United States: Parties Push To Enforce Statutory Time Limits On SEC Enforcement Actions

Last Updated: April 14 2015
Article by Benjamin Neaderland and Jared B. Cohen

Two cases now before US Courts of Appeals carry the possibility of placing meaningful new limits on the US Securities and Exchange Commission's (SEC) time horizon for bringing enforcement actions. The SEC has long argued that certain statutory provisions which appear on their face to create time limits on SEC actions are either limited in their scope or merely establish internal policy guidelines for the agency, and do not actually circumscribe its jurisdiction to bring actions. These impending appellate decisions, depending on their outcomes, may expand the defenses available to parties subject to SEC enforcement actions when those actions are not undertaken in a timely fashion.     
 
SEC v. Graham, pending in the 11th Circuit, involves 28 U.S.C. § 2462, a generally applicable statute of limitations providing 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 US Supreme Court's 2013 Gabelli decision held that in SEC enforcement actions seeking civil penalties, § 2462 applies and the claim accrues (thus the limitations period begins to run) when the conduct giving rise to the claim occurred and the fraud was complete.1 The SEC had argued that the claim should only accrue when the fraud was discovered, not when it occurred. The Court in Gabelli left open the question of whether § 2462 may apply similarly to enforcement actions seeking equitable relief, including disgorgement and various forms of injunctive relief.
 
The District Court in Graham held first that § 2462 is no mere administrative "claims processing" rule, but rather a "jurisdictional" statute of limitations that removes courts' power to hear actions brought too late. Furthermore, it held that § 2462 applies to disgorgement, injunctive relief, and any other remedy sought by the SEC that operates in effect—regardless of formal title or label—as a "civil fine, penalty, or forfeiture, pecuniary or otherwise."2
 
On appeal to the 11th Circuit, the SEC argued that under Gabelli, and by its own terms, § 2462 does not apply at all to enforcement actions seeking relief that the agency terms "equitable." Mr. Graham and amicus curiae counter that the equitable relief sought by the SEC is really not in the nature of a compensatory remedy as it is sometimes claimed: in practice, more often, disgorgement operates as a punitive forfeiture and declaratory and injunctive relief operates as a non-pecuniary penalty. Indeed, they cite compelling precedent holding certain SEC injunctive remedies to be punitive in effect for purposes of the general statute of limitations.3 For example, disgorgement payments frequently go to the US Treasury instead of to compensate victims, and industry bars in particular—a common form of injunctive relief sought by the SEC—clearly do more to punish culpable individuals than to remedy any damage they have caused. While these forms of relief are sometimes warranted and appropriate, one can reasonably question why they should be granted broad exemption from Gabelli's holding that the five-year limitations period in § 2462 applies to SEC enforcement actions. With regard to industry bars, it would seem hard to take seriously the SEC's claims about their purportedly prospective value (the urgent need to protect investors from potential recurrence of past unlawful behavior) if the SEC has waited more than five years following the previous violation to seek such relief. 
 
If the 11th Circuit is persuaded by these arguments, the SEC may have to bring many more of its actions for equitable relief within five years of a claim's accrual. This will be particularly the case for equitable and injunctive actions that seem to differ from penalties in name only. While amici in Graham note that the SEC already files roughly 60% of its actions within two years of starting an investigation, and the agency may still seek tolling agreements to allow it to extend the limitations period, the SEC would certainly face heightened pressure to act in a more timely manner.
 
In Montford v. SEC, pending before the DC Circuit,4 the potential time-limiting provision at issue was enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The statute provides that "[n]ot later than 180 days after the date on which Commission staff provide a written Wells notification to any person, the Commission staff shall either file an action against such person or provide notice to the Director of the Division of Enforcement of its intent to not file an action."5
 
This statute would seem on its face to set a firm deadline, 180 days after issuing a Wells notice, by which the SEC must decide whether or not to commence an action—notwithstanding that the statute leaves room for the Commission and the Division of Enforcement to take steps to extend the deadline. And yet, before the Montford case, the few courts to consider the provision held that it did not prevent the SEC from bringing actions past the 180-day deadline, regardless of whether any extensions were properly obtained.6 
 
In the case currently before the DC Circuit, the SEC brought charges against Montford in an administrative proceeding on the 187th day after issuing its Wells notice. An administrative law judge ruled that the claim was not time-barred by the 180-day limitation in Dodd-Frank. The Commission itself turned down Montford's appeal of the administrative ruling, and held that "this provision is intended to operate as an internal timing directive, designed to compel our staff to complete investigations, examinations, and inspections in a timely manner and not as a statute of limitations."7 Montford has now sought review of the Commission's ruling in federal court. According to press reports the SEC's brief, filed under a protective order, argues that the DC Circuit should defer to the Commission's interpretation of ambiguous language in the Dodd-Frank 180-day limit, even though the statute appears unambiguous in what it proscribes, if not in the remedy for a violation.
 
Whether the DC Circuit follows the interpretation of the Commission (and the district courts in New York and Florida), or departs in favor of a seemingly plain-text reading of the statute's language, could affect SEC conduct in its investigations, including whether or when it chooses to issue Wells notices. The court is scheduled to hear oral argument in Montford on April 23.    
 
Both Graham and Montford have the potential to focus greater attention on the timelines of SEC investigations and enforcement decisions. If the courts accept the defendants' arguments, others subject to the SEC investigation and enforcement may gain a new weapon in their defensive arsenals.


1Gabelli v. SEC, 133 S.Ct. 1216 (2013).
 
2SEC v. Graham, Case No. 13-10011-CIV-KING, 2014 WL 1891418 (S.D. Fla. May 12, 2014).
 
3See, e.g., Johnson v. SEC, 87 F.3d 484 (D.C. Cir. 1996); In re Blizzard, Initial Decision Release No. 229, 80 S.E.C. Docket 1464 (June 13, 2003); SEC v. Jones, 476 F.Supp.2d 374 (S.D.N.Y. Feb. 26, 2007).
 
4Montford and Co., Inc. v. SEC, No. 14-1126 (D.C. Cir.).
 
5 15 U.S.C. § 78d-5. As enacted, the provision modified § 4E of the Securities Exchange Act of 1934, adding a new section entitled: "Deadline for Completing Enforcement Investigations and Compliance Examinations and Inspections."
 
6SEC v. The NIR Group, LLC and Corey Ribotsky, CV 11-4723, 2013 WL 5288962, at *1, *5 (E.D.N.Y. March 24, 2013) ("Because the statute does not explicitly provide for dismissal of an enforcement action for failure to comply . . . I find that no such remedy exists. . . . [E]xpiration of the 180-day deadline imposed by [§ 4E of the Exchange Act] does not create a jurisdictional bar to SEC enforcement actions."); SEC v. Levin, No. 12-21917-CIV, 2013 WL 594736, at *13 (S.D. Fla. Feb. 14, 2013) ("[A]n internal agency deadline of the type found in Section 4E does not create a statute of limitations.").
 
7 Opinion of the Commission, In the Matter of Montford and Co., Inc., et al., Investment Advisers Act of 1940 Release No. 3829, May 2, 2014.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions