In SEC v. Bartek, filed August 7, 2012, the Fifth Circuit held that the discovery rule does not apply to 28 U.S.C. § 2462, the statute of limitations governing penalties in SEC civil enforcement actions, thus affirming a district court’s grant of summary judgment in favor of the defendants. Under the Fifth Circuit’s ruling, the SEC’s claims for penalties accrue on the date of the violation, not on the date that the SEC discovers the violation. This opinion creates a circuit split after the Second Circuit’s decision in SEC v. Gabelli, 653 F.3d 49 (2d Cir. 2011), which held that the discovery rule applied to Section 2462, and increases the likelihood that the Supreme Court will weigh in on the issue.
The SEC’s case stemmed from an alleged stock options backdating scheme that occurred between 2000-2003. The SEC alleged that the defendants committed securities fraud, books and record-keeping violations, and aided and abetted their former company’s securities law violations. In addition to civil penalties, the SEC sought permanent injunctions and officer and director bars against the defendants.
The Fifth Circuit determined that the SEC’s claims must be dismissed because they were not filed within Section 2462’s statute of limitations period. It expressly rejected the SEC’s argument that the statute of limitations did not begin to run until 2003, when the SEC discovered the alleged fraud. Instead, the Fifth Circuit focused on the plain language of the statute itself, which contains no discovery rule exception, and held that the statute of limitations began to run in 2000, when the defendants filed a registration statement containing the alleged misstatements. The court chose not to rely on cases, including Gabelli, that presumed that the discovery rule applied to fraud actions. Here, the court observed, there was no indication that the defendants had attempted to conceal the stock options backdating, and therefore cases addressing fact patterns involving actual concealment were not instructive.
In addition, the court rejected the SEC’s argument that the sanctions—permanent injunctions and officer and director bars—that it sought against the defendants were not “penalties” subject to Section 2462’s statute of limitations. It refused to adopt a bright-line rule that sanctions are always remedial in nature, rather than punitive. Instead, the Fifth Circuit held that the determination of whether a remedy is remedial or punitive, and thus subject to Section 2462, is based on several factors, including: 1) the extent of the collateral consequences to the defendant resulting from the particular sanction, 2) whether the relief would remedy the damage caused by the defendant’s conduct, and 3) whether the remedy focused on preventing future harm. In this case, the sanctions were punitive because they did not remedy past damage, were not focused on preventing future harm given the unlikelihood of additional stock option backdating violations, and involved a “severe” lifetime ban preventing the defendants from working in their chosen profession.