Litigation: SEC actions time-barred after five years? Not quite.
On Feb. 27, the U.S. Supreme Court held in a unanimous ruling in Gabelli v. SEC that actions by the Securities and Exchange Commission (SEC) for civil penalties must be brought within five years from the date on which the claim first accrued, as opposed to five years from discovery...
March 28, 2013 at 03:38 AM
9 minute read
The original version of this story was published on Law.com
On Feb. 27, the U.S. Supreme Court held in a unanimous ruling in Gabelli v. SEC that actions by the Securities and Exchange Commission (SEC) for civil penalties must be brought within five years from the date on which the claim first accrued, as opposed to five years from discovery of the underlying wrongful conduct. The five-year limitations period is based upon 28 U.S.C. § 2462 – Time for Commencing Proceedings, which applies to actions for civil penalties where the federal statute upon which the claim is based does not contain its own statute of limitations. An issue not reached by the Supreme Court's Gabelli decision, however, is whether Section 2462 applies to suits in which the government is seeking equitable relief, as opposed to civil penalties. The lower federal courts have reached varying conclusions on this issue.
In Gabelli, the SEC alleged that individual defendants aided and abetted an illicit quid pro quo between a mutual fund and one of its corporate investors. The SEC filed its action more than five years from the date of the alleged wrongdoing but argued that because the claim was based on fraud, the time within which it was required to bring the action did not begin to run until the agency could reasonably have discovered the alleged fraudulent conduct. The Supreme Court rejected the application of the so-called “discovery rule” on the grounds that its rationale is inconsistent with a regulatory action for civil penalties. According to the court, the discovery rule is “an exception to the standard rule … where a plaintiff has been injured by fraud and remains [ignorant] without any fault or want of diligence.” By contrast, “the SEC's very purpose is to root [fraud out].” As a result, the court held that the limitations period for the SEC's claims for civil penalties should be calculated from the date of the defendants' wrongdoing, not from the date of the SEC's discovery of that wrongdoing.
Despite the Supreme Court's adoption of a bright line rule as to when an SEC claim based on fraud accrues, the decision left open the question of whether the five-year limitations period applies when the SEC is seeking equitable relief, as opposed to civil penalties. Some lower federal courts have held that there are circumstances in which equitable relief may be punitive in nature, making it subject to the five-year limitations period of Section 2462, whereas other courts have held that claims for equitable relief are not subject to the five-year limitations period. In assessing whether a particular claim is inherently punitive or equitable, courts have considered whether the relief sought acts as a penalty or whether it is designed to undo damage or prevent future harm to the public. As the 6th Circuit noted in SEC v. Quinlan, “some courts have held that some or all equitable remedies are exempt from the [five-year] limitations period as a matter of law. … Other courts have engaged in a fact-intensive inquiry to determine whether the equitable remedies sought in a particular case are remedial or punitive.”
For example, in SEC v. Kelly, the District Court for the Southern District of New York held that “Section 2462's statute of limitations applies to the SEC's request for civil penalties but not to its request for permanent injunctive relief, disgorgement or an officer and director bar.” By contrast, in SEC v. Quinlan, the 6th Circuit affirmed a ruling of the Eastern District of Michigan, which also found that SEC claims for an injunction and officer bar were equitable in nature, but only after a fact-intensive inquiry of the particular circumstances of the case. In Johnson v. SEC, the D.C. Circuit took a similarly fact-intensive approach in determining that a six-month suspension of a securities broker was punitive in nature and thus subject to the five-year limitations period of Section 2462. Lower courts' varying approaches with respect to this issue make it difficult to predict whether an SEC claim will be subject to Section 2462. Particularly troublesome are claims in which the SEC asks the court to require a defendant to return money obtained unlawfully from harmed investors or to give up ill-gotten gains. If, as some courts have held, such remedies are equitable in nature, Section 2462 would offer no protection to a defendant against the SEC's claims. Yet the monetary impact of such remedies could be much more severe than any civil fines sought by the SEC.
In sum, individuals and corporate entities should be aware that they may not necessarily be immune from all types of SEC enforcement actions merely because the five-year limitation period under Section 2462 has expired.
On Feb. 27, the U.S. Supreme Court held in a unanimous ruling in Gabelli v. SEC that actions by the Securities and Exchange Commission (SEC) for civil penalties must be brought within five years from the date on which the claim first accrued, as opposed to five years from discovery of the underlying wrongful conduct. The five-year limitations period is based upon
In Gabelli, the SEC alleged that individual defendants aided and abetted an illicit quid pro quo between a mutual fund and one of its corporate investors. The SEC filed its action more than five years from the date of the alleged wrongdoing but argued that because the claim was based on fraud, the time within which it was required to bring the action did not begin to run until the agency could reasonably have discovered the alleged fraudulent conduct. The Supreme Court rejected the application of the so-called “discovery rule” on the grounds that its rationale is inconsistent with a regulatory action for civil penalties. According to the court, the discovery rule is “an exception to the standard rule … where a plaintiff has been injured by fraud and remains [ignorant] without any fault or want of diligence.” By contrast, “the SEC's very purpose is to root [fraud out].” As a result, the court held that the limitations period for the SEC's claims for civil penalties should be calculated from the date of the defendants' wrongdoing, not from the date of the SEC's discovery of that wrongdoing.
