Court Says SEC Remedies Against D&Os Are Penalties and Time-Barred
A federal appeals court recently expanded the protection that the statute of limitations affords defendants in securities enforcement cases brought by the SEC. The applicable statute of limitations, 28 U.S.C. § 2462, states that actions by the SEC for the “enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise” must be commenced within five years of when “the claim first accrued.” The SEC has historically interpreted this statute to apply only to what it viewed as legal remedies, such as civil fines, but not to what it viewed as equitable remedies, such as injunctions, D&O bars, and disgorgement. The new case, SEC v. Bartek, for the first time includes permanent injunctions and director and officer (D&O) bars among the remedies covered by the five-year statute of limitations. The court also ruled that there is no “discovery rule” that impacts when claims first accrue in the context of SEC actions.
In 2008, the SEC brought an action in a Texas district court against former Microtune officers. The SEC accused the defendants of accounting fraud by backdating stock options, and asked for permanent injunctions, civil penalties, and D&O bars. The defendants moved for summary judgment, citing 28 U.S.C. § 2462. The district court agreed with the defendants and granted summary judgment
The 5th Circuit affirmed the district court in an August 2012 unpublished decision. The court held that permanent injunctions and D&O bars are subject to the five-year statute of limitations because they are “penalties” rather than equitable remedies. The court reasoned that: “[t]he SEC’s sought-after remedies would have a stigmatizing effect and long-lasting repercussions. Neither remedy addresses past harm allegedly caused by the Defendants. Nor does either remedy address the prevention of future harm in light of the minimal likelihood of similar conduct in the future.”
The case may put pressure on the SEC to conduct investigations more efficiently, and will restrain the agency’s ability to use two weapons in its remedy arsenal.