This week, the Supreme Court heard argument regarding whether the SEC’s actions to disgorge ill-gotten gains are subject to a five-year statute of limitations for “any civil fine, penalty, or forfeiture.”
The appeal stems from an SEC action alleging that between 1995 and 2006, Charles Kokesh, a New Mexico-based investment adviser, misappropriated a staggering $35 million from two investment advisory companies that he owned and controlled, squandering the money of tens of thousands of small investors. While Kokesh moved into a gated mansion and bought himself a personal polo court (complete with a stable of 50 horses), he allegedly concealed his massive ill-gotten earnings by distributing false proxy statements to investors and filing dozens of false reports with the Securities and Exchange Commission.
In 2009, the SEC brought a civil enforcement action against Kokesh in the District of New Mexico alleging violations of the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, and the Investment Company Act of 1940. The jury found violations of all three acts, and the district court ordered Kokesh to disgorge the $35 million he misappropriated (plus interest) and pay a $2.4 million civil monetary penalty for the “egregious” frauds he committed within the prior five years. While the district court ordered disgorgement of all of Kokesh’s ill-gotten gains since 1995, the civil monetary penalty it imposed was constrained by the five-year statute of limitations found in 28 U.S.C. § 2462, which applies to claims throughout the U.S. Code for “any civil fine, penalty, or forfeiture.” READ MORE
On August 8, 2013, the Second Circuit vacated the SEC’s $38 million fine against hedge fund Pentagon Capital Management PLC, holding that the Supreme Court’s decision in Gabelli v. SEC required the case to be remanded for recalculation of the civil penalty. This case is one of several SEC enforcement actions affected by the Gabelli ruling since the Court issued its decision less than six months ago. The Second Circuit’s decision highlights the limiting effect Gabelli will have on civil remedies available to the SEC for securities law violations that occurred more than five years before the agency initiated its enforcement action.
In Gabelli, the Court held that the five-year statute of limitations for filing civil enforcement actions seeking penalties for fraud begins to run from the date of the alleged violation, not when the SEC discovers, or reasonably should have discovered, the violation. Citing Gabelli, the Second Circuit in SEC v. Pentagram Capital Management PLC found that any profits Pentagon earned more than five years before the SEC filed its suit could not be included in the penalty. The parties agreed that remand on the issue was required.
The SEC alleged that Pentagon and its owner, Lewis Chester, committed securities fraud under Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 by engaging in late trading of mutual funds. Late trading involves placing and executing orders as if they occurred at or before the time the mutual fund price was determined. Such trading allows the purchaser to profit from information released after the mutual fund price is fixed each day, but before it can be adjusted the following day. The SEC alleged that Pentagon engaged in late trading through its broker dealer, Trautman Wasserman & Co., from February 2001 through September 2003. READ MORE
Orrick partner Jim Meyers provides his perspective to JD Supra in the May 14, 2013 article, “A Look Ahead at SEC Enforcement Actions – with Orrick’s Jim Meyers.” Jim comments on trends in Securities and Exchange Commission enforcement, the new arrivals of SEC chairwoman, Mary Jo White and Enforcement Unit co-head, Andrew Ceresney, the recent “Non-Prosecution Agreement” with Ralph Lauren, and more.
To read the full JD Supra article, please click here.
Today, the Solicitor General filed a motion asking the Supreme Court to dismiss the Securities and Exchange Commission’s petition for a writ of certiorari in SEC v. Bartek. As noted in a previous blog post, the Bartek petition focused on when the limitations period under 28 U.S.C. § 2462 begins to accrues, a question that was answered in Gabelli.
However, the petition also presented a second question: whether director and officer bars and injunctive relief constituted penalties. Although the Supreme Court was unlikely to take up that question at this juncture, the government’s decision to dismiss the petition perhaps signals a view that Gabelli will not have a significant adverse impact on the SEC’s civil enforcement activities. Certainly, Gabelli’s impact can be minimized if, as expected, Mary Jo White is confirmed as the next SEC Chair and follows through on her commitment to the Senate Banking Committee to “aggressive” pursuit of wrongdoers.
In Gabelli v. SEC, a unanimous Supreme Court held that the statute of limitations for “penalty” claims in governmental enforcement actions begins to run from the date of the underlying violation of the law, not when the government discovers or reasonably should have discovered the misconduct. Gabelli has important implications for the Securities and Exchange Commission (“SEC”) and all governmental agencies because it limits the sanctions available to the agency for conduct that occurred more than five years before it commences a civil enforcement action. Opinion.
Gabelli involved the application of 28 U.S.C. § 2462, which provides that “an action, suit or proceeding for the enforcement of any civil fine, penalty or forfeiture … shall not be entertained unless commenced within five years from the date when the claim first accrued[.]” In 2008, the SEC sought civil penalties from Mark Gabelli, a mutual fund portfolio manager, for alleged violations of the Investment Advisers Act in connection with alleged market timing issues. Gabelli successfully moved to dismiss the penalty claims as time-barred under Section 2462 because the complaint was filed almost six years after the alleged misconduct. On appeal, the Second Circuit reversed, reasoning that in cases of fraud the statute of limitations does not begin to run until the SEC discovered (or reasonably could have discovered) the wrongful acts. The Supreme Court disagreed, holding that “a claim based on fraud accrues—and the five-year clock begins to tick—when a defendant’s allegedly fraudulent conduct occurs.” READ MORE