United States: Eleventh Circuit Limits SEC's Ability To Seek Disgorgement Or Declaratory Relief For Conduct Occurring More Than Five Years Before The Suit Is Filed

On May 26, 2016, the United States Court of Appeals for the Eleventh Circuit issued an important decision regarding the applicability of 28 U.S.C. § 2462, the five-year statute of limitations governing SEC enforcement actions seeking "any civil fine, penalty, or forfeiture." In SEC v. Graham, the court expressly distinguished between remedies that are backward-looking and subject to Section 2462, such as declaratory relief and disgorgement, and those that are forward-looking and not subject to Section 2462, such as injunctions.1 This was the first time any circuit court applied Section 2462's statute of limitations to declaratory relief and disgorgement. The decision is significant because it means that—at least in the Eleventh Circuit—the SEC can no longer seek disgorgement and declaratory relief going back more than five years.

DISTRICT COURT DISMISSES SEC ACTION WITH PREJUDICE

The SEC commenced a civil action in January 2013 in the Southern District of Florida against defendants who allegedly had violated the federal securities laws between November 2004 and July 2008 by "selling condominiums that were functioning, in reality, as unregistered securities."2 The SEC alleged that defendants had raised more than $300 million from approximately 1,400 investors around the country but failed to pay out the returns they had guaranteed.

In its complaint, the SEC sought an order from the district court (1) declaring that defendants violated the securities laws, (2) permanently enjoining defendants from violating the securities laws in the future, (3) directing defendants to disgorge all profits from the sales, (4) requiring the repatriation of funds held outside the court's jurisdiction, and (5) imposing civil penalties. The district court held that Section 2462 applied not only to the SEC's penalty request but to all other remedies, as well.3 In so deciding, the district court relied largely on SEC v. Gabelli, 133 S.Ct. 1216 (2013), in which the Supreme Court held that, under Section 2462, a fraud claim brought by the SEC accrues when the defendant's allegedly fraudulent conduct occurred, not when it is discovered. The district court dismissed the case with prejudice.

ELEVENTH CIRCUIT LARGELY AFFIRMS

On appeal, the Eleventh Circuit reversed the district court only with respect to the injunctive relief sought by the SEC, holding that injunctions are forward-looking remedies and not penalties within the meaning of Section 2462.4 The court then affirmed the remainder of the district court's order.

The Eleventh Circuit held that declaratory relief is "backward-looking and thus would operate as a penalty under § 2462."5 A declaration of liability, the court reasoned, is "intended to punish because it serves neither a remedial nor a preventative purpose; it is designed to redress previous infractions rather than to stop any ongoing or future harm."6 Although the SEC argued that declaratory relief should be exempt from Section 2462 because the SEC may use findings of past violations to obtain other remedies, the court stated that some of the remedies the SEC could seek (such as penalties) were themselves time-barred under Section 2462, and declaratory relief establishing past securities law violations was not necessary for obtaining injunctive relief (which the court had held was not subject to Section 2462). The court also noted that the SEC still could seek declaratory relief as a predicate for other remedies, so long as it did so before the applicable statute of limitations expired.7

The Eleventh Circuit concluded that disgorgement amounted to a forfeiture and, therefore, was subject to Section 2462. The court, quoting Webster's Dictionary and the Oxford English Dictionary, explained that a forfeiture is "'the divesting of the ownership of particular property of a person on account of the breach of a legal duty and without any compensation to him.'"8 Forfeiture, the court explained, "occurs when a person is forced to turn over money or property because of a crime or wrongdoing."9 Disgorgement, the court said, quoting Black's Law Dictionary, is "'[t]he act of giving up something (such as profits illegally obtained) on demand or by legal compulsion.'"10 The court found "no meaningful difference in the definitions of disgorgement and forfeiture."11

The court also noted that the Supreme Court had used disgorgement and forfeiture interchangeably in one case when the Supreme Court stated, "'Forfeitures serve a variety of purposes, but are designed primarily to confiscate property used in violation of the law, and to require disgorgement of the fruits of illegal conduct.'"12 The SEC had urged the court to hold that "disgorgement only includes direct proceeds from wrongdoing, whereas forfeiture can include both ill-gotten gains and any additional profit earned on those ill-gotten gains," but the court found that Congress meant for disgorgement and forfeiture to have their "ordinary meanings" when it adopted Section 2462, not their "technical definitions."13

This decision is significant because it expands on the Supreme Court's Gabelli decision and limits dramatically defendants' exposure for conduct occurring outside of the five-year statute of limitations period, at least within the Eleventh Circuit. The decision creates a circuit split, as both the D.C. Circuit and the Ninth Circuit have held, pre-Gabelli, that disgorgement was not subject to the statute of limitations.14 Although the ultimate impact of the Graham decision remains to be seen, the SEC could become more aggressive in seeking tolling agreements and more selective about the circuits in which it chooses to litigate.

Footnotes

1 No. 14-13562 (11th Cir. May 26, 2016).

2 Slip op., at 3.

3 SEC v. Graham, 21 F. Supp. 3d 1300, 1308-11 (S.D. Fla. 2014).

4 Graham, slip op., at 5-9.

5 Id. at 9.

6 Id. at 10.

7 Id. at 11.

8 Id. at 12 (quoting "Forfeiture," Webster's Third New Int'l Dictionary (2002)).

9 Id. at 12.

10 Id. (quoting "Disgorgement," Black's Law Dictionary (10th ed. 2014)).

11 Id.

12 Id. at 13 (quoting United States v. Ursery, 518 U.S. 267, 284 (1996)).

13 Id. at 13, 14.

14 Riordan v. SEC, 627 F.3d 1230 (D.C. Cir. 2011); SEC v. Rind, 991 F.2d 1486 (9th Cir. 1993). The D.C. Circuit currently has before it another case in which defendants are seeking to prevent the SEC from disgorging funds for conduct occurring outside the limitations period. Time will tell whether the D.C. Circuit will be swayed by the Gabelli and Graham decisions. See Timbervest v. SEC, No. 15-1416.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Morrison & Foerster LLP. All rights reserved

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
James J. Beha, II
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions