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

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RECORD MAR - 3 2017

AND No. 16-529 |__OFFICE OF THE CLERK

BRIEFS

IN THE

Supreme Court of the Anited States

CHARLES R. KOKESH,

Petitioner,

Vv.

SECURITIES AND EXCHANGE COMMISSION,

Respondent.

On Writ of Certiorari to the

U.S. Court of Appeals

for the Tenth Circuit

BRIEF OF WASHINGTON LEGAL FOUNDATION

AS AMICUS CURIAE IN SUPPORT OF PETITIONER

Richard A. Samp

(Counsel of Record)

Mark S. Chenoweth

Washington Legal Foundation

2009 Massachusetts Ave., NW

Washington, DC 20036

202-588-0302

rsamp@wlf.org

Date: March 3, 2017

_ Re gear te rs ns ISHN AE DE LARA IMT TED ALE DELETES GICAL EADEES AREER A es AE

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

QUESTION PRESENTED

Under 28 U.S.C. § 2462, any “action, suit or

proceeding for 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”?

ill

TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES .... ccc rcccccccces Vv

INTERESTS OF AMICUS CURIAE ............ 1

STATEMENT OF THE CASE .......--cccceee 2

Te Cle? MEP 9 oe cece ccc ceveces 4

eo ee ee nk eee aoe ae 4

1. DISGORGEMENT IS A SECTION 2462

“PENALTY” BECAUSE ITS MONETARY

SANCTION IS NOT IMPOSED SOLELY, OR

EVEN PARTIALLY, FOR THE PURPOSE OF

REDRESSING PRIVATE INJURY ............-.- 8

A. Gabelli Confirms the Broad Reach

SE. Ccecedaee cass ce 11

B. The Manner in which SEC Imposes

Its Disgorgement Remedy Has All

the Hallmarks of a “Penalty” ...... 14

TI. THE SEC’s EFFORT TO DISTINGUISH

EQUITABLE SANCTIONS FROM PUNITIVE

SANCTIONS IS UNAVAILING ...-.-...------- 17

A. What SEC Now’ Terms

“Disgorgement” Has Never Been

Categorized as an Equitable

Remedy by this Court ............ 17

Page

B. Disgorgement Is Barred as a

Section 2462 “Penalty” Even If It

Could Properly Be Termed

I 6s og a hance 21

C. The SEC’s “Equitable” Argument

Would Eviscerate Section 2462 ..... 22

Ill. THE COURT SHOULD INTERPRET SECTION

2462 WITHOUT REGARD TO ANY “NARROW

CONSTRUCTION” PRESUMPTION ........... 25

SN 6 Sb i dv ccehapannss ocecu awe os 28

TABLE OF AUTHORITIES

Page(s)

Cases:

3M Company v. Browner,

17 F.3d 1463 (D.C. Cir. 1994) ............... 28

Adams v. Woods,

6 U.S. (2 Cranch) 336 (1805) ........... 7, 27, 28

America Production Co. v. Burton,

TR 6 are ee eben 26

Badaracco v. Comm’r of Internal Revenue,

ee IED on oc cc ccc cbeseccesancues 26

Coryell v. Colbaugh,

sg eae acebebawseseebes 16

EI. Du Pont de Nemours & Co. v. Davis,

ee te obae 26

Exxon Shipping Co. v. Baker,

ts 16, 24, 25

Feltner v. Columbia Pictures Television, Inc.,

SPR PEE oct cecccvcesccccecce 18, 20

Gabelli v. SEC,

ee ee ED cs ou os 0 o's Kanwar passim

Guaranty Trust Co. of New York v. United States,

I Sl ee eke 26

Halliburton Co. v. Erica P. John Fund, Inc.,

rr ee oa cp sees aviwuens tes

Huntington v. Attrill,

ED wwe cneccccceveeses 10, 11

Livingston v. Woodworth,

ee cs, Cab ew ee eees eenwe 21

Meeker v. Lehigh Valley R. Co.,

EE ee 5, 9, 10

Mowry v. Whitney,

Se En 21

Omunicare, Inc. v. Laborers Dist. Council Constr.

Indus. Pension Fund, 135 S. Ct. 1318 (2015) .... 1

PHH Corp. v. CFPB,

839 F.3d 1 (D.C. Cir. 2016), vacated and

reh. granted, __ F.3d ____ (Feb. 16, 2017) ..... 24

Proffitt v. SEC,

200 F.3d 855 (D.C. Cir. 2000) ............... 11

Root v. Lake Shore and Michigan So. Ry. Co.,

De PI PE nw ccc tcc rect osuveser 19, 20

Rotella v. Wood,

PERM wk. pwc bce we cecceevecen 13

SEC v. Haligiannis,

470 F. Supp. 2d 373 (S.D.N.Y. 2007) .......... 15

SEC v. JT Wallenbrock & Assocs.,

440 F.3d 1109 (9th Cir. 2006) ............... 14

Sheldon v. Metro-Goldwyn Pictures Corp. ,

309 U.S. 390 (1940) ................. 17, 18, 20

Suffolk Co. v. Hayden,

no soo ask eeekee bevwbes 20

Timbervest LLC v. SEC,

Case No. 151416 (dec. pending, D.C. Cir.) ...... 1

United States v. Whited & Wheless, Ltd.,

SE EE go cee ce voce sereces 26

Wood v. Carpenter,

rh Ds oss sob es ces w ewe ee swan 23

Yates v. United States,

as ey EE coon eo ks weeee nae wks 9

Page(s)

