalty in its entirety. In light of the facts and
circumstances, the Court finds that a third-tier, civil
money penalty should be imposed against Defendant in
the amount of $2,354,593.

The Court further finds that neither injunction nor
disgorgement constitutes a “penalty” in this case
because neither is unrelated to, or in excess of, the
damages caused by Defendant. In fact, they are
tailored to the injury caused by Defendant. Therefore,
neither injunction nor disgorgement is subject to the
statute of limitations at § 2462.

The Court further finds that there is a reasonable
and substantial likelihood that Defendant, if not
enjoined, will violate securities laws in the future.
Accordingly, he will be permanently enjoined from
violating the securities laws.

Finally, the Court determines that $34,927,329
reasonably approximates the ill-gotten gains causally
connected to Defendant’s violations and will order him
to disgorge that amount, plus prejudgment interest of
$18,077,103.37.

A. The Court will impose a civil penalty
against Defendant in the amount of
$2,354,593.

There is no dispute that a civil money penalty
generally would be available for the violations at issue
in this case. [Doc. 176] at 9 (citing 78u(d); 80b-9(e); and
80a-41(e)); [Doc. 179] at 5. Similarly, there is no dispute
that § 2462 applies to such a penalty and, thus, limits

26a

the time period during which Plaintiff may seek to
enforce it. The statute reads:

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.

§ 2462. The parties further agree that because Plaintiff
filed its Complaint on October 27, 2009, the relevant
limitations period begins on October 27, 2004.
Accordingly, there is no dispute that the claim for a
civil money penalty must have “first accrued” on or
later than October 27, 2004. If it “first accrued” on or
prior to October 26, 2004, it would be barred.’

The parties dispute when the claim for the civil
money penalty “first accrued.” Plaintiff maintains that
the claim accrued for purposes of § 2462 when the
monies at issue were taken by Defendant. [Doc. 181] at
1-3. Plaintiff concedes that monies taken by Defendant
on or before October 26, 2004, are barred by § 2462. /d.
However, according to Plaintiff, Defendant took
$5,004,773 and also signed and filed misleading reports
with Plaintiff during the limitations period, i.e., on or

' The five-year limitations period may be subject to tolling under
certain circumstances. SEC v. Jones, 476 F. Supp. 2d 374, 381
(S.D.N.Y. 2007). However, here, Plaintiff does not argue that it is
entitled to tolling. See [Doc. 181].

27a

after October 27, 2004.° Jd. Therefore, Plaintiff urges
the Court to impose a civil monetary penalty against
him for $5,004,773. Id.

Defendant argues that no monetary penalty should
be imposed because the claim first accrued prior to the
limitations period. Defendant’s position is that accrual
occurred, not when he took funds, but rather when he
submitted the first of certain filings with Plaintiff.
Specifically, he argues that the claim related to his
improper receipt of incentive payments accrued when
“the registration statements originally containing the
unauthorized incentive compensation plans were filed
with the SEC.” [Doc. 179] at 3 (citing Exs. 2, 54, 165,
274), at 7 (such statements were filed between 1986 and
1992). He argues further that the claim related to the
wrongful tax distributions accrued when the quarterly
10Qs and annual 10Ks were filed with SEC in May of
2000. [Doc. 179] at 7; at 4 (citing Exs. 83, 195, 295,
(10Qs) 91, 203, 299 (10Ks)). Finally, the claim related to
the improper payments to “controlling persons”
accrued when the related definitive proxy solicitations
were filed with Plaintiff on Nov. 8, 2000. [Doc. 179] at 3
(citing Exs. 29, 90, 202, 298), at 7. Defendant makes no
argument regarding the accrual of the claim related to
the improper rent payments. See [Doc. 179].

* The monies included improper payments to “controlling

persons,” office-rent payments, and bonuses. [Doe. 181] at 1-3. The
misleading reports are contained in Exhibits 117, 119, 122, 127,
131, 144, 139, 156, 232, 233, 289, 243, 245, 247, 252, 268, 323. 325,
330, 334, 338, 340, and 346. [Doc. 181] at 3, n.4.

