United States: All Relief Sought By SEC Subject To 5-Year Statute Of Limitations

Last Updated: May 23 2014
Article by James C. Freije

As we reported last year, the U.S. Supreme Court's decision in Gabelli v. SEC precludes the SEC from using the "discovery rule" to extend the five-year statute of limitations on the government's claims for civil penalties available under 28 U.S.C. § 2462. In Gabelli, the Supreme Court expressly declined to address whether the statute of limitations under Section 2462 also applies to disgorgement and an injunction. Early last week, U.S. District Judge James King in the Southern District of Florida answered that question in the affirmative. In issuing a Final Order of Dismissal in SEC v. Graham, Judge King significantly expands Gabelli by applying Section 2462 to all forms of relief, not just civil penalties, sought by the SEC in that matter.1 Given that SEC investigations often take years, this decision likely will incentivize the SEC to expedite investigations and charging decisions.

SEC v. Graham involved an action against five former executives of the defunct Cay Clubs Resorts and Marinas in connection with an alleged offering fraud and Ponzi scheme. According to the SEC, more than 1,400 investors were defrauded into investing more than $300 million through purchases of units at Cay Clubs' resort locations based on promises of, among other things, immediate income from a guaranteed 15-percent return and a future income stream through a rental program. The SEC filed the action in 2013, following a protracted investigation spanning more than seven years. In the action, the SEC sought declaratory relief, injunctive relief, civil money penalties, a sworn accounting, and the repatriation and disgorgement of all ill-gotten gains. The defendants moved for summary judgment that the five-year statute of limitations under Section 2462 barred the SEC's claims.

Judge King raised sua sponte the issue of whether the Court had subject matter jurisdiction to entertain the SEC's case. In deciding whether Section 2462 was jurisdictional, the Court dismissed the notion that the statute operated as a "claim-processing rule" and determined that Congress "clearly states that a threshold limitation on a statute's scope shall count as jurisdictional."2 Moreover, the Court stated that statutes of limitation, especially the "more absolute" kind whose text speaks to the power of a court to act, as opposed to those that "seek primarily to protect defendants against stale or unduly delayed claims" can remove such claims not brought within the time limit from the court's adjudicatory authority.3 Applying this standard to Section 2462 and relying on established conclusions reached in Gabelli, the Court determined that because the date of accrual is a fixed date and the SEC could not take advantage of the "discovery rule" to delay that accrual, the SEC had to begin the cause of action within five years of the last act that gave rise to the claim. Stating that the statutory language provided by Section 2462 "is a congressional removal of a court's power to entertain – its adjudicatory authority and jurisdiction – cases not brought within five years of accrual," Judge King opined that the Court could not maintain subject-matter jurisdiction.

The Court also considered whether the language of Section 2462 – "for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise" – applied to other forms of relief that the SEC sought. Although Gabelli expressly declined to address whether disgorgement and injunctive relief were covered by Section 2462, this Court invoked the "long-held policies and practices that underpin" the Gabelli decision,4 along with the text of Section 2462 itself, to reach the conclusion that this statute did include the types of relief the SEC sought. The Court maintained that to agree with the SEC's position that Section 2462 did not apply in this instance "would make the Government's reach to enforce such claims akin to its unlimited ability to prosecute murderers and rapists." The SEC relied on United States v. Banks, which concluded that the "plain language of § 2462 does not apply to equitable remedies" and therefore the "clear expression of Congress" required before the application of the statute of limitations was not present in Section 2462.5 The Court stressed that Banks dealt with a different kind of remedy to enjoin a different kind of harm compared to the issue at present. Banks involved the United States' sovereign capacity to enforce the Clean Water Act to enjoin the continuing harm of discharging fill into U.S. waters, not punish the defendants for discharging that fill.

Furthermore, the Court ruled that even though the words "declaratory relief," "injunction" and "disgorgement" do not appear in the statute, penalties, "pecuniary or otherwise," are at the heart of all forms of relief sought in this case. The SEC sought to declare the defendants in violation of the federal securities laws and label them "wrongdoers." The injunctive relief the SEC sought to forever bar defendants from future violations of the federal securities laws is meant to punish, and the SEC's pursuit to disgorge the ill-gotten gains realized from the alleged violations "can truly be regarded as nothing other than a forfeiture ... which remedy is expressly covered by § 2462." The Court declared that "to hold otherwise would be to open the door to Government plaintiffs' ingenuity in creating new terms for the precise forms of relief expressly covered by the statute in order to avoid its application." The Court held that Section 2462 applied to all forms of relief sought by the SEC, thereby legitimizing the statute in the Court's evaluation of the established time-barred claims, and resulting in the Court's loss of subject-matter jurisdiction.

Therefore, because the SEC "failed to meet its serious duty to timely bring this enforcement action" against the defendants within the five-year period, Judge King dismissed the case.

Finally, the dismissal order does not address whether Section 2462 applies to other remedies available to the SEC, such as the imposition of a corporate monitor or undertakings, and the SEC undoubtedly will argue that Section 2462 does not apply to such claims because they are not penalties.

The full Order can be found here:
http://www.scribd.com/doc/223939169/Final-Order-of-Dismissal

To learn more about the Graham case, the SEC litigation release can be found here: http://www.sec.gov/litigation/litreleases/2013/lr22607.htm

Footnotes

1 SEC v. Graham, No. 13-1001 (S.D. Fla. May 12, 2014).

2 See Arbaugh v. Y&H Corp., 546 U.S. 500, 515-16 (2006).

Citing John R. Sand & Gravel v. United States, 552 U.S. 130, 133 (2008).

4 "But this case involved penalties, which go beyond compensation, are intended to punish, and label defendants wrongdoers." See Gabelli v. SEC, 133 S. Ct. 1216, 1233.

5 15 F.3d 916, 919 (11th Cir. 1997)

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