Statutes and Constitutional Provisions:

Soe CM, WE lors so veccesetecescvcecs 18

Act of Feb. 28, 1839, ch. 36, § 4,

I a eos ke A os ote oes sun e dna 8

Investment Company Act of 1940, § 37,

I ok 6a as dos oe xo v0 cb ee 8

EE © 60 6c oe wees Keeeseniinnees 3

IS ies ree whde ae es eebes passim

Rev. Stat. § 1047, Comp. Stat. 1913, § 1712 ..... 10

Miscellaneous:

SEC, Select SEC and Market Data, 2011 ....... 23

SEC, Select SEC and Market Data, 2015 ....... 23

Webster’s Third New International

et aan oh ae te a 9

INTERESTS OF AMICUS CURIAE

Washington Legal Foundation (WLF) is a non-

profit public interest law firm and policy center with

supporters in all 50 states.’ WLF devotes a substantial

portion of its resources to defending free enterprise,

individual rights, a limited and _ accountable

government, and the rule of law.

To that end, WLF has regularly appeared before

this Court and other federal courts in numerous cases

related to the proper scope of the federal securities

laws. See, e.g., Omnicare, Inc. v. Laborers Dist. Council

Constr. Indus. Pension Fund, 135 S. Ct. 1318 (2015);

Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct.

2398 (2014). In particular, WLF has participated in

litigation regarding the applicability of 28 U.S.C.

§ 2462’s five-year limitations period to enforcement

actions filed by the Securities and Exchange

Commission (SEC). See, e.g., Timbervest LLC v. SEC,

Case No. 15-1416 (dec. pending, D.C. Circuit).

WLF is concerned by SEC’s willingness to

pursue enforcement actions many years after the

events giving rise to those actions occurred. Congress

has established a five-year limitations period for the

enforcement of any civil fine, penalty, or forfeiture by

SEC and other federal agencies. Nonetheless, SEC

over the past several decades has raised a series of

arguments regarding why that statute of limitations

' Pursuant to Supreme Court Rule 37.6, WLF states that

no counsel for a party authored this brief in whole or in part; and

that no person or entity, other than WLF and its counsel, made a

monetary contribution intended to fund the preparation or

submission of this brief. All parties have consented to the filing;

letters of consent have been lodged with the Court.

imposes virtually no constraints on its enforcement

authority. WLF fears that if the Court accepts SEC’s

arguments in this case, the five-year statute of

limitations will be rendered a nullity.

WLF agrees with Petitioner that the

disgorgement order SEC issued in this case is both a

“penalty” and a “forfeiture,” within the meaning of 28

U.S.C. § 2462. This brief focuses on the “penalty”

issue.

STATEMENT OF THE CASE

The disgorgement order at issue in this case

arose in connection with an SEC enforcement action

filed against Petitioner Charles Kokesh in 2009. The

SEC charged that Kokesh, between 1991 and 2007,

misappropriated funds from four SEC-registered

business development companies in violation of federal

securities laws. Following a jury verdict in SEC’s

favor, the district court entered judgment against

Kokesh in March 2015. Pet. App. 20a-47a. The final

judgment: (1) permanently enjoined Kokesh from

violating certain provisions of the securities laws; (2)

imposed a civil fine of $2.4 million; (3) ordered Kokesh

to disgorge $34.9 million (which the court said

“reasonably approximates the ill-gotten gains causally

connected to Defendant’s violations”); and (4) ordered

Kokesh to pay $18.1 million in prejudgment interest.

Id. at 46a.

The district judge held that § 2462—the five-

year limitations period—applied to SEC’s imposition of

a civil fine, and he thus based his fine calculation solely

on Kokesh’s activities during the five years

immediately prior to SEC’s 2009 filing. Jd. at 25a-32a.

He held, however, that § 2462 was inapplicable to the

SEC’s request for disgorgement of ill-gotten gains

because, he concluded, disgorgement is not a “penalty”

within the meaning of § 2462. Id. at 4la-44a. He

stated that a $34.9 million disgorgement order was

appropriate because it “reasonably approximate[d]” the

amount of funds that Kokesh misappropriated between

1991 and 2007, although he noted that many of the

funds in question were not transferred to Kokesh or

related entities. Id. at 43a-45a. The judge deemed it

proper to base disgorgement on the total amount of

misappropriated funds—not simply Kokesh’s net profit

from his activities—because doing so would “deter

others’ violations of the securities laws.” Id. at 43a.

The Tenth Circuit affirmed. Pet. App. la-19a.

It held that disgorgement was neither a “penalty” nor

a “forfeiture” within the meaning of § 2462 and thus

that the five-year limitations period did not bar a

disgorgement order for pre-2004 activities. Id. at 10a-

16a. It stated that “disgorgement is not a penalty

under § 2462 because it is remedial” and “does not

inflict punishment.” Id. at 10a-1la. The Court stated,

“To be sure, disgorgement serves a deterrent purpose,

but it does so only by depriving the wrongdoer of the

benefits of wrongdoing.” Jd. at lla. It categorized

disgorgement as “equitable relief’ and noted that

federal law authorizes courts to grant equitable relief

sought by SEC. Td. at 10a (citing 15 U.S.C.

§ 78u(d)(5)).