28a

A claim “accrues” under § 2462 when the fraud
occurs (as opposed to when it is discovered). Gabelli v.
SEC, 133 S. Ct. 1216, 1220 (2013). In this case,
Defendant’s fraud spanned 12 years and continued into
the limitations period. Therefore, his fraud accrued
both before and after October 27, 2004, the limitations
cut-off for the purposes of § 2462. Under Gabelli, the
fraud that accrued before the cut-off would be barred
by § 2462, while the fraud accruing after would not.
Accordingly, some of the _ illegally obtained
funds—those distributed after on or after October 27,
2004—are not barred hy the statute of limitations.

Having found that some of the illegally obtained
funds would not be barred by § 2462, the Court must
still evaluate whether to impose a civil money penalty,
and if so, how much. The relevant statutes set forth a
three-tier penalty structure in which each tier provides
for a penalty that shall not exceed the greater of either
a specific enumerated statutory amount or “the gross
amount of pecuniary gain to such defendant as a result
of the violation.” 15 U.S.C. §§ 78u(d)\(3)(B), 80b-9(e)(2),
80a-41(e)(2). A first-tier penalty cannot exceed the
greater of $5,000 or the gross amount of pecuniary gain;
a second-tier penalty cannot exceed the greater of
$50,000 or the gross amount of pecuniary gain; and a
third-tier penalty cannot exceed the greater of $100,000
or the gross amount of pecuniary gain. Jd.’ The

; Although the statute itself provides for enumerated penalties
not to exceed $5,000, $50,000, and $100,000, respectively, this
statutory amount has been adjusted for inflation pursuant to the
Debt Collections Improvement Act of 1996, Pub. L. No. 104-134,
§ 31001 (April 26, 1996). See 17 C.F.R. § 201.1003. Accordingly, the

29a

first-tier penalty appears to be the default penalty
amount. A second-tier penalty is appropriate if the
violation “involved fraud, deceit, manipulation, or
deliberate or reckless disregard for a regulatory
requirement.” §§ 78u(d)(8)(B)ii), 80b-9(e)(2)(B),
80a-41(e)(2)(B). A third-tier penalty is appropriate if
the requirements for a second-tier penalty are met and
the violation “directly or indirectly resulted in
substantial losses or created a significant risk of
substantial losses to other persons.” §§ 78u(d)(3)(B (iii),
80b-9(e)(2)(C), 80a-41(e)(2)(C).

Courts determine the amount of the civil penalty, if
any, “in light of the facts and circumstances” of the
particular case. §§ 78u(d)(3)(B), 80b-9(e)(2),
80a-41(e)(2). In determining the amount of a civil
penalty, courts have looked to various factors,
including: (1) the egregiousness of the violations at
issue; (2) the degree of the defendant’s scienter; (3)
whether the violations were isolated or recurrent; (4) a
defendant’s failure to admit wrongdoing; (5) whether
the defendant’s conduct created substantial losses or
the risk of substantial losses to investors; (6)
defendant’s lack of cooperation and honesty with
authorities; and (7) whether an otherwise appropriate
penalty should be reduced due to the defendant’s
demonstrated current and f ture financial condition.
SEC v. United Amer. Ventures, LLC, 2012 U.S. Dist.
LEXIS 51978, *24 (D.N.M. Mar. 2, 2012) (citing S.E.C.

actual statutory amounts have incicased. However, the specific
amounts are not ultimately consequential here because the Court
does not rely on them in awarding the civil money penalty. See

infra.

30a
v. Universal Express, Inc., 646 F. Supp. 2d 552, 568
(S.D.N.Y. 2009) (listing factors)). The purpose of a civil
penalty is to punish the wrongdoer and discourage
future violations of the securities laws. See, e.g., id. at
*27 (considering punishment and deterrence in
imposing civil money penalties).

In this case, Defendant was found liable for
numerous “knowing” violations of securities laws, and
the circumstances were egregious. He misappropriated
nearly $35 million over an ll-year period, abusing his
roles in several adviser and investment firms for his
own personal benefit and to the detriment of investors.
He specifically targeted smaller investors (those
investing $5,000 or less) because they would be less
likely to sue if they discovered his schemes. See Trial
Transcript dated Nov. 4, 2014 [Doc. 163] at 43-44.
Based on these circumstances, the Court finds that
Defendant’s violations were egregious.

