For about 50 years – at least since Texas Gulf Sulphur – the SEC has ordered defendants to disgorge their profits from transactions that violated the securities laws. Despite disgorgement’s long history, in its 2017 opinion in Kokesh v. SEC, the US Supreme Court put two aspects of the remedy on the table. It applied a five-year statute of limitations to disgorgement. It also reopened old debates over agencies’ power to seek remedies not specified in statute. My article, Disgorgement in Insider Trading Cases: FY2005-FY2015 (forthcoming in SMU Law Review 2018, Texas Gulf Sulphur 50th Anniversary Special Issue), provides data to inform these debates over the agency’s use of disgorgement and the effects of Kokesh. It reports the results of an empirical study of ten years of the remedies ordered by the SEC in insider trading actions, with particular emphasis on the agency’s reliance on disgorgement.
In Kokesh v. SEC, the Court classified disgorgement as a ‘penalty’ for the purposes of 28 U.S.C. § 2462, so that the five-year statute of limitations applies. More broadly, the Kokesh opinion potentially destabilized the use of remedies such as disgorgement which were not explicitly enabled by statute. In a footnote, the Court disclaimed any opinion on ‘whether courts possess authority to order disgorgement in SEC enforcement proceedings.’ By making this disclaimer rather than treating the issue as settled and obvious, the Court suggested that the SEC’s authority to order disgorgement might be up for debate.
What impact will Kokesh have on SEC enforcement? This study provides evidence from SEC insider trading actions resolved from FY2005 to FY2015. The data reflect heavy reliance on disgorgement of profits from insider trading. It also suggests, however, limits to how much the newly imposed statute of limitations or even the destabilization of the disgorgement remedy altogether would affect this category of cases.
Perhaps unsurprisingly, the SEC ordered disgorgement in the vast majority of insider trading actions identified in the study. The result is consistent with statements from SEC staff that they seek disgorgement in the majority of enforcement actions. It also corresponds with aggregate numbers in SEC annual reports that point, for instance, to disgorgement of more than $2.9 billion in FY2017 – totals that exceeded comparable total penalty amounts.
Nonetheless, some results suggest limits to the impact of Kokesh — either the holding or its more radical insinuations — on this category of SEC action. First, a rough time frame between conduct and judgment can be calculated using the disgorgement amount, the prejudgment interest amount, and the SEC rule prescribing the interest rate and compounding method. There are certainly caveats about this calculation, which the article reviews in more detail. But by this measure, prejudgment interest seems rarely to have been charged for more than five years, which may suggest that the newly imposed five-year statute of limitations would have limited effect in this area.
Second, statutes limit the penalties for insider trading to three times the amount of profit (or loss avoided). But most defendants in the study were ordered to pay less than that, with more than half ordered to pay ‘one plus one’ (equal disgorgement and penalty). One possible implication is that penalties could be used as a substitute for disgorgement amounts, perhaps lessening the impact of Kokesh on the SEC’s ability to order payment or to use money payments for deterrence.
The article provides additional details about the monetary remedies ordered annually from FY2005 to FY2015, depicts the patterns of disgorgement amounts, and analyses the ratio between money penalties and disgorgement. More generally, it provides an empirical baseline for assessing how past agency practices might adapt as this area develops.
Verity Winship is Professor of Law at the University of Illinois.