The appeals court concluded that the

disgorgement order was not rendered “punitive” simply

because Kokesh was “being required to disgorge more

than he actually gained himself.” Jd. at 12a. It

explained, “[T]here is nothing punitive about requiring

a wrongdoer to pay all the funds he caused to be

improperly diverted to others as well as to himself.”

Ibid.

The appeals court stated that its decision was

informed by a presumption that statutes of limitation

are to be strictly construed when applied against the

federal government:

Statutes of limitations 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 interest. ...

And we have recognized that equitable

claims are usually not subject to statutes

of limitations.

Id. at 6a (citation omitted).

SUMMARY OF ARGUMENT

The SEC conceded that it filed its enforcement

action against Kokesh more than five years after most

of the events giving rise to the proceedings. A federal

statute bars any SEC “action, suit, or proceeding for

the enforcement of any civil fine, penalty, or forfeiture,”

unless it is commenced within five years of the date on

which its claims “first accrued.” 28 U.S.C. § 2462.

Those claims accrued at the time the alleged

misconduct occurred. Gabelli v. SEC, 133 S. Ct. 1216,

1220-21 (2013). Because the disgorgement ordered by

the district court is properly classified as a “penalty,”

§ 2462 bars disgorgement of any funds allegedly

misappropriated more than five years before October

27, 2009 (the date on which SEC filed suit).

More than a century ago, the Court provided

guidance regarding when a civil sanction should be

deemed a penalty or forfeiture for purposes of § 2462’s

predecessor:

The words “penalty or forfeiture” in this

section refer to something imposed in a

punitive way for an infraction of a public

law, and do not include a liability

imposed solely for the purpose of

redressing a private injury, even though

the wrongful act be a public offense, and

punishable as such.

Meeker v. Lehigh Valley R. Co., 236 U.S. 412, 423

(1915). It is uncontested that no portion of the

disgorgement order sought by SEC and granted by the

district court was imposed “for the purpose of

redressing a private injury.” Accordingly, that sanction

qualifies as a “penalty” within the meaning of § 2462.

The Court recently reiterated the broad scope of

§ 2462 in Gabelli, which rejected SEC’s efforts to apply

a “discovery rule” to § 2462, such that an SEC claim

would not accrue until the Commission “discovers” its

cause of action. The Court ruled instead that an SEC

claim “accrues when it comes into existence.” Jd. at

1220. It explained that its reading of “accrued”

advances the “basic policies” of all statutes of

limitations by setting a “fixed date” after which the

threat of SEC enforcement ends, and thereby provides

defendants with repose and certainty about their

potential liability. /bid.

In disputing Kokesh’s § 2462 defense, SEC

argues that its disgorgement remedy is “equitable,” not

“punitive,” in nature. That argument lacks merit.

What SEC terms “disgorgement”—a remedy that SEC

only recently began requesting in enforcement actions

and that is not designed to provide restitution to

anyone injured by Kokesh’s conduct—has never been

categorized as an equitable remedy by this Court. The

historical antecedents to which SEC points involve

efforts by equity courts to provide restitution to

individuals identified as having been injured by the

defendants’ activities.

The disgorgement order imposed on Kokesh can

only be viewed as an effort to punish him. The Tenth

Circuit concluded that the order did not impose a

penalty because “[djisgorgement just leaves the

wrongdoer in the position he would have occupied had

there been no misconduct.” Pet. App. lla. But under

what circumstances would the government ever seek to

disgorge funds from a private individual and keep

them for itself? The appeals court’s own words provide

the ready answer: when the government determines

that the individual deserves to be sanctioned because

he is a “wrongdoer” who has engaged in “misconduct.”

Imposing a civil judgment because an individual has

engaged in “misconduct” and because the government

seeks to prevent him from profiting by his misconduct

fits comfortably within any commonly understood

definition of “penalty.” The appeals court’s recognition

that “disgorgement serves a deterrent purpose,” ibid,

only strengthens that conclusion; deterrence of future

wrongdoing is one of the principal reasons why

governments impose penalties.

Moreover, adopting SEC’s argument would

eviscerate § 2462. The statute of limitations would

cease to exist if SEC could avoid the limitations of

§ 2462 any time it articulated an “equitable” rationale

for imposing sanctions, and (as this case well

illustrates) SEC has little difficulty concocting such

rationales. Indeed, now that Gabelli has taken a major

weapon out of SEC’s arsenal—by preventing use of a

discovery rule to extend the § 2462 limitations

period—SEC seeks disgorgement in virtually all of its

enforcement actions.

Finally, the Court should construe § 2462

without placing a thumb on SEC’s side of the scale, as

the Tenth Circuit did. This Court has never cited the

narrow-construction-of-statutes-of-limitations maxim

in cases in which, as in Gabelli, it addressed a statute-

of-limitations issue in the context of a government

enforcement action. Indeed, Gabelli cited another

maxim, older still, a maxim specifically relating to

actions for penalties and that points in the opposite

direction: “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 v. Woods, 6 U.S. (2 Cranch) 336, 342 (1805)

(Marshall, C.J.)).