Defendant was aware of his wrongdoing, which
supports a higher civil penalty. Scienter, according to
the Supreme Court, is knowing or intentional
misconduct designed to deceive or defraud investors.
Rolf v. Blyth, Eastman Dillon & Co., Inc., 570 F.2d 38,
45 (2nd Cir. 1978) (citing Ernst & Ernst v. Hochfelder,
425 U.S. 185, 199 (1976)); see also SEC v. Wall Street
Pub. Institute, Inc., 591 F. Supp. 1070, 1084 (D.D.C.
1984) (scienter established by showing intentional,
knowing, or reckless conduct resulting in the alleged
fraud or deceit). Tenth Circuit authority has reasoned
that illegal conduct that is knowing and willful satisfies
the scienter requirement. Hdward J. Mawod & Co. v.
SEC, 591 F.2d 588 (10th Cir. 1979). Defendant is highly

Sla

educated and by all accounts highly intelligent and
knowledgeable about advising and investing. These
circumstances, coupled with the vast extent of the
fraud, tend to show that Defendant acted with a high

degree of scienter.

The fourth and fifth factors support a higher civil
penalty, but the sixth and seventh do not. Defendant
has never admitted any wrongdoing. Even in the face
of a unanimous jury verdict, Defendant has not
recognized his wrongful conduct. In his Declaration,
[Doe. 180], filed concurrently with the Response, [ Doc.
179], Defendant blames the dissolution of the Funds on
market conditions and certain market collapses. /d.
Defendant also blames the “profound changes in the
capital markets” since 2000 rather than take any
responsibility for his own conduct. [Doc. 179] at 9. He
even blames those in control of the very funds he
pilfered. See Final Jury Instructions [Doc. 166] at
15-17. His conduct created substantial losses to
investors. However, Defendant has cooperated with
Plaintiffs investigations. Defendant strenuously
emphasizes the seventh factor. He insists that he is
insolvent and has no prospect of recovering from
insolvency, which if true, may support a lower civil
penalty.

Balancing these factors, and pursuant to
78u(d)(3)(B)(iii), 80b-9(e)(2)(C), and 80a-41(e)(2)(C), the
Court finds that Defendant meets the statutory
requirements for third-tier penalties. In furtherance of
the dual purposes of punishment and deterrence, and
on careful consideration of all the circumstances, the
Court finds that a civil money penalty equal to the

32a
amount of funds that Defendant himself received
during the limitations period, or $2,354,593, is
warranted.’ See [Doc. 179] at 4 (Defendant’s calculated
total).

B. The Court will permanently enjoin
Defendant from violating the securities
laws and order him to disgorge
$34,927,329 plus prejudgment interest
of $18,077,103.37.

The parties agree that the violations at issue in this
case could result in an injunction barring further
violations, as well as a disgorgement order. [Doc. 176]
at 4-5 (citing 15 U.S.C. §§ 78u(d), 80b-9(d), 80a-41(d));
see [Doc. 179] at 8-11. Additionally, the parties agree
that an injunction or disgorgement order, being an
equitable remedy, would not be subject to the five-year
statute-of-limitations found in § 2462. [Doc. 179] at
8-11; [Doc. 181] at 3-7. They also agree that if an
injunction or disgorgement order did amount to a
“penalty,” those remedies would then become subject
to the § 2462 limitations period. [Doc. 179] at 8-11;
| Doce. 181] at 3-7.

The dispute here is whether the injunction or
disgorgement order requested by Plaintiff constitutes a
“penalty” such that § 2462 would apply. Plaintiff argues

* This finding should not be interpreted as a legal determination
on whether civil money penalties may be imposed for monies paid
to third-parties. Although Defendant has raised such argument,
| Doe. 179] at 4-6, the Court need not reach the issue because, here,
a penalty exceeding the amount that Defendant himself received is
not warranted anyway.

33a
that neither remedy amounts to a “penalty,” and
therefore, § 2462 does not apply. Plaintiff urges the
Court to permanently enjoin Defendant from violating
the securities law and to order him to disgorge all of his
ill-gotten gains, in the amount of $34,927,329. [Docs.
176, 181).

