SEC v. Kokesh

FILED
United States Court of Appeals
PUBLISH Tenth Circuit
UNITED STATES COURT OF APPEALS March 5, 2018
Elisabeth A. Shumaker
FOR THE TENTH CIRCUIT Clerk of Court
_________________________________
SECURITIES AND EXCHANGE
COMMISSION,
Plaintiff - Appellee,
No. 15-2087
v.
CHARLES R. KOKESH,
Defendant - Appellant.
_________________________________
Appeal from the United States District Court
for the District of New Mexico
(D.C. No. 1:09-CV-01021-SMV-LAM)
_________________________________
Clinton W. Marrs, Marrs Griebel Law, Ltd., Albuquerque, New Mexico for Defendant-
Appellant.
Robert B. Stebbins, General Counsel, Michael A. Conley, Solicitor, and Sarah R. Prins,
Senior Counsel, Securities and Exchange Commission, Washington, D.C., for Plaintiff-
Appellee.
_________________________________
Before HARTZ, PHILLIPS, and McHUGH, Circuit Judges.
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HARTZ, Circuit Judge.
_________________________________
This case returns to us after reversal and remand from the United States Supreme
Court. The Supreme Court held that the claims for disgorgement against Defendant
Charles Kokesh brought by the Securities and Exchange Commission (SEC) were subject
to the five-year limitations period in 28 U.S.C. § 2462. The SEC contends that
$5,004,773 was converted within this period and must be disgorged. Mr. Kokesh
contends that the SEC’s causes of action first accrued more than five years before it filed
its claim. We agree with the SEC because the SEC’s claims accrued separately for each
conversion of funds.
I. BACKROUND
A. Factual History
Defendant owned and controlled two SEC-registered investment-adviser firms,
Technology Funding Ltd. (TFL) and Technology Funding, Inc. (TFI), which were the
managing general partners of, and contracted to provide investment advice to, several
SEC-registered business-development companies (the BDCs) formed by Defendant. The
contracts that the BDCs had with TFL and TFI (the Advisers) prohibited payments to the
Advisers not expressly delineated in the contracts. Nevertheless, Defendant directed the
treasurer for the Advisers to take substantial sums from the BDCs to pay salaries and
bonuses to Defendant and other officers and, although expressly prohibited in the
contracts, to reimburse the Advisers’ office rent. A 2000 amendment to the contracts
between the BDCs and the Advisers authorized reimbursements to cover the salaries of
the Advisers’ “controlling persons,” a term that included Defendant and other officers.
But the amendment was obtained through misleading proxy statements signed by
Defendant that falsely identified him as the only controlling person and grossly
underreported his salary.
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B. Procedural History
The SEC filed its complaint against Defendant in New Mexico federal court on
October 27, 2009. Among other things, it alleged that from 1995 through 2006
Defendant had misappropriated over $34.9 million from the BDCs to the Advisers. After
a jury found that Defendant had committed the fraud, the district court ordered (1) that he
pay a civil penalty of $2,354,593; (2) that he be enjoined from violating securities laws in
the future; and (3) that he disgorge $34,927,329 (plus interest). He appealed and we
affirmed. See SEC v. Kokesh, 834 F.3d 1158, 1168 (10th Cir. 2016).
Defendant sought Supreme Court review of our decision that the disgorgement
claim was not subject to the five-year statute of limitations governing suits “for the
enforcement of any civil fine, penalty, or forfeiture.” 28 U.S.C. § 2462. The Supreme
Court reversed, holding that “[d]isgorgement in the securities-enforcement context is a
‘penalty’ within the meaning of § 2462, and so disgorgement actions must be commenced
within five years of the date the claim accrues.” Kokesh v. SEC, 137 S. Ct. 1635, 1639
(2017).
On remand the SEC contends that Defendant must disgorge $5,004,773 converted
within the limitations period—that is, after October 27, 2004. That sum comprises
$279,295 for payment of office rent; $1,200,000 paid as a bonus to Defendant and
another officer; and other payments to controlling persons totaling $3,525,478.
