Eleventh Circuit Limits SEC’s Claims for Declaratory Judgment and Disgorgement to Five-Year Statute of Limitations

Unless otherwise provided by law, 28 U.S.C. § 2462 ordinarily requires the government to bring any “action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture” within five years of the claim’s accrual. In SEC v. Graham, 2016 WL 3033605 (11th Cir. May 26, 2016), the Eleventh Circuit held that this statute of limitations barred claims asserted by the Securities and Exchange Commission (SEC) for declaratory relief and disgorgement—but did not preclude “forward-looking” claims for injunctive relief.

Graham was a civil enforcement action based on allegations that the defendants had violated federal securities law by selling unregistered securities from 2004 to 2008. The SEC sought declaratory relief injunctive relief, and disgorgement, and the defendants raised § 2462’s five-year statute of limitations as an affirmative defense. After a hearing, the district court dismissed the entire complaint as time-barred on the ground that injunctive relief and declaratory relief were penalties and that disgorgement constituted forfeiture, all within the meaning of § 2462. In an opinion by Judge Jill Pryor, the Eleventh Circuit reversed in part and affirmed in part.

With respect to the district court’s ruling that injunctive relief is a “penalty” within the meaning of § 2462, the court of appeals held that its “precedent forecloses the argument that § 2462 applies to injunctions, which are equitable remedies.” The court further explained that § 2462’s statute of limitations applies only to backward-looking remedies, unlike injunctive relief.

On the other hand, the Eleventh Circuit upheld the district court’s conclusion that declaratory relief and disgorgement are backward-looking penalties that invoke § 2462’s statute of limitations. The court reasoned, “[a] declaration of liability goes beyond compensation and is intended to punish because it serves neither a remedial nor a preventative purpose; it is designed to redress previous infractions rather than to stop any ongoing or future harm.” Similarly, the Eleventh Circuit held that “forfeiture” as used in § 2462 and “disgorgement are effectively synonyms; § 2462’s statute of limitations applies to disgorgement.”

This decision will act to limit the SEC’s current practice of pursuing disgorgement claims beyond five years, which is particularly significant given the Supreme Court’s recent unanimous decision that § 2462’s five-year statute of limitations begins running when the fraud occurs, not when it is discovered. Gabelli v. SEC, 133 S. Ct. 1216 (2013). Graham’s holding that disgorgement is subject to the five-year statute of limitations also creates a circuit split with the Ninth and D.C. Circuits. See SEC v. Rind, 991 F.2d 1486 (9th Cir. 1993); Zacharias v. SEC, 569 F.3d 458 (D.C. Cir. 2009).

Posted by Margaret Flatt.

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