Defendant argues that neither an injunction nor a
disgorgement order—apparently in any amount—is
permissible. He makes the same § 2462
statute-of-limitations argument here that he makes
against a civil penalty. See n.4, supra. With respect to
these (traditionally) equitable remedies, however, he
makes a necessary additional argument. He insists that
an injunction or disgorgement order would constitute a
civil penalty under § 2462. If he is correct, and if either
constitutes a civil penalty, then § 2462's
statute-of-limitations period applies. As he did with the
civil-money-penalty argument, Defendant posits that
all of Plaintiff's claims “first accrued” prior to October
27, 2004. Therefore, any injunction or disgorgement
order would be barred by § 2462. To support his theory,
he points to SEC v. Graham, 21 F. Supp. 3d 1300 (8.D.
Fla. 2014), and Gabelli, 133 S. Ct. at 1220-21.

In Graham, the Honorable Lawrence King, United
States District Judge for the Southern District of
Florida, held that an injunction barring future
violations of securities laws and a disgorgement order
would be “penalties” subject to § 2462’s statute of
limitations. 21 F. Supp 3d at 1810-11. In Graham, all of
the alleged wrongdoings had occurred outside of
§ 2462’s five-year limitations period, which was the
heart of Judge King’s ruling. /d. at 1305. Relying

34a

heavily on the Supreme Court’s decision in Gabelli,
which reaffirmed the fundamental importance and
necessity of statutes of limitations, Judge King rejected
the notion that equitable remedies for violations of
securities laws might not be subject to § 2462 and thus
might have no statute of limitations. Jd. at 1310-11. He
reasoned that under Gabelli, there simply must be
some method of repose. After all, finding that § 2462
did not apply to equitable remedies “would make the
Government’s reach to enforce such claims akin to its
unlimited ability to prosecute murderers and rapists.”
Id. at 1310. Accordingly, he found that enjoining the
defendants from any future violations of securities laws
“can be regarded as nothing short of a_ penalty
‘intended to punish,’ especially where [there was] no
evidence (or allegations) of any continuing harm or
wrongdoing [within the limitations period].” Jd. at 1310.
With respect to the proposed disgorgement order,
Judge King found that it would be essentially the same
as a civil penalty (which is clearly subject to § 2462)
because ordering the disgorgement of al] ill-gotten
gains would be tantamount to a forfeiture. /d. at
1310-11.

Although the Graham opinion does not expressly
mention the term, Judge King’s reasoning is referred to
as the concurrent remedy rule. “The concurrent
remedy rule provides: when legal and equitable relief
are available concurrently (7.e., when an action at law or
equity could be brought on the same facts), equity will
withhold its relief in such a case where the applicable
statute of limitations would bar the concurrent legal
remedy.” United States v. Telluride Co., 146 F.3d 1241,

35a

1249 n.12 (10th Cir. 1998) (internal quotation marks
omitted) (citing Cope v. Anderson, 331 U.S. 461, 464
(1947)). As Plaintiff points out, the Tenth Circuit has
spoken on this issue and has reached a different result
than Graham. Id.

In Telluride, the Tenth Circuit held that equitable
remedies are available to the government even where
legal relief on the same facts is barred by the statute of
limitations. /d. at 1248-49. The court explained that “a
suit by the United States in its governmental capacity
is not subject to a time limitation unless Congress
explicitly imposes one and any statute of limitations
sought to be applied against the United States must
receive a_ strict construction in favor of the
Government.” /d.

In addition to rejecting the concurrent remedy rule,
the court also determined whether the equitable relief
sought—enjoining the defendant from continuing to
illegally fill wetlands and requiring the defendant to
restore damaged wetlands or create new wetlands to
replace those that could not be restored—amounted to
a penalty and, thus, whether § 2462 applied. /d. at 1243,
1245-46. The court held that the injunction did not
constitute a penalty under § 2462 because it sought only
to restore the damaged wetlands. Jd. at 1246. It “did
not seek compensation unrelated to or in excess of the
damage caused by the defendant’s acts.” Id.

