The Securities and Exchange Commission’s
Division of Enforcement is charged with
investigating and prosecuting violations
of the federal securities laws. The agency
is given vast resources to accomplish
this task, and Congress and the courts have made
clear that they expect it to act promptly in accomplishing
its mission. Enforcement actions seeking
penalties long have been subject to the five-year
statute of limitations set forth in 28 U.S.C. §2462.
For years, the SEC sought to not be tied down by
a strict five-year limitation by arguing that the
clock does not start to run until the alleged fraud
is discovered by the agency—a position flatly
rejected by the U.S. Supreme Court last year.1
The last arrow in its quiver to avoid the fiveyear
statute has been its argument that when it
seeks so-called “equitable” remedies, like injunctions
and disgorgement, the limitations period
contained in Section 2462 is inapplicable. This
final effort to avoid statutory time constraints
also may be doomed, however. SEC v. Graham,2
a recent decision from the Southern District of
Florida, if upheld, would require the SEC to timely
investigate and file all enforcement actions
regardless of the remedy sought.
Enforcement actions brought by the SEC may
seek a variety of remedies including civil money
penalties and “equitable” remedies such as
injunctions, disgorgement, and employment bars
and suspensions. Section 2462 explicitly applies
to actions “for the enforcement of any civil fine,
penalty, or forfeiture, pecuniary or otherwise.”
The SEC has taken the position that equitable
remedies do not qualify as penalties under the
statute and therefore are not subject to its fiveyear
In April 2012, the U.S. Court of Appeals for the
Fifth Circuit considered the agency’s position in
SEC v. Bartek.3 In that action, the SEC sued the
issuer and two of its officers for options backdating
more than five years after the alleged scheme
occurred. It sought an injunction and officer-anddirector
bars for the individuals, arguing that the
statute of limitations set forth in Section 2462 is
limited to a sanction that involves the collecting
of money or property. The Fifth Circuit rejected
the SEC’s narrow definition, finding that the term
“penalty” encompassed a variety of “punishments
imposed by statute as a consequence of the commission
of an offense.”4
The court noted that even remedial sanctions
like those sought by the SEC carry the sting of
punishment, and a determination of whether
the remedies sought are “penalties” subject to
Section 2462 requires objective consideration
by the court of “the degree and extent of the
consequences to the subject of the sanction.”
This analysis, known as the Johnson test articulated
by the U.S. Court of Appeals for the D.C.
Circuit in Johnson v. SEC,5 was employed by the
district court in Bartek, which concluded that
the collateral consequences that would result
from the officer-director bars and injunctions
were punitive, not remedial, in nature.
In affirming the district court’s decision, the
Fifth Circuit noted the penalizing character
of the sanctions sought by the SEC, as distinguished
from remedial sanctions sought only
to prevent future harm. The court explained:
“[t]he SEC’s sought-after remedies would have
a stigmatizing effect and long-lasting repercussions.
Neither remedy addresses past harm
allegedly caused by the [d]efendants. Nor does
either remedy address the prevention of future
harm in light of the minimal likelihood of similar
conduct in the future.”6 Accordingly, the case
was dismissed because it was brought after the
expiration of the five-year limitations period
set forth in Section 2462.
The SEC sought review of the Fifth Circuit’s
decision by the Supreme Court. In its relatively
short certiorari petition, the SEC asserted that
remedies such as injunctions and disciplinary
bars traditionally have been viewed as remedial.
For instance, in Hudson v. United States,
the Supreme Court examined whether banking
debarment sanctions were “criminal” in
nature for double jeopardy purposes, finding
that although the sanctions were “intended
to defer future wrongdoing,” they ultimately
were a civil remedy that “serve[s] to promote
the stability of the banking industry” and were
therefore remedial in nature.7
In Hecht Co. v. Bowles, a 1944 decision,
the Supreme Court wrote that “[t]he historic
injunctive process was designed to deter, not
to punish,” when considering the validity of an
injunction brought to restrain the defendant’s
violation of the Emergency Price Control Acts.8
Based on these decisions, the SEC urged the
court to consider the issue of whether Section
2462 had any application to enforcement
actions seeking remedial sanctions.