ARGUMENT

4 DISGORGEMENT IS A SECTION 2462 “PENALTY”

BECAUSE ITS MONETARY SANCTION IS NOT

IMPOSED SOLELY, OR EVEN PARTIALLY, FOR

THE PURPOSE OF REDRESSING PRIVATE INJURY

The SEC’s enforcement action against Kokesh

sought sanctions against him for alleged violations of,

inter alia, § 37 of the Investment Company Act of 1940,

15 U.S.C. § 80a-36. The SEC alleged that he

knowingly and willfully converted investment-company

assets to his own use or to the use of another. Because

the Act lacks a statute-specific limitations period, SEC

proceedings under the Act are subject to the five-year

statute of limitations imposed by 28 U.S.C. § 2462 on

all proceedings “for the enforcement of any civil fine,

penalty, or forfeiture, pecuniary or otherwise.”*

Gabelli, 133 S. Ct. at 1219. Because the disgorgement

sanction SEC seeks to impose against Kokesh qualifies

as a “penalty,” it is largely time-barred. Of the $34.9

* The statute provides:

Except as otherwise provided by Act of Congress,

an action, suit or proceeding for the enforcement of

any civil fine, penalty, or forfeiture, pecuniary or

otherwise, shall not be entertained unless

commenced within five years from the date when

the claim first accrued if, within the same period,

the offender or the property is found within the

United States in order that proper service may be

made thereon.

28 U.S.C. § 2462. The statute’s origins date back to at least 1839,

and its wording has been unchanged since 1948. See Act of Feb.

28, 1839, ch. 36, § 4, 5 Stat. 322.

million disgorgement sanction, only $4 million relates

to activities that occurred within five years of SEC’s

2009 filing.

Ordinarily, a word’s usage in a statute “accords

with its dictionary definition.” Yates v. United States,

135 S. Ct. 1074, 1082 (2015). In common usage, a

“penalty” is “the suffering in person, rights, or property

which is annexed by law or judicial decision to the

commission of a crime or public offense.” Webster’s

Third New International Dictionary 1668 (1976). The

disgorgement sanction imposed on Kokesh fits

comfortably within that definition. The $34.9 million

sanction (plus prejudgment interest) imposes

“suffering” and “punishment” on Kokesh as a

consequence of his alleged violations of the Investment

Company Act of 1940.

In construing § 2462 and its predecessor

statutes, the Court has sought to distinguish between

sanctions designed to punish the defendant and

sanctions whose principal purpose is to provide

compensation for individuals injured by the defendant’s

conduct. The former are “penalties” subject to § 2462's

five-year limitations period; the latter are not:

The words “penalty or jorfeiture” in this

section refer to something imposed in a

punitive way for an infraction of a public

law, and do not include a _ liability

imposed solely for the purpose of

redressing a private injury, even though

the wrongful act be a public offense, and

punishable as such.

Meeker, 236 U.S. at 423.° It is undisputed that none of

the disgorgement sanction imposed on Kokesh is

designed to provide compensation to anyone who may

have been injured by his alleged misconduct.

Accordingly, the disgorgement qualifies as a “penalty”

(as well as a “forfeiture”) within the meaning of § 2462.

Meeker’s definition of “penalty” aligns with the

definition adopted by the Court in other contexts. For

example, in a 19th-century decision that addressed

when a judgment in a state court should be deemed

“penal” for purposes of the Full Faith and Credit

Clause, the Court explained that “[pJenal laws, strictly

and properly, are those imposing punishment for an

offense committed against the state. ... The test

whether a law is penal, in the strict and primary sense,

is whether the wrong sought to be redressed is a wrong

to the public, or a wrong to the individual.”

Huntington v. Attrill, 146 U.S. 657, 667-68 (1982). In

further explanation, the Court stated that the question

of whether a law is penal depends on whether its

purpose “is to punish an offense against the public

justice of the State, or to afford a private remedy to a

person injured by the wrong.” Id. at 673-74. The

’ Meeker held that sanctions imposed by the Interstate

Commerce Commission against a railroad did not constitute a

“penalty or forfeiture” within the meaning of the predecessor of

§ 2462—Rev. Stat. § 1047, Comp. Stat. 1913, § 1712—because the

sanctions were designed to provide compensation to a company

that the railroad had overcharged for shipping coal. Id. at 423.

* The Court concluded that the New York statute in

question was not “penal” because it was designed to provide

compensation to creditors of underfunded corporations, not to

Court relied on Huntington in construing the meaning

of “penalty” as used in § 2462’s predecessor. See

Meeker, 236 U.S. at 423.

The D.C. Circuit has adopted that same

definition of a § 2462 “penalty”: “a sanction used to

punish an individual for unlawful or proscribed

conduct, going beyond compensation of the wronged

party.” Proffitt v. FDIC, 200 F.3d 855, 860 (D.C. Cir.

2000) (citations omitted). Because SEC waited more

than five years before initiating proceedings for the

purpose of imposing a disgorgement sanction on

Kokesh that went “beyond compensation of the

wronged party,” the sanction is time-barred to the

extent that it relies on events pre-dating October 2004.

A. Gabelli Confirms the Broad Reach of

Section 2462

The SEC has long chafed at what it views as

§ 2462’s overly restrictive limitations period. But

rather than approaching Congress to amend the

statute, it has urged courts to adopt a variety of

measures designed to lengthen the limitations period.

In particular, over the past several decades it has

urged courts to adopt a “discovery” rule, under which

§ 2462’s limitations period would not accrue until SEC

discovers, or with reasonable diligence should have

discovered, the defendants’ violations of the securities

laws.

punish an alleged wrongdoer. Id. at 676-77.

In Gabelli, the Supreme Court unanimously

declined to adopt a discovery rule, holding instead that

the § 2462 limitations period begins to run against SEC

as soon as the defendant completes the actions alleged

to have violated the securities law. 133 S. Ct. at 1216.

