Amicus Curiae Brief — Kokesh v. Sec. & Exch. Comm'n, 137 S. Ct. 1635 (2017) (No. 16-529)

MAR ~3 2015

No. 16-529 OFT ICE OF THE CLERK

a ae)

IN THE

Supreme Court of the United States

CHARLES R. KOKESH,

Petitioner,

V.

SECURITIES AND EXCHANGE COMMISSION.

Respondent.

On Writ of Certiorari to

the United States Court of Appeals

for the Tenth Circuit

BRIEF OF DONALD R. MILLER, JR.,

IN HIS CAPACITY AS THE INDEPENDENT

EXECUTOR OF THE WILL AND ESTATE

OF CHARLES J. WYLY, JR., AS AMICUS

CURIAE SUPPORTING PETITIONER

DEREK L. SHAFFER KATHLEEN M. SULLIVAN

QUINN EMANUEL Counsel of Record

URQUHART ELLYDE R. THOMPSON

& SULLIVAN, LLP QUINN EMANUEL URQUHART

777 6th Street NW & SULLIVAN, LLP

11th Floor 51 Madison Avenue

Washington, DC 20001 22nd Floor

(202) 538-8000 New York, NY 10010

(212) 849-7000

kathleensullivan@

quinnemanuel.com

March 3, 2017 Counsel for Amicus Curiae

WILSON-EPES PRINTING CO., INC. — (202) 789-0096 — WASHINGTON, D. C. 20002

Page

INTERESTS OF AMICUS CURIAE ...........0..02.002 0000+ 1

SUMMARY OF ARGUMENT .......................... ianapeleiel 2

EEE HEE Rae OCUEE Sey eee ee ae a eS 5

I. THE SEC’S USE OF DISGORGEMENT

REMEDIES UNLIMITED IN TIME

LEADS TO DRACONIAN AND

INEQUITABLE RESULTS ........................0.... 5

A. The SEC’s Use Of Unlimited

Disgorgement Allowed It To

Obtain A “Staggering” Award

Against The Wylys Reaching

Back Over Two Decades ........................ 5

B. The SEC’s Use Of Unlimited

Disgorgement Undermines The

Purposes Of Statutes Of

I iiini inci senadadedahiebedesendniedsisieatens 8

Il. THE SEC’S BROAD USE OF

TABLE OF CONTENTS

DISGORGEMENT IS UNSUPPORTED

BY THE HISTORY OF CONGRESS'S

LIMITATIONS ON REMEDIES..................... 15

A. At The Time Of Section 2462's

Enactment, “Forfeiture” Was

Understood As Analogous To

TINIE ciccnendsibankesitnensvbacddaneacads 16

u

B. Section 2462 Applies To

Disgorgement Awards That

Amount To A “Penalty” Within

The Meaning Of 28 U.S.C. § 2462....... 21

CFE TA AIRF ON scscecevesenvesssennséudeedssaieteneteassiienanevinne 25

ll

TABLE OF AUTHORITIES

Page

Cases

3M Co. (Minn. Min. & Mfg.) v. Browner,

17 F.3d 1453 (D.C. Cir. 1994) ............cccccccrccrreroees 20

Adams v. Woods,

2 Cranch 336, 2 L.Ed. 297 (1805)............-....cecceeees 8

Diggs v. Wolcott,

PO OD wvcccscccccccccccsscoseseccccvcccvcssesecesesccsee 17

Gabelli v. SEC,

133 S. Ct. 1216 (2013)........ 2, 5, 8, 9, 10, 11, 13, 22

Estate of Goodwyn v. C.I.R., T.C. Memo 1976-238,

BOTS Wi, BESS (1GTE) ......ccccvvcccccerseccrccsssccovveeeseeees 12

Helvering v. Mitchell,

BOB U.S. 391 (19BS) ..........cccecceccrersoccereeerersecccseeeees 17

Horsbure v. Baker,

I, BE CIID coves cocsccccvccescessveccccenccnecesececsssooes 18

McCulloch v. Maryland,

BF UD, BIG CABO) .200..cercescccsescccsccsceccscecscessecees sess 17

Rotella v. Wood,

BPS U.S. GEO (BOOO).........00000.cccceesesecesseeerreseceeseccees 5

SEC v. Cavanagh,

445 F.3d 105 (2d Cir. 2006) ...............ccccecceceeeeeeees 21

SEC v. First City Fin. Corp.,

890 F.2d 1215 (D.C. Cir. 1989) ............ccccceeeeees 23

SEC v. Fischbach em

133 F.3d 170 (2d Cir. 1997) .........:0ccccceeseerereeeeeens 22

lv

SEC v. Graham,

823 F.3d 1357 (11th Cir. 2016)......................2-4. .20

SEC v. Kokesh,

834 F.3d 1158 (10th Cir. 2016)...................... 16, 24

SEC v. Razmilovic,

. 22 Of [. | See 23

es Wyly

F Sup. & 7 § ti | eee 23

SEC v. Wyly,

56 F. SUPP. 3d 394

(S.D.N.Y. 2014) ...... ss sesiniebbeaiinimtihiaadsl 3, 6, 7,10, 12, 22

SEC v. mae

71 F. Supp. 3d 399 (S.D.N.Y. 2014)................000008 7

SEC v. Wyly,

107 F. ‘ie. 3d 260 (S.D.N.Y. 2015)............0.-00000 8

SEC v. Wyly,

860 F. ‘Bese. 2d 275 (S.D.N.Y. 2012)............. 11, 13

SEC v. Wyl ay,

950 F. Supp. 2d 547 (S.D.N.Y. 2013)............. 5, 6, 7

SEC v. Wyl

No. 10 CIV. 5760 (SAS), 2013 WL 2951960

Ok Rg ae) 8 12

The Appollon,

8 A 8 le 17

United States v. 92 Buena Vista Ave.,

8k ig 16

United States v. Bajakajian,

GS UD. SEE CED ceccccrccscccccccscccvcecceseeees 18, 19, 22

United States v. oo

557 F.3d 707 (6th Cir. 2009)................ccceceeeeeeeenes 19

United States v. Casey

444 F.3d 1071 (oth Cir. |. Se 20

United States v. Contorinis,

692 F.3d 136 (2d Cir. 2012) .............ccccceeeeeeeeeeeeees 19

United States v. Hoover-Hankerson,

611 F.3d 164 (D.C. Cir. 3007) ................ccccceseeeeees 20

United States v. More,

bi) DldllCU—>——— 17