SERVING THE BENCH
AND BAR SINCE 1888
Volume 252—NO. 68 tuesday, october 7, 2014
SEC’s Possible Reality: all Enforcement Actions
Filed Within Five Years
White-Collar Crime Expert Analysis
Robert J. An ello and Richard F. Albert are partners
at Morvillo Abramowitz Grand Iason & Anello.
Gretchan R. Ohlig, an attorney, assisted in the
preparation of this article.
The SEC has taken the position that
equitable remedies do not qualify
as penalties under 28 USC §2462
and therefore are not subject to its
five-year limitations period.
The SEC urged the court to hold its petition for
certiorari in Bartek pending the court’s decision
in Gabelli v. SEC.9 After the court handed down
its decision in Gabelli, which rejected the SEC’s
often-invoked position that the fraud discovery
rule10 should be grafted onto Section 2462 to
extend the date upon which the five-year statute
of limitations accrued, the SEC withdrew its petition.
11 The question raised in the SEC’s withdrawn
certiorari petition in Bartek—whether Section
2462 applies to SEC enforcement actions for
equitable relief—is at the heart of SEC v. Graham.
‘SEC v. Graham’
The SEC accused the defendants in Graham
of defrauding over 1,400 investors to
the tune of more than $300 million by soliciting
investments in a real estate development
business. The defendants allegedly
promised investors lucrative returns on
their investment in condominium projects
across the nation where undervalued and
decaying apartment complexes were to be
transformed into luxury resort destinations.
Initial returns supposedly were paid from
funds obtained from subsequent investors,
in Ponzi-like fashion, and, according to the
SEC, the developers ultimately abandoned
the project, leaving investors out in the cold.
The SEC investigated the case for at least
seven years. On Jan. 30, 2013, the SEC filed a
complaint alleging violations of the registration
and anti-fraud provisions of the federal securities
laws, seeking: i) declaratory relief that
violations of the securities laws had occurred;
ii) injunctive relief barring future violations of
the securities laws; and iii) the repatriation and
disgorgement of ill-gotten gains.
The defendants moved for summary judgment
arguing that the statute of limitations expired in
December 2012, five years after the final act taken
by any defendant in connection with the alleged
scheme.12 The SEC countered that Section 2462
does not apply where the SEC seeks equitable
remedies such as disgorgement, and injunctive
and declaratory relief.
In beginning his analysis, Southern District
of Florida Judge James Lawrence King opined
that Section 2462 was a jurisdictional limitations
statute, finding that the statute’s clear
statement that a suit “shall not be entertained
unless commenced within five years” served
as a “congressional removal of a court’s power
to entertain—its adjudicatory authority
and jurisdiction—cases not brought within
five years of accrual.”13
Judge King noted that in Gabelli the Supreme
Court had fixed the accrual date of claims bound
by Section 2462 as the date on which the last
act giving rise to the cause of action occurred.
Accordingly, in the context of the facts of the
case, the court wrote, “where the last act of each
defendant giving rise to the SEC’s claim against
such defendant was not committed within five
years prior to the SEC’s filing of its complaint—
a window of time the Court and parties have
referred to as the ‘red zone’—if §2462 applies to
the SEC’s claims, it operates to divest the Court
of the power to entertain that claim.”14
The court then turned to the question of
whether Section 2462 applied to the equitable
claims brought by the SEC. Judge King characterized
the actions within the scope of Section
2462 as “penalty” actions, noting that the
Supreme Court’s decision in Gabelli that the
fraud discovery rule did not apply to Section
2462 “invoked Chief Justice Marshall’s ‘particularly
forceful language…emphasizing the
importance of time limits on penalty actions’
that ‘it would be utterly repugnant to the genius
of our laws if actions for penalties could be
brought at any distance of time.’”15
The court concluded that penalties, pecuniary
or otherwise, were the crux of the relief sought by
the SEC in the instant case. The declaratory relief
sought would label the defendants as wrongdoers.
The injunctive relief sought would have the
effect of forever barring the defendants from future
violations of the securities laws, which the court
believed should be regarded “as nothing short of
a penalty ‘intended to punish,’ especially where,
as here, no evidence (or allegations) of any continuing
harm or wrongdoing has been presented.”
