On May 12, Judge James Lawrence King of the U.S. District Court for the Southern District of Florida dismissed with prejudice the U.S. Securities and Exchange Commission’s (SEC) case against five defendants in an action alleging that the defendants engaged in securities fraud.1 In ordering the dismissal, Judge King held that:
The five-year statute of limitations found in 28 U.S.C. § 2462 is a jurisdictional statute of limitations that removes the court’s subject-matter jurisdiction over a claim if the statute of limitations has run. As the party seeking to invoke the court’s jurisdiction over the claims, the SEC had the burden of establishing subject-matter jurisdiction, which it failed to do.
Pursuant to the statutory language of § 2462, as well as the U.S. Supreme Court’s decision in Gabelli v. SEC, the five-year statute of limitations not only bars civil fines and other pecuniary penalties, but also claims for declaratory relief, injunction, and disgorgement as well.
The case, SEC v. Graham et al., stems from the sale of securities through a web of entities known as Cay Clubs Resorts and Marinas (Cay Clubs). The SEC claimed that the defendants, through Cay Clubs, ran a Ponzi scheme in purporting to offer and sell real estate investments to investors, which were really unregistered securities.
The defendants’ activities lasted from July 2004 through some point prior to January 2008. Although the SEC’s investigation of the Cay Clubs Ponzi scheme lasted for seven years, the SEC did not bring an action until January 30, 2013. In its complaint, the SEC prayed for “declaratory relief that violations of the securities laws had occurred, injunctive relief barring future violations of the securities laws, and a sworn accounting and the repatriation and disgorgement of all ill-gotten gains realized from the alleged violations of the securities laws.”2 In addition, the SEC sought civil money penalties against three of the defendants.3 Each defendant moved for summary judgment and raised as an affirmative defense that the SEC’s claims were barred by the five-year statute of limitations found in 28 U.S.C. § 2462, which sets forth the time for the federal government to commence proceedings.
Lack of Subject-Matter Jurisdiction Over the Claim
The court agreed with the defendants’ affirmative defense and furthermore concluded, without argument from the parties, that the five-year limitations period required by § 2462 was a jurisdictional limit.4 The court explained that there are two different types of rules: claims processing rules that help with the “orderly transaction of business,” and jurisdictional rules that “can operate to remove from the court’s adjudicatory authority” claims not brought within the time-specified limit of the statute.5 Section 2462, according to the court, falls under the latter.6
Normally, the rules placing the burden on the moving party to establish the lack of a genuine issue of material fact would require the defendants to establish that the claims were barred by the statute of limitations, since the defendants initially moved for summary judgment. Judge King, however, held that because § 2462 can act to remove subject-matter jurisdiction over a claim, it is the burden of the party invoking the court’s jurisdiction to establish that the court has subject-matter jurisdiction. In other words, it was incumbent on the SEC to prove that the claim was not barred by the statute of limitations.
Section 2462 states that “[e]xcept 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 addition, the U.S. Supreme Court held in Gabelli v. SEC that in a SEC action for the enforcement of a civil fine, penalty, or forfeiture, the claim accrues for purposes of § 2462 when the defendant’s conduct occurs, as opposed to when it was discovered.7 Since the SEC first brought the action against the defendants on January 30, 2013, the SEC was required to establish by a preponderance of the evidence that the defendants engaged in offering or selling illegal securities at some point after January 30, 2008, or within five years prior to commencing the action.8 The court concluded that the SEC failed to provide sufficient proof establishing that the defendants committed any of the alleged acts after January 30, 2008; as such, the court lacked subject-matter jurisdiction over the claims.9
Declaratory Relief, Disgorgement, and Injunctive Relief Are Barred By the Five-Year Statute of Limitations
In addition to holding that the court lacked subject-matter jurisdiction over the SEC’s claim, the court held that neither the language of § 2462 pertaining to the “enforcement of any civil fine, penalty or forfeiture, pecuniary or otherwise…” nor the Supreme Court’s decision in Gabelli10 excludes from the statute of limitations actions for declaratory relief, injunctions, or disgorgement.11 The SEC argued that because declaratory relief, injunction, and disgorgement were not included in the language of § 2462, Congress did not mean to include those forms of relief within the statute of limitations. The SEC based its argument, in part, on the U.S. Court of Appeals for the Eleventh Circuit’s pre-Gabelli decision in United States v. Banks.12 The Banks court upheld an injunction sought by the U.S. government to enjoin the discharge of fill into U.S. waters, holding that “the plain language of § 2462 does not apply to equitable remedies.”13
Judge King disagreed and distinguished Banks, concluding that the activity that the government sought to enjoin in Banks was “continuing in nature” and, as such, the injunction was an enforcement action and not a penalty excluded by § 2462.14 In contrast, Judge King held that the declarations and injunctions sought by the SEC in Graham were penal in nature and that disgorgement is a form of forfeiture, thus the forms of relief do fall under the exclusions of § 2462.15 The court also concluded that although Gabelli did not address the forms of relief at issue in Graham, “[t]he principles underlying the Supreme Court’s decision… counsel against accepting the SEC’s argument.”16
Judge King did not address or acknowledge rulings in other circuits that equitable remedies are not covered by § 2462. The SEC has not yet filed an appeal. However, in light of the decisions in sister circuits, it will be interesting to see how the Eleventh Circuit rules if the SEC appeals the decision.
1 See Securities and Exchange Commission v. Graham et al, No. 13-10011 (S.D. Fla. May 12, 2014).
7 See Gabelli v. SEC, 133 S. Ct. 1216, 1220 (2013).
8 See Graham, No. 13-10011 at 18.
10 The Supreme Court explicitly declined to decide the question of whether § 2462 bars injunctive relief or disgorgement since those questions were not before the court. See Gabelli, 133 S. Ct. at 1220 n.1.
11 See Graham, No. 13-10011 at 14.
12 115 F.3d 916, 919 (11th Cir. 1997).
13 Graham, No. 13-10011 at 14 (quoting Banks, 115 F.3d at 919).