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1393Strict Limitations Period Applied to SEC Enforcement Actions

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  • Baker, John
    May 15, 2014
      A federal judge in Florida has ruled that enforcement actions by the Securities and Exchange Commission (and, presumably, other federal agencies) are subject to a strict five-year statute of limitations that applies to disgorgement and injunctive and declaratory relief as well as money penalties. SEC v. Graham, No. 4:13-cv-10011 (S.D. Fla. May 12, 2014). The court also ruled that the statute of limitations is jurisdictional, which implies that it cannot be extended even with tolling agreements. The ruling is at variance with those by other courts, which have ruled that the statute applies only to money penalties and treated it as an affirmative defense.


      28 U.S.C. § 2462 provides that an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued. The U.S. Supreme Court held last year that a claim under Section 2462 based on fraud accrues-and the five-year clock begins to tick-when a defendant's allegedly fraudulent conduct occurs, not when the fraud is discovered by the SEC. Gabelli v. SEC, No. 11-1274 (U.S. Feb. 27, 2013). The district court in Gabelli had ruled that Section 2462 did not apply to the SEC's claims for injunctive relief and disgorgement, and the Supreme Court noted only that the issue was not before it.


      The current case involves claims that the defendants defrauded investors out of more than $300 million in real estate investments that were in fact unregistered securities. The defendants stopped selling investments in 2007, and the SEC's case was not brought until January 30, 2013. The court concluded sua sponte that 28 U.S.C. § 2462 operates to remove the court's subject matter jurisdiction to entertain the SEC's case. Statutes of limitations ordinarily are affirmative defenses that defendants must raise, but some statutes of limitation are jurisdictional, and the court ruled that Section 2462 is one such. The court ruled that it therefore had a duty to consider issues relating to its subject matter jurisdiction, even if not raised by the parties, and that the SEC had the burden of showing compliance with the statute of limitations. The court's ruling implies that compliance with the statute of limitations cannot be waived by defendants, even with a tolling agreement.


      The court also ruled that Section 2462's time limit applies to claims for declaratory relief, injunctive relief, and disgorgement of ill-gotten gains. The SEC's position is that those claims are not subject to a statute of limitations. Other courts have ruled that Section 2462 does not apply to claims for injunctive relief and disgorgement of ill-gotten gains, and none seem to have treated it as jurisdictional. The court's ruling, if followed by other courts, would have a significant impact on federal civil enforcement actions, particularly those brought by the SEC. The SEC is expected to appeal the ruling.


      I have placed the opinion in SEC v. Graham on the FundLaw website (free registration with Yahoo Groups may be required), and it is available at


      https://groups.yahoo.com/group/FundLaw/files/SECvGraham.pdf


      For my post on the Supreme Court's ruling in Gabelli v. SEC, see


      https://groups.yahoo.com/neo/groups/fundlaw/conversations/messages/1370






      John M. Baker, Esquire
      Stradley Ronon Stevens & Young, LLP
      1250 Connecticut Avenue, N.W., Suite 500
      Washington, DC 20036-2652
      p: 202.419.8413
      f: 202.822.0140
      FundLaw Listowner http://groups.yahoo.com/neo/groups/fundlaw/conversations/messages