This week, the United State Supreme Court finally resolved a circuit split and unanimously held that SEC actions seeking to disgorge ill-gotten gains are subject to a five-year statute of limitations on civil fines, penalties or forfeitures under 28 U.S.C. § 2462. This decision is expected to dramatically reduce the SEC’s ability to collect disgorgement in enforcement actions.
The decision arose out of an SEC enforcement action brought in 2009 that alleged between 1995 and 2006, Charles Kokesh, a New Mexico-based investment adviser, misappropriated $35 million from two investment advisory companies he owned and controlled, thereby squandering the money of tens of thousands of small investors. Kokesh was ultimately found liable at trial and the trial court ordered him to disgorge the entire $35 million he was found to have misappropriated plus interest, and pay a civil monetary penalty. Kokesh subsequently challenged the disgorgement order before the U.S. Court of Appeals for the Tenth Circuit, arguing that the SEC’s claim for disgorgement was subject to the five year statute of limitations period codified in Section 2462, and therefore the $35 million disgorgement amount should be significantly reduced by eliminating any ill-gotten gains received prior to 2004—five years prior to the initiation of the SEC enforcement action. A three judge circuit court panel of the Tenth Circuit unanimously disagreed, and upheld the disgorgement order on the basis that disgorgement is not a “penalty” or “forfeiture” as defined in Section 2462, but rather was “remedial” and “does not inflict punishment” because it leaves the wrongdoer “in the position he would have occupied had there been no misconduct.” On this basis, the Tenth Circuit held that Section 2462’s limitations period was inapplicable to disgorgement. READ MORE
The SEC suffered a blow very recently when Judge James Lawrence King of the U.S. District Court for the Southern District of Florida entered summary judgment dismissing the entirety of its alleged Ponzi scheme case on statute of limitations grounds. SEC v. Graham, 2014 WL 1891418 (S.D. Fla. May 12, 2014). The court’s order is a significant application of last year’s Supreme Court decision in Gabelli v. SEC, 133 S. Ct. 1216 (2013), in that (i) it applies the applicable statute of limitations to sanctions that have usually been considered equitable, rather than punitive, in nature; and (ii) it holds that the applicable statute of limitations is a jurisdictional threshold on which the SEC bears the burden, not an affirmative defense on which the defendant bears the burden.
In Graham, the SEC alleged that five defendants defrauded nearly 1,400 investors of more than $300 million by marketing unregistered securities as real estate investments and guaranteeing an immediate 15% profit and future rental revenue on certain resort properties. According to the SEC, the defendants were using the new deposits to pay earlier investors in a classic Ponzi-scheme. After the defendants abandoned their efforts with the collapse of the real estate and credit markets in 2007, the SEC embarked on a seven-year investigation, and ultimately brought suit in January of 2013. The SEC alleged five counts of violations of federal securities laws, and sought not only civil penalties but also injunctive relief and disgorgement of all ill-gotten gains. The defendants moved for summary judgment on the ground that the five-year statute of limitations under 28 U.S.C. § 2462 time-barred all of the SEC’s claims. Section 2462 states, “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 ….”
As noted in a previous blog, in Police & Fire Retirement Systems of City of Detroit v. IndyMac MBS, Inc., 721 F.3d 95 (2d Cir. 2013), the Second Circuit held that tolling under American Pipe – which plaintiffs had often used to revive claims by relying on earlier-filed class actions – does not apply to statutes of repose, including Section 13 of the ’33 Act. The significance of IndyMac was felt in New Jersey Carpenters Health Fund, et al. v. Residential Capital, et al., No. 08 CV 8781, 08 CV 5093 (S.D.N.Y. Dec. 18, 2013), where Hon. Harold Baer, Jr. was asked to reconsider his pre-IndyMac order denying defendants’ motion to dismiss a securities class action involving mortgage-backed securities. Upon reconsideration, Judge Baer dismissed one of the defendants, Deutsche Securities Inc., and several claims against other defendants, finding that intervening plaintiffs did not have standing to sue because the claims were not filed within the ’33 Act’s three-year statute of repose. As the case highlights, IndyMac’s effect will continue to be felt in pending cases – Judge Baer held that it should be applied retroactively – and will significantly limit the timing of future lawsuits.
Last week we heard from RUSH. This week we’re tuning in to The Supremes.
On January 8, 2013, the U.S. Supreme Court heard arguments in Gabelli v. Securities and Exchange Commission, No. 11-1274, concerning when the clock begins to run on the five-year statute of limitations for civil penalty claims by the SEC and other federal agencies. The 200-year-old statute at the heart of the dispute (28 U.S.C. §2462) provides: “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 . . . .” Taking their cue from the Supremes that, “No, you just have to wait,” the SEC argues that “accrued” means when the government discovered, or reasonably could have discovered, the alleged wrongdoing (in this case, market timing by two executives of investment adviser Gabelli Funds, LLC ). On the other hand, the two executives want to know, “How long must I wait, How much more can I take?” arguing that “accrued” means when the government can first bring the action (typically when the alleged wrongdoing occurs), regardless of whether the government knows about it.
What can be divined from the oral argument? The justices appeared skeptical of the government’s position. It was pointed out that this was not a position that had ever been taken by any other government agency, and not by the SEC until 2004, even though the statute had been on the books for almost 200 years. Justice Breyer went so far as to press, “All I’m asking you for is one case [prior to 2004],” but the government’s attorney could not provide one.
Some of justices also commented that it would almost be impossible for a defendant to prove that the government “should have known” about something. There would be no bright-line rules to such an approach. Whether an agency “should have known” could potentially depend on any number of circumstances, for example whether the agency had 100 or 1,000 people reviewing things to shed light on a violation or even whether the agency was overworked or underfunded at the time of the violation. In other words, SEC, “Think it over.” READ MORE