United States v. Simms,

a Be GI ccciicccecccecescesvserscesenesinessencevsessstess 17

United States v. Ursery,

518 U.S. 267 (1996).......... set DO ae eae 18, 19

United States v. Venturella,

585 F.3d 1013 (7th Cir. 2009)..............c.00-eeeneeees 19

Wood v. Carpenter,

101 U.S. 135 (1879) CSE RNR NE oe DO A Se 13

Wood v. United States,

Ee) fl ee 17

Statutes

28 U.S.C. § 2468 ..............:. 2, 3, 4, 5, 7, 8, 9, 10, 11, 13

OSS Fe Sener 15, 16, 18, 20, 21, 22, 23, 24

Act of February 28, 1839,

YS 20

Act of July 31, 1789,

c. 5, s 36, a asa reeciniiaepenabateiepeitiiiel 17

vi

EERE ER SES SEN ere ee Ca TEP Re or 1

a a ti a 1

Miscellaneous

Advanced Estate Planning Practice Update —

Summer 2016 Cases, Regulations, and Analyses,

http://files.ali-

cle.org/thumbs/datastorage/skoobesruoc/pdf/TSXB

30_chapter_01_thumb.pdi ........................cccccceees 12

BLACK’S LAW DICTIONARY (9th ed. 2009) .................- 19

Jeremy Bentham, THE RATIONALE OF PUNISHMENT

(Robert Heward ed., 1830).................ccccceeeeeeee eens 16

Russell G. Ryan, The Equity Faade of SEC

Disgorgement, 4 Harv. Bus. L. Rev. Online 10,

Sn cic icennacnnsaunidiisienedaehiiiclindiin deieisactscnen ascnddinimistadands 21

SEC, FY 2017 Congressional Budget Justification,

FY 2017 Annual Performance , and FY 2015

Annual Performance Report (Feb. 9, 2016),

https://www.sec.gov/about/reports/secfy | 7congbud

SII ciichiosisth aiceigtiabtetihabiaiidahibicmepdandaneciiedakotiadan 15

SEC, Year-By- Year Monetary Sanctions in SEC

Enforcement Actions, available at

https:/Avww.sec.gov/news/newsroom/

See 14

SEC, Investor Bulletin: How Harmed Investors May

Recover Money (2014), available at

https://www.sec. gov/oiea/investor-alerts-

bulletins/Ab_recovermoney.html ......................... 22

SEC, Rules of Practice and Rules on Fair Fund and

Disgorge ment Plans (2006), available at

http://www.sec.gov/about/rulesprac2006.pdf ..... 22

BRIEF OF DONALD R. MILLER, JR.,

IN HIS CAPACITY AS THE INDEPENDENT

EXECUTOR OF THE WILL AND ESTATE

OF CHARLES J. WYLY, JR., AS AMICUS

CURIAE SUPPORTING PETITIONER

AND URGING REVERSAL

INTERESTS OF AMICUS CURIAE'!

Amicus curiae the Estate of Charles J. Wyly, Jr.,

along with Charles Wyly’s brother Samuel E. Wyly, are

subject to one of the largest disgorgement awards ever

against individual defendants in an SEC enforcement

action—an award currently on appeal to the U.S. Court

of Appeals for the Second Circuit. Early in their

careers, the brothers founded a software company that

later went public. Over the years, the Wylys acquired

a controlling stake in the craft retailer Michaels Stores,

Inc., took public the reinsurance company Scottish Re,

and served on the boards of directors for numerous

companies. In 1992, the Wylys each created trusts in

the Isle of Man. In 2010, the SEC brought a civil

enforcement action against the Wylys for disclosure

! Pursuant to this Court’s Rule 37.6, amicus curiae

states that no counsel for any party authored this brief

in whole or in part and no entity or person, aside from

amicus curiae and counsel, made any monetary

contribution toward the preparation or submission of

this brief. Pursuant to this Court’s Rule 37.3(a), the

Estate notes that all parties have consented to the

filing of this brief; their consents have been filed with

the Clerk of this Court.

violations dating back to the early 1990s stemming

from the treatment of the stocks and options held by

these trusts. Charles Wyly died in 2011.

In the Wylys’ SEC enforcement action, the district

court held that this Court’s decision in Gabelli v. SEC,

133 S. Ct. 1216, 1220 (2013), barred the SEC from

seeking penalties for conduct outside the five-year

statute of limitations in 28 U.S.C. § 2462. The district

court, however, permitted the SEC to seek

disgorgement for conduct dating back to the early

1990s, deeming Section 2462’s limitations period

inapplicable. Ultimately, the court awarded

approximately $300 million in disgorgement and

prejudgment interest stretching back nearly twenty-

two years. An appeal of the judgment is pending

before the Second Circuit. The Estate therefore has a

strong interest in supporting petitioner’s arguments for

treating the disgorgement sought by the SEC as a

“forfeiture” and/or “penalty” under 28 U.S.C. § 2462

that is therefore limited to conduct within the five

years preceding the SEC’s filing of an action.

