On Tuesday, the Supreme Court will hear arguments in an arcane-sounding securities case that could affect the lives of people targeted by the SEC and disrupt the work of that agency.
The case, Kokesh v. SEC, concerns whether a five-year statute of limitations applies to claims for “disgorgement,” or repayment of stolen money. Disgorgement differs from fines, which the SEC considers to be punitive. The SEC doesn’t consider disgorgement to be punishment since defendants are simply paying back — or disgorging — money they never should have had in the first place.
The SEC has come to rely heavily on disgorgement, so a ruling against it could shake things up at the agency and also please some business people accused of fraud.
But the case hasn’t captured the public’s imagination in the way that, say, disputes over gay marriage or Obamacare have in recent years. It has caught the attention of Mark Cuban, though.
“Mr. Cuban has an abiding interest in challenging the SEC”
The billionaire Dallas Mavericks owner and “Shark Tank” investor submitted an amicus (aka, “friend of the court”) brief in support of Charles R. Kokesh, a venture capitalist fighting a disgorgement order to the tune of $34.9 million after a jury found him liable for looting clients’ funds. Much of Kokesh’s conduct occurred more than five years before the SEC’s lawsuit, and a federal law prohibits the filing of suits to enforce any “civil fine, penalty, or forfeiture” more than five years after the fact.
The SEC, however, argues that disgorgement doesn’t count as a punishment but rather leaves the wrongdoer in the same position he would have been in if he hadn’t committed the fraud.
Kokesh obviously disputes that argument, as does Cuban, who had his own run-in with the SEC.
“As a businessman who has faced down a misguided and defective SEC enforcement action, Mr. Cuban has an abiding interest in challenging the SEC when it takes positions unmoored from governing law and precedent,” Cuban’s amicus brief stated.
That brief added: “Here, the SEC has done exactly that in claiming that it can obtain as ‘disgorgement’ a money judgment against defendants, plus crippling prejudgment interest, without regard to the time period that has passed between the time of the alleged violation and the time the SEC chose to bring its case.”
Cuban’s long-running fight with the SEC
Cuban comes by his disdain for the SEC honestly. Back in 2013, a jury cleared him of insider trading following a five-year legal battle with the agency. The SEC accused Cuban of dumping stock in an internet company called Mamma.com after he got an inside tip about a pending private offering that would have diluted his shares.
Much of the government’s case hinged on an unrecorded phone call, and Cuban fought the case long after others would have settled. In fact, he said at the time, he paid more to litigate than he would if he’d settled with the SEC. But, Cuban said, “I won’t be bullied. I don’t care care if it’s the federal government.”
Cuban apparently doesn’t want others to be bullied, either. Last year, he filed an amicus brief in another Supreme Court case in support of a grocery wholesaler accused of insider trading. The government won that case after the high court ruled unanimously that it’s illegal for business executives to give private inside tips to their relatives.
“Their view is we’re taking the money that the defendants stole”
The Kokesh case could pose a more difficult question. The law that imposes the five-year statute of limitations for a “civil fine, penalty, or forfeiture,” a statute called 2462, dates back to 1839. That was before the SEC even existed and long before it began seeking disgorgement, so the law couldn’t have specifically mentioned that term.
Still, the SEC will argue that disgorgement doesn’t belong in the same category as other forms of financial punishment. In its brief in the case, the SEC made a point to illustrate Kokesh’s “extravagant” lifestyle, noting that his “illicit gains” had funded a gated mansion, private polo ground and stable of more than 50 horses.
“Their view is we’re taking the money that the defendants stole. You can’t defend keeping stolen money … And therefore, who cares when he did it,” Peter Henning, a professor of law at Wayne State University and former senior attorney at the SEC, told Yahoo Finance.
“I expect at the oral arguments the SEC is going to beat the drums for don’t let the bad guys keep their ill-gotten gains,” Henning said. “There’s a natural appeal there.”
High stakes for the SEC and an uncertain outcome
Of course, Kokesh’s argument that disgorgement constitutes punishment could also appeal to the justices. In his brief, his lawyers argue that money from disgorgement doesn’t go to victims but rather the Treasury Department. “When a remedy imposes negative consequences on wrongdoing without compensating victims, it is a penalty,” that brief states.
Regardless of whether disgorgement is a penalty, if the Supreme Court rules in Kokesh’s favor it could take away a weapon it uses routinely. Kokesh’s brief notes that the agency collected $3 billion in disgorgement payments in 2015 alone, far more than its $1.2 billion in money penalties. So, how likely is the Supreme Court to take away this weapon? It’s difficult to say, since the Supreme Court has never taken up this issue before, and since it is not an inherently political one.
“The Court is interpreting a really old statute trying to figure out if it should apply to a relatively recent remedy,” Adam C. Pritchard, a professor at the University of Michigan Law School, noted in an email to Yahoo Finance. Asked how the case might shake out, he acknowledged, “Your guess is as good as mine.”
Erin Fuchs is deputy managing editor of Yahoo Finance.
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