A federal appellate court recently held that the five-year statute of limitations in 28 U.S.C. § 2462 applies to actions by the Securities and Exchange Commission for declaratory relief and disgorgement. The decision extends the five-year deadline to actions that the SEC has long argued were not subject to any statute of limitations.
The decision was issued on May 25, 2016, by the United States Court of Appeals for the Eleventh Circuit in Securities and Exchange Commission v. Graham et al. It addressed a question that the U.S. Supreme Court expressly left open in 2013 when it decided Gabelli v. SEC: whether the five-year statute of limitations for “any civil fine, penalty, or forfeiture” applies to SEC actions for equitable remedies, such as disgorgement or injunctive or declaratory relief.
In the Graham case, as it has long argued, the SEC contended that the five-year statute did not apply to claims for injunctive relief, declaratory relief, and disgorgement because none of those three remedies is a “civil fine, penalty, or forfeiture.” But the Eleventh Circuit disagreed as to both declaratory relief and disgorgement. It held that a declaration of wrongdoing was a kind of penalty, and that disgorgement was synonymous with forfeiture, and thus both came within the statute. It did agree with the SEC that injunctive relief does not fall within the statute, and thus is not subject to the five-year statute.
The decision may provide an additional defense to respondents in cases brought years after the conduct in question. It may also spur the SEC to act more quickly in matters where it previously thought it had more time, or to seek tolling agreements during investigations. It remains to be seen if other courts adopt the Eleventh Circuit’s approach, or if the issue ultimately reaches the Supreme Court.
Prospects for Supreme Court consideration are increased by the fact that at least one other federal court of appeals, the D.C. Circuit, has held that the five-year statute did not apply to disgorgement actions. See Riordan v. SEC, 627 F.3d 1230 (D.C. Cir. 2010). Such a split in the circuits raises the likelihood of the Supreme Court addressing the issue. Indeed, the SEC argued that its position was also supported by two other circuit courts, though the defendants in Graham contended that those cases were inapposite.
In Graham, the court focused on the meaning of the statutory language. As to declaratory relief, the court reasoned that a declaration of liability is punitive rather than remedial or preventative, and such a declaration would therefore constitute a “penalty” within the statute.
As to disgorgement, the Eleventh Circuit held that disgorgement is synonymous with the term “forfeiture” in the statute. The SEC argued that disgorgement and forfeiture are not interchangeable because disgorgement refers only to requiring a respondent to pay back ill-gotten gains, while forfeiture may include such gains as well as any further profits on those gains. The Eleventh Circuit rejected this attempted distinction and held that forfeiture necessarily includes disgorgement. Defendants argued that disgorgement could also be considered punitive in nature and so could be encompassed by the statutory term “penalty” as well, but the Court expressly did not decide this issue.
Conversely, the Eleventh Circuit held that injunctions are not subject to the statute. It reasoned that because an injunction is forward looking and intended to prevent a future harm, it is not a penalty under the statute.
The Gabelli case, which the Eleventh Circuit drew on for its analysis, involved a separate question: Does the statute of limitations under 28 U.S.C. 2462 begin to run when the plaintiff discovers the fraud or when the fraud occurs? The Supreme Court held that the “discovery rule” applies only to victims of a fraud and not to regulatory agencies such as the SEC. Such agencies are subject to the “standard rule,” i.e., the statute begins to run when the fraud occurs. In its discussion, the Supreme Court left open whether 28 U.S.C. 2462 applied at all to actions for equitable relief, the question Graham answered with respect to disgorgement and injunctions and declaratory relief.