The disgorgement remedy requiring defendants
to relinquish money and property, the court reasoned,
is the equivalent of forfeiture, which is
expressly covered by Section 2462.
Accordingly, the court held that the fiveyear
statute of limitations set forth in Section
2462 applied to the equitable relief sought by
the SEC. “To hold otherwise would be to open
the door to Government plaintiffs’ ingenuity
in creating new terms for the precise forms
of relief expressly covered by the statute in
order to avoid its application.”16
Although a motion for summary judgment was
pending before the court, Judge King’s sua sponte
consideration of and conclusion that Section 2462
was a jurisdictional statute of limitations shifted
the burden from the defendants to the SEC to
establish jurisdiction. Because the agency was
unable to identify any act of offering or sale of
alleged securities by any of the defendants in
the “red zone” of five years prior to the SEC’s
filing, the court dismissed the case with prejudice,
ruling it had no subject matter jurisdiction
over the action.
The SEC has appealed the decision in Graham
to the U.S. Court of Appeals for the Eleventh
Circuit. The Eleventh Circuit’s decision
will be highly anticipated. It likely will address
not only the open question of Section 2462’s
application to equitable remedies, but also
Judge King’s jurisdictional view of Section 2462.
In Gabelli, the Supreme Court recognized that
the SEC has an obligation to investigate and
prosecute in a timely manner. Graham and the
Fifth Circuit’s decision in Bartek underscore
that obligation. These decisions, if sustained,
will be the death knell for SEC’s efforts to maintain
an exception to that duty when it seeks
only remedies deemed “equitable.”
1. Gabelli v. SEC, 133 S.Ct. 1216 (2013).
2. 2014 WL 1891418 (S.D.Fla. May 12, 2014). See Robert Anello,
“Supreme Court in Gabelli: Clock Starts Ticking When
Fraud Occurs, Not When It’s Discovered,” Forbes.com (Feb.
27, 2013); Robert G. Morvillo and Robert J. Anello, “Statute of
Limitations in SEC Enforcement Actions,” NYLJ (April 5, 2011).
3. 484 Fed.Appx. 949 (5th Cir. 2012).
4. Id. at 956-57.
5. 87 F.3d 484, 487 (D.C.Cir. 1996).
6. 484 Fed.Appx. at 957.
7. 522 U.S. 93, 105 (1997).
8. 321 U.S. 321, 329 (1944).
9. Petition for a Writ of Certiorari, SEC v. Bartek, 12-1000,
2013 WL 543280 (Feb. 13, 2013).
10. The fraud discovery rule was created to ensure that victims
of fraud who do not know they are injured are still able
to bring their claims after they have discovered, or reasonably
should have discovered, their injury.
11. SEC v. Bartek, 133 S.Ct. 1658 (Mem)(2013). Interestingly,
in Gabelli, the court noted without comment that the lower
court had found that the injunction and disgorgement sought
were not subject to Section 2462. 133 S.Ct. at 1220 n.1.
12. The defendants also maintained that the securities laws
were not implicated because the transactions at issue were
simple real estate transactions. The court declined to rule on
this issue, ruling only on the statute of limitations issue. 2014
WL 1891418 at *1 n.3.
13. 2014 WL 1891418 at *7.
15. 133 S.Ct. at 1223 (quoting Adams v. Woods, 2 Cranch 336,
16. 2014 WL 1891418 at *9.
tuesday, october 7, 2014
The court in ‘Graham’ held that the
five-year statute of limitations set
forth in Section 2462 applied to
the equitable relief sought by the
SEC. “To hold otherwise would be
to open the door to Government
plaintiffs’ ingenuity in creating new
terms for the precise forms of relief
expressly covered by the statute in
order to avoid its application.”
Reprinted with permission from the October 7, 2014 edition of the NEW YORK
LAW JOURNAL © 2014 ALM Media Properties, LLC. All rights reserved. Further
duplication without permission is prohibited. For information, contact 877-257-3382
or email@example.com. # 070-10-14-07