SUMMARY OF ARGUMENT

Application of 28 U.S.C. § 2462 to SEC actions for

disgorgement is necessary to prevent the SEC from

undermining the purposes of the statute of limitations

that this Court articulated in Gabelli. The SEC

increasingly has sought larger and larger disgorgement

awards for conduct dating back further and further in

time, including the $300 million judgment against the

Wylys in 2014 for disclosure violations occurring as far

back as the early 1990s. The district court recognized

that the award against the Wylys is “staggering and

among the largest awards ever imposed against

individual defendants,” SEC v. Wyly, 56 F. Supp. 3d

394, 433 (S.D.N.Y. 2014), and “equivalent to

approximately 10% of the total penalties and

disgorgement ordered in SEC enforcement cases

nationwide [in 2013],” id. at 433 n.242. The SEC

should not be able to avoid the force of Congress’s time

limit through the simple expedient of styling the

remedy “disgorgement.” The history of the treatment

of Section 2462 demonstrates that no reason exists to

treat what the SEC terms “disgorgement” any

differently from a forfeiture or penalty.

I. In rejecting a discovery rule for accrual of the

statute of limitations in Section 2462 where the SEC

seeks penalties, this Court noted that the SEC has the

responsibility and tools to investigate violations of

securities laws in order to bring enforcement actions

within a reasonable time period. In the case of the

Wylys, the SEC failed for more than a decade to

request information from the Wylys or to investigate

the relationship between the Wylys and the overseas

trusts that were later at issue in the enforcement

action, despite public information concerning the

Wylys’ interest in the trusts. When the district court

rejected the SEC’s request to toll the statute of

limitations, the SEC sought disgorgement under a

dizzying array of theories. Ultimately, the district

court picked two alternative theories and awarded

hundreds of millions of dollars in disgorgement and

prejudgment interest dating back twenty-two years.

The Wylys’ case demonstrates that the SEC’s use of

disgorgement runs contrary to the purposes underlying

the statute of limitations in Section 2462. The

judgment permits a nearly $300 million recovery for

conduct long-since past under a so-called “tax-

avoidance” theory, which depended upon a novel

interpretation of the tax laws. The SEC should not be

permitted to fail to investigate violations for an

extended period, to re-interpret earlier-existing laws,

and to characterize “ill-gotten gains” so loosely as to

encompass virtually any amount the SEC chooses—all

without any limitation to the Section 2462 time period.

Such draconian and inequitable results not only

reward the SEC for its nonfeasance but leave

individuals exposed to liability for an unlimited period

of time, contrary to the purposes of statutes of

limitations.

II. The history of Section 2462 does not support the

SEC’s avoidance of the statute of limitations through

the framing of the remedy as equitable “disgorgement”

as opposed to a penalty or forfeiture. Forfeiture and

the SEC’s version of “disgorgement” are synonymous.

Even assuming that disgorgement is remedial, Section

2462 does not limit “forfeitures” to punitive rather than

remedial forfeitures, which have antecedents going

back to the early days of the republic. And any

interpretation of Section 2462 as extending only to

actions for “penalties” and punitive forfeitures still

would cover the SEC’s use of disgorgement as a general

matter and particularly based on facts like those in the

Wylys’ case, where the disgorgement lacks any close

causal nexus to the violations.

ul

ARGUMENT

I. THE SEC’S USE OF DISGORGEMENT

REMEDIES UNLIMITED IN TIME LEADS TO

DRACONIAN AND INEQUITABLE RESULTS

As this Court explained in Gabelli, the statute of

limitations in Section 2462 advances basic policies of

“repose, elimination of stale claims, and certainty

about a plaintiffs opportunity for recovery and a

defendant's potential liabilities.” 133 S. Ct. at 1221

(quoting Rotella v. Wood, 528 U.S. 549, 555 (2000)).

The SEC’s increasing pursuit of disgorgement without

any time bar runs counter to these important policies

and has led to draconian and inequitable results, as

illustrated by the disgorgement award the SEC

obtained against the Wylys.

A. The SEC’s Use Of Unlimited

Disgorgement Allowed It To Obtain A

“Staggering” Award Against The Wylys

Reaching Back Over Two Decades

The Wylys’ case demonstrates that the SEC’s

pursuit of stale claims reaching back decades is not

unique to petitioner's case. The SEC took the same

approach in seeking recovery from the Wylys as

against petitioners. Here, as in the case against

petitioner, the SEC turned its own delay into an

opportunity to obtain a massive “disgorgement” award

unlimited by Section 2462 or any other limitations

period.

The disgorgement award against the Wylys stems

from an enforcement action the SEC brought in July

2010. See SEC v. Wyly, 950 F. Supp. 2d 547, 553 n.30

(S.D.N.Y. 2013). The civil complaint alleged that the

Wylys, their attorney, and their securities brokers

violated securities laws by failing to make the requisite

disclosures for securities held in overseas trusts. Id. at

550-53. The Wylys had set up these overseas trusts in

the early 1990s after learning through a tax attorney

that such a system would provide tax deferral and

asset protection. See Wyly, 56 F. Supp. 3d at 410-13.

Assets, primarily securities, would be transferred to

the trusts in exchange for private annuities. The

Wylys each settled the first in a series of offshore

trusts in March 1992. Id. at 410.