On careful analysis of the case law, this Court is not
persuaded that the reasoning in Graham should apply
here. First, Graham is factually distinct. In Graham,
none of the alleged wrongdoing had occurred within the
limitations period. Here, however, the Court has found

36a

that some of Defendant’s wrongs did occur within the
limitations period. Therefore, even if the concurrent
remedy rule were to apply in this case, it would not
preclude all equitable relief. Second, the Court finds
Graham to be an outlier. Plaintiff cites numerous cases
in which other courts have addressed, and rejected,
Graham’s reasoning. See [Doc. 181] at 10 (collecting
cases). Finally, and most importantly, this Court is
bound by Telluride and, accordingly, shall not apply the
concurrent remedy rule.

Graham and the concurrent remedy rule
notwithstanding, Defendant still argues that the
injunction and disgorgement sought in this case are
actually “penalties” subject to § 2462. A permanent
injunction or a disgorgement order would be a punitive
measure, and thus subject to § 2462, if it is imposed as
“a form of punishment” that “goes beyond remedying”
the damage allegedly caused by the defendant. Johnson
v. SEC, 87 F.3d 484, 488 (D.C. Cir. 1996). A § 2462
penalty is a “sanction or punishment imposed for
violating a public law which goes beyond compensation
for the injury caused by the defendant.” Telluride, 146
F.3d at 1246. In other words, there may be a penalty
where the “sanction seeks compensation unrelated to,
or in excess, of the damages caused by the defendant.”
Id.

i. Injunction

Defendant urges the Court to ignore Telluride in
determining whether the proposed injunction would
amount to a penalty. Defendant argues that the

injunction would constitute a penalty because there is
minimal] likelihood that the injunction would restore the

37a

status quo ante Defendant’s wrongs, and because there
is “no reasonable prospect of future harm.” [Doc. 179]
at 9-10; see SEC v. Jones, 476 F. Supp. 2d 374, 384
(S.D.N.Y. 2007) (holding that where the SEC adduced
no positive proof, aside from the defendants’ past
wrongdoing, to suggest some cognizable danger of
recurrent violation, an injunction barring future
violations of securities laws would constitute a
“penalty” under § 2462).

The Court is not persuaded. The Court finds that
the requested injunction—barring Defendant from any
future violations of the securities laws—is not a penalty
under § 2462 because it does not seek compensation
unrelated to or in excess of the damage caused by
Defendant. See Telluride, 146 F.3d at 1246. In fact,
enjoining Defendant from future _ securities-laws
violations is precisely tailored to Defendant’s wrongs.

Additionally, even assuming arguendo that the
injunction were a penalty, § 2462 would not bar it.
Because the Court finds that some of Defendant’s
violations occurred within the five-year window,
injunctive relief—even if tantamount to a
“penalty”—would not be barred by the statute of
limitations.

Even though the Court has found that the
injunction requested in this case is not a penalty and is
not barred by the statute of limitations, those findings
do not mean, ipso facto, that an injunction is warranted.
“An injunction based on the violation of securities laws
is appropriate if the SEC demonstrates a reasonable
and substantial likelihood that the defendant, if not
enjoined, will violate securities laws in the future.”

38a

SEC v. Pros Int’l, Inc., 994 F.2d 767, 769 (10th Cir.
1993). The relevant factors for determining the
likelihood of future violations are the seriousness of the
violation, the degree of scienter, whether the
defendant’s occupation will present opportunities for
future violations, and whether the defendant has
recognized his wrongful conduct and gives sincere
assurances against future violations. Jd. While no single
factor is determinative, “the degree of scienter bears
heavily on the decision.” /d.

The first factor, the seriousness of Defendant’s
violations, was established at trial. Defendant was
found liable for numerous “knowing” violations of
securities laws, and the circumstances were egregious.
He misappropriated nearly $35 million over an 11-year
period, abusing his roles in several adviser and
investment firms for his own personal benefit and to
the detriment of investors. He specifically targeted
smaller investors (those investing $5,000 or less)
because they would be less likely to sue if they
discovered his schemes. See Trial Transcript dated
Nov. 4, 2014 [Doc. 163) at 48-44. Based on these
circumstances, the Court finds that Defendant’s
violations were quite serious. Consequently, this factor
weighs in favor of an injunction.

