A federal appeals court has ruled that the statute of limitations bars the U.S. Securities and Exchange Commission from bringing stock option backdating charges against two former Microtune Inc. executives more than five years after the alleged illegal conduct. The 5th U.S. Circuit Court of Appeals held that the discovery rule — which suspends the statute of limitations until the wrongful activity could have reasonably been discovered — did not apply because there was no fraudulent concealment claim. The SEC abandoned that claim on appeal.

The 5th Circuit on Aug. 7 affirmed a February 2011 ruling by U.S. District Judge Jane Boyle of the Northern District of Texas. In her ruling, she granted summary judgment in favor of former Microtune chief executive officer Douglas Bartek and former general counsel Nancy Richardson, holding that the charges were time-bared.

Fifth Circuit Judges Catharina Haynes and James Graves Jr. and Senior Judge Thomas M. Reavley issued the per curiam opinion in SEC v. Bartek, et al.

Bartek co-founded Microtune, which developed silicon tuners to be used in media applications, in 1996.

The SEC brought the case on June 30, 2008, alleging the former executives engaged in fraudulent stock options backdating at Microtune between 2000 and mid-2003. The agency claimed that Microtune failed to record and report more than $22.5 million in compensation expenses because of the backdating scheme.

The defendants countered that most of the SEC’s claims had expired because of a five-year statute of limitations.

The controlling federal statute provides that civil fine and penalty suits must be “commenced within five years from the date when the claim first accrued.”

Boyle noted the SEC’s August 2003 receipt of a June 2001 email concerning “tricks on timing” and its “apparent inactivity from mid-2004 to mid-2006″ when its investigation was on hold. “As such, the Court concludes that the SEC has failed to raise a genuine issue of material fact as to whether it diligently pursued its claim once it received the tricks on timing email on August 26, 2003, and the SEC is therefore not entitled to tolling under the fraudulent concealment doctrine,” Boyle wrote. The SEC appealed the ruling on its fraud claim but abandoned its fraudulent concealment claim.

The 5th Circuit noted, “The parties dispute whether the discovery rule applies. The SEC argues that the discovery rule applies to §2462 for fraud cases and the five-year limitations for civil penalties began to run in 2003, when the SEC discovered the fraud. The district court determined that the fraudulent concealment or equitable tolling claims are without merit under these facts.”

The court stated, “We have held that the discovery rule does not apply to this statute.” It cited a 1985 case, United States v. Core Labs Inc., which involved the government’s quest for civil penalties for Export Administration Act violations. The 5th Circuit noted similar D.C. Circuit, 9th and 11th Circuit rulings.

The 5th Circuit also called the SEC’s reliance on a 2nd Circuit ruling, SEC v. Gabelli (2011), “misplaced.” Gabelli held that a claim “first accrues” under the statute of limitations when the government discovers the violation. But, the 5th Circuit noted, “that case involved an inherently self-concealing fraudulent scheme, circumstances that are not found in this case.”

Ron Breaux, a partner in Dallas-based Haynes and Boone and Bartek’s lead trial lawyer in the case, says it’s important that the 5th Circuit ruled in the defendants’ favor because the SEC “believes every fraud-based statute has a discovery rule inherently written into it.”

Ultimately, however, the 5th Circuit’s ruling was not surprising, because of its own prior case law, Breaux says: “There is 5th Circuit precedent on this statute, but not in a securities fraud context.”

Jeremy Kernodle, another partner in Dallas-based Haynes and Boone, argued for Bartek at the 5th Circuit.

E. Joshua Rosenkranz, who heads the U.S. Supreme Court and appellate litigation practice at Orrick, Herington & Sutcliffe, argued for Richardson at the 5th Circuit. He says that the SEC claims it has limitless power to penalize companies and individuals for alleged violations without making a showing that the parties hid their conduct or that “an earlier inquiry would have been fruitless.”

“For hundreds of years, the law has been clear that the government just does not have that power,” Rosenkranz says. “Congress adopts statutes of limitations, especially in securities cases, to assure businesses, executives, and investors that the government cannot ruin careers and bankrupt companies based on stale information dug out of dusty files that no one can remember and no one can defend against.”

In an emailed statement, SEC spokesman Kevin Callahan says the agency is “reviewing the court’s decision.”