By R. Jason Howard, J.D.
On the heels of the Supreme Court holding in Kokesh v. SEC that disgorgement, “as it applied in SEC enforcement proceedings, operates as a penalty,” the Sixth Circuit, in a criminal sentencing appeal, held that SEC civil disgorgement is not a criminal punishment (U.S. v. Dyer, November 13, 2018, Suhrheinrich, R.).
Broad Street. For more than eight years, the defendants owned and managed Broad Street Ventures, LLC, which they used to embezzle investor funds by paying the funds out to themselves as nontaxable distributions and underreported income to evade paying taxes on it. In all, the government estimated that the amount of the loss or fraud totaled over $4.9 million.
On July 20, 2016, the SEC began a civil enforcement suit against the defendants and nine months later, in April 2017, the government filed an information charging the defendants with conspiracy to commit mail and wire fraud and tax evasion. In May 2017, the defendants pleaded guilty to the conspiracy to commit wire fraud and mail fraud, and tax evasion. As part of their plea deals, the defendants stipulated that the amount of loss caused by their conduct was greater than $3.5 million, waived any double jeopardy defenses, and agreed to pay over $538,000 in restitution to the IRS.
In May 2017, the defendants consented to entry of a final judgment in the civil case, where they agreed that the court would order disgorgement of ill-gotten gains, pre-judgment interest, and a civil penalty. In the criminal case, sentencing guidelines after all considerations left the defendants with between 46 and 71 months of imprisonment. The defendants objected to the guideline calculations, arguing that the 18-level increase of their base offense level per the guidelines, violated the Double Jeopardy Clause because the defendants were already punished by disgorgement in the civil case. The defendants also argued that the five-year statute of limitations from Kokesh prevented the court from considering conduct the occurred more than five years before the indictment.
District court holding. The district court ruled that Kokesh did not apply and that it “was allowed to consider ‘relevant conduct’ that could not be prosecuted separately because of the statute of limitations.” The court also ordered the defendants to pay restitution in the full amount of the loss, over $4.9 million.
Appeal. Despite their attempts, the Sixth Circuit explained that the holding in Kokesh was narrow and that “nothing from Kokesh serves as the ‘clearest proof’ we require to transform a civil remedy into a criminal punishment for Double Jeopardy purposes.” The court continued, stating that if anything, “Kokesh reinforces the long-held understanding that SEC disgorgement is civil in nature.”
Even if the SEC disgorgement were a criminal punishment, the Sixth Circuit explained that it would affirm the defendants’ sentences for two reasons. First, with the civil complaint alleging securities violations, the SEC had to prove that the purchase or sale of a security was involved and in the criminal case, where the defendants were charged with conspiracy, the government had to prove the defendants joined in the agreement. Those elements are exclusive to the civil and criminal cases and, as such, there is no double jeopardy. Secondly, the Sixth Circuit said that “the consideration of relevant conduct resulting in an 18-level enhancement is not ‘punishment’ for Double Jeopardy purposes.”
Holding. The defendants’ other arguments met with a similar fate and the Sixth Circuit affirmed the lower court’s ruling that the SEC’s civil disgorgement is not a criminal punishment and affirmed the defendants’ sentences.
The case is No. 17-6174.