The second factor, Defendant’s degree of scienter,
also weighs in favor of an injunction. Scienter,
according to the Supreme Court, is knowing or
intentional misconduct designed to deceive or defraud
investors. Rolf, 570 F.2d at 45 (citing Ernst & Ernst,
425 U.S. at 199); see also Wall Street Pub., 591 F. Supp.
at 1084 (scienter established by showing intentional,

39a

knowing, or reckless conduct resulting in the alleged
fraud or deceit). Tenth Circuit authority has reasoned
that illegal conduct that is knowing and willful satisfies
the scienter requirement. Edward J. Mawod & Co., 591
F.2d 588.

Defendant is highly educated and by all accounts
highly intelligent and knowledgeable about advising
and investing. The jury found that his violations were
committed “knowingly.” [Doc. 174). These
circumstances, coupled with the vast extent of the
fraud, tend to show that Defendant acted with a high
degree of scienter.

The third factor is whether Defendant’s occupation
will present opportunities for future violations.
Defendant testified at trial that he owned and
controlled investment-adviser firms and operated
investment companies for decades. [Doc. 165] at 48-58;
[Doec. 166] at 38-69. He holds a law degree and a
master’s degree in business administration. At trial, he
expounded on his vast business experience, knowledge,
and training in business formation and securities
markets. /d. Defendant attests that he does not intend
to engage in business activity that would present
opportunities for future violations, citing his age (67
years old), his alleged insolvency, loss of his residence
in foreclosure proceedings, and “fundamental market
changes” precluding investment opportunities in high
tech initial public offerings. [Doc. 180]. Howevei, his
occupation has historically been in business formation
and securities markets. /d. Moreover, the evidence at
trial establishes that Defendant has been accustomed to
an extravagant lifestyle, and in light of his demeanor,

40a

the Court is not persuaded that Defendant would
refrain from pursuing a business opportunity that could
lead to violating the securities laws. Although
Defendant attests that he is not currently employed,
{[Doc. 180] at 3, the Court finds this third factor favors
issuance of an injunction.

The final factor the Court considers is whether
Defendant has recognized his wrongful conduct or
given assurances against future violations. Even in the
face of a unanimous jury verdict, Defendant has not
recognized his wrongful conduct. Defendant’s
Declaration, [Doc. 180], filed concurrently with his
Response, [Doc. 179], blames the dissolution of the
Funds on market conditions and certain market
collapses. Jd. Defendant also blames the “profound
changes in the capital markets” since 2000 for his
financial circumstances rather than take any
responsibility for his own conduct. [Doc. 179] at 9. His
claims that he does not intend to engage in his prior
business activities are self-serving. Defendant has not
recognized his wrongful conduct, nor has he given any
credible assurances against future violations.
Therefore, the final factor also weighs in favor of an
injunction.

All of the factors set forth by the Tenth Circuit
weigh in favor of issuing a permanent injunction.
Therefore, the Court finds that there is a reasonable
and substantial likelihood that Defendant will again
violate the securities laws. Accordingly, an injunction is
warranted and shall issue.

Ala
ii. Disgorgement

The question of disgorgement is slightly different
from the question of an injunction. Although the Court
finds that some of the violations occurred within the
five-year period, not all did. Nevertheless, Plaintiff
requests disgorgement of all funds that were
misappropriated, even those outside the five-year
window. Therefore, the Court first analyzes whether
disgorgement in this case would constitute a penalty
such that § 2462 would apply. Finding that it does not
apply, the Court next evaluates whether and to what
extent disgorgement is warranted.

a. Disgorgement in this case is not
a penalty.

In Telluride, the Tenth Circuit explained that an
equitable remedy, like disgorgement, would not amount
to a “penalty” under § 2462 where it “did not seek
compensation unrelated to or in excess of the damage
caused by the defendant’s acts.” 146 F.3d at 1246. The
court specifically described disgorgement as “remedial”
even though it “sanction{s] past conduct. Jd. at 1247.
Under Telluride, equitable disgorgement should apply
to “ill-gotten gains earned by the defendant while in
violation of securities laws.” /d. (internal quotation
marks omitted).

