Supreme Court Update: Kokesh v. SEC (16-529), Town of Chester v. Laroe Estates (16-605), and North Carolina v. Covington (16-1023)

June 7, 2017 Supreme Court Update

Greetings, Court Fans!

The Court took care of some deck clearing this week, handing down five unanimous decisions in relatively uncontroversial cases, including Honeycutt v. United States (No. 16-142), on the applicability of federal forfeiture statutes to members of a conspiracy who did not personally acquire forfeitable property, and Advocate Health Care Network v. Stapleton (No. 16-74), on the scope of ERISA's "church plan" exemption. We'll bring you summaries of those decisions in our next Update. In this installment, we'll cover Kokesh v. SEC (No. 16-529), on the application of the Securities Exchange Act's statute of limitation to disgorgement actions; Town of Chester v. Laroe Estates (No. 16-605), on the standing requirements for intervenors as of right; and North Carolina v. Covington (No. 16-1023), on the standard for awarding equitable relief in racial gerrymandering cases.

In Kokesh v. SEC (No. 16-529), the Court held that SEC disgorgement actions are subject to the Securities Exchange Act's five-year statute of limitations for enforcement proceedings resulting in fines, penalties, or forfeiture, thereby significantly curtailing one of the SEC's chief enforcement mechanisms.

The Securities Exchange Act authorizes the SEC to investigate violations of federal securities laws and to commence enforcement actions in federal district court if it uncovers evidence of wrongdoing. While this authority was initially limited to seeking injunctions barring future violations, beginning in the 1970s, the SEC began requesting disgorgement—a form of restitution measured by the defendant's wrongful gain—in enforcement proceedings, and district courts complied. Subsequently, Congress expressly authorized the SEC to seek monetary "civil penalties, subject to a five-year limitations period for "an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture." The question in Kokesh was whether that limitations period applies also to disgorgement actions.

The question is significant because even though Congress has authorized the SEC to seek civil penalties, the SEC has continued to seek disgorgement in enforcement proceedings and has recouped big bucks in so doing. Charles Kokesh's case provides a good example. In 2009, the SEC commenced an enforcement action alleging that between 1995 and 2009, Kokesh, through his investment-adviser firms, misappropriated $34.9 million from several development companies. After a jury found against him, the district court imposed a fine of $2.4 million, equivalent to the amount he personally received in the five years leading up to the enforcement action, i.e. during the limitations period. But the court found that the statute of limitations did not apply to the SEC's request for disgorgement and therefore required Kokesh to pay back the full $34.9 million ($29.9 million of which was obtained outside the limitations period) along with an extra $18.1 million in prejudgment interest dating back to 1995. The Tenth Circuit affirmed (no, Gorsuch wasn't on the panel), agreeing with the SEC and the district court that disgorgement is neither a "penalty" nor a "forfeiture" and therefore is not governed by the five-year statute of limitations.

The Supreme Court disagreed, in unanimous decision penned by Justice Sotomayor. According to the Court, the issue boiled down to whether SEC disgorgement constitutes a "penalty." If so, then the statute of limitations applies on its own terms. The Court concluded that disgorgement is a penalty for three reasons. First, SEC disgorgement has been imposed as a consequence for an offense committed against the public, as opposed to an individual wrong that would be remedied in a traditional civil lawsuit. (This is why SEC enforcement actions can proceed even if the actual victims do not support it.) Second, SEC disgorgement is imposed for punitive purposes, specifically deterrence. And third, in many cases disgorgement does not serve any compensatory purpose. Disgorged profits are paid to the district court and it is within the court's discretion to determine how the money will be distributed. There is no requirement that it be repaid to the "victims" and in many cases the funds go directly to the U.S. Treasury. The Court flatly rejected the Government's contention that disgorgement is "remedial," not "punitive." While it may serve a compensatory purpose in some cases, in many cases defendants are ordered to disgorge more than their own ill-gotten gains, suggesting the status quo ante is not always the destination of a disgorgement action. Because disgorgement, as applied in SEC enforcement actions, operates as a penalty, the statute of limitations applies, meaning that a defendant can only be required to disgorge ill-gotten gains dating back five years from the commencement of the enforcement action.

Even by itself, this is a pretty significant holding insofar as it impacts the Government's bottom line. (After all, Kokesh has just effectively recouped almost $30 million that had been ordered disgorged.) But there is further intrigue below the line. In a dog-whistle footnote, Justice Sotomayor stressed that "[n]othing in this opinion should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC enforcement proceedings or on whether courts have properly applied disgorgement principles in this context." (That sound you hear is a thousand Wall St. lawyers drafting motions to dismiss the disgorgement counts of SEC enforcement actions.)

