In SEC v. Graham, No. 14-13562 (11th Cir. May 26, 2016), the Court of Appeals for the Eleventh Circuit held that the limitations period found in 28 U.S.C. § 2462 barred the U.S. Securities and Exchange Commission ("SEC") from seeking declaratory relief and disgorgement from defendants who allegedly sold unregistered securities. The Eleventh Circuit also held, however, that the limitations period found in 28 U.S.C. § 2462 did not preclude an action for injunctive relief by the SEC against the defendants. The Eleventh Circuit found that while declaratory relief and disgorgement fit within the definitions of “penalty” and “forfeiture,” as those terms are used in 28 U.S.C. § 2462, an injunction was not a “penalty” within the meaning of the statute and therefore the statute’s five year limitations period did not bar injunctive relief.

During January 2013, the SEC filed an action in the United States District Court for the Southern District of Florida and alleged that the defendants sold condominiums, which actually were unregistered securities, in violation of federal securities law. The SEC alleged that approximately 1,400 investors tendered more than $300 million to defendants, who failed to make good on guaranteed returns. The SEC sought a declaration that the defendants had violated federal securities laws, a permanent injunction barring defendants from future violations of federal securities laws, and disgorgement of all profits plus prejudgment interest, as well as fines and civil penalties. Defendants sought summary judgment under 28 U.S.C. § 2462, which bars the government from bringing suit to enforce “any civil fine, penalty, or forfeiture” more than five years after the claim first accrued. The district court dismissed the action as time-barred.

On appeal, the SEC agreed that 28 U.S.C. § 2462 expressly barred any claim against defendants for civil money penalties. Nonetheless, the SEC argued that the statute did not bar its request for injunctive relief, declaratory relief and disgorgement. The Eleventh Circuit agreed with the SEC in regard to its claim for injunctive relief, but disagreed in regard to the claims for declaratory relief and disgorgement.

According to the Eleventh Circuit, its prior precedent easily disposed of the argument relating to injunctive relief. The Eleventh Circuit held that 28 U.S.C. § 2462 did not apply to injunctive relief because it was an equitable remedy prohibiting future misconduct. In other words, injunctive relief looked forward in time and therefore did not amount to a “penalty” within the meaning of 28 U.S.C. § 2462.

By contrast, declaratory relief sought by the SEC looked back in time and therefore a declaratory judgment in regard to past conduct would operate as a penalty under 28 U.S.C. § 2462. Inasmuch as the SEC had not filed its action within five years, its claim for declaratory relief was time-barred. Similarly, disgorgement, i.e,. the relinquishment of money and property as ill-gotten gains from past securities law violations, was a forfeiture within the meaning of 28 U.S.C. § 2462. For this reason, the statute’s five year limitations period applied to the disgorgement claim, making it time-barred.

The reversal of the district court’s decision regarding injunctive relief likely was a pyrrhic victory for the SEC in light of comments made by the Eleventh Circuit in regard to the injunctive relief sought by the SEC in its operative complaint. The Eleventh Circuit viewed the requested injunctive relief as an “obey-the-law” injunction, which the Eleventh Circuit unequivocally viewed as unenforceable because it was not sufficiently specific. Thus, on remand, the SEC will be left with attempting to obtain specific and narrow injunctive relief that will afford the defendants sufficient warning with which to conform their future conduct. The relief with any teeth to it, disgorgement of the $300,000,000 obtained from investors through the sale of unregistered securities plus prejudgment interest, will be unavailable to the SEC because it waited too long to file its claims against the defendants.