(Article from Securities Law Alert, June 2016)
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Pursuant to 28 U.S.C. § 2462, the Government may not bring any “action, suit, or proceeding for the enforcement of any civil fine, penalty, or forfeiture” more than five years after the claim accrues.
On May 26, 2016, the Eleventh Circuit held Section 2462’s limitations period applies to SEC claims for disgorgement and declaratory relief, but not to claims for injunctive relief. SEC v. Graham, 2016 WL 3033605 (11th Cir. 2016) (Pryor, J.). The court determined that, for Section 2462 purposes, disgorgement is a type of “forfeiture” and declaratory relief “operate[s] as a penalty.” However, the court found injunctions are “equitable, forward-looking remedies” outside the reach of Section 2462.
Background
At issue were claims that several individual defendants had “violated federal securities laws by selling condominiums that were functioning, in reality, as unregistered securities.” The SEC brought suit against defendants in the Southern District of Florida, seeking declaratory and injunctive relief, as well as disgorgement and civil penalties. Defendants moved to dismiss the SEC’s claims under Section 2462 on the grounds that the alleged violations occurred more than five years before the SEC filed suit.
The district court held Section 2462 applied to bar all of the SEC’s claims. The court found “the injunctive and declaratory relief the SEC sought were penalties” within the meaning of Section 2462, while “the disgorgement the SEC requested constituted forfeiture” under that provision. Defendants appealed.
Eleventh Circuit Finds Section 2462 Applicable to Disgorgement Claims Because Disgorgement Is a “Forfeiture” Under Section 2462
The Eleventh Circuit agreed with the district court’s conclusion that disgorgement “can truly be regarded as nothing other than a forfeiture” within the meaning of Section 2462.
Because Section 2462 does not define the term “forfeiture,” the Eleventh Circuit considered the term’s ordinary meaning. The court found “forfeiture occurs when a person is forced to turn over money or property because of a crime or wrongdoing.” The Eleventh Circuit discerned “no meaningful difference in the definitions of disgorgement and forfeiture,” and observed that the Supreme Court “has used the terms interchangeably.”
The court rejected the SEC’s attempt to distinguish disgorgement from forfeiture by arguing that “disgorgement only includes direct proceeds from wrongdoing, whereas forfeiture can include both ill-gotten gains and any additional profit earned on those ill-gotten gains (i.e., secondary profits).” The Eleventh Circuit found that “even under” the SEC’s proposed definitions, “disgorgement is imposed as redress for wrongdoing and can be considered a subset of forfeiture” subject to Section 2462’s limitations period.
Eleventh Circuit Holds Section 2462 Applies to Claims for Declaratory ReliefBecause Such Relief Operates as a “Penalty”
The Eleventh Circuit held Section 2462’s limitations period also applies to claims for declaratory relief. The court reasoned that declaratory relief “operate[s] as a penalty under § 2462” because it “is backward-looking” and “intended to punish.” The court explained that declaratory relief “serves neither a remedial nor a preventative purpose” but is instead “designed to redress previous infractions.” The Eleventh Circuit stated that “[a] public declaration that the defendants violated the law does little other than label the defendants as wrongdoers.”
Eleventh Circuit Holds Injunctive Relief Is Not a “Penalty” for Purposes of Section 2462
As to the SEC’s claims for injunctive relief, the Eleventh Circuit concluded that its “precedent forecloses the argument that § 2462 applies to injunctions, which are equitable remedies.” The court explained that in United States v. Banks, 115 F.3d 916 (11th Cir. 1997), it held Section 2462 inapplicable to a claim for injunctive relief brought to enforce the Clean Water Act. The Banks court found the government’s injunction was “an equitable remedy and thus beyond the reach” of Section 2462. Following its holding in Banks, the Eleventh Circuit determined that “[a]n injunction requiring (or forbidding) future conduct is not subject to § 2462’s statute of limitations.”
The Eleventh Circuit stated that “[e]ven if [it] were not bound by Banks,” it would still “conclude that § 2462 does not apply to injunctions like the one in this case” because injunctions are not "penalties" for Section 2462 purposes. Since the statute does not define the term “penalty,” the court considered “the term’s ordinary meaning.” The court found that each of the variously formulated definitions of “penalty” “has the common element of looking backward in time.” While “a penalty addresses a wrong done in the past,” the Eleventh Circuit observed that injunctions “typically look forward in time.” The court concluded that an injunction “is not a penalty within the meaning of § 2462,” and held “the five-year statute of limitations [ ] inapplicable to injunctions such as the one the SEC sought in this case.”