Last month the United States Court of Appeals for the Eleventh Circuit held in SEC. v. Graham et al that the five-year statute of limitations in 28 USC §2462 applies to SEC claims for disgorgement or declaratory relief.
Although Graham is not binding outside of the Eleventh Circuit, it represents a significant challenge to the SEC’s stated position that disgorgement is not subject to the U.S. Code’s general statute of limitations established by §2462 because it is an equitable remedy.
28 USC §2462 says:
Except as otherwise provided by Act of Congress, 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 if, within the same period, the offender or the property is found within the United States in order that proper service may be made thereon.
Graham is a body blow to the SEC’s current view of its enforcement powers, particularly if its reasoning is adopted by other circuit courts or if the U.S. Supreme Court affirms the decision.
Graham is particularly notable because of the importance the SEC places on disgorgement in enforcement proceedings. Disgorgement — provided for under the Securities and Exchange Act of 1934 — is a tool the SEC frequently relies on in civil dispositions, including those involving alleged violations of the FCPA to oblige alleged wrongdoers to disgorge their ill-gotten gains.
The SEC first ordered disgorgement as part of an FCPA resolution in 2004, and it has since become the primary driver of the SEC’s record-setting monetary impositions under the FCPA over the last 10 years. In the last three years alone, the SEC has extracted more than $940 million from companies as part of FCPA-related civil enforcement actions, of which approximately $829 million has been disgorgement, $59 million has been civil fines and $53 million has been prejudgment interest.
This imbalance is attributable, at least in part, to the SEC’s current view, rejected in Graham, that no statute of limitations prevents the SEC from seeking injunctions, declaratory judgments or the disgorgement of ill-gotten gains, regardless of when the conduct occurred, because these remedies are equitable in nature and therefore not subject to the strictures of §2462.
The Eleventh Circuit’s decision in Graham that disgorgement is subject to the five-year statute of limitations creates a circuit split (with the D.C. and Ninth Circuits) on whether §2462 governs the SEC’s use of disgorgement in civil enforcement actions.
In the short term, Graham will likely put pressure on the SEC to take measures to resolve enforcement actions more quickly. That could mirror recent attempts by the DOJ to accelerate the pace of its own FCPA enforcement. This push by the DOJ has included working with the FBI to create three squads devoted to the prosecution of FCPA and money laundering violations, increasing the number of DOJ attorneys devoted to FCPA cases by 50 percent, and enacting an FCPA pilot program to encourage companies to voluntarily self-disclose FCPA issues (discussed in Miller & Chevalier’s FCPA Spring Review 2016).
Individuals and entities currently involved in SEC enforcement proceedings, particularly administrative proceedings or in judicial circuits that have not considered this issue, are quite likely to vigorously challenge any continued efforts by the SEC to pursue disgorgement if the statute of limitations has run.
Graham may also discourage defendants from signing tolling agreements to extend or entirely waive the statute of limitations. Given the importance the SEC places on cooperation as a factor in settlement negotiations, however, it is likely that companies and some individuals will continue to sign such agreements, but this decision should increase the leverage of these entities and individuals, who may now be more aggressive in pushing the SEC to narrowly define the scope of their tolling agreements.
Because of the decision’s potentially significant impact on SEC enforcement strategies, the SEC is likely to seek review by the Supreme Court.
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A copy of the decision in SEC v. Graham et al is here (pdf).
For additional information about Graham, please see the recent analysis of the opinion by Saskia Zandieh, Homer E. Moyer Jr., Austen Walsh, and Marc Alain Bohn of Miller & Chevalier.