In April 1992, the Wylys transferred stock options

to corporate subsidiaries of the first two trusts, which

issued private annuities to the Wylys in consideration

for the transferred option. Jd. 411-12, 417. For the

next decade, the Wylys continued with this approach,

transferring securities to the trusts, which the trusts

would sell at times. Jd. Following an IRS audit of the

trusts, the SEC entered into a tolling agreement with

the Wylys in 2006. Id. at 420-21; Wyly, 950 F. Supp. 2d

at 553. Only then did the SEC investigate the Wylys

for violating the securities laws. After four years, in

2010, the SEC filed its complaint, alleging that the

Wylys were beneficial owners of the securities held in

the trusts and that the Wylys had failed to make the

requisite filings of amendments to their Schedule 13Ds

and Form 4s when the trusts engaged in transactions.

Ajury found Sam Wyly and the Estate of Charles Wyly

liable for certain securities disclosure violations in

2014. See Wyly, 56 F. Supp. 3d at 401.

In June 2013, the district court rejected the SEC’s

argument that the statute of limitations should be

tolled so that the SEC could seek penalties beyond the

penalties falling within the five-year window permitted

by Section 2462. Wyly, 950 F. Supp. 2d at 557-58. To

avoid the force of this ruling, the SEC then sought

disgorgement under a series of potential theories. The

SEC cycled through numerous options, including a

theory based on the idea that shareholders were

“misled” as to the total number of shares the Wylys

held in approving stock option plans, one based on the

Wylys’ alleged concealment to avoid depressing stock

prices, and one based on the assumption that the

Wylys had exercised their options before transferring

the securities to the trusts.

Ultimately, following the jury’s liability

determination, the district court separately held two

bench trials to determine the amount of disgorgement.

SEC v. Wyly, 71 F. Supp. 3d 399, 403 (S.D.N.Y. 2014).

Under two alternative approaches, the SEC sought a

disgorgement order based on either the amount of tax

payments the Wylys had avoided or trading profits

they had made from the sale of registered securities.

Id. at 403-04. The district court awarded disgorgement

on each of the two “alternative” theories. Id.

Under the first, tax-avoidance theory, the district

court ordered Sam Wyly to disgorge nearly $124

million and the Estate to disgorge more than $63

million. /d. at 403. The prejudgment interest alone

totaled more than $104 million for the twenty-two-year

period. See Final Judgment, SEC v. Wyly, No. 10 Civ.

05760 (S.D.N.Y. Feb. 26, 2015), ECF No. 591. The

district court recognized that this award is “staggering

and among the largest awards ever imposed against

individual defendants,” Wyly, 56 F. Supp. 3d at 433,

and “equivalent to approximately 10% of the total

penalties and disgorgement ordered in SEC

enforcement cases nationwide [in 2013].” Jd. at 433

n.242.

The “alternative” disgorgement award, which

would take effect only if an appellate court rejected the

SEC’s novel tax-avoidance method of calculating

disgorgement, was based on a trading-profits theory.

Under this approach, the district court ordered Sam

Wyly to disgorge $83 million and the Estate to disgorge

$39 million. SEC v. Wyly, 107 F. Supp. 3d 260, 264

(S.D.N.Y. 2015). Total prejudgment interest on these

awards totaled $42 million. Jd. In evaluating

prejudgment interest for each award, the district court

adopted a lower rate than what the SEC urged, but

nonetheless awarded tens of millions of dollars because

of the vast passage of time.

B. The SEC’s Use Of Unlimited

Disgorgement Undermines The Purposes

Of Statutes Of Limitations

As this Court stated in Gabelli, “it ‘would be utterly

repugnant to the genius of our laws’ if actions for

penalties could ‘be brought at any distance of time.”

Gabelli, 133 S. Ct. at 1223 (quoting Adams v. Woods, 2

Cranch 336, 342, 2 L.Ed. 297 (1805) (Marshall, C.J.)).

The disgorgement award against the Wylys puts in

sharp focus the SEC’s use of disgorgement to avoid

statutes of limitations. Such use conflicts with the

purposes underlying limitations provisions like Section

2462: “repose, elimination of stale claims, and

certainty about a plaintiffs opportunity for recovery

and a defendant’s potential liabilities.” Id. at 1221.

Applying the five-year statute of limitations to

disgorgement claims will prevent the SEC from

9

waiting decades and then seeking outsized recoveries

based on novel theories.

In Gabelli, in rejecting the SEC’s effort to avoid

Section 2462's five-year clock by means of a “discovery

rule,” this Court explained that the statute of

limitations in Section 2462 “sets a fixed date when

exposure to the specified Government enforcement

efforts ends.” Jd. Section 2462, like statutes of

limitations generally, is “intended to promote justice by

preventing surprises through the revival of claims that

have been allowed to slumber until evidence has been

lost, memories have faded, and witnesses have

disappeared.” Jd. (internal quotation marks omitted).

Certainty about an individual’s liability “provide[s]

security and stability to human affairs,” which society

has “deemed .. . vital to the welfare of society, and

concluded that even wrongdoers are entitled to assume

that their sins may be forgotten.” Jd. (internal

quotation marks and citations omitted).

This Court further explained in Gabelli that the

SEC may not wait to bring an enforcement action and

then claim it did not know of the circumstances giving

rise to the action in order to seek recovery long after

the statute of limitations has passed. To the contrary,

the “central mission of the [SEC] is to investigat[e]

potential violations of the federal securities laws.” Jd.

at 1222 (internal quotation marks omitted). The SEC’s

core duty is to root out such violations, “and it has

many legal tools at hand to aid in that pursuit.” Id.

Similarly for purposes of Section 2462, the SEC should

not be allowed to assert that its own failure to

investigate allows it to seek disgorgement for conduct

dating back more than five years.