In rejecting SEC’s efforts to narrow the scope of § 2462,

the Court repeatedly emphasized the broad reach of

the statute of limitations. While the Court did not

directly address § 2462’s definition of a “penalty,”

language in the decision confirms Meeker’s holding that

the “penalty” analysis should focus on whether SEC’s

sanctions go beyond remedying the damage caused to

the harmed parties by the defendant’s action.

For example, in rejecting SEC’s request for

adoption of a discovery rule, the Court explained, “We

have never applied the discovery rule in this context

where the plaintiff is not a defrauded victim seeking

recompense.” Jd. at 1221. The Court distinguished

statutes cited by SEC as examples of a discovery rule

being applied to lawsuits filed by the government,

noting that “in many of those instances, the

Government is itself an injured victim looking for

recompense, not a prosecutor seeking penalties.” Jd. at

1224. In other words, the Court was unwilling to relax

the limitations imposed by § 2462 when the suit is one

designed primarily to impose sanctions on the

defendant, not to provide recompense for those injured

by the defendant’s conduct.°

° The Court noted that “[t]he discovery rule helps to

ensure that the injured receive recompense.” /d. at 1223. But, the

Court explained, “this case involves penalties, which go beyond

compensation, are intended to punish, and label defendants

Gabelli also rejected a discovery rule because it

determined that establishing a “fixed date” after which

government enforcement efforts would be time-barred

best served the purposes of statutes of limitations:

This reading sets a fixed date when

exposure to the specified Government

enforcement efforts ends, advancing “the

basic policies of all limitations provisions:

repose, elimination of stale claims, and

certainty about a plaintiffs opportunity

for recovery and a defendant’s potential

liabilities.”

Id. at 1221 (quoting Rotella v. Wood, 528 U.S. 549, 555

(2000)). The Court added that it has “deemed [statutes

of limitations] vital to the welfare of society ... and

concluded that even wrongdoers are entitled to assume

that their sins may be forgotten.” Ibid (citations

omitted). That language is an implicit rejection of the

SEC’s approach in this case. By asserting that the

overwhelming majority of its regularly employed

sanctions is not subject to § 2462 without regard to

whether those sanctions provide recompense to

victims—and thus is not subject to any statute of

limitations—SEC undercuts the purposes that,

according to Gabelli, § 2462 serves.

wrongdoers.” /bid (citing Meeker, 236 U.S. at 423).

B. The Manner in which SEC Imposes

Its Disgorgement Remedy Has All the

Hallmarks of a “Penalty”

That SEC’s disgorgement remedy is a § 2462

“penalty” is further confirmed by the manner in which

SEC has sought to apply it and the manner in which

the Tenth Circuit and other federal appeals courts have

enforced it.

In particular, SEC disclaims any interest in

limiting disgorgement to the amount of profit that the

defendant derived from his wrongdoing. Rather than

simply attempting to disgorge funds for the purpose of

placing Kokesh and other defendants in the same

financial position they would have occupied but for

their wrongdoing, SEC unabashedly claims the right to

a monetary judgment that encompasses all funds

misappropriated by wrongdoers—without regard to

whether those funds represent profits and even

without regard to whether the funds were ever received

by the wrongdoer or affiliated entities.

The Tenth Circuit denied that such supra-profit

sanctions constituted evidence that the disgorgement

order in this case constituted a § 2462 “penalty.” Pet.

App. 12a-13a. The court asserted that imposing such

sanctions is just: “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.” Jd. at 12a

(quoting SEC v. JT Wallenbrock & Assocs., 440 F.3d

1109, 1114-15 (9th Cir. 2006)). But regardless whether

such sanctions are “just,” one cannot plausibly argue

that they are being imposed for the purpose of

returning Kokesh to the financial position he would

have occupied had no investor funds been

misappropriated. Imposing supra-profit sanctions that

place Kokesh in a far worse financial position, on the

ground that justice requires that those guilty of fraud

be treated in this manner, can only be described as

subjecting him to a “penalty.”

Moreover, SEC repeatedly asserts that normal

evidentiary burdens should not apply to its efforts to

calculate the proper size of the disgorgement judgment.

It justifies that lightened evidentiary burden by

pointing to the defendant’s demonstrated status as a

wrongdoer. The district court in this case agreed and

awarded $34.9 million in disgorgement based on its

conclusion that wrongdoers like Kokesh are not

entitled to insist on normal evidentiary standards:

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 ofexactitude,

any risk of uncertainty in calculating

disgorgement should fall on the

wrongdoer whose illegal conduct created

that uncertainty.”

Pet. App. 44a (quoting SEC v. Haligiannis, 470 F.

Supp. 2d 373, 384 (S.D.N.Y. 2007)) (emphasis added).

The district court stated that $34.9 million “reasonably

approximates the ill-gotten gains causally connected to

[Kokesh’s] violations.” Jd. at 45a (emphasis added).

WLF does not dispute that it may be

appropriate, in some circumstances, for courts to apply

a relaxed evidentiary standard to SEC efforts to

demonstrate the size of the sanction to be imposed on

one found to have violated the securities laws. But a

decision to apply a relaxed evidentiary standard

because “any risk of uncertainty in calculating

disgorgement should fall on the wrongdoer whose

illegal conduct created that uncertainty” penalizes a

defendant because of his wrongdoing.

Finally, WLF notes that both the Tenth Circuit

and the district court recognized that one purpose of

imposing a disgorgement remedy on securities-law

violators is to deter others’ violations of the securities

laws. Pet. App. lla, 43a. Deterrence is one of the

principal reasons why governments impose penalties.