II. DISCUSSION
The governing statute of limitations states:
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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 (emphasis added). Focusing on the “first accrued” language, Defendant
argues that the limitations period begins “when the claim first ‘comes into existence’”
and therefore the SEC’s claims accrued when he began his fraudulent schemes. Aplt.
Supp. Br. at 4. Stating that the first occasions on which he engaged in each type of
misappropriation occurred as early as 1995 and no later than 2001, he concludes that the
entire action is time-barred. The SEC responds that a new limitations period applied to
each improper conversion of funds, so the limitations period had not expired for the
conversion of $5,004,773 described above.
A. The Meaning of § 2462
Although neither party directs our attention to the opinion, we recently interpreted
§ 2462 in Sierra Club v. Oklahoma Gas & Electric Co., 816 F.3d 666 (10th Cir. 2016).
Sierra Club filed suit seeking civil penalties against the owner-operator of a power plant
for modifying a boiler without first obtaining a permit required by the Clean Air Act. See
id. at 669. The suit was not filed, however, until more than five years after construction
had commenced. See id. Sierra Club argued that the limitations period reset on each day
that the construction continued without a permit, so civil penalties could be assessed for
those days within the five-year limitations period. See id. at 671. We disagreed.
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Sierra Club held that the conduct in that case constituted a continuing violation,
rather than separately accruing violations, and then held that the limitations period
commenced with the first day of unpermitted modification. See id. at 671–72 n.5. In
determining that the modification of the boiler constituted a continuing violation, we
explained that “[a] single violation continues over an extended period of time when the
plaintiff’s claim seeks redress for injuries resulting from a series of separate acts that
collectively constitute one unlawful act, as opposed to conduct that is a discrete unlawful
act.” Id. at 672 (internal quotation marks omitted). That is, a violation is a continuing
one “when the conduct as a whole can be considered as a single course of conduct.” Id.(internal quotation marks omitted). The power-plant modification fit that description: “It
is the act of constructing [without a permit] itself that is unlawful. ‘Construct’ is an active
verb that has force after construction has begun. Thus, ‘construct’ should not be read to
encompass a disjointed series of discrete acts of construction. ‘To ‘construct’ is an
ongoing project.” Id. (alterations, citations, and internal quotation marks omitted).
Once we had so characterized the violation, we concluded that the limitations
period had expired. We explained: “[A] claim accrues when the plaintiff has a complete
and present cause of action. In other words, a claim accrues as soon as the plaintiff can
file suit and obtain relief. And a continuing violation is actionable even before the last
act of the violation where the conduct that has already occurred is sufficient to support a
claim.” Id. at 673 (citations and internal quotation marks omitted). Sierra Club argued
that the opposite conclusion should follow if the challenged conduct constituted a
continuing violation. It said that the fact that a violation is continuing should actually
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delay the commencement of the limitations period until the last occurrence of the
continuing violation. See, e.g., Havens Realty Corp. v. Coleman, 455 U.S. 363, 380–81
(1982). But we distinguished Havens on the ground that it concerned a statute of
limitations with different language. In our view, the essential feature of § 2462 was that
it speaks in terms of when a cause of action first accrues. See Sierra Club, 816 F.3d at
673–74 (“[T]he clock under § 2462 begins only once, when a claim first accrues. If the
limitations period under § 2462 reset each day, the statutory term ‘first’ would have no
operative force. In other words, the statute could just as easily state that the limitations
period begins whenever ‘the claim accrues.’”).
The statute-of-limitations issue in this case therefore turns on whether Defendant’s
misappropriations of funds from the BDCs are properly viewed as a continuing violation
or as a number of discrete wrongs. Sierra Club provides some guidance on that issue, but
further exploration of the relevant law will be helpful.
