SEC v. Koenig

United States Court of Appeals for the Seventh Circuit · 2009 · Civil Procedure

Updated July 29, 2026

Civil Procedure28 U.S.C. § 2462equitable tollingfraud concealmentaccrualRule 403hearsayinvited error

Facts

Koenig, Waste Management's former CFO, used accounting practices including netting and basketing/bundling to overstate current profits and hide losses that should have been recognized earlier. Waste Management publicly disclosed in October 1997 that its financial statements were unreliable, and a later restatement took a charge of about $1.1 billion for 1992-96. The SEC sued on March 26, 2002, seeking penalties and disgorgement, and the district court found that properly stated profits would have eliminated bonuses Koenig received in 1992, 1994, and 1995. At trial, Koenig pursued an "earnings bath" theory blaming later management, objected to juror questioning and the SEC's use of his own expert, and challenged the inclusion of prejudgment interest in the penalty calculation.

Issue

Whether the SEC's penalty claim was timely under 28 U.S.C. § 2462 when the fraud was not discovered until 1997; whether the district court abused its discretion in its evidentiary and trial-management rulings; and whether prejudgment interest could be treated as part of Koenig's pecuniary gain and whether the bonus disgorgement calculation was correct.

Rule

For fraud, the limitations period under § 2462 does not begin to run until the fraud is discovered, or could have been discovered with reasonable diligence, whether described as accrual on discovery or equitable tolling. Trial-management decisions such as admitting motive-related evidence opened by a party, allowing juror-submitted questions, and permitting use of an already-disclosed opposing expert are reviewed for abuse of discretion, and delayed expert-designation notice is harmless when the witness was already disclosed by the opposing party and fully known. In calculating securities penalties capped by the defendant's gross pecuniary gain, prejudgment interest may be included as part of that gain because it measures the economic return on ill-gotten funds.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

In Seattle, a federal market regulator sued Nora Patel in 2024 for civil penalties based on sham revenue entries she made for a public issuer in 2017 and 2018. The issuer did not reveal the falsity until a 2021 public announcement, and Nora does not argue that the regulator could have uncovered the fraud earlier through reasonable diligence.

Is the agency's penalty action timely under the five-year limitations period?

Explanation. The majority held that, for fraud, the limitations period under § 2462 runs from discovery of the fraud, or when it could have been discovered through reasonable diligence, whether framed as accrual on discovery or equitable tolling. The government gets the benefit of that rule even when enforcing laws for the public rather than as a direct victim. Here, suit within five years of the first public revelation is timely absent any argument that earlier diligent discovery was possible. (Derived from SEC v. Koenig (n.d.).)