Despite the Supreme Court's adoption of a bright line rule as to when an SEC claim based on fraud accrues, the decision left open the question of whether the five-year limitations period applies when the SEC is seeking equitable relief, as opposed to civil penalties. Some lower federal courts have held that there are circumstances in which equitable relief may be punitive in nature, making it subject to the five-year limitations period of Section 2462, whereas other courts have held that claims for equitable relief are not subject to the five-year limitations period. In assessing whether a particular claim is inherently punitive or equitable, courts have considered whether the relief sought acts as a penalty or whether it is designed to undo damage or prevent future harm to the public. As the 6th Circuit noted in SEC v. Quinlan, “some courts have held that some or all equitable remedies are exempt from the [five-year] limitations period as a matter of law. … Other courts have engaged in a fact-intensive inquiry to determine whether the equitable remedies sought in a particular case are remedial or punitive.”
For example, in SEC v. Kelly, the District Court for the Southern District of
In sum, individuals and corporate entities should be aware that they may not necessarily be immune from all types of SEC enforcement actions merely because the five-year limitation period under Section 2462 has expired.
This content has been archived. It is available through our partners, LexisNexis® and Bloomberg Law.
To view this content, please continue to their sites.
Not a Lexis Subscriber?
Subscribe Now
Not a Bloomberg Law Subscriber?
Subscribe Now
NOT FOR REPRINT
© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
You Might Like
View AllOld Laws, New Tricks: Lawyers Using Patchwork of Creative Legal Theories to Target New Tech
Lawsuit Against Amazon Could Reshape E-Commerce Landscape
King Kullen—the Nation's First Supermarket—Hires Outside Counsel as GC
Trending Stories
- 1Judicial Ethics Opinion 24-57
- 2Milbank Leads Bonus Race, Rolling Out Year-End Pay News
- 3Teen Overseas Boarding Schools Face Wave of Miami Federal Lawsuits
- 4Decision of the Day: While Judge Was 'Moved' by Immigrant Couple's Efforts to Cast Votes in 2024 Election, Late Registration Denied
- 5California-Based Portal Crypto Exchange Faces Delaware Investor Class Action
Who Got The Work
Michael G. Bongiorno, Andrew Scott Dulberg and Elizabeth E. Driscoll from Wilmer Cutler Pickering Hale and Dorr have stepped in to represent Symbotic Inc., an A.I.-enabled technology platform that focuses on increasing supply chain efficiency, and other defendants in a pending shareholder derivative lawsuit. The case, filed Oct. 2 in Massachusetts District Court by the Brown Law Firm on behalf of Stephen Austen, accuses certain officers and directors of misleading investors in regard to Symbotic's potential for margin growth by failing to disclose that the company was not equipped to timely deploy its systems or manage expenses through project delays. The case, assigned to U.S. District Judge Nathaniel M. Gorton, is 1:24-cv-12522, Austen v. Cohen et al.
Who Got The Work
Edmund Polubinski and Marie Killmond of Davis Polk & Wardwell have entered appearances for data platform software development company MongoDB and other defendants in a pending shareholder derivative lawsuit. The action, filed Oct. 7 in New York Southern District Court by the Brown Law Firm, accuses the company's directors and/or officers of falsely expressing confidence in the company’s restructuring of its sales incentive plan and downplaying the severity of decreases in its upfront commitments. The case is 1:24-cv-07594, Roy v. Ittycheria et al.
Who Got The Work
Amy O. Bruchs and Kurt F. Ellison of Michael Best & Friedrich have entered appearances for Epic Systems Corp. in a pending employment discrimination lawsuit. The suit was filed Sept. 7 in Wisconsin Western District Court by Levine Eisberner LLC and Siri & Glimstad on behalf of a project manager who claims that he was wrongfully terminated after applying for a religious exemption to the defendant's COVID-19 vaccine mandate. The case, assigned to U.S. Magistrate Judge Anita Marie Boor, is 3:24-cv-00630, Secker, Nathan v. Epic Systems Corporation.
Who Got The Work
David X. Sullivan, Thomas J. Finn and Gregory A. Hall from McCarter & English have entered appearances for Sunrun Installation Services in a pending civil rights lawsuit. The complaint was filed Sept. 4 in Connecticut District Court by attorney Robert M. Berke on behalf of former employee George Edward Steins, who was arrested and charged with employing an unregistered home improvement salesperson. The complaint alleges that had Sunrun informed the Connecticut Department of Consumer Protection that the plaintiff's employment had ended in 2017 and that he no longer held Sunrun's home improvement contractor license, he would not have been hit with charges, which were dismissed in May 2024. The case, assigned to U.S. District Judge Jeffrey A. Meyer, is 3:24-cv-01423, Steins v. Sunrun, Inc. et al.
Who Got The Work
Greenberg Traurig shareholder Joshua L. Raskin has entered an appearance for boohoo.com UK Ltd. in a pending patent infringement lawsuit. The suit, filed Sept. 3 in Texas Eastern District Court by Rozier Hardt McDonough on behalf of Alto Dynamics, asserts five patents related to an online shopping platform. The case, assigned to U.S. District Judge Rodney Gilstrap, is 2:24-cv-00719, Alto Dynamics, LLC v. boohoo.com UK Limited.
Featured Firms
Law Offices of Gary Martin Hays & Associates, P.C.
(470) 294-1674
Law Offices of Mark E. Salomone
(857) 444-6468
Smith & Hassler
(713) 739-1250