B. The Nature of Defendant’s Violations
Sierra Club cited several federal appellate decisions to illustrate the difference
between continuing violations and separately accruing ones. Two of those opinions held
that the violation was a continuing one. The Supreme Court in National Railroad
Passenger Corp. v. Morgan, 536 U.S. 101 (2002) addressed the limitations period for
employee claims complaining of a hostile work environment. “Hostile environment
claims,” it said, “are different in kind from discrete acts. Their very nature involves
repeated conduct.” Id. at 115. This is due in part to the difficulty of establishing a hostile
work environment based on a single act alone. The unlawful employment practice
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“cannot be said to occur on any particular day.” Id. “Such claims are based on the
cumulative effect of individual acts.” Id. The plaintiff was seeking redress for injuries
resulting from “a series of separate acts that collectively constitute one ‘unlawful
employment practice.’” Id. at 117. The Court held that a hostile-environment claim is
timely as long as a plaintiff “file[s] a charge within 180 or 300 days [depending on which
limitations period applies] of any act that is part of the hostile work environment.” Id. at
118 (emphasis added). (Thus, unlike the situation in Sierra Club, the fact that the
misconduct constituted a continuing violation prolonged the limitations period rather than
shortening it. See id.)
Also cited by Sierra Club was Shomo v. City of New York, 579 F.3d 176 (2d Cir.
2009), which considered a prisoner’s Eighth Amendment claim of deliberate indifference
to serious medical needs. The prisoner alleged that he had been diagnosed with right-arm
paralysis and limited use of his left arm, but prison personnel had failed to follow orders
by “several doctors . . . that he receive assistance with activities of daily living . . . , be
transferred to specialized infirmary housing, and receive various treatments.” Id. at 179–
80. The court held that the prisoner could invoke “the continuing violation doctrine when
challenging discrimination [by alleging] both the existence of an ongoing policy of
deliberate indifference to his or her serious medical needs and some non-time-barred acts
taken in the furtherance of that policy.” Id. at 181 (internal alterations and quotation
marks omitted).
On the other hand, other decisions cited with apparent approval by Sierra Club
make clear that just because a person continued to engage in misconduct over an
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extended period of time, it does not follow that the person had engaged in a singular
continuing violation, as opposed to a series of separate violations, for limitations
purposes.
Figueroa v. District of Columbia Metropolitan Police Department, 633 F.3d 1129,
1131 (D.C. Cir. 2011), involved a lawsuit under the Fair Labor Standards Act by police
officers alleging that their overtime pay had been improperly calculated. For several
years the officers had fulfilled the duties of detective sergeants but had not been paid the
extra $595 per year that went with the position. The City eventually paid them that sum
for each year they had served as detective sergeants, but rejected their claim that their
overtime pay for those years should also be recalculated. The district court had held that
the officers’ overtime claims were time-barred, but the D.C. Circuit reversed. See id. at
1130–31. The court held that each element of the officers’ overtime claims (performance
and improper compensation) “recur[red] with each pay period” and that the limitations
period therefore began anew from the time of each violation. Id. at 1135. It explained:
[A]lthough the officers refer to their “each paycheck” theory as one
involving “continuing claims,” that term is something of a misnomer. In
fact, the gravamen of this theory is not that there has been one continuing
violation . . . , but rather that there have been a series of repeated
violations of an identical nature.
Id. (citation and internal quotation marks omitted) (emphasis added).
In Birkelbach v. SEC, 751 F.3d 472, 479 (7th Cir. 2014), the defendant argued that
his failure to supervise an underling who had engaged in trading misconduct “was a
single indivisible act which accrued on the day of the first failure to supervise.” The
court held that acceptance of this argument would produce an “absurd” result. Id.8
“Under his interpretation,” the court reasoned, “if an unethical supervisor were to avoid
detection for five years, he could continue his unethical behavior forever without [facing]
discipline . . . .” Id. Rather, “[t]he rules contemplate a continuing duty to reasonably
supervise, and any violative conduct that falls within the statute of limitations is
independently sanctionable, regardless of whether there was additional violative conduct
which occurred before that time.” Id. The duty may have been a continuing one, but
each act in violation of the duty created a separate claim.
And in Poster Exchange, Inc. v. National Screen Service Corp., 517 F.2d 117 (5th
Cir. 1975), the court, following Zenith Radio Corp. v. Hazeltine Research, Inc., 401 U.S.