10

The SEC’s conduct in the Wylys’ case demonstrates

why Gabelillis logic should apply directly to

disgorgement awards. In the Wylys’ case, the SEC

waited until 2010—eighteen years following the

establishment of the overseas trusts at issue—to bring

an enforcement action against the Wylys. The SEC

neglected to investigate the relationship between the

Wylys and the trusts even though public information

indicated that the Wylys controlled a large percentage

of the shares of the public companies at issue and that

trusts associated with the Wylys had purchased shares

in private placements. Wyly, 56 F. Supp. 3d at 421-22.

Indeed, news reports during the time _ period

characterized the shares in the trusts as among the

Wylys’ holdings. Jd. Nonetheless, the SEC sought

disgorgement for this entire time period, unconstrained

by Section 2462.

In addition, notwithstanding the passage of

eighteen years between establishment of the trusts

giving rise to the violations and the SEC’s filing of the

complaint, the district court permitted the award of

prejudgment interest for the entire twenty-two-year

period. Jd. at 433. The district court recognized that

this Court “noted in Gabelli, that the SEC is, at least

in part, responsible for the delay.” Jd. Yet, despite

bearing some responsibility, the SEC still sought

interest at the extraordinarily high IRS underpayment

rate. Id. Although the district court used the LIBOR

rate instead of the rate the SEC urged, the district

court did not reduce that period to reflect the SEC’s

delay in bringing suit or the Wylys’ cooperation in

entering a tolling agreement. Jd. The upshot was to

reward the SEC for its delay while magnifying the

punishment to the Wylys, imposing prejudgment

11

interest running from 1992 throughout the Wyly’s

tolling agreement with the SEC and totaling more than

$100 million on the SEC’s primary, tax-avoidance

disgorgement theory.

Further, the SEC sought such inflated recovery

even though it identified no victims that it sought to

compensate. The SEC conceded, in fact, that

disgorgement was non-compensatory. SEC v. Wyly,

860 F. Supp. 2d 275, 280 (S.D.N.Y. 2012) (“Admittedly,

the SEC does not seek compensation.”). This fact

further undercuts any justification for removing

disgorgement from Section 2462. This Court reasoned

in Gabelli that a statute of limitations may be tolled “to

ensure that the injured receive recompense.” 133 S.

Ct. at 1223. In Gabelli, the SEC sought penalties, not

compensation for victims, and thus the discovery rule

had no application. Jd. The same is true for the SEC's

use of disgorgement against the Wylys, as in

petitioner's case. The SEC never alleged that the

Wylys’ offenses had victims apart from the IRS, which

remains well equipped and positioned to vindicate its

own interest in recovering any taxes owed.

In effect, the non-application of Section 2462

removes « key incentive for the SEC has to root out

violations because the longer the SEC waits to pursue

a claim, the larger its recovery. In the Wylys’ case, the

SEC is being permitted to pursue recovery dating all

the way back to 1992 without any regard for whether

or when it previously believed that the Wylys’ use of

the overseas trusts violated securities laws. The SEC

should not be permitted to reach back so far, so

unconstrainedly. Such an approach “leave[s]

defendants exposed to Government enforcement action

12

not only for five years after their misdeeds, but for an

additional uncertain period into the future.” Id.

Moreover, the SEC’s practice of bringing stale

enforcement actions runs the risk that violators will be

hugely penalized for conduct not known to be wrongful

at the time it was undertaken. Such long delays in

bringing enforcement actions subject individuals to

liability based on changing interpretations of the laws.

In the case of the Wylys, the SEC proposed (among

other methods) a wholly unprecedented measure of

disgorgement based on “the amount of federal income

taxes that the Wylys allegedly avoided” by transferring

stock options to the offshore trusts. SEC v. Wyly, No.

10 CIV. 5760 (SAS), 2013 WL 2951960, at *1 (S.D.N_Y.

June 13, 2013). In adopting the SEC’s novel “tax

avoidance” theory, the district court concluded that the

Wylys’ persuasive control over the trustees of the

offshore trusts meant that the Wylys should have been

taxed on the sale of assets in the trusts, unless an

exception applied. See Wyly, 56 F. Supp. 3d at 427-29.

The district court’s rationale for that determination

required rejection of long-standing Tax Court

precedent in place during the prior three decades,

upending well-settled tax treatment and jeopardizing

countless other carefully crafted estate plans.?

2 The district court’s opinion explicitly contradicted

longstanding Tax Court precedent found in Estate of

Goodwyn v. C.I.R., T.C. Memo 1976-238, 1976 WL 3423

(1976). Indeed, the Wyly district court “opinion made

several statements about the domestic grantor trust

rules (without input from the IRS) that give tax and

13

The unsettling application of this novel “tax

avoidance” theory was compounded by the district

court’s decision that the disgorgement award was not

subject to the time bar at Section 2462. The Wylys,

counseled by both tax and securities lawyers, could not

have known that the tax treatment of the offshore

trusts, resting as it did on well-settled Tax Court

precedent, would be overturned by a district court

decades after the establishment of the trusts—under

the rubric of disgorgement for securities violations.

And the Wylys could not have predicted that any

potential liability would stretch back over a period of

two decades to reach conduct that was clearly “stale.”

In this way, the SEC’s disgorgement award against the

Wylys cuts directly against the purposes served by the

statute of limitations in “provid[ing] ‘security and

stability to human affairs.” Gabelli, 133 S. Ct. at 1221

(quoting Wood v. Carpenter, 101 U.S. 135, 139 (1879)).

Finally, the harsh effects of the SEC’s disregard for

the statute of limitations is even more egregious as

against the Estate because Charles Wyly died a year

after the SEC filed its complaint. Wyly, 860 F. Supp.

2d at 275-76. Yet, the SEC continued to seek

disgorgement from his Estate for conduct occurring 20

years before his death.

estate planning professionals pause.” Advanced Estate

Planning Practice Update — Summer 2016 Cases,

Regulations, and Analyses, http://files.ali-

cle.org/thumbs/datastorage/skoobesruoc/pdf/TSXB30_c

hapter_01_thumb.pdf.

