SEC Request For Declaratory Relief, Injunction Time Barred
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.