On May 26, 2016, the United States Court of Appeals for the Eleventh Circuit issued an important decision, in SEC v. Graham et al., No. 4:13-cv-10011 (11th Cir. May 26, 2016), regarding the applicability of 28 U.S.C. § 2462’s five year statute of limitations to the Securities and Exchange Commission’s (the “SEC”) claims for injunctive relief, declaratory relief, and disgorgement. The court affirmed the trial court’s holding that § 2462, which 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, applies to declaratory relief and disgorgement because these remedies are a “penalty” and a “forfeiture” under § 2462. The court, however, reversed the trial court’s holding that § 2462’s statute of limitations applies to injunctive relief because an injunction is not a “penalty” under § 2462.
On January 30, 2013, the Securities and Exchange Commission (the “SEC”) filed a civil enforcement action, in the Southern District of Florida, against five defendants—Barry J. Graham, Fred Davis Clark, Jr., Cristal R. Coleman, David W. Schwarz, and Ricky Lynn Stokes (collectively, the “Defendants”). Slip Op. at 2. The SEC alleged that the Defendants violated federal securities law by selling condominiums that were functioning as unregistered securities and requested the trial court to: (1) declare that the Defendants had violated federal securities laws; (2) permanently enjoin the Defendants from violating federal securities laws in the future; (3) direct the Defendants to disgorge all profits from their illegal ventures; (4) order the Defendants to repatriate any funds held outside the trial court’s jurisdiction; and (5) require three defendants, Coleman, Clark, and Stokes, to pay civil money penalties. Id. at 3.
Defendants Coleman, Clark, Stokes, and Schwarz filed motions for summary judgment arguing, among others, that the statute of limitations under § 2462 barred all of the SEC’s requested forms of relief. Id. The trial court dismissed the SEC’s complaint as time-barred because § 2462, which 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, is a “jurisdictional” statute of limitations; thus, the court lacked subject matter jurisdiction. Id. at 4. The trial court further held that § 2462 applied to all of the remedies sought by the SEC, including the injunctive relief, declaratory relief, and disgorgement. Id. Specifically, the trial court held that the: (1) injunction enjoining the Defendants from violating federal securities laws in the future was nothing short of a penalty and thus, covered by § 2462’s plain language; (2) declaratory relief that the Defendants violated federal securities laws was backward-looking and thus, operated as a penalty under § 2462; and (3) disgorgement of all ill-gotten gains realized from the alleged violations of the securities laws, i.e., requiring defendants to relinquish money and property, can truly be regarded as nothing other than a forfeiture (both pecuniary and otherwise), which is expressly covered by § 2462. Id.
The SEC appealed the trial court’s ruling that § 2462 applied to injunctive relief, declaratory relief, and disgorgement.
The Eleventh Circuit reversed the trial court’s decision that § 2462’s five year statute of limitation applied to injunctive relief, but affirmed the trial court’s decision applying § 2462 to declaratory relief and disgorgement. According to the court:
- An injunction is an equitable remedy requiring (or forbidding) future conduct. In this case, the injunction would only prevent the Defendants from violating securities laws in the future. Thus, under the ordinary meaning of the term “penalty” and the non-punitive effect of the SEC’s claim, § 2462’s five year statute of limitations is inapplicable. Id. at 5-9.
- A declaratory relief redresses previous infractions rather than to stop any ongoing or future harm. The SEC’s request to declare that the Defendants violated federal securities laws “fits the definition of a penalty” and thus, is subject to § 2462’s five year statute of limitations. Id. at 9-11.
- Forfeiture occurs when a person is forced to turn over money or property because of a crime or wrongdoing. Thus, there is no meaningful difference in the definitions of disgorgements and forfeiture. Accordingly, § 2462’s statute of limitations applies to disgorgement. Id. at 11-14.