14

The Wylys’ case exposes the draconian results that

would arise if the SEC may seek disgorgement

unrestrained by the time bar of Section 2462. Faced

with the SEC’s extreme delay in bringing an

enforcement action, the district court denied the SEC’s

motion for tolling the statute of limitations.

Nonetheless, the district court permitted disgorgement

for a two-decade period, with prejudgment interest. In

fashioning the nearly $300 million disgorgement award

against the Wylys, the district court allowed the SEC

to avoid any consequence for its long delay in bringing

suit. The SEC should not be permitted to obtain

proceeds that are otherwise time-barred by labeling

the remedy a “disgorgement” instead of a “forfeiture.”

C. The SEC’s Increasing Use Of

Disgorgement Threatens To Intensify

These Harms

The SEC’s treatment of petitioner and the Wylys is

not unique. The SEC increasingly has sought

disgorgement in civil enforcement actions to avoid any

limitation on its monetary recoveries for the

Government. That trend has only intensified following

this Court’s ruling in Gabelli, after which the SEC

extended its use of disgorgement as an alternative to

penalties as the means to seek recovery for stale

claims.

In recent years, the SEC has recovered growing

amounts of supposed “ill-gotten gains” from

defendants. From Fiscal Year 2010 to Fiscal Year

2013, total disgorgement awards increased from $1.82

billion to $2.257 billion. See SEC, Year-By-Year

Monetary Sanctions in SEC Enforcement Actions,

available at https://www.sec.gov/news/newsroom/

15

images/enfstats2.pdf. The disgorgement awarded was

roughly double the amount of penalties over the same

time period. Id.

In Fiscal Year 2015, the SEC obtained orders for

$4.195 billion in monetary relief (up from $2.846

billion in Fiscal Year 2010), consisting of both

disgorgement and penalties. See SEC, FY 2017

Congressional Budget Justification, FY 2017 Annual

Performance Plan, and FY 2015 Annual Performance

Report 40-41 (Feb. 9, 2016),

https://www.sec.gov/about/reports/secfy 1 7congbudg

just.pdf. The SEC, however, distributed only $158

million to investors in 2015. Id.

The SEC’s shift from pursuing penalties—clearly

subject to Section 2462—to disgorgement, raises the

strong inference that the SEC has increasingly relied

upon disgorgement to perform an end-run around the

time limit on pecuniary penalties. This trend serves to

undermine the purposes of the statute of limitations.

This Court should close that loophole and confirm that

disgorgement is subject to the limitation of Section

2462.

Il. THE SEC’S BROAD USE OF

DISGORGEMENT IS UNSUPPORTED BY

THE HISTORY OF CONGRESS’S

LIMITATIONS ON REMEDIES

Section 2462 provides that, “[e]xcept 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 ....” Id.

16

This Court should adopt petitioner's argument that,

because the remedy of disgorgement falls squarely

within the meaning of “forfeiture,” it is subject to the

five-year limitations period of Section 2462.

Separately, as petitioner also correctly argues, the

SEC’s use of disgorgement qualifies as a “penalty”

subject to the time bar in Section 2462—especially

where, as in the Wylys’ case, disgorgement is used to

recover amounts unconnected to the need to

compensate victims and far afield from the underlying

offense.

A. At The Time Of Section 2462’s Enactment,

“Forfeiture” Was Understood As

Analogous To “Disgorgement”

In the first half of the 19th century, “disgorgement”

was not a widely used legal term, but “forfeiture” had a

broad meaning, encompassing any situation “when a

man is, by a judicial sentence, compelled to pay a sum

of money to another ....” Jeremy Bentham, THE

RATIONALE OF PUNISHMENT 252 (Robert Heward ed.,

1830). This historical understanding of forfeiture

encompasses modern-day disgorgement: it applied to

monetary sums and was considered a remedial, rather

than punitive, measure. Examination of the history of

forfeiture confirms that the SEC’s “disgorgement” is

nothing more than forfeiture by a different name.

1. The Tenth Circuit rejected the argument that

disgorgement fell under the rubric of “forfeiture”

because it wrongly reasoned that forfeiture was an in

rem procedure aimed exclusively at taking “tangible

property used in criminal activity.” SEC v. Kokesh,

834 F.3d 1158, 1165 (10th Cir. 2016) (quoting United

States v. 92 Buena Vista Ave., 507 U.S. 111, 118

17

(1993)). Contrary to the Tenth Circuit's decision, early

statutory forfeitures required giving up tangible

property—including contraband and

instrumentalities—as well as monetary sums. In fact,

“[florfeiture of goods or their value and the payment of

fixed or variable sums of money are other sanctions

which have been recognized as enforceable by civil

proceedings since the original revenue law of 1789.”

Helvering v. Mitchell, 303 U.S. 391, 400 (1938)

(emphasis added) (citing Act of July 31, 1789, c. 5, s 36,

1 Stat. 29, 47).

In 1824, for example, this Court examined the “29th

section of the collection act of 1799,” which provided

that the master of a ship in violation “shall forfeit and

pay the sum of 400 dollars.” The Appollon, 22 U.S. (9

Wheat.) 362 (1824). Other statutes in that period used

“forfeit” in a similar fashion.* Likewise, a 1799

enactment “not only provide[d] for a forfeiture of the

goods, but in the alternative, for a forfeiture of the

value thereof, to be recovered of the person making the

false entry.” Wood v. United States, 41 U.S. 342, 365

(1842). Courts in equity also used the term “forfeit” to

describe the forced giving up of monetary sums by

3 See, e.g., McCulloch v. Maryland, 17 U.S. 316,

321-22 (1819) (“forfeit a sum of $500 for each and every

offence .. . to be recovered by indictment, or action of

debt... .”); United States v. Simms, 5 U.S. 252, 253

(1803)) (discussing requirement to “forfeit and pay the

sum of one hundred and fifty dollars”), abrogated on

other grounds by United States v. More, 7 U.S. 159

(1805).

