The SEC suffered a blow very recently when Judge James Lawrence King of the U.S. District Court for the Southern District of Florida entered summary judgment dismissing the entirety of its alleged Ponzi scheme case on statute of limitations grounds. SEC v. Graham, 2014 WL 1891418 (S.D. Fla. May 12, 2014). The court’s order is a significant application of last year’s Supreme Court decision in Gabelli v. SEC, 133 S. Ct. 1216 (2013), in that (i) it applies the applicable statute of limitations to sanctions that have usually been considered equitable, rather than punitive, in nature; and (ii) it holds that the applicable statute of limitations is a jurisdictional threshold on which the SEC bears the burden, not an affirmative defense on which the defendant bears the burden.
In Graham, the SEC alleged that five defendants defrauded nearly 1,400 investors of more than $300 million by marketing unregistered securities as real estate investments and guaranteeing an immediate 15% profit and future rental revenue on certain resort properties. According to the SEC, the defendants were using the new deposits to pay earlier investors in a classic Ponzi-scheme. After the defendants abandoned their efforts with the collapse of the real estate and credit markets in 2007, the SEC embarked on a seven-year investigation, and ultimately brought suit in January of 2013. The SEC alleged five counts of violations of federal securities laws, and sought not only civil penalties but also injunctive relief and disgorgement of all ill-gotten gains. The defendants moved for summary judgment on the ground that the five-year statute of limitations under 28 U.S.C. § 2462 time-barred all of the SEC’s claims. Section 2462 states, “Except as otherwise provided by Act of Congress, 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 ….”
In granting the defendants’ motion, the court made two significant holdings:
The court found that it lacked subject-matter jurisdiction over the SEC’s claims because § 2462’s five-year limitations period had expired. The court held that this language indicated an “absolute” jurisdictional rule that spoke to the power of a court to act in a given case, as opposed to the type that sought primarily to protect defendants against stale or unduly delayed claims. Regarding when a claim “first accrued” under the statute, the Supreme Court held in Gabelli that a claim accrues when the conduct giving rise to the claim occurs and that the SEC cannot claim tolling of the limitations period until it first discovers the alleged fraud. Because the SEC’s claim was based on the offering and sales of what it alleged to be securities, the latest point at which the SEC’s claim could accrue is the date on which a defendant last sold or offered the alleged security.
The court held that § 2462 applied to all forms of relief requested by the SEC, including injunctive relief and disgorgement. The court explained that while the Supreme Court in Gabelli expressly declined to decide whether § 2462 applies to injunctive relief and disgorgement, the policies behind and spirit of the decision were consistent with precluding all forms of relief. While the text of § 2462 did not explicitly include the words “declaratory relief,” “injunction” and “disgorgement,” the court found that “penalties,” “pecuniary or otherwise,” were at the heart of all forms of relief the SEC sought. In particular, the court held that disgorgement, by requiring a defendant to relinquish money or property, “can truly be regarded as nothing other than a forfeiture (pecuniary or otherwise),” whose remedy is expressly covered by the statute.
This blow to the SEC is another in a string of decisions that will likely pressure the SEC to speed up the timing of investigations and actions. Graham is particularly significant because, to our knowledge, it is the first decision that holds that § 2462 is a jurisdictional threshold on which the SEC bears the burden (typically, statute of limitations is an affirmative defense on which the defendant bears the burden) and that disgorgement is subject to § 2462. As noteworthy as these substantive holdings was the court’s tone, which strongly rebuked the SEC. For example, at the conclusion of its order, the court, after noting that the SEC’s mission is to protect investors, stated that in this case the SEC had “failed to meet its serious duty to timely bring this enforcement action.” It will be interesting to see if the SEC decides to appeal the Graham decision, and whether and to what extent other courts adopt Graham’s holdings.