Nevertheless, relying upon other, out-of-circuit
cases, namely Johnson, Bartek, and Commonwealth
Chemical, Defendant urges the Court to find that
disgorgement would constitute a penalty because of the
“crushing financial consequences” to Defendant, and
because there is no evidence of the likelihood of

42a

recurrence of violations. [Doc. 179] at 10. Therefore,
Defendant argues that no equitable purpose could be
served by ordering disgorgement of all of the
misappropriated funds, including those taken outside
the five-year window. Id.

However, neither Johnson nor Bartek nor
Commonwealth Chemical supports his position.
Disgorgement was not at issue in any of these cases.
See Johnson 87 F.3d at 491; Bartek, 484 F.App’x at
950-57; SEC v. Commonwealth Chem. Sec., Inc., 574
F.2d 90, 95-96, 102 (2d Cir. 1978). In fact, the Johnson
court refers to “disgorgement of ill-gotten gains” to
illustrate a “strictly remedial” measure without respect
for the consequences of disgorgement on the defendant.
Johnson 87 F.3d at 491. Disgorgement is not mentioned
at all in Bartek. And the court in Commonwealth
Chemical seems to suggest that the effect of a
disgorgement order on a defendant is irrelevant to its
equitable nature. 574 F.2d at 96. The authorities cited
by Defendant actually seem consistent with the rule in
Telluride. Applying the Telluride rule, the Court finds
that the disgorgement sought by Plaintiff is remedial,
equitable, and thus, not subject to § 2462.

Defendant makes one final argument as to why
disgorgement amounts to a penalty. He states in his
Response (with no citation to authority) that an order
for disgorgement of funds paid to third parties, instead
of paid directly to Defendant, would constitute a
penalty. [Doc. 179] at 2. The implication is that
Defendant should not be ordered to disgorge funds that
were paid to landlords or other controlling persons to
whom Defendant was not related. See id. Plaintiff

43a

replies that the question is not what amount of illegally
obtained funds was received by Defendant but, rather,
what amount of illegally obtained funds was distributed
under Defendant’s control. [Doc. 181] at 11 (citing
United Amer. Ventures, 2012 U.S. Dist. LEXIS 51978,
at *16).

A “person who controls the distribution of illegally
obtained funds is liable for the funds he or she
dissipated as well as the funds he or she retained.”
United Amer. Ventures, 2012 U.S. Dist. LEXIS 51978,
*16 (quoting S.E.C. v. Platforms Wireless Int'l Corp.,
617 F.3d 1072, 1098 (9th Cir. 2010)). Moreover,
defendants “should not be allowed to deduct referral
fees, payroll, or other expenses from the net proceeds
to reduce their liability for ill-gotten gains, because it
would be ‘unjust to permit the defendants to offset
against investor dollars the expenses of running the
very business created to defraud those investors.” /d.
at *17 (quoting SEC v. JT Wallenbrock & Assocs., 440
F.3d 1109, 1114 (9th Cir. 2006) (ellipsis omitted). These
rules make sense considering that disgorgement is
designed both to prevent the wrongdoer’s unjust
enrichment and to deter others’ violations of the
securities laws, especially in cases of securities fraud.
See United States v. Nacchio, 573 F.3d 1062, 1080 (10th

Cir. 2009).

Defendant’s argument—that any disgorgement of
monies that he distributed to third parties would not be
equitable—holds water only on the most superficial
review. The Court is persuaded that all of the funds
misappropriated by Defendant should be disgorged.
Requiring Defendant to give up his _ ill-gotten

44a

gains—even those he received many years ago and
those he caused to be paid to third parties—is
quintessentially equitable. The requested disgorgement
is for the precise damage caused by Defendant’s acts
and, thus, does not amount to a penalty. Therefore, the
limitations period in § 2462 does not apply to the
request for disgorgement.

b. Disgorgement in the amount of
$34,927,329 is appropriate.

Although disgorgement does not amount to a
penalty in this case and is not barred by the statute of
limitations, the Court must still evaluate whether and
what amount of disgorgement is appropriate. Plaintiff
argues that Defendant should be ordered to disgorge
all of the profits causally connected to his violations.
[Doc. 176] at 8 (citing First Pacific Bancorp, 142 F.3d
at 1192 n.6.). Plaintiff contends that such order would

total $34,927,329. Id.