18

judicial decree. See Diggs v. Wolcott, 8 U.S. 179 (1807)

(obtaining in “suit in chancery” both injunctive relief

and forfeiture of $1,500).4

2. Nor is it true that forfeiture, as opposed to

disgorgement, historically had been considered an

exclusively punitive remedy. Early forfeitures often

were viewed as serving remedial purposes like that the

SEC now attributes to disgorgement. See, e.g., United

States v. Ursery, 518 U.S. 267, 291 (1996) (“it is

absolutely clear that in rem civil forfeiture has not

historically been regarded as punishment’). In this

regard, it cannot be said that “disgorgement” does not

fit among the remedies listed in Section 2462.

In fact, this Court traced the use of forfeiture as a

remedial measure to the early days of the republic in

United States v. Bajakajian, 524 U.S. 321 (1998). In

the context of customs violations, the Court explained

that “the early monetary forfeitures [] were considered

not as punishment for an offense, but rather as serving

the remedial purpose of reimbursing the Government

for the losses accruing from the evasion of customs

4 The term “forfeiture” also has been used

historically to refer to contractual clauses in deeds

requiring a party to give up a certain contractual right.

It is in this contractual context that courts have noted

that “a Court of Chancery [was] not the proper tribunal

for enforcing forfeitures.” Horsburg v. Baker, 26 U.S.

232, 236 (1828). The Court in Horsburg referred to the

“clause of forfeiture for alienation, which the deed

contains”—not the type of forfeiture at issue in this

case. Id. at 235.

19

duties.” Id. at 342. Indeed, forfeitures were considered

to be remedial in nature “at the founding,” and only

encompassed a punitive remedy beginning in the

1970s. Jd. at 340-41 & n.16. The modern concept of

disgorgement shares the same remedial underpinning

Bajakajian ascribed to the historical concept of

forfeiture.

3. This historical overlap between “disgorgement”

and “forfeiture” is confirmed by the contemporary use

of the two words as interchangeable. Modern legal

dictionaries confirm that the two words have

equivalent meanings. See BLACK’S LAW DICTIONARY

(9th ed. 2009) (“forfeiture: 1. The divestiture of

property without compensation.”) (“disgorgement: The

act of giving up something (such as profits illegally

obtained) on demand or by legal compulsion.”). This

Court, too, has recognized that the terms

“disgorgement” and “forfeiture” may be used

interchangeably. See Ursery, 518 U.S. at 284 (“[Civil

florfeitures serve a variety of purposes, but are

designed primarily to confiscate property used in

violation of the law, and to require disgorgement of the

fruits of illegal conduct.”).5 As a result, the term

5 Numerous courts of appeals also have used the

terms interchangeably. See, e.g., United States v.

Contorinis, 692 F.3d 136, 146 (2d Cir. 2012) (“Criminal

forfeiture focuses on the disgorgement by a defendant

of his ‘ill-gotten gains.”); United States v. Venturella,

585 F.3d 1013, 1019 (7th Cir. 2009) (“forfeiture seeks to

punish a defendant for his ill-gotten gains by

transferring those gains .. . to the United States

Department of Justice”) (citations and quotations

20

“forfeiture” in Section 2462 is best read to encompass

“disgorgement” as a virtual synonym—the same

remedy by a different name. The Eleventh Circuit has

recognized this very point, holding that “for the

purposes of § 2462 forfeiture and disgorgement are

effectively synonyms; § 2462's statute of limitations

applies to disgorgement.” SEC v. Graham, 823 F.3d

1357, 1363 (11th Cir. 2016).

4. The absence of separate reference to the term

“disgorgement” in Section 2462 is best explained by the

fact that the term “disgorgement” had not gained

currency at the time Congress enacted the predecessor

statute in 1839. The 1839 version of the statute read:

“No suit or prosecution shall be maintained, for any

penalty or forfeiture, pecuniary or otherwise, accruing

under the laws of the United States, unless the same

suit or prosecution shall be commenced within five

years from the time when the penalty or forfeiture

accrued.” Act of February 28, 1839, § 4, 5 Stat. 322.

Section 2462, enacted in 1948, included mere “changes

in phraseology” that did not change the meaning of the

statute from its predecessor. 3M Co. (Minn. Min. &

omitted); United States v. Boring, 557 F.3d 707, 714

(6th Cir. 2009) (“Forfeiture, in contrast, is punitive; it

seeks to disgorge any profits that the offender realized

from his illegal activity.”) (citations and quotation

omitted); United States v. Hoover—Hankerson, 511 F.3d

164, 171 (D.C. Cir. 2007) (“Forfeiture is a means of

forcing a criminal defendant to disgorge ill-gotten

profits.”); United States v. Casey, 444 F.3d 1071, 1073-

74 (9th Cir. 2006) (similar).

21

Mfg.) v. Browner, 17 F.3d 1453, 1458 (D.C. Cir. 1994).

By contrast, the first disgorgement of ill-gotten gains

in the securities context did not occur until the 1970s.

See Russell G. Ryan, The Equity Facade of SEC

Disgorgement, 4 Harv. Bus. L. Rev. Online 10, nn.60-61

(2013); see also SEC v. Cavanagh, 445 F.3d 105, 118

(2d Cir. 2006) (“[A]lthough the term ‘disgorgement’

became common only recently, equity courts have

traditionally awarded analogous forms of relief under a

variety of names.”). Accordingly, “forfeiture,” as

understood by legislators and courts in the early

nineteenth century, encompasses modern-day

disgorgement.