For example, the Court has explained that punitive

damages historically have been awarded as a

“punishment” for the defendant “to prevent such

offences in the future.” Exxon Shipping Co. v. Baker,

554 U.S. 471 (2008) (quoting Coryell v. Colbaugh, 1

N.J.L. 77 (1791)). Imposing a disgorgement remedy in

order to deter future misconduct and not solely for the

purpose of restitution to those injured by the

defendant's misconduct has all the hallmarks of a

“penalty,” as that term is commonly understood.

Il. THE SEC’S EFFORT TO DISTINGUISH

EQUITABLE SANCTIONS FROM PUNITIVE

SANCTIONS IS UNAVAILING

The SEC has repeatedly argued that

disgorgement is not a § 2462 “penalty” because it is

properly categorized as an “equitable” remedy that

lacks punitive intent. See, e.g. Opp. Cert. at 8. The

Tenth Circuit cited the equitable-remedy argument in

affirming the district court judgment. Pet. App. 10a.

That reliance on equitable principles fails to

demonstrate § 2462’s inapplicability—both because it

misreads legal history (the disgorgement sought by

SEC has never been deemed an equitable remedy) and

because it wrongly presumes that Congress would

choose not to apply its § 2462 limitations period to an

equitable remedy that is punitive in nature. Moreover,

accepting SEC’s equitable-remedy argument would

eviscerate § 2462; it would permit SEC to seek a

disgorgement remedy based on conduct that occurred

decades in the past.

A. What SEC Now Terms

“Disgorgement” Has Never Been

Categorized as an Equitable Remedy

by this Court

The SEC contends that “disgorgement is relief

‘given in accordance with principles governing equity

jurisdiction” and that “its purpose is ‘not to inflict

punishment but to prevent unjust enrichment.” Opp.

Cert. at 8 (quoting Sheldon v. Metro-Goldwyn Pictures

Corp., 309 U.S. 390, 399 (1940)). It cites the following

quotation from a later Court decision raising Seventh

Amendment right-to-jury-trial issues: “[W]je have

characterized as equitable ... actions for disgorgement

of improper profits.” [bid (quoting Feltner v. Columbia

Pictures Television, Inc., 523 U.S. 340, 352 (1998)).

The SEC citations are misleading because those

cases refer to a “disgorgement” remedy quite unlike the

remedy sought by SEC in recent decades. The

disgorgement remedy referenced by the Court is a form

of restitution: in some instances, equity courts deemed

it fair to order a defendant found to have infringed

another’s patent or copyright to disgorge the profits

generated by his infringement and to pay them to the

injured plaintiff, who was deemed the rightful owner of

those profits. As explained above, the “disgorgement”

sought by SEC in recent decades is of a far different

nature. It seeks disgorgement from securities-law

violators (to the Government, not to victims) because it

deems it unjust to permit violators to be enriched by

their wrongdoing. Thus, Sheldon’s statement that

disgorgement is a remedy whose purpose “is not to

inflict punishment” is irrelevant to this case because it

was referring to a remedy far afield from the

disgorgement remedy SEC now seeks.

Throughout American legal history, whether a

remedy was classified as legal or equitable had

particular significance in the fields of patent and

the 20th century, patentees and copyright owners faced

a difficult choice in deciding whether to proceed against

infringers at law or in equity. If they were most

interested in enjoining future infringement, they would

proceed in equity because injunctive relief was

available only in equity, not in courts of law. But

throughout most of the 19th century (until 1870 in the

case of patents, 1909 in the case of copyrights),

damages were unavailable in equitable actions filed

against infringers; so a second lawsuit was required to

recover damages for past infringement. See Root v.

Lake Shore and Michigan So. Ry. Co., 105 U.S. 189,

201 (1881)

Federal courts were sympathetic to this dilemma

and thus permitted plaintiffs proceeding in equity to

seek “equitable” monetary remedies (referred to as an

“accounting”) in addition to injunctive relief. The

courts permitted patentees and copyright owners to

recover in equity the net profit that the defendant

earned as a result of his infringement, as a substitute

for the damages they might have been awarded in an

action at law. In an 1881 patent-law decision, this

Court explained that once a federal court acquired

jurisdiction to consider a grant of injunctive relief, it

could “retain the cause for the sake of administering

an entire remedy and complete justice, rather than

send him to a court of law for redress in a second

action.” Root, 105 U.S. at 214. The Court elaborated:

The rule adopted was that which the

court in fact applies in cases of trustees

who have committed breaches of trust by

an unlawful use of trust property for their

own advantage; that is, to require them to

refund the amount of profit which they

have actually realized. This rule was

adopted, not for the purpose of acquiring

jurisdiction, but, in cases where, having

jurisdiction to grant equitable relief, the

court was not permitted by the principles

and practice in equity to award damages

in the sense in which the law gives them,

but a substitute for damages, for the

purpose of preventing multiplicity of

suits.

Id. at 214-15.

