On June 29, 2017, the United States Court of Appeals for the Eighth Circuit vacated a disgorgement order against Crawford Capital Corporation, a venture capital firm, and its owner, Paul D. Crawford, citing the U.S. Supreme Court’s recent ruling in Kokesh v. SEC, which held that disgorgement collected by the Securities and Exchange Commission (“SEC”) is subject to a five-year statute of limitations. United States Sec. & Exch. Comm’n v. Collyard, No. 16-1405 (8th Cir. June 29, 2017). At the same time, however, the court ruled that Kokesh does not preclude the SEC from obtaining injunctive relief for five-year-old conduct.
The SEC sued Paul Crawford and his firm for acting as unregistered brokers in violation of § 15(a) of the Securities Exchange Act of 1934. The SEC alleged that from February 2004 to November 2006, Crawford referred investors to Bixby Energy Systems while collecting a 10% commission, despite not being a registered broker at that time. The district court granted summary judgment to the SEC, permanently enjoining Crawford and his company from violating § 15(a) and ordering $240,000 in disgorgement. Crawford appealed, arguing among other things that the statute of limitations barred both the disgorgement award and the injunction.
After Crawford’s appeal was argued, the Supreme Court announced its decision in Kokesh, in which it held that disgorgement, as it is applied in SEC enforcement proceedings, operates as a “penalty,” and is thus subject to the five-year statute of limitations in 28 U.S.C. § 2462. Kokesh v. SEC, No. 16-529 (June 5, 2017). In light of the Kokesh decision, the SEC conceded that the statute of limitations in § 2462 barred it from seeking disgorgement in the Crawford case, and the Eighth Circuit vacated the disgorgement order.
However, the Eight Circuit left the permanent injunction undisturbed. While declining to address the broader question as to whether an injunction can ever properly be considered a penalty (and thus subject to the limitations period in § 2462), the appeals court determined that the injunction imposed in the Crawford case was not a penalty because it was not imposed for the purpose of punishment or to deter others from breaking the law. Instead, the injunction merely enjoined Crawford from violating Section 15(a) and was imposed after the district court found that Crawford was likely to continue to violate Section 15(a) unless enjoined; thus, the Court concluded that the injunction sought to protect the public prospectively from Crawford’s harmful conduct, rather than to penalize him for his past violations.
While as a practical matter it is somewhat unlikely that, post-Kokesh, the SEC will pursue new matters involving more than five-year-old conduct, the ability to continue to pursue injunctive relief (which often carries collateral consequences for defendants) will give the SEC a measure of continued leverage to obtain tolling agreements as cases approach statute of limitations deadlines.
Click here to view Kokesh v. SEC
Click here to view United States Sec. & Exch. Comm'n v. Collyard