Because the term “forfeiture” has been historically

understood to share the same characteristics as

modern day disgorgement, it follows that disgorgement

should likewise be subject to the limitations period

found in Section 2462 and its predecessors.

B. Section 2462 Applies To Disgorgement

Awards That Amount To A “Penalty”

Within The Meaning Of 28 U.S.C. § 2462

Even if the term “forfeiture” in Section 2462 were

limited to punitive measures and thus made

synonymous with “penalty,” the statute of limitations

should apply to the SEC’s use of disgorgement as a

general matter and, at a minimum, in a case like

petitioner’s and that of the Wylys. Where the SEC’s

version of “disgorgement” lacks any meaningful

remedial purpose or causal link to the securities

violation, it is necessarily a “penalty” within the

meaning of Section 2462.

22

As a general matter, the SEC seeks disgorgement

not to compensate harmed investors but rather to deter

and punish defendants, as demonstrated by

petitioner's and the Wylys’ cases. The district court

recognized as much in the Wylys’ case, noting that

“disgorgement of this magnitude is more than

sufficient to deter future violations.” Wyly, 56 F. Supp.

3d at 433-34; see also SEC v. Fischbach Corp., 133 F.3d

170, 175 (2d Cir. 1997) (describing deterrence as the

“primary purpose of disgorgement orders”).

“Deterrence, however, has traditionally been viewed as

a goal of punishment.” Bajakajian, 524 U.S. at 329.

To this extent, the SEC’s use of disgorgement is

rightfully labeled punitive and treated as a penalty

subject to Section 2462.

The SEC cannot avoid this conclusion through an

argument that disgorged amounts may be viewed as

compensation to harmed investors. Although the SEC

may endeavor to provide these disgorged funds to

victims of a defendant’s fraudulent scheme, see

generally SEC, Investor Bulletin: How Harmed

Investors May Recover Money (2014), available at

https://www.sec.gov/oiea/investor-alerts-

bulletins/ib_recovermoney.html; SEC, Rules of Practice

and Rules on Fair Fund and Disgorgement Plans 103-

107 (2006), available at

http://www.sec.gov/about/rulesprac2006.pdf, in fact it

rarely does so, see supra at 15.

Treatment of such disgorgement awards as subject

to the statute of limitations in Section 2462 fits this

Court’s reasoning in Gabelli. As this Court explained,

“penalties, which go beyond compensation, are

intended to punish.” Gabelli, 133 S. Ct. at 1223. The

same can be said for disgorgement awards like the

ones against petitioner and the Wylys, which make

whole no victims and have no otherwise compensatory

purpose. In fact, the SEC conceded in the Wylys’ case

that its disgorgement request was not meant to

compensate victims.

Further, a punitive purpose is evident at a

minimum in a case like that of the Wylys, where the

disgorgement remedy lacks a causal connection to the

securities violations. In securities law enforcement, it

is settled that “disgorgement may not be used

punitively,” SEC v. First City Fin. Corp., 890 F.2d

1215, 1231 (D.C. Cir. 1989), and thus the SEC must

“establish[] a reasonable approximation of the profits

causally related to the fraud,” SEC v. Razmilovic, 738

F.3d 14, 31 (2d Cir. 2013). Absent the required causal

connection, the disgorgement orders serve only as a

“penalty” within the ambit of Section 2462.

The SEC’s primary disgorgement theory in the

Wylys’ case, for example, allowed for a $300 million

disgorgement award based on supposediy avoided

taxes owed to the IRS without regard for what the IRS

might determine the Wylys actually owed. This award

was nearly twice the “alternative” disgorgement

award, based on a trading-profits theory. And the

district court permitted the SEC to pursue the trading-

profits disgorgement award despite concluding that the

SEC had provided “no evidence here that the

defendants’ unlawful conduct ... resulted in any

market distortion, price impact, or profit tied to the

violation.” SEC v. Wyly, 56 F. Supp. 3d 260, 269

(S.D.N.Y. 2014). The SEC never linked either award in

any proximate way to the underlying securities

violations—as the SEC’s cycling between alternative

theories in and of itself illustrates. The award of such

large amounts, untethered to any compensatory or

remedial purpose, simply serves to punish and

qualifies as a penalty under Section 2462.

The Tenth Circuit’s citation to damages in tort law

inadvertently confirms this point. The Tenth Circuit

explained that it “dofes] 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.” Kokesh,

834 F.3d at 1165. But the law permits such awards

because tort damages serve to compensate an injured

victim, not to deter wrongdoers. Punitive damages

awarded in tort cases, in contrast, go beyond any such

causal link to compensation, and simply seek to deter

wrongful conduct. A disgorgement award lacking close

connection to underlying securities violations is

similarly properly viewed as punitive. In the Wylys’ as

in petitioner’s case, the award of disgorgement to the

Government is not compensatory but primarily

punitive, and thus properly constitutes a penalty

subject to Section 2462.

25

CONCLUSION

The judgment below should be reversed.

Respectfully submitted,

DEREK L. SHAFFER KATHLEEN M. SULLIVAN

QUINN EMANUEL Counsel of Record

URQUHART ELLYDE R. THOMPSON

& SULLIVAN, LLP QUINN EMANUEL URQUHART

777 6th Street NW & SULLIVAN, LLP

11th Floor 51 Madison Avenue

Washington, DC 20001 22nd Floor

(202) 538-8000 New York, NY 10010

(212) 849-7000

kathleensullivan@

quinnemanuel.com