EC v. Cohen et al., U.S. District Court, Eastern District of New York, No. 17-00430

On July 13, a federal judge dismissed a U.S. Securities and Exchange Commission (SEC) lawsuit accusing two former executives of Och-Ziff Capital Management Group LLC (OZCM) of paying foreign bribes. In SEC v. Cohen, the court found that the SEC’s claims were time-barred under 28 U.S.C. § 2462 because the SEC’s claims had all “accrued more than five years before the SEC filed suit” and sought “relief that is at least partly penal, not solely remedial.” Cohen highlights new limitations that the SEC may face in pursuing enforcement actions in the wake of the Supreme Court’s ruling in Kokesh v. S.E.C., 137 S. Ct. 1635 (2017), including that claims for injunctive relief may be time-barred under § 2462. Because parties may raise a limitations defense even after entering a tolling agreement, paying close attention to the terms of tolling agreements, as well as the applicability of the statute of limitations to each type of relief, could lead to the dismissal of SEC claims as time-barred.

Background

In its complaint, the SEC alleged that from May 2007 through April 2011, defendants diverted money from funds managed by OZCM that would be used to pay bribes to high-ranking officials in various African countries in violation of the Foreign Corrupt Practices Act (FCPA) and the Investment Advisers Act of 1940 (Advisers Act). The officials allegedly awarded OZCM “preferential access to mining rights and other natural resources investments and, on one occasion, made a substantial investment in OZCM-managed funds.”

The SEC filed its initial complaint against the defendants on Jan. 26, 2017 and amended the complaint on May 29, 2017, to state additional claims. The SEC sought civil penalties (under both the Advisers Act and the Securities Exchange Act of 1934), disgorgement of allegedly ill-gotten gains and a permanent injunction barring defendants from violating these provisions. The defendants moved to dismiss, arguing, inter alia, that all of the SEC’s claims were time-barred. One of the defendants had entered into three different tolling agreements.

District Court’s Ruling Provides Expansive Interpretation of Kokesh

The court concluded that the SEC’s claims were time-barred under § 2462, finding that the SEC sought relief that was at least partly penal and not solely remedial and that the claims had all accrued more than five years before the SEC filed suit.

The court’s reasoning rested on its application of § 2462. Although no specific statute of limitations governed civil suits brought by the SEC to enforce the provisions at issue in Cohen, the parties had agreed that the relevant statute of limitations (to the extent that one applied) was § 2462, which imposes a five-year limitations period on actions to enforce “fine[s], penalt[ies], [and] forfeiture[s].” Although there was uncertainty over whether disgorgement of ill-gotten gains constituted a penalty  at the time that the SEC filed suit, the Supreme Court subsequently decided in Kokesh that it was, and thus § 2462 required the SEC to bring claims for disgorgement within five years. The court applied Kokesh to the SEC’s disgorgement claims and also found that § 2462 applied to the SEC’s claims seeking an “obey-the-law” injunction, because it would have operated at least partly as a penalty. Although Kokesh did not address the application of § 2462 to obey-the-law injunctions, the court followed the Supreme Court’s reasoning but stressed that it was not deciding whether such injunctions were always penalties for purposes of § 2462.

Significantly, the court rejected the SEC’s argument that its claims against one defendant were timely based on three tolling agreements, which expressly tolled the statute of limitations for claims “arising out of” the SEC’s investigation into two transactions involving Libya from 2007-08 (LIA Investigation). The defendant, however, argued that he had not agreed to toll the statute of limitations as it pertained to the other transactions alleged in the SEC’s complaint, which he claimed arose out of separate SEC investigations. The SEC argued that the tolling agreements covered claims related to all of the transactions listed in the amended complaint because the SEC’s broader investigations into OZCM’s dealings in Africa “arose out of” the Libya investigation.

Applying general principles of contract law, the court concluded that the tolling agreements applied only to the SEC claims based on the two transactions at issue in the LIA Investigation and not to the transactions targeted in subsequent SEC investigations. The court noted that the tolling agreements lacked “the sort of broad, open-ended language that might have evinced the parties’ mutual intent to extend the statute of limitations applicable to any claims the SEC might bring.” Instead, by their plain terms, the agreements covered actions “arising out of” the LIA Investigation and “not actions arising out of investigations that themselves arose out of the LIA investigation.” The court concluded that because claims related to the Libya transactions were time-barred despite falling under the tolling agreements and the claims arising out of subsequent investigations were not covered, all of the claims concerning the transactions in the amended complaint were time-barred.

The court additionally rejected the SEC’s argument that its disgorgement claims were not time-barred because they accrued only when defendants received ill-gotten gains from their corrupt transactions, and the court should authorize discovery into whether the defendants received any ill-gotten gains during the limitations period. The court stressed that statutes of limitations run from the date that defendants engage in misconduct, not from the date they receive compensation therefrom.

Cohen Highlights the Need to Pay Careful Attention to Language in Tolling Agreements and Demonstrates the Reach of the Kokesh Opinion

Cohen has important implications for parties entering into tolling agreements with the SEC. First, the case underscores the importance of paying careful attention to the language in tolling agreements to ensure a clear understanding of what is covered. To the extent an agreement is ambiguous or overly broad, a court could construe the agreement to apply to any claims and limit a party’s statute-of-limitations defenses, leaving defendants unexpectedly exposed to claims based on old conduct or arising out of other investigations. 

Second, the Cohen case further shows that SEC enforcement actions may face new hurdles as a result of the Kokesh decision. Although Kokesh identified SEC disgorgement (and not injunctive relief) as penal for purposes of § 2462, the Cohen case and others have invited questions about the nature of obey-the-law injunctions. As Cohen notes, many pre-Kokesh courts held that injunctions could never be penalties under § 2462, while others held that they could be penalties if they were punitive. No doubt, Cohen has increased the likelihood that other courts may find that SEC claims seeking disgorgement, penalties and injunctions are time-barred even when tolling agreements have been signed.