Statute of Limitations on Disgorgement Claims Brought by the SEC – Resolving the Circuit Split

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By: Nirav P. Patel

The Securities and Exchange Commission (“Commission”) has retained the right to seek enforced restitution or disgorgement for ill-gotten profits of securities violations since 1965.1 Disgorgement entails the repayment of monies obtained as a result of alleged violations of the federal securities laws. The statute of limitations on such actions, however, has not provided the requisite clarity as to which claims retain such limitations and which do not. As the Commission began to abide by the five-year statute of limitations provided under Section 2462, disgorgement was treated as an exception to the rule. Thus, claims for disgorgement were permitted to extend beyond the five-year look-back period and to acquire full restitution of ill-gotten gains from securities violators. However, with the recent Eleventh Circuit Court of Appeals decision in SEC v. Graham, the Commission’s ability to pursue such claims without limitation is under debate.

The Eleventh Circuit Court of Appeals in Securities and Exchange Commission v. Graham went against the established precedent and held that disgorgement actions brought by the Commission would be subject to the statute of limitations prescribed for civil penalties.2 In Graham, the Commission brought a civil enforcement action against defendants Graham, Clark, Coleman, Schwarz, and Stokes for violating federal securities laws by “selling condominiums that were functioning, in reality, as unregistered securities.”3 Through their fraudulent activities, the defendants raised $300 million dollars in ill-gotten gains from about 1,400 investors.4 Amongst its other claims, the Commission requested a permanent injunction against defendants, civil money penalties, and disgorgement of “all profits from their illegal ventures, with prejudgment interest.” In response, defendants filed motions for summary judgment on the following grounds:

(1) The sale of their condominiums were not investment contracts, and thus were not governed by securities laws; and (2) the statute of limitations under 28 U.S.C. § 2462 barred all of the SEC’s requested forms of relief. 5

The Commission then filed a competing motion for summary judgment. The district court, however, “held a hearing on the defendant’s statute of limitations defense” and dismissed the Commission’s complaint as time-barred according to § 2462 and taking place beyond the five-year statute of limitations period. 6 The district court further held that §2462 applied to all of the remedies requested by the Commission, not just the civil money penalty. 7 The court justified its holding by reasoning that disgorgement constituted forfeiture within the meaning and scope of §2462.

In its de novo review of the Commission’s appeal, the Eleventh Circuit Court of Appeals held in favor of the defendants and concluded the Commission was time-barred from proceeding with its claim for disgorgement. The court declared that disgorgement, “requiring defendant to relinquish money and property-can truly be regarded as nothing other than a forfeiture.” 8 In its interpretation of the meaning of “forfeiture,” the court considered definitions from Webster’s Dictionary and the Oxford English Dictionary, and concluded “forfeiture occurs when a person is forced to turn over money or property because of a crime or wrongdoing.” 9 The court then likened the definition to Black’s Law Dictionary’s definition of disgorgement. Additionally, the court held, for purposes of §2462 the remedy of disgorgement is a forfeiture, and the Supreme Court has also used the two terms interchangeably.

The Commission argued that the two terms are not one, as disgorgement only includes direct proceeds from wrongdoing, whereas forfeiture can include both ill-gotten gains and any additional profits. However, the Eleventh Circuit disagreed and stated that as disgorgement would still constitute redress for wrongdoing, it would be a “subset of forfeiture.”10 Moreover, the court held that as “words in statutes should be given their ordinary, popular meaning unless Congress clearly meant the words in some more technical sense,” the terms forfeiture and disgorgement should be interpreted normally.11 Therefore, as disgorgement retains the same meaning as forfeiture, the two remedies should be treated equally within the application of section 2462.

Of the remaining appellate courts, there has been a consensus that disgorgement claims are not punitive and Section 2462’s statute of limitations does not apply to it. Additionally, the Court of Appeals for the Tenth Circuit in SEC v. Kokesh has acknowledged and directly opposed the ruling in Graham.12 The court held that it was not a penalty and thus, outside the scope of §2462, as it is remedial and does not inflict punishment. Similarly, district courts in other circuits have also declined to follow the Eleventh Circuit decision and as it currently stands, the Eleventh Circuit is the only one supporting its holding.

This dissent highlights the weaknesses of the Eleventh Circuit’s arguments of primarily basing their holding upon similarities in the standard dictionary definitions for the terms “forfeiture” and “disgorgement;” but as highlighted within Kokesh, the context in which these remedies are utilized must be given greater consideration, and the focus should primarily rest on their enforcement. In the enforcement of forfeiture claims, defendants are ordered to relieve “valid rights” retained within property.13 However, in the enforcement of disgorgement claims, defendants are ordered to relieve property for which they do not retain any legal rights.14

Nevertheless, the Eleventh Circuit’s holding has brought to light the lack of clarity and the room for error in the treatment of disgorgement claims; and other circuits may soon follow in its rationale. Additionally, public policy dictates the implementation of a statute of limitations for the disgorgement actions to prevent disadvantaging corporate defendants and establishing consistency and predictability. Moreover, the Commission is capable of implementing such limitations without incurring substantial burden or difficulty to its regulatory function, as it retains applicable exceptions to the statute of limitations and plausible alternatives to disgorgement actions. Thus, the Eleventh Circuit, through its decision in Graham, rightfully recognized the judicial and societal necessity for subjecting disgorgement to §2462’s statute of limitations; but erroneously accredited such necessity to literary similarities between disgorgement and forfeiture. Now, with the existing circuit split, the Supreme Court may grant certiorari to address the issue directly and establish the foundation for the future treatment of the Commission’s disgorgement claims.

[1]      SEC v. Texas Gulf Sulpher Co., 258 F. Supp. 262 (S.D.N.Y. 1966).

[2]      823 F.3d 1357 (2016).

[3]      Id. at 1359.

[4]      Id.

[5]      Id.

[6]      Id.

[7]      Id.

[8]      Id. at 1363.

[9]      Id.

[10]     Id. at 1364.

[11]     Id.

[12]     2016 WL 4437585 (10th Cir. 2016).

[13]     Catherine E. Maxson, The Applicability of Section 2462’s Statute of Limitations to SEC Enforcement Suits in Light of the Remedies Act of 1990, 94 Mich. L. Rev. 512, 526 (1995).

[14]     Id.

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