321 (1971), held that the conduct of persons who had allegedly conspired to violate the
antitrust laws by engaging in a refusal to deal should be “viewed as a continuing series of
acts upon which successive causes of action may accrue,” rather than “as a single act and
invasion of Poster’s rights, occurring with the original refusal to deal . . . or with the
earlier birth of the alleged conspiracy.” 517 F.2d at 125; see Zenith, 401 U.S. at 338 (“In
the context of a continuing conspiracy to violate the anti-trust laws, . . . each time a
plaintiff is injured by an act of the defendants a cause of action accrues to him to recover
the damages caused by that act and . . . , as to those damages, the statute of limitations
runs from the commission of the act.”). The court concluded that “any other result here
would, we think, improperly transform the limitations statute from one of repose to one
of continued immunity.” Poster Exch., 517 F.2d at 127. The court remanded the case to
determine whether there had been “some specific act or word” within the limitations
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period that had prevented Poster from dealing with the defendants or whether there had
been a “mere absence of dealing” during that period. Id. at 128.
Another opinion highly relevant to this case was not cited in Sierra Club. In
Rodrigue v. Olin Employees Credit Union, 406 F.3d 434 (7th Cir. 2005), a doctor’s
assistant, Wiltshire, stole 269 insurance-reimbursement checks issued to her employer,
Rodrigue, over seven years, fraudulently endorsing the checks to herself. See id. at 435.
Applying Illinois law, the circuit court held that the negotiation of each separate check
constituted a separate actionable conversion. See id. at 441–43. The court observed that
“[u]nlike a cause of action for medical malpractice based on a course of negligent
treatment with cumulative effects, or a cause of action for the intentional infliction of
emotional distress arising from a course of tortious acts considered as a whole,
Rodrigue’s claim for conversion does not depend on the cumulative nature of either
Wiltshire’s or [the bank’s] acts.” Id. at 443 (emphasis added). “Rather, a cause of action
for conversion arose each time Wiltshire cashed or deposited one of the checks she had
embezzled. The fact that Wiltshire managed to negotiate hundreds of checks over an 85–
month period is irrelevant insofar as Rodrigue’s right or ability to sue for conversion.” Id.As the court explained, “Whether Wiltshire had negotiated one check or 1000, Rodrigue
had a valid cause of action for conversion; nothing about the repeated or ongoing nature
of Wiltshire’s conduct affected the nature or validity of Rodrigue’s suit, beyond
increasing her damages.” Id. (emphasis added). It concluded, “[I]n contrast to a claim
that arises from a cumulation of wrongful acts, a claim for conversion does not pose
undue difficulty for the victim in identifying the nature, origin, and extent of her injury.”
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Id. Thus, any claims concerning checks negotiated more than three years before the
filing of plaintiff’s suit were barred. See id. at 447.
In light of this authority, we readily conclude that Defendant’s misappropriations
of funds from the BDCs are properly viewed as discrete violations. Defendant’s
misconduct was not a continuing omission to act in compliance with a duty, as in Sierra
Club (failure to obtain a permit) or Shomo (failure to provide medical care). Nor did the
“very nature” of the misconduct “involve[] repeated conduct.” Morgan, 536 U.S. at 115.
And the SEC’s claim did “not depend on the cumulative nature of [Defendant’s] acts.”
Rodrigue, 406 F.3d at 443. Rather, the gist of Defendant’s misconduct was taking funds
without proper authority, without consent. Some misappropriations were contrary to the
terms of the contracts between the BDCs and the Advisers. Some were authorized by the
2000 amendment to the contracts, but the amendment was approved by the investors only
because they were defrauded by the proxy statements, so there was no valid consent. As
in Figueroa, the misappropriations constituted “a series of repeated violations of an
identical nature,” 633 F.3d at 1135 (internal quotation marks omitted), with each
unlawful taking being actionable for five years after its occurrence.
To hold that Defendant’s misappropriations constituted only one continuing
violation would do much more than provide repose for ancient misdeeds; it would confer
immunity for ongoing repeated misconduct. See Poster Exch., 517 F.2d at 127.
Defendant could take $100 a year for five years and then misappropriate tens of
thousands without fear of liability. We cannot countenance such a result, nor do we think
that a proper interpretation of § 2462 requires us to.
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We REVERSE the judgment of the district court and REMAND with instructions
to enter an order requiring Defendant to disgorge $5,004,773.
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