Next up, in Town of Chester v. Laroe Estates, Inc. (16-605), the Court held that an intervenor as of right must meet Article III standing requirements where the intervenor seeks a distinct recovery. The case involved a land development gone bad . . . very, very bad. It all began in 2001 when Steve Sherman bought land he wished to develop into a subdivision. But he was thwarted at every turn by the Town of Chester's "ever-changing labyrinth of red tape." Early on, Sherman entered into an agreement with Laroe Estates, Inc., under which Laroe advanced Sherman millions in exchange for a mortgage on the entire property and the right to purchase certain parcels once the regulatory hurdles were cleared. But despite Sherman's efforts over many years and millions of dollars, Sherman couldn't manage to get the subdivision built. When, in 2013, TD Bank sought to foreclose on the property, Sherman offered Laroe ownership of the property for his past loans and whatever he needed to pay TD Bank to avoid the foreclosure, but Laroe was unable to make a deal with bank, which ultimately took over the property, putting the final kibosh on the project.

In 2012, however, before the bank took over, but after more than a decade of fruitless haggling, Sherman filed suit against the Town, alleging that the regulatory run-around effectively amounted to a taking of property in violation of the Fifth and Fourteenth Amendments. Laroe later attempted to intervene in the case as of right under Federal Rule of Civil Procedure 24(a)(2). Laroe claimed that, as a result of its agreements with Sherman, it was the "equitable owner" of the property. The district court concluded that Laroe lacked standing to intervene because it was merely a contract vendee of the property, but the Second Circuit reversed, holding that Laroe did not need to establish independent Article III standing because it qualified as an intervenor as of right.

The Court, once again unanimous, reversed, this time led by Justice Alito. He began with the basic premise that "standing is not dispensed in gross," and must be demonstrated "for each claim" and "for each form of relief that is sought." Applying these core principles, the Court concluded that an intervenor as of right must have Article III standing to seek relief that is different than the relief sought by existing parties with standing. "Different relief" can include a separate money judgment in the intervenor's own name even where another party (here, Sherman) was also seeking a money judgment. Unfortunately, the record below was muddy as to whether Laroe was seeking only to "maximize Sherman's recovery" or to obtain a distinct money judgment in its own name running directly against the Town. Accordingly, the Court remanded the case to the Second Circuit to sort through the muck in the first instance. If it turns out that Laroe is seeking damages different from those sought by Sherman, then it must establish its own Article III standing in order to intervene. At that point, the Court of Appeals will need to decide whether Laroe's alleged equitable interest in the property is sufficient to satisfy Article III standing requirements.

Finally, North Carolina's legislative districts were back before the Court in two cases captioned North Carolina v. Covington (Nos. 16-649 & 16-1023). Both petitions were brought by the State. The first challenged a three-judge district court's order striking down 28 majority-Black districts as unconstitutional racial gerrymanders. The Supreme Court affirmed that order in light of its decision two weeks ago week in Cooper v. Harris (No. 15-1262). But in the second case, the Court gave North Carolina a narrow victory. As a result of its racial-gerrymandering holding, the district court had ordered the NC General Assembly to redraw its map before the State held any future elections for its General Assembly. But three months later (shortly after the November 2015 elections), the district court amended its order, setting a March 2017 deadline for the drawing of new districts and ordering that the term of any legislator elected in the November 2016 elections (which included the unconstitutional districts) must be shortened to one year, with special elections for those seats to be held in the fall of 2017. (This required the district court to further order that certain provisions of the NC Constitution would be suspended.)

That was all a bit much for the Supreme Court, which held, in a unanimous per curiam decision, that the district court erred in failing to weigh any equitable considerations in ordering this extraordinary relief. A district court deciding a redistricting case must undertake an "equitable weighing process to select a fitting remedy for the legal violations it has identified." Some of the factors to be weighed are the nature and severity of the particular violation, the extent of the disruption to ordinary processes of governances if something like special elections are imposed, and the need to act with proper judicial restraint when intruding on state sovereignty. Though the Court did not suggest anything about the relative weight of those factors in this particular case, it faulted the district court for not even considering them, and remanded the case for it to do so in the first instance.

Before we leave you, there was also a big crim-pro cert grant this week. The Court agreed to hear Carpenter v. United States (No. 16-402), which asks whether the warrantless seizure and search of historical cell phone records revealing the location and movements of a cell phone user over a period of time is permitted by the Fourth Amendment.

We'll have that Update for you next year. But stay tuned this week for our summaries of Honeycutt and Stapleton.