The SEC or the SEC Historical Society? — Application of Statute of Limitations to SEC Investigations

The traditional focus of remedies in SEC enforcement actions is to deter violations of the federal securities laws via two methods.  First, in district court actions, the SEC typically seeks a statutory injunction requiring that the defendant obey the securities laws in the future.  Second, following the 1990 Amendments to the statutes Congress empowered the SEC to seek cease and desist orders in its administrative proceedings directing violations of the federal securities laws stop immediately.  

If these two remedies are the preferred outcome of enforcement actions, one has to wonder why SEC investigations, which precede its enforcement actions, take years to complete and often focus on conduct that began and ended years ago.  Stated differently, does it make sense to investigate years old conduct and then demand a cease and desist order or an injunction concerning conduct that ended years ago?  

The courts seem to be asking the same question.  For example, on March 21, 2007, Senior Judge Peter C. Dorsey of the District of Connecticut took the extraordinary step of granting defendants’ motion to dismiss for lack of prosecution where the Commission sought permanent injunctions and disgorgement against the defendants for conduct dating back to 1999.  SEC v., Inc., et al., 3:05 CV 1747 (PCD) (D. Conn. March 21, 2007).  The SEC alleged a “pump and dump” scheme that occurred from December 1999 to February 2000.  The SEC began its investigation into the conduct after the alleged scheme ended.  The enforcement action was not brought until 2005, almost 6 years after the conduct and 3½ years after the Wells Notice.  By that time, the statute of limitations had run on penalties.  More delay resulted from the SEC’s repeated failure to comply with its discovery obligations.  In dismissing the action the court was clearly troubled by the delays and perhaps the prospect that the SEC would request an injunction to prevent future violations of conduct that began and ended over six years ago – a request that would make little sense.  Law enforcement by delay is no law enforcement at all.  Dismissal of this case for want of prosecution clearly seems appropriate. 

On February 26, 2007, Judge Richard C. Casey granted summary judgment against the SEC in SEC v. Thomas W. Jones and Lewis E. Daidone, No. 05 Civ. 7044 (RCC) (S.D.N.Y. Feb. 26, 2007), dismissing SEC claims for civil penalties and an injunction as time-barred.  In granting the dispositive motion concerning an injunction under the Investment Advisers Act of 1940, the court held that the SEC is required to “go beyond the mere facts of past violations and demonstrate a realistic likelihood of recurrence,” and that the absence of such proof “would indicate that the requested injunction is not aimed at protecting the public from future harm, but more likely aimed at punishing Defendants,” and, therefore, a five-year statute of limitations applies. (emphasis added). 
All to often the SEC escapes the impact of its long delays with settlements as evidenced by two recent administrative proceedings.  In one against Banc of America Securities, the SEC claimed that the broker willfully failed to provide clear and effective internal policies and to detect failures in its internal controls to prevent the misuse of forthcoming research reports by the firm or its employees, including analyst upgrades and downgrades, and for issuing fraudulent research.  But all the conduct took place in 1999 though 2001.  In a second proceeding, the SEC and the NYSE claimed that Wall Street giant Goldman Sachs violated regulations that require brokers to accurately mark sales long or short and restricting stock loans on long sales.  Again the conduct in question, according to the SEC, took place from 2000-2002. (see post 3/15/07)  It is hard to make an argument that the public was somehow protected by ordering a halt to  conduct that ended years ago. 

Clearly, over the years the SEC’s enforcement program has been effective and made a significant contribution to policing the U.S. capital markets and helping maintain their competitiveness.  At the same time as the cases discussed above illustrate, there is an increasing tendency to focus on years old conduct, which raises significant questions about the current effectiveness of the enforcement program.  Yet it is beyond dispute that the effectiveness of that program is critical.  Much has been written recently about the competitiveness of the American capital markets in a global economy.  While it is currently fashionable in some quarters to debate the impact of SOX and private litigation for causing a decline in the competitiveness of the U.S. capital markets, everyone should be able to agree on one point:  an effective cop on the beat, fairly enforcing the law is key to maintaining fair and honest markets and world class competitive markets, which was the intent of Congress in creating the SEC.  Bringing years old enforcement actions based on long delayed investigations is not effective law enforcement.  To maintain the competitiveness of the U.S. capital markets it is time to get the SEC out of the archives and into the present.  Perhaps imposing a statute of limitations on any SEC investigation and enforcement action just as there is on their criminal counterparts at DOJ would refocus the SEC on the present.