Both Sheldon and Feltner, the decisions on

which SEC relies, were copyright cases. The

“disgorgement” relief referenced in those decisions is

the relief described in Root: a restitution award in

equity to a patentee or copyright holder (consisting of

the profits earned by the defendant as a result of his

infringement) in lieu of the damages he might have

recovered in an action at law.® That disgorgement

* Nineteenth century courte recognized a rough

equivalence between the equitable monetary remedy

(disgorge ment of the net profit earned by the defendant as a result

of his infringement) and damages at law (awarded for losses

suffered by the patentee or copyright holder as a result of the

infringement). Indeed, in actions at law, this Court routinely

recognized that the amount of the infringer’s unjust profit could

properly be used as evidence of the plaintiff's lost profits. See, e.g.,

Suffolk Co. v. Hayden, 70 U.S. 315, 320 (1865) (“And what evidence

could be more appropriate and pertinent [in assessing damages]

than that of the utility and advantage of invention over the old

modes or devices that had been used for working out similar

results? With a knowledge of these benefits to the persons who

have used the invention, and the extent of the use by the infringer,

a jury will be in possession of material and controlling facts that

may enable them, in the exercise of a sound judgment, to ascertain

the damages, or in other words, the losses to the patentee or owner

relief is far afield from the disgorgement SEC seeks,

which would disgorge profits from a wrongdoer not for

the purpose of compensating an injured plaintiff but for

the purpose of ensuring that the defendant is not

“unjustly enriched” by his wrongdoing. Historically,

courts in equity did not recognize the relief SEC seeks.

The stark contrast between the equitable relief

recognized by 19th-century equity courts and the

disgorgement relief SEC seeks is all the greater given

SEC’s refusal to limit disgorgement to a wrongdoer’s

net profits. Nineteenth-century equity courts

consistently refused to grant monetary relief that

exceeded the infringer’s net profits derived directly

from the infringement, even when the plaintiff

presented evidence that his losses far exceeded those

net profits or that the defendant could have earned

much more from his infringement if he had operated

his business more efficiently. See, e.g., Livingston v.

Woodworth, 56 U.S. 546, 560 (1854) (injured claimants

are entitled to claim the defendant’s net profits derived

from the infringement, “that which ... is theirs, and

nothing beyond this”); Mowry v. Whitney, 81 U.S. 620,

650 (1871).

B. Disgorgement Is Barred as a Section

2462 “Penalty” Even If It Could

Properly Be Termed Equitable Relief

The SEC’s equitable-remedy argument is

unavailing for the additional reason that it fails to

by the piracy instead of the purchase of the use of the invention.”).

address the language of § 2462, which imposes a five-

year limitations period on actions to enforce a “civil

fine, penalty, or forfeiture.” If the disgorgement relief

sought by the SEC is a “penalty” within the meaning of

that statute—and it is, for all the reasons cited

above—it is irrelevant whether that relief was

available historically from courts of equity.

Nothing in the language of § 2462 suggests that

Congress was imposing a limit on remedies available in

legal actions but not on equitable remedies. The SEC

has cited no 19th-century case law in which the

government sued in equity for injunctive relief and also

sought “equitable” monetary relief, let alone an action

of that sort in which the predecessor to § 2462 was

deemed inapplicable. In sum, even if SEC’s equitable-

remedy argument were historically accurate, it would

add nothing to the statutory-interpretation issue before

the Court.

C. The SEC’s “Equitable” Argument

Would Eviscerate Section 2462

The SEC’s interpretation of § 2462 should be

rejected for the additional reason that it would

virtually eliminate all limits on the Commission’s

power to reach back in time to prosecute long-ago

alleged violations of the securities laws.

The statute of limitations would cease to exist if

SEC could avoid § 2462 limitations any time it

articulated an “equitable” rationale for imposing

sanctions, and (as this case well illustrates) SEC has

little difficulty concocting such rationales. In the years

since the Court decided Gabelli, SEC has come to rely

increasingly on disgorgement claims to extract

monetary payments from the regulated community,

and many of those claims stretched back far more than

five years. From 2011 to 2015, the annual monetary

penalties collected by the SEC remained flat, while the

annual disgorgement awards increased 60% during

that same period, to more than $3 billion in 2015. The

2015 disgorgement awards were nearly double the

2015 penalty awards. Compare SEC, Select SEC and

Market Data, Fiscal 2011 with SEC, Select SEC and

Market Data, Fiscal 2015.

As Gabelli recognized, statutes of limitations are

“vital to the welfare of society.” 133 S. Ct. at 1221.

They provide “security and stability to human affairs,”

Wood v. Carpenter, 101 U.S. 135, 139 (1879), without

which society cannot function effectively. In adopting

§ 2462, Congress determined that, although

enforcement of the securities law is an important

societal goal, citizens should be permitted to arrange

their affairs secure in the knowledge that securities

transactions in which they engaged more than five

years ago will not suddenly give rise to unanticipated

civil fines, penalties, or forfeitures. That security will

be all but eliminated if SEC prevails in this matter.

The SEC’s efforts to thwart § 2462 are

particularly worrisome because they create the danger

of arbitrary enforcement. By lifting virtually all

constraints regarding how far back SEC can reach to

impose monetary sanctions, the Tenth Circuit has

granted the Commission extraordinary discretion

regarding whom to target and whether to seek to

bankrupt those targeted.’ The SEC may attempt to

assure the Court that it will use its new-found power

responsibly. But as a D.C. Circuit panel recently

responded to similar assurances from the Consumer

Financial Protection Bureau, “trust us’ is ordinarily

not good enough.” PHH Corp. v. CFPB, 839 F.3d 1, 55

(D.C. Cir. 2016), vacated and reh. granted, _ F.3d ___

(Feb. 16, 2017).°

In the context of punitive damages, the Court

has identified the unpredictability of penalties as

particularly worrisome and as calling into question the

fairness of the legal system:

[A] penalty should be reasonably

predictable in its severity, so that even

Justice Holmes’s “bad man” can look

ahead with some ability to know what the

stakes are in choosing one course of

action or another. ... And when the bad

man’s counterparts turn up from time to

time, the penalty scheme they face ought

’ Lifting those constraints also grants SEC tremendous

leverage to force settlements. Few SEC targets can afford to resist

settlement pressures, even if they believe that SEC’s charges are

unwarranted, when the alternative is to go to trial and thereby

risk incurring the huge “disgorgement” sanctions (covering

transactions dating back decades) that SEC often seeks to assess.

