Fifth Circuit: SEC Action and Remedies Time Barred

The SEC frequently brings its enforcement actions years after the conduct occurred. In some instances this happens because the agency did not initiate its investigation until long after the events in question. In others it stems from the nature of the conduct involved can be very complex and difficult to unravel transactions. While these delays can have statute of limitations implications under Section 2462 of Tile 28 which applies a five year statute of limitations to obtaining a penalty, traditionally the Commission has successfully argued that at least its equitable remedies are not impacted. A recent ruling by the Fifth Circuit Court of Appeals holds otherwise however. SEC v. Bartek, No. 11-10594 (5th Cir. Decided Aug. 7, 2012).

Bartek is an option backdating case against Douglas Bartek and Nancy Richardson, respectively, the CEO and CFO of Microtune. The complaint, filed June 30, 2008, alleges that from 2000 to 2003 the defendants backdated millions of dollars worth of options for which the proper accounting charges were not taken. It alleges violations of Securities Act Section 17(a) and Exchange Act Sections 10(b), 13(b)(5) and 14(a) and sought remedies which include an injunction and an officer and director bar.

The district court granted the defendants’ motion for summary judgment, concluding that the action was barred by the statute of limitations under Section 2462. In making this ruling the court concluded that the remedies sought by the SEC were penalties within the meaning of the statute. The district court rejected the Commission’s cross motion for summary judgment.

The Fifth Circuit affirmed, concluding that the Commission’s action and the remedies it sought were time barred by the statute of limitations. The SEC argued that it did not have notice of the backdating practices until its 2003 investigation of the revenue recognition practices of Microtune. Since the cause of action was not discovered until then, the action is not time barred, according to the agency. Defendants disputed this point claiming that the Commission should have known of its practices when the company conducted its 2000 IPO and the agency reviewed its registration statement.

The Court rejected the Commission’s contention that the statute of limitations in Section 2462 does not commence until the cause of action is discovered rather than when it occurs. Examining the text of the statute, the Court held that “A plain reading of §2462 reveals no discovery rule exception. Congress specified the exceptions it wanted to adopt by stating at the beginning of the statute: ‘Except as otherwise provided by Act of Congress . . . “ Since it failed to incorporate a discovery exception into the statute, there is none. SEC v. Gabelli, 653 F. 3d 49 (2nd Cir. 2011), cited by the Commission, is not to the contrary. There the court found that the discovery rule does not govern the accrual of most claims because they do not involve conduct that is inherently self-concealing as in that case. Here there is no such conduct.

Finally, the Court rejected the SEC’s claim that the permanent injunctions and the officer director bars sought here are equitable remedies and not penalties barred by Section 2462. The test for what constitutes a penalty is an objective one. In this context the D.C. Circuit, in a case cited by the SEC in the district court but rejected by the agency on appeal, held that a “’penalty,’ as the term is used in §2462, is a form of punishment imposed by the government for unlawful or proscribed conduct, which goes beyond remedying the damage caused to the harmed parties by the defendant’s actions,’” quoting Johnson v. SEC, 87 F. 3d 484, 487 (D.C. Cir. 1996).

Here, determining whether the injunctions sought are a penalty or are remedial requires an examination of their nature or characteristics. In this case the injunctions would have a “stigmatizing effect and long-lasting repercussions.” Other courts have held that excluding a person from their profession is a penalty. Neither remedy addresses the past harm alleged here. Accordingly, the lifetime bans sought here are penalties and time barred. The district court’s grant of summary judgment in favor of the defendants was affirmed.

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