The Sixth Circuit Court of Appeals affirmed a district court’s award of a permanent injunction and a director/officer bar in a Securities and Exchange Commission enforcement action against Patrick Quinlan, the former CEO and Chairman of the Board for MCA Financial Corporation, pursuant to which Mr. Quinlan was enjoined from future violations of the securities laws and prohibited from acting as an officer or director of any publicly traded company.
In its complaint, the SEC alleged that Mr. Quinlan, and others, committed numerous violations of securities laws and regulations by, among other things, participating in a fraudulent scheme between 1994 and January 1999 to falsely inflate income and hide losses at MCA Financial, with the scheme resulting in more than $256 million in total losses.
The SEC’s enforcement action originally was stayed pending the resolution of related criminal prosecutions. In the criminal proceedings, Mr. Quinlan pleaded guilty to both federal and state charges and was sentenced to 120 months in prison in the federal case and a concurrent one-year term in the state prosecution. He was ordered to pay $256 million in restitution by the federal court and $83 million by the state.
The stay in the SEC enforcement action was then lifted and Mr. Quinlan litigated the case pro se. On the merits, the SEC moved for and obtained summary judgment under the doctrine of collateral estoppel, relying on Mr. Quinlan’s criminal guilty plea. With regard to remedies, Mr. Quinlan moved to dismiss the SEC’s claim for civil money penalties, permanent injunctive relief and an officer/director bar arguing, among other things, that such remedies were precluded by the five-year statute of limitations set forth in 28 U.S.C. Section 2462, which governs any suit or proceeding for the enforcement of any civil fine, penalty or forfeiture, pecuniary or otherwise.
In response, the SEC voluntarily dismissed its claim for civil money penalties (conceding that civil money penalties were subject to the five-year limit in 28 U.S.C Section 2462), but argued that the permanent injunction and officer/director bar were remedial in nature, not punitive, and therefore were not subject to the limitations period at all.
The Sixth Circuit observed that some courts hold that equitable remedies such as a permanent injunction and an officer/director bar are exempt from the statute of limitations as a matter of law, while others have engaged in an individualized inquiry to determine whether such remedies may be “punitive” based on the facts of a particular case. While not deciding which approach was required, the Sixth Circuit affirmed the district court’s individualized analysis and concluded that the injunction and the officer/director bar were remedial rather than punitive because Mr. Quinlan posed a substantial risk of recurrence, and the risk to the investing public outweighed the collateral consequences of the equitable relief sought by the SEC. (SEC v. Quinlan, No. 08-2619, 2010 WL 1565473 (6th Cir. Apr. 21, 2010))