SEC: Time Out?

Posted on 20 December 2017 by Min Weaving

Sec: Time Out?

US Courts expand the number of SEC sanctions which are subject to statutory time limits

2017 has seen a growing trend of Securities and Exchange Commission (SEC) cases being thrown out by US courts on the basis that they are time barred. Three cases in 2017 have found that actions brought by the SEC which are punitive in nature, regardless of any monetary sanction, are subject to statutory time limits.

Under 28 US Code section 2462 of, a five-year limitation applies to any “action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise.” Since the Supreme Court case of Gabelli v SEC in 2013, the SEC has reasoned that disgorgement (a sanction designed to deprive defendants of their ill-gotten gains) is an equitable remedy and therefore not subject to statutory limitations.

However, on 5 June 2017 the US Supreme Court unanimously ruled in SEC v Kokesh that disgorgement is subject to the five-year statute of limitations. Justice Sonia Sotomayor said “Disgorgement, as it is applied in SEC enforcement proceedings, operates as a penalty… intended to deter, not to compensate. Accordingly, any claim for disgorgement in an SEC enforcement action must be commenced within five years of the date accrued”. 

The case was heralded a "game-changer" for SEC cases, and has already been applied twice since. In October 2017 a court in Columbia ruled that orders to expel or block individuals from working in certain industries were punitive, rather than remedial. In Saad v SEC, the Judge said that the reasoning in Kokesh was not limited to disgorgement but could be applied to any remedy sought by the SEC that was punitive.

The SEC dropped civil penalties and disgorgement charges against Guy Gentile in July 2017, following Kokesh, but continued with other claims. However, on 13 December 2017 a court in New Jersey threw the SEC's case out on the basis that the remedies sought were still punitive in nature; the sanctions sought would stigmatise Gentile in the eyes of the public and wouldn't compensate any victims.

Two former Och-Ziff employees have also filed a motion to dismiss the SEC's case against them on the basis that the alleged misconduct took place no later than 2008, nine years before they were charged in January 2017. Citing the cases above, the defendants argued that the SEC is time barred from pursuing any action which is punitive in nature. The SEC responded that the defendants continued to be compensated for the alleged behaviour as they continued to be employed by Och-Ziff in 2012 and 2013.

It will be interesting to see how the above cases shape the SEC's investigations in 2018. The unanimous decision from the Supreme Court is quite a precedent and we have already seen the impact it is having on existing cases. It is a reminder to the authorities that in upholding the law they are also bound by it and should expect defendants to make full use of its protections.