* In rejecting CFPB’s claim that no limitations period

applied to Bureau enforcement proceedings, the panel stated, “This

Court looks askance ... at the idea that the CFPB is free to pursue

an administrative enforcement action for an indefinite period of

time after the relevant conduct took place.” Ibid.

to threaten them with a fair probability of

suffering in like degree when they wreak

like damages.

Exxon Shipping, 554 U.S. at 502. Were it to grant SEC

virtually unlimited authority to reach back in time, the

Court would exacerbate the unpredictability

problem—particularly in light of the tendency of some

federal agencies to base their enforcement decisions on

newly minted interpretations of existing federal law.

In sum, SEC’s position—that imposing a

monetary sanction equal tothe funds misappropriated

by the defendant is “equitable” and thus not subject to

§ 2462 limitations—should be rejected because it would

eliminate virtually all temporal limits on SEC’s

authority and provide SEC with largely unfettered

enforcement discretion.

Ill, THECOURTSHOULD INTERPRET SECTION 2462

WITHOUT REGARD TO ANY “NARROW

CONSTRUCTION” PRESUMPTION

In interpreting § 2462, the Tenth Circuit may

have been led astray by its inappropriate invocation of

a “narrow construction” canon. It stated, “Statutes of

limitations are to be interpreted narrowly in the

government's favor,” Pet. App. 6a, and then proceeded

to construe § 2462 in the government's favor.

There is no evidence that Congress intended

§ 2462 to be read narrowly, and there is no basis for

construing it in a manner other than in accord with the

natural meaning of the statutory language.

While this Court has occasionally cited the

“narrow construction” presumption, it has done so

exclusively in cases in which some proprietary

government interest was at stake. See, eg., BP

America Production Co. v. Burton, 549 U.S. 84, 95

(2006) (royalties for oil and gas production on federal

land); Badaracco v. Comm’r of Internal Revenue, 464

U.S. 386 (1984) (suit to recover unpaid federal income

tax); E. I. Du Pont de Nemours & Co. v. Davis, 264 U.S.

456, 462 (1924) (collection of unpaid shipping fees on

government-operated railroad); United States v. Whited

& Wheless, Lid., 246 U.S. 552, 561 (1918) (recovery of

fraudulently procured government land). It has never

been cited in a case in which the government was

exercising its enforcement authority. For example, the

Court did not cite it when construing § 2462 against

SEC in Gabelli.

The Court’s expressed rationale for the

presumption indicates that it is inapplicable to

enforcement actions. The Court explained in

Guaranty Trust Co. of New York v. United States, 304

U.S. 126, 132 (1938) that “[t]he true reason [for the

presumption] is to be found in the great public policy of

preserving public rights, revenues, and property from

injury and loss, by the negligence of public officers.”

That rationale could explain the application of the

presumption when (as in the cases cited above) the

Government’s proprietary interests are at stake. But

when, as here, SEC is not suing to “preserv[e] public

rights, revenues, [or] property,” when the Government

is simply attempting to enforce the laws with respect

to long-ago events, and when there is no question of

“negligence of public officers,” there is no reason to

construe § 2462 in a biased manner.

Moreover, it makes little sense to construe a

statute of limitations in favor of the federal

government when, as with § 2462, the only possible

plaintiff is the federal government (or a private

attorney general acting pursuant to a citizen-suit

provision). In the great majority of the cases in which

the Court has cited the narrow-construction

presumption, the statute of limitations at issue applied

to a wide array of potential plaintiffs; thus, it was at

least plausible that Congress intended the statute to

apply more narrowly when the United States was the

plaintiff. But § 2462 only applies when the United

States (or its surrogate) is filing suit. Under those

circumstances, one would expect Congress, if it had

intended the statute to apply narrowly, to include

narrowing language in the statute and not to rely on

courts to do the narrowing for it.

Finally, whatever force the narrow-construction

maxim may have, it is more than counterbalanced by

a maxim that runs in the opposite direction and is

directly applicable to Government enforcement actions.

Gabelli cited that maxim, as announced by Chief

Justice John Marshall: “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 v. Woods, 6 U.S. at 342 (Marshall,

C.J.)). The D.C. Circuit also cited Adams in a decision

that expressly rejected application of the narrow-

construction maxim and held (contrary to a position

then espoused by SEC) that § 2462 imposed a five-year

limitations period for administrative enforcement

actions filed by federal agencies:

In a country where not even treason can

be prosecuted, after a lapse of three

years, it could scarcely be supposed, that

an individual would remain forever liable

to a pecuniary forfeiture.

3M Co. v. Browner, 17 F.3d 1453, 1457 (D.C. Cir. 1994)

(quoting Adams, 6 U.S. at 341).

CONCLUSION

The decision below should be reversed.

Respectfully submitted,