May 27, 2016

On May 26, 2016, the United States Court of Appeals for the Eleventh Circuit issued a significant decision, in SEC v. Graham, No. 14-13562 (11th Cir. May 26, 2016), holding that the Securities and Exchange Commission's claims for disgorgement and declaratory relief are subject to the five year statute of limitations set forth in 28 U.S.C. § 2462. 

The decision is important to participants in the securities industry because the SEC often seeks disgorgement going back more than five years, and has long taken the position that such claims are not subject to a limitations period.  Now, claims for disgorgement, declaratory relief, and penalties are subject to the same five year statute of limitations.  Coupled with the IRS's recent decision that SEC claims for disgorgement in settlements are not tax deductible because they are punitive, IRS Memorandum, No. 201619008 (May 6, 2016), and the Supreme Court's unanimous decision applying § 2462 to civil money penalties, Gabelli v. SEC, 133 S. Ct. 1216 (2013), Graham provides strong support for other jurisdictions to hold the SEC to the strictures of § 2462.

In January 2013, the SEC brought a civil enforcement action, in the Southern District of Florida, alleging that defendants had violated federal securities laws between November 2004 and July 2008.  Slip op. at 3.  As relief, the Commission sought (1) a declaration that defendants violated the securities laws; (2) disgorgement of all profits, with prejudgment interest, from the allegedly improper conduct; and (3) a permanent injunction from future securities law violations.  Id.

The district court found that the SEC's claims were time barred under § 2462, which prohibits any action "for the enforcement of any civil fine, penalty, or forfeiture" if brought more than five years from the date the claim first accrued.  Id. at 4. 

On appeal, the Eleventh Circuit affirmed in substantial part.  The court squarely held that § 2462 applies to declaratory relief because it is backward looking and punitive, and to disgorgement because it is synonymous with forfeiture.  Id. at 9-14.  In so holding, the court expressly rejected the SEC's argument that declaratory relief was necessary to obtain other remedies.  Id. at 10-11.  The court also explained that it was "loath to adopt" the SEC's "technical definition" of disgorgement, "because § 2462 applies to a wide variety of agency actions and contexts."  Id. at 13-14.  Although the court held that circuit precedent "foreclose[d] the argument that § 2462 applies to injunctions" per se, it noted that an "obey-the-law" injunction barring future securities-law violations may be unenforceable.  Id. at 5, 9 n.2.

The Graham decision represents a significant victory for securities market participants.  Graham builds on the Supreme Court's unanimous decision to apply § 2462 to civil money penalties, Gabelli v. SEC, 133 S. Ct. 1216 (2013).  Graham also comports with IRS's decision holding that a disgorgement payment for violations of the Foreign Corrupt Practices Act, 15 U.S.C. §§ 78dd-1, et seq., is not tax deductible because the payment is "primarily punitive."  IRS Memorandum, No. 201619008 (May 6, 2016).  As a result, Graham further limits potential exposure for conduct more than five years in the past, and limits the SEC's opportunity to pursue declaratory relief.

It remains to be seen how the SEC will respond to this significant blow to their ability to seek disgorgement for aged claims.  The Graham court's disgorgement holding creates an apparent circuit split.  See Riordan v. SEC, 627 F.3d 1230 (D.C. Cir. 2011) (citing Zacharias v. SEC, 569 F.3d 458 (D.C. Cir. 2009)); SEC v. Rind, 991 F.2d 1486 (9th Cir. 1993).  But, given the soundness of the reasoning in Graham, the SEC may opt to hold its fire and wait to see how the D.C. Circuit rules in Timbervest v. SEC, No. 15-1416, which presents similar issues.

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Gibson Dunn partner Mark A. Perry and associate Gabriel K. Gillett represented the Securities Industry and Financial Markets Association as amicus curiae in SEC v. Graham


Gibson Dunn's lawyers are available to assist in addressing any questions you may have regarding these developments.  Please contact the Gibson Dunn lawyer with whom you usually work, or the authors of this alert:

Mark A. Perry - Washington, D.C. (202-887-3667, mperry@gibsondunn.com)
Richard W. Grime - Washington, D.C. (202-955-8219, rgrime@gibsondunn.com)
Gabriel K. Gillett - New York (212-351-2656, ggillett@gibsondunn.com)

Please also feel free to contact the following leaders of the firm's Securities Enforcement and Appellate and Constitutional Law practice groups: 

Securities Enforcement Group:
Barry R. Goldsmith - New York (212-351-2440, bgoldsmith@gibsondunn.com)
Mark K. Schonfeld - New York (212-351-2433, mschonfeld@gibsondunn.com)
Richard W. Grime - Washington, D.C. (202-955-8219, rgrime@gibsondunn.com)
Marc J. Fagel - San Francisco (415-393-8332, mfagel@gibsondunn.com)

Appellate and Constitutional Law Group:
Thomas G. Hungar - Washington, D.C. (202-955-8500, thungar@gibsondunn.com)
Caitlin J. Halligan - New York (212-351-4000, challigan@gibsondunn.com)


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