Wednesday, June 01, 2016

Injunctions are not covered under catch-all statute of limitations

By Rodney F. Tonkovic, J.D.

The SEC was time-barred from proceeding with claims for declaratory relief and disgorgement that were more than five years old. Under the plain meaning of 28 U.S.C. Section 2462, an Eleventh Circuit panel held, these remedies are a penalty and a forfeiture, respectively. The court, however, remanded for further proceedings on the Commission's claim for an injunction because that is not a penalty under Section 2462 (SEC v. Graham, May 26, 2016, Pryor, J.).

The Commission alleged that five individuals ran an offering fraud and Ponzi scheme through a real estate development company that raised more than $300 million from over 1,400 investors between November 2004 and July 2008. Returns paid to investors came from the funds of later investors, and the defendants eventually abandoned the projects and misappropriated millions in investor funds. The complaint, filed in early 2013, alleged violations of the registration and anti-fraud provisions of the securities laws, and sought as relief a permanent injunction, disgorgement, an order to repatriate funds, and civil penalties.

District court dismisses. The district court dismissed the case with prejudice, finding that Section 2462's statute of limitations is jurisdictional and that every remedy the SEC requested was outside the court’s jurisdiction. According to the court, the injunctive and declaratory relief sought by the SEC were penalties within the meaning of Section 2462 and that the requested disgorgement constituted forfeiture. Additionally, all of the alleged securities violations took place more than five years before the Commission filed suit.

Injunction. The district court held that the injunction requested by the Commission was a penalty covered by the plain language of Section 2462. Under Eleventh Circuit precedent, however, injunctions are equitable remedies and beyond the reach of the statute. Even if it were not bound by that precedent, the court stated that it would still conclude that Section 2462 would not apply. According to the court, a penalty "addresses a wrong done in the past," while injunctions look forward. An injunction, therefore, is not a penalty under Section 2462, the court concluded, and the time bar was inapplicable.

Declaratory relief. Next, the panel agreed with the district court that the declaratory relief sought by the Commission was backward-looking and thus a penalty under Section 2462. Here, the court looked to the Supreme Court's ruling in Gabelli v. SEC where the Court recognized that civil penalties “go beyond compensation, are intended to punish, and label defendants wrongdoers.” The declaratory relief at issue in this case was no different, the panel said, because it was intended to redress previous infractions rather than to stop any ongoing or future harm.

Disgorgement. The court then agreed with the district court's holding that, for the purposes of Section 2462, forfeiture and disgorgement are effectively synonyms. Looking at dictionary definitions and the usage of the Supreme Court, the panel concluded that the terms are interchangeable, and "forfeiture" is expressly covered by Section 2462. While the Commission urged a technical definition, that disgorgement only includes direct proceeds from wrongdoing, while forfeiture can include both ill-gotten gains and secondary profits from those gains, the court said that if Congress had wished to attach such specialized meanings of the terms, it would have done so.

The case is No. 14-13562.

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