Court Rejects SEC Request For “Obey The Law” Injunction

The statute of limitations and the decision in Kokesh v SEC, 137 S.Ct. 1635 (2017) clearly present challenges for the SEC. In that case the Court rejected the SEC’s claim that its disgorgement remedy is equitable and not subject to the statute of limitations. To the contrary, the High Court concluded that the SEC’s version of the remedy is a penalty and thus subject to the five year statute of limitations. Now a district court has granted summary judgment against the Commission in a Securities Act Section 5 case centered on a years long Ponzi scheme based on the statute of limitations and refused to enter an injunction, although Kokesh is not actually cited. SEC v. Jones, Civil Action No. 17-11226 (D. Mass. Opinion Jan. 5, 2018).

The opinion

Defendant Cheryl Jones was named as a defendant in a Commission complaint alleging she sold unregistered and worthless securities in the Bridge Fund, a Ponzi scheme operated by her brother Mark Jones. The complaint alleged violations of Securities Act Section 5 and sought the entry of an injunction, disgorgement and penalties.

Mark Jones created and operated the Bridge Fund from 2007 through 2015. The fund promised returns from using investor money to extend short-term “bridge loans” to Jamaican companies that had been approved for commercial bank loans but were in need of cash until the bank loans closed. In fact Mr. Jones took the investor cash. When the fund failed he pleaded guilty and was sentenced to serve seventy months in prison. He defaulted in an SEC enforcement action.

The SEC then filed an enforcement action on July 3, 2017 naming his sister as a defendant. Ms. Jones was one of the early investors in the Bridge Fund. The SEC claimed that she had directly or indirectly offered to sell or sold securities in the Fund based on four pieces of evidence: 1) Her brother paid Ms. Jones a 10% commission on securities purchased by eight investors she had introduced to him; 2) Ms. Jones communicated periodically with five of the eight investors; 3) she spoke with her brother about how to address investor concerns; and 4) three of the investors Ms. Jones contacted purchased over $540,000 of additional securities from her brother.

The Court rejected each claim and, in any event, concluded that the entry of an injunction would be contrary to Rule 65, F.R. Civ. P. The court permitted limited discovery on the question of the statute of limitations and then converted a motion to dismiss to one for summary judgment. The question here is whether the SEC established that Ms. Jones was a necessary participant or substantial factor in the sale, according to the court. Those tests must be carefully applied since Securities Act Section 5 imposes strict liability and could ensnare those who perform “’mechanical acts without which there could be no sale,’” quoting SEC v. Murphy, 626 F. 2d 633 (9th Cir. 1980).

The four points presented by the SEC are not sufficient to permit the agency to meet its burden of proof, the Court concluded. For example, as to the commissions, there is no evidence to link the money Ms. Jones received from her brother to investors she recruited or investments she solicited after the limitation period had run as opposed to those she recruited prior to its expiration. While Ms. Jones admitted introducing her friends to her brother in 2008 and 2009 for which she received commissions, there is no evidence that she took such steps after July 3, 2012. In any event, the passive receipt of commissions from her brother is not sufficient by itself to establish a necessary or substantial participation in the sale of the fraudulent shares.

The SEC’s claims that Ms. Jones mollified investors to aid the scheme by at one point after the limitations period suggesting to her brother that he again send investors account statements as some had suggested to her, or that he consider having a life insurance policy as others recommended, or that she talked to investors, are also insufficient. This evidence, even when viewed in the light most favorable to the SEC, does not prove substantial participation. Collectively, the evidence falls more in the de minimis rather than the substantial participation area. Accordingly, the Court granted Ms. Jones’ motion for summary judgment.

Finally, while the Court agreed that the request for an injunction is one for equitable relief, “in a practical sense there is nothing remaining to be enjoined. Mark Jones is in prison, the Bridge Fund is defunct . . .” An injunction would only admonish Ms. Jones to obey the law. While that type of an injunction may or may not be enforceable, depending on the circumstances, in this case the Court found it would not comport with Rule 65.


The SEC tried to marshal the evidence necessary to tie Ms. Jones to her brother’s scheme. The proof offered, however, was little more than “pretty thin gruel” in the words of the Court. Ms. Jones did in fact introduce some friends who became investors early on. She was paid commissions. The record established that those actions took place long ago and were outside the statute of limitations – they were not actionable.

The Commission’s efforts to stretch the facts into sufficient evidence failed. While those efforts were not cited in denying the injunction, they undoubtedly impacted the Court’s conclusion that an obey the law injunction was not appropriate. Although the Commission has frequently sought and obtained “obey the law injunctions” in the past, in the age of Kokesh it would do well to carefully consider the circumstances under which such requests are made lest other courts reach the same conclusion as the Court here.

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