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UPDATE 1-U.S. top court rules against SEC over recovery of ill-gotten gains

(Adds background on dispute, quotes from ruling, paragraphs 3-10)

WASHINGTON, June 5 (Reuters) - The U.S. Supreme Court on Monday scaled back the Securities and Exchange Commission's power to recover ill-gotten profits from defendants' misconduct, handing Wall Street firms a victory and dealing another blow to the regulator's enforcement powers.

In a 9-0 ruling, the Supreme Court found that the SEC's recovery remedy known as "disgorgement" is subject to a five-year statute of limitations. The justices sided with New Mexico-based investment adviser Charles Kokesh, who previously was ordered by a judge to pay $2.4 million in penalties plus $34.9 million in disgorgement of illegal profits after the SEC sued him.

The decision marked the second time since 2013 that the Supreme Court has reined in the SEC's enforcement powers. In the prior case, called Gabelli v. SEC, the justices unanimously ruled that civil monetary penalties are also subject to a five-year time bar.

The ruling also represented a major victory for Wall Street firms, whose Securities Industry and Financial Markets Association trade group had urged the justices to curb the SEC's powers in order to provide more certainty and predictability to the enforcement process.

Writing for the court, Justice Sonia Sotomayor said that disgorgement counts as a penalty and is therefore bound by the five-year statute of limitations that already applies to "any civil fine, penalty or forfeiture."

The SEC disgorgement process "bears all the hallmarks of penalty: It is imposed as a consequence of violating a public law and is intended to deter, not to compensate," Sotomayor wrote.

Kokesh was sued by the SEC in 2009 for misappropriating investors' money. His penalties covered conduct within the five-year statute of limitations, but the disgorgement covered conduct that largely occurred outside that time frame.

Kokesh appealed to the Supreme Court after losing at the Denver-based 10th U.S. Circuit Court of Appeals. Kokesh's attorney argued that a disgorgement in the case constituted a punitive "forfeiture" that is time-barred.

The Justice Department argued that disgorgement is equitable relief that is not considered a punishment, but merely restores the defendant to the same position he was in prior to when the misconduct occurred.

During oral arguments for the case in April, the court's conservatives expressed skepticism at the Justice Department's defense, and even some of the more liberal-leaning justices at times seemed wary.

(Reporting by Sarah N. Lynch and Lawrence Hurley; Editing by Will Dunham)