SEC Injunction Not Time-Barred – In This Case

In Kokesh v. SEC, No. 16-529)(June 5, 2017) the Supreme Court held that the five year statute of limitations in Section 2462 of Title 28 applies to SEC claims for disgorgement because they are a penalty within the meaning of the statute. Left open for future consideration was a question regarding the propriety of awarding disgorgement in SEC actions. Also not considered was whether a request for an injunction by the agency was subject to Section 2462. The Eighth Circuit Court of Appeals has now considered the question of whether the five year limitation period of the Section applies to an SEC request for an injunction. The answer: not this time, but maybe in the future. SEC v. Collyard, No. 16-1405 (8th Cir. Decided June 29, 2017).

Defendant Gary Collyard is a former broker whose license was suspended for selling unregistered securities. He founded and owns Defendant Collyard Group, LLC which assists early stage entities with raising capital. In 2004 Mr. Crawford worked out an arrangement with Bixby Energy Systems to refer potential investors to the firm in exchange for a 3% commission. The year before Mr. Collyard had purchased shares in the firm.

Over the next two years Mr. Crawford referred investors to Bixby. He invited Crawford Capital clients to Bixby presentations, emailed suggestions that they invest in the firm, told some investors he could negotiate the stock price and in one instance offered a line of credit for the purchase. In another instance Mr. Crawford aided an investor with completing the subscription agreement. Mr. Crawford and his firm were not registered brokers.

In December 2011 the SEC named Mr. Crawford and his firm as defendants in an enforcement action alleging violations of Exchange Act Section 15(a). The District Court granted summary judgment in favor of the SEC.

The Eight Circuit reversed in part. On appeal Mr. Crawford and his firm argued that under Kokesh any request for disgorgement or an injunction was time-barred. The SEC conceded that the award of disgorgement by the District Court was time barred. The award was vacated.

The SEC claimed that Section 2462 does not apply to its request for an injunction, citing Sierra Club v. Otter Tail Power Co., 615 F. 3d 1008 (8th Cir. 2010). Kokesh undermines Sierra Club the Court held. That decision concluded that a claim is not a penalty if it is equitable. Kokish made it clear, however, that just because the remedy is labeled equitable does not mean that Section 2462 does not apply. To the contrary, under Kokesh the question of whether the remedy is a Section 2462 penalty turns on a two prong test: 1) if the wrong sought to be redressed is to the public; and 2) if the sanction is sought as punishment and to deter others rather than for compensation it is a penalty.

The Circuit Courts are split over whether an injunction can be a Section 2462 penalty. The Eleventh Circuit has rejected the notion that an injunction is such a penalty while the Fifth Circuit has reached the opposite conclusion. Compare SEC v. Graham, 823 F. 3d 1357 (11th Cir. 2016) with SEC v. Bartek, 484 Fed. Appx. 949 (5th Cir. 2012).

Here the Court found it unnecessary to resolve the question in view of three factors: 1) the injunction only requires defendants to obey the law; 2) it is based on evidence of a likelihood of future violations in view of Mr. Crawford’s past violation of the securities laws, the violation in this case and the fact that the wrongful conduct continued after this action was brought; and 3) it seeks to protect the public prospectively from Mr. Crawford’s wrongful conduct rather than punish him.

While Kokish held that a remedy such as disgorgement sought to deter infractions of pubic laws is inherently punitive, that is not the case here, according to the Eighth Circuit. The “deterrent purpose of SEC disgorgement differs from the deterrent effect of this injunction.” This is because the primary purpose of SEC disgorgement is deterrence while deterrence is only an incidental effect of the injunction in this case. The injunction here is only that Mr. Crawford obey the law and applies to nobody else. The Court thus concluded that the injunction here is not barred by Section 2462.

Tagged with: ,