Disgorgement is “an equitable remedy as to which a
trial court is vested with broad discretionary powers.”
SEC v. Mazxzxon, Inc., 465 F.3d 1174, 1179 (10th Cir.
2006). When the Court is calculating the proper amount
of disgorgement for violation of securities laws, it need
not make “an exact calculation of the defendant’s
profits, but only a reasonable approximation of profits
causally connected to the violation. Because such
calculations are not capable of exactitude, any risk of
uncertainty in calculating disgorgement should fall on
the wrongdoer whose illegal conduct created that
uncertainty.” S.E.C. v. Haligiannis, 470 F. Supp. 2d
373, 384 (S.D.N.Y. 2007) (internal quotations and
modifications omitted); see SEC v. Fisher, 2008 US

45a

Dist. LEXIS 37838, at *25 (N.D. Ill. May 13, 2008)
(unpublished) (holding that disgorgement of all
ill-gotten gains would be available if the SEC “prove[d]
that its disgorgement figure reasonably approximate[d|
the amount of unjust enrichment”)).

In this case, the Court is satisfied that $34,927,329
reasonably approximates the ill-gotten gains causally
connected to Defendant’s violations. Indeed, Defendant
does not argue otherwise. He argues that portions of
the amount should not be ordered disgorged for other
reasons, which have already been addressed above.
However, he does not dispute the calculation. The
Court will order Defendant to disgorge $34,927,329,
plus prejudgment interest of $18,077, 103.37.

III. CONCLUSION

The statute of limitations at 15 U.S.C. § 2462 applies
to the civil money penalty and, thus, limits the total
amount of penalty the Court may impose. However,
because some of the claims first accrued within the
limitations period, § 2462 does not bar a civil money
penalty in its entirety. In light of the facts and
circumstances, the Court finds that a third-tier, civil
money penalty should be imposed against Defendant in
the amount of $2,354,593.

The Court further finds that neither injunction nor
disgorgement, as Plaintiff requests, amounts to a
“penalty” in this case because neither is unrelated to, or
in excess, of the damages caused by Defendant. In fact,
they are tailored to the injury caused by Defendant.
Therefore, neither injunction nor disgorgement is
subject to the statute of limitations at § 2462.

46a

There is a reasonable and substantial likelihood that
Defendant, if not enjoined, will violate securities jaws
in the future. Accordingly, he will be permanently
enjoined from violating the securities laws. Finally, the
Court determines that $34,927,329 reasonably
approximates the ill-gotten gains causally connected to
Defendant's violations and wil] order him to disgorge
that amount plus'- prejudgment interest of
$18,077,103.37.

IT IS THEREFORE ORDERED, ADJUDGED,
AND DECREED that Plaintiff's Motion for Entry of
Final Judgment against Defendant Charles R. Kokesh
(Doc. 176] is GRANTED.

IT IS FURTHER ORDERED that Defendant
shall pay a civil penalty in the amount of $2,354,593
pursuant to Section 21(d) of the Exchange Act, Section
209(e) of the Advisers Act, and Section 42(e) of the
Investment Company Act, 15 US.C. §$§& 7S8u(d);
80b-9(e), and 80a-41(e), within 30 days of entry of this
Order.

IT IS FURTHER ORDERED that a permanent
injunction will issue enjoining Defendant from violating
Section 206(1) and (2) of the Investment Advisers Act;
Section 13(a) of the Exchange Act and Exchange Act
Rules 12b-20, 13a-1, and 13a-13; Section 14(a) of the
Exchange Act and Exchange Act Rule 14a-9; Section 37
of the Investment Company Act, and Section 205(a) of
the Investment Advisers Act, directly or indirectly.

Alva

IT IS FURTHER ORDERED that Defendant
shall disgorge $34,927,329, together with prejudgment
interest thereon in the amount of $18,077,103.37, within
30 days of entry of this Order.

IT IS SO ORDERED.

cm /s/ bad
STEPHAN M. VIDMAR
United States Magistrate Judge
Presiding by Consent

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385016_0720%3A02. Public record. Not legal advice.