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Is the SEC Mortal After All?

8/27/18

By:Ted Peters
The Securities and Exchange Commission, created through the Securities Exchange Act of 1934, is without a doubt one of the most powerful regulatory agencies in the free world.  According to its website, the SEC’s mission is “to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.” Since its inception, the Commission has wielded great power, and in many instances has pushed the envelope to expand that power. But, as reflected in a handful of recent landmark cases, courts around the country and even this nation’s highest court have pushed back making clear that the Commission’s authority is not unlimited.
The SEC initiates enforcement actions in federal court when it determines that a violation of securities law has occurred. Like any other plaintiff, the SEC is subject to statutes of limitation.  The statute governing enforcement actions is five (5) years.  28 U.S.C. § 2462.  Section 2462 provides that, “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.”
Historically, the Commission has acted with the belief that Section 2462 applied only to the specific enforcement actions enumerated therein.  The SEC’s own enforcement manual provides that “certain claims are not subject to the five-year statue of limitations under Section 2462, including claims for injunctive relief.” (See § 3.1.2 (Nov. 28, 2017)).
In Kokesh v. SEC, 137 S. Ct. 1635 (2017), the United States Supreme Court ruled that Section 2462 extends to disgorgement claims.  Prior to Kokesh, the Commission had taken the position that disgorgement claims could reach back indefinitely.  Writing for a unanimous Court, Justice Sotomayor stated that “[d]isgorgement in the securities-enforcement context is a ‘penalty’ within the meaning of § 2462.”  The Court explained that disgorgement operates as a sanction because it redressed a wrong to the public, as opposed to an individual.  The Court rejected the SEC’s argument that disgorgement is remedial, finding instead that it was punitive because it “does not simply restore the status quo,” and often “leaves the defendant worse off.”
Prior to the Court’s decision in Kokesh, the SEC initiated an enforcement action in SEC v. Cohen, 2018 U.S. Dist. LEXIS 121164 E.D.N.Y. (Jul. 12, 2018), in the United States District Court for the Eastern District of New York.  In that action, the Commission asserted that between 2007-2012, the defendants participated in a scheme that involved making improper payments to government officials in a number of African countries.  As typical, the Commission sought recovery of monetary penalties, disgorgement and injunctive (follow-the-law) relief.  While the action was pending, Kokesh was decided.  Following Kokesh, the Cohen court held that Section 2462 also extended to actions for injunctive relief.  Finding that the SEC’s demand for injunctive relief would operate, at least in part, as a penalty, the court concluded that the claims were time-barred.
But not every court addressing injunctive relief has reached the same result.  In SEC v. Collyard, 861 F.3d 760 (8^th Cir. 2017), a case decided after Kokesh, the Eighth Circuit, acknowledging a split of authority over whether an injunction can be a “penalty” for purposes of Section 2462, concluded that the at-issue injunction entered by the district court was not a penalty and, therefore, not subject to Section 2462.  That injunction enjoined the defendant from violating Securities Exchange Act § 15(a) and the district court concluded that the defendant was “reasonably likely to violate Section 15(a) again unless enjoined.”  Upholding that determination, the Eighth Circuit remarked that “[n]ot every injunction that specifically deters an individual is imposed to punish.”
After Kokesh, it is clear that SEC disgorgement actions fall within the limitations of Section 2462.  As for injunctive relief, district courts around the country remain split.  Given the importance of the SEC’s ability to seek injunctive relief, it is likely that the Supreme Court may be called upon to settle the split, perhaps through a possible certiorari of Cohen. Regardless, these recent decisions undeniably provide defendants with more leverage when facing the SEC.
If you have questions or would like more information, please contact Ted Peters  at tpeters@fmglaw.com.