11th Circuit Holds That SEC is Subject to Standard Five-Year Statute of Limitations in Enforcement Actions Seeking Disgorgement
On May 26, 2016, the Securities and Exchange Commission suffered another significant loss in its efforts to seek remedies more than five years after the commission of an offense. As we have previously covered here, the Supreme Court held in SEC v. Gabelli that in enforcement actions seeking civil penalties the SEC does not get the benefit of the “discovery rule,” under which the statute of limitations only starts after a party discovers an offense. In Gabelli, the Supreme Court left open the question of whether the general five-year statute of limitations under 28 U.S.C. § 2462 applies to claims for equitable relief such as disgorgement.
Before Gabelli, both the 9th Circuit and the D.C. Circuit held that disgorgement was not subject to the five-year statute of limitations. In Graham, the 11th Circuit disagreed. The case required interpretation of 28 U.S.C. § 2462, which bars any “action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture … unless commenced within five years from the date when the claim first accrued.” The 11th Circuit held that declaratory relief is a penalty and disgorgement is tantamount to forfeiture, both subject to section 2462’s five-year limitations period.
The SEC spent no time licking its wounds after this loss. In a brief the SEC filed in the 8th Circuit a mere week later, the SEC made its position going forward clear: “Graham is incorrect.”1 In asking the 8th Circuit to come out the other way, the SEC argued that “Graham’s holding that disgorgement and forfeiture are synonymous… is without legal merit.” The SEC chose not to seek rehearing of Graham before the 11th Circuit. However, given the circuit split the issue may end up before the Supreme Court.
Unless and until the Supreme Court weighs in, Graham is likely to impact the SEC’s strategy in pending and future investigations. In the past decade, the SEC has used its disgorgement power to settle a substantial number of matters that look back more than five years, including many brought under the Foreign Corrupt Practices Act. In light of Graham, the SEC is likely to be more aggressive in seeking tolling agreements while it conducts investigations.
1 Appellee’s Brief, SEC v. Collyard, App. No. 16-1405, 2016 WL 3157530 at *39 (8th Cir. June 3, 2016).