by T. GormanPosted on Posted in SECActions

In Gabelli v. SEC, 133 S.Ct. 1216 (2013) the Court cautioned against leaving “defendants exposed to Government enforcement action . . . for an additional uncertain period into the future” beyond the five year limitation period of §2462 of Title 28. The High Court then concluded that the cause of action in an SEC enforcement action accrues when the alleged conduct occurred, not at some later point when it is discovered. The eleventh circuit, construing the same statute, found that its time limits delimit the remedies available to the SEC. SEC v. Graham, No. 14-13562 (11th Cir. May 26, 2016).

The SEC filed an enforcement action against Barry J. Graham and others claiming that they sold unregistered securities in violation of the federal securities laws. Specifically, between November 2004 and July 2008 the defendants raised over $300 million from about 1,400 investors, selling unregistered securities. The agency filed its complaint on January 20, 2013. On cross-motions for summary judgment the district court dismissed with prejudice the SEC’s complaint as time-barred.

Section 2462 bars any action “for the enforcement of any civil fine, penalty, or forfeiture” if brought more than five years from the date the claim first accrued. Here the SEC sought injunctive and declaratory relief and disgorgement. The circuit court rejected the claim that the Section applied to the Commission’s request for injunctive relief. An injunction is an equitable remedy that is concerned with future conduct. As such it cannot be a penalty as that term is used in §2462. While that term is not defined in the statute, a penalty typically addresses a wrong done in the past. Since it is backward looking it is, in effect, the opposite of an injunction which is concerned only with the future. Accordingly, an injunction is not a penalty within the meaning of §2462.

The same cannot be said of the SEC’s request for declaratory relief the court concluded. The district court correctly concluded that the Section bars this request for relief. Declaratory relief is backward looking like a penalty. It is a “public declaration that the defendants violated the law [and] does little other than label the defendants as wrongdoers.” The SEC’s contention that that such findings are the predicate to obtain other remedies does not change this point. Some of the remedies the agency might seek based on a declaration, such as penalties, are time-barred; others, such as an injunction, are not. At the same time declaratory relief is not necessary to obtain an injunction. To the contrary, to secure such relief the SEC need only establish a prima facie case of prior violations of the federal securities laws and a reasonable likelihood that the wrong will be repeated.

Finally, the district court properly concluded that the SEC’s request for disgorgement is time-barred by §2462. In reaching that conclusion the court found that disgorgement is in the same category as a forfeiture which is subject to the time limits of the Section. Disgorgement is, according to Black’s Law Dictionary, the “act of giving up something (such as profits illegally obtained) on demand or by legal compulsion . . .” That definition is very similar to the one for forfeiture which is, according to the same source, the “loss of a right, privilege, or property because of a crime, breach of obligations, or neglect of duty.” (internal quotations omitted).

The SEC argued that disgorgement and forfeiture are distinct concepts. That theory was built on the notion that the court’s power to order disgorgement extends only to the amount of the ill-gotten gains. The circuit court, however, rejected this contention, finding that “even under the definitions the SEC puts forth, disgorgement is imposed as redress for wrongdoing and can be considered a subset of forfeiture. Because forfeiture includes disgorgement, §2462 applies to it. Accordingly, the court affirmed in part, reversed in part and remanded the action to the district court.

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by T. GormanPosted on Posted in SECActions

Earlier this month Deputy AG Sally Yates defended her controversial memorandum on cooperation in remarks made before the New York City Bar Association White Collar Conference (here). The memo to which her name is attached redefined cooperation in terms of furnishing all the facts regarding the individuals who are responsible for wrongful conduct. Specifically, the Yates Memo requires that to earn any cooperation credit a company specifically identify those who are responsible for the conduct and furnish all the facts. Firms that fail to meet these requirements do not get cooperation credit.

The private bar has at times acted as if the “sky was falling,” according to the Deputy AG. In fact she asserted that the memo has had positive effects. Firms are making efforts to comply and other divisions of the DOJ are revamping their policies.

The U.S. Chamber’s Institute for Legal Reform may not think the “sky is falling” in the wake of the Yates memo. At the same time, its recent report on the new cooperation initiative is less than complimentary. “DOJ’s New Threshold for ‘Cooperation,’” May 2016 (here). The focus of the new policy, the Report notes, is to leverage corporate investigations to facilitate DOJ actions. In fact, the Report declares, the “new policy is likely to have a number of unintended consequences that will muddy what was traditionally a straightforward decision – whether to cooperate with a government investigation . . . Paradoxically, in seeking to make it easier to bring cases against culpable individuals in corporate investigations, the Department has complicated the mix for individuals, the corporate community – and ultimately, for the Department itself.” The new policy raises several serious concerns which include:

Decision to cooperate: The Yates memo adopts an all or nothing approach to cooperation – either all the facts about the individuals must be ferreted out and turned over to the Department or there is no cooperation credit. Since the decision must be made at the beginning of the investigation before the facts are known “it may be challenging for a business to evaluate whether to commit to cooperation, especially where the degree of criminal exposure – and the benefit derived from cooperation—are uncertain. After all, companies often evaluate decisions based on risk . . .” and those are difficult to assess at the beginning of an investigation.

Inhibit the corporate investigation: Corporate and in-house counsel, as well as any internal investigative team, may find themselves at the intersection of conflicting interests. On the one hand the firm is incentivized to root out wrongful conduct. On the other hand individual employees may be at odds with the view of the company. The firm may struggle to avoid creating a wedge between executives and corporate counsel during investigations. This can make conducting the investigation more difficult.

Fundamental rights: The DOJ’s effort to leverage corporate investigations presents fundamental issues regarding the rights of those involved in any corporate inquiry. For example, one critical question is the extent to which the firm has been “deputized,” a fact which has significant implications for those who are interviewed during the investigation. This also presents the company with difficult issues regarding the application of the Fifth Amendment privilege and Sixth Amendment right to counsel, at least to the extent its internal investigation has, in effect, become an instrument of the government rather than a self-reflective endeavor through which a firm seeks to identify a malady and root it out.

Privilege: The Yates memo expressly provides that the Department is not asking firms to waive privilege. Deputy AG Yates reiterated this point in her recent remarks. Nevertheless, there is at least an inherent tension here. While it is clear that the firm need not turn over privilege memoranda to earn cooperation credit, all the facts must be made available. That includes those from interviews. Yet typically the interviews during a corporate investigation are summarized in attorney notes. To meet the requirements of the Yates memo the firm will need to find some way to make the facts from the interviews available. The practical impact of this is that “’in many instances . . . you waive privilege,’ the Report notes, quoting Ms. Yate’s immediate predecessor, former Deputy AG James Cole.

In view of these issues, it is apparent that the Yates memo, and its approach to cooperation, presents significant issues for corporations seeking to cooperate with the DOJ and for the Department it self, the Report concludes.

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