Two cases now before US Courts of Appeals carry the possibility
of placing meaningful new limits on the US Securities and Exchange
Commission's (SEC) time horizon for bringing enforcement
actions. The SEC has long argued that certain statutory provisions
which appear on their face to create time limits on SEC actions are
either limited in their scope or merely establish internal policy
guidelines for the agency, and do not actually circumscribe its
jurisdiction to bring actions. These impending appellate decisions,
depending on their outcomes, may expand the defenses available to
parties subject to SEC enforcement actions when those actions are
not undertaken in a timely
fashion.
SEC v. Graham, pending in the 11th Circuit, involves 28
U.S.C. § 2462, a generally applicable statute of limitations
providing that "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." The US
Supreme Court's 2013 Gabelli decision held that in SEC
enforcement actions seeking civil penalties, § 2462 applies
and the claim accrues (thus the limitations period begins to run)
when the conduct giving rise to the claim occurred and the fraud
was complete.1 The SEC had argued that the claim should
only accrue when the fraud was discovered, not when it occurred.
The Court in Gabelli left open the question of whether
§ 2462 may apply similarly to enforcement actions seeking
equitable relief, including disgorgement and various forms of
injunctive relief.
The District Court in Graham held first that § 2462
is no mere administrative "claims processing" rule, but
rather a "jurisdictional" statute of limitations that
removes courts' power to hear actions brought too late.
Furthermore, it held that § 2462 applies to disgorgement,
injunctive relief, and any other remedy sought by the SEC that
operates in effect—regardless of formal title or
label—as a "civil fine, penalty, or forfeiture,
pecuniary or otherwise."2
On appeal to the 11th Circuit, the SEC argued that under
Gabelli, and by its own terms, § 2462 does not apply
at all to enforcement actions seeking relief that the agency terms
"equitable." Mr. Graham and amicus curiae
counter that the equitable relief sought by the SEC is really not
in the nature of a compensatory remedy as it is sometimes claimed:
in practice, more often, disgorgement operates as a punitive
forfeiture and declaratory and injunctive relief operates as a
non-pecuniary penalty. Indeed, they cite compelling precedent
holding certain SEC injunctive remedies to be punitive in effect
for purposes of the general statute of limitations.3 For
example, disgorgement payments frequently go to the US Treasury
instead of to compensate victims, and industry bars in
particular—a common form of injunctive relief sought by the
SEC—clearly do more to punish culpable individuals than to
remedy any damage they have caused. While these forms of relief are
sometimes warranted and appropriate, one can reasonably question
why they should be granted broad exemption from
Gabelli's holding that the five-year limitations
period in § 2462 applies to SEC enforcement actions. With
regard to industry bars, it would seem hard to take seriously the
SEC's claims about their purportedly prospective value (the
urgent need to protect investors from potential recurrence of past
unlawful behavior) if the SEC has waited more than five years
following the previous violation to seek such relief.
If the 11th Circuit is persuaded by these arguments, the SEC may
have to bring many more of its actions for equitable relief within
five years of a claim's accrual. This will be particularly the
case for equitable and injunctive actions that seem to differ from
penalties in name only. While amici in Graham
note that the SEC already files roughly 60% of its actions within
two years of starting an investigation, and the agency may still
seek tolling agreements to allow it to extend the limitations
period, the SEC would certainly face heightened pressure to act in
a more timely manner.
In Montford v. SEC, pending before the DC
Circuit,4 the potential time-limiting provision at issue
was enacted as part of the Dodd-Frank Wall Street Reform and
Consumer Protection Act of 2010. The statute provides that
"[n]ot later than 180 days after the date on which Commission
staff provide a written Wells notification to any person, the
Commission staff shall either file an action against such person or
provide notice to the Director of the Division of Enforcement of
its intent to not file an action."5
This statute would seem on its face to set a firm deadline, 180
days after issuing a Wells notice, by which the SEC must decide
whether or not to commence an action—notwithstanding that the
statute leaves room for the Commission and the Division of
Enforcement to take steps to extend the deadline. And yet, before
the Montford case, the few courts to consider the
provision held that it did not prevent the SEC from bringing
actions past the 180-day deadline, regardless of whether any
extensions were properly obtained.6
In the case currently before the DC Circuit, the SEC brought
charges against Montford in an administrative proceeding on the
187th day after issuing its Wells notice. An administrative law
judge ruled that the claim was not time-barred by the 180-day
limitation in Dodd-Frank. The Commission itself turned down
Montford's appeal of the administrative ruling, and held that
"this provision is intended to operate as an internal timing
directive, designed to compel our staff to complete investigations,
examinations, and inspections in a timely manner and not as a
statute of limitations."7 Montford has now sought
review of the Commission's ruling in federal court. According
to press reports the SEC's brief, filed under a protective
order, argues that the DC Circuit should defer to the
Commission's interpretation of ambiguous language in the
Dodd-Frank 180-day limit, even though the statute appears
unambiguous in what it proscribes, if not in the remedy for a
violation.
Whether the DC Circuit follows the interpretation of the Commission
(and the district courts in New York and Florida), or departs in
favor of a seemingly plain-text reading of the statute's
language, could affect SEC conduct in its investigations, including
whether or when it chooses to issue Wells notices. The court is
scheduled to hear oral argument in Montford on April
23.
Both Graham and Montford have the potential to
focus greater attention on the timelines of SEC investigations and
enforcement decisions. If the courts accept the defendants'
arguments, others subject to the SEC investigation and enforcement
may gain a new weapon in their defensive arsenals.
1Gabelli v. SEC, 133 S.Ct. 1216
(2013).
2SEC v. Graham, Case No. 13-10011-CIV-KING,
2014 WL 1891418 (S.D. Fla. May 12, 2014).
3See, e.g., Johnson v. SEC, 87 F.3d 484 (D.C.
Cir. 1996); In re Blizzard, Initial Decision Release No.
229, 80 S.E.C. Docket 1464 (June 13, 2003); SEC v. Jones,
476 F.Supp.2d 374 (S.D.N.Y. Feb. 26, 2007).
4Montford and Co., Inc. v. SEC, No. 14-1126
(D.C. Cir.).
5 15 U.S.C. § 78d-5. As enacted, the provision
modified § 4E of the Securities Exchange Act of 1934, adding a
new section entitled: "Deadline for Completing Enforcement
Investigations and Compliance Examinations and
Inspections."
6SEC v. The NIR Group, LLC and Corey Ribotsky,
CV 11-4723, 2013 WL 5288962, at *1, *5 (E.D.N.Y. March 24, 2013)
("Because the statute does not explicitly provide for
dismissal of an enforcement action for failure to comply . . . I
find that no such remedy exists. . . . [E]xpiration of the 180-day
deadline imposed by [§ 4E of the Exchange Act] does not create
a jurisdictional bar to SEC enforcement actions."); SEC v.
Levin, No. 12-21917-CIV, 2013 WL 594736, at *13 (S.D. Fla.
Feb. 14, 2013) ("[A]n internal agency deadline of the type
found in Section 4E does not create a statute of
limitations.").
7 Opinion of the Commission, In the Matter of
Montford and Co., Inc., et al., Investment Advisers Act of
1940 Release No. 3829, May 2, 2014.
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