SEC’s FCPA Charges Against Executives Dismissed As Time-Barred
07/17/2018On July 12, 2018, Judge Nicholas G. Garaufis of the United States District Court for the Eastern District of New York dismissed the Securities and Exchange Commission’s charges against two former executives of a hedge-fund management firm on statute of limitations grounds. SEC v. Cohen & Baros, No. 1:17-CV-00430 (E.D.N.Y. July 12, 2018). The SEC originally filed the charges before the Supreme Court’s ruling in Kokesh v. SEC, 137 S. Ct. 1635 (2017), in which the Court held that disgorgement is a penalty subject to the five-year statute of limitations under 28 U.S.C. § 2462. United States Supreme Court Holds SEC Disgorgement Orders Subject to Five-Year Statute of Limitations, Shearman & Sterling (Jun. 6, 2017). Relying on Kokesh, the district court held that the SEC’s claims for monetary and injunctive relief were time-barred. In so holding, the district court contributed to a circuit split regarding the applicability of Section 2462 to certain types of equitable relief.
As alleged in the SEC’s Complaint, defendants “orchestrated a ‘sprawling scheme’ to bribe various African public officials in exchange for business” for their hedge-fund management firm. The SEC charged the two executives with violating the FCPA’s anti-bribery provisions, as well as aiding and abetting violations of the FCPA, in connection with schemes to bribe officials in Libya, the Democratic Republic of the Congo, South Africa, and the Republic of the Congo. All of the alleged transactions took place between May 30, 2007 and April 15, 2011—well outside the five-year statute of limitations of Section 2462.
The SEC made four principal arguments against dismissal on statute of limitations grounds, all of which the Court rejected.
First, the SEC argued that the statute of limitations issue was premature at the motion to dismiss stage, since Section 2462—which prohibits “the enforcement of any civil fine, penalty, or forfeiture”—only applies to remedies. The Court rejected this argument, concluding that while statutes of limitations ordinarily serve as affirmative defenses, a court may dismiss for failure to state a claim if the allegations demonstrate that relief is time-barred. The Court further stated that this rule applies with particular force to Section 2462, which prohibits even “entertain[ing]” a suit that falls outside the limitations period.
Second, the SEC cited statutes of limitations tolling agreements it signed with one of the defendants, which it claimed expanded the limitations period for certain of the charges. The Court rejected this argument by focusing on the narrow language of the tolling agreement, which the Court interpreted to extend only to potential actions relating to a specific investigation the SEC was conducting. The Court rejected the SEC’s argument that the tolling agreement covered actions arising out of any related investigation that the SEC was conducting, stating that it was “implausible that the parties manifested their intent to toll the statute of limitations with respect to claims arising from this separate investigation by referring only to the [Libyan] investigation.”
Third, the Court dismissed the SEC’s argument that the limitations period for its disgorgement claims should accrue from the time that defendants received any ill-gotten gains. The Court concluded that the statute of limitations runs from the point at which the alleged misconduct occurred, and further noted that the SEC failed even to allege that defendants received any ill-gotten gains. The Court also rejected the SEC’s request to conduct further discovery into whether misconduct occurred within the limitations period, reasoning that it “make[s] no sense” for the SEC to file an untimely action, and then demand discovery to cure these deficiencies.
Finally, the Court rejected the SEC’s argument that its suit was timely since it sought injunctive relief, which was not a punitive form of relief and therefore not subject to the five-year limitations period of Section 2462. The Court found that the SEC sought an “obey-the-law” injunction that was punitive in nature. The Court emphasized that the SEC sought this injunction to “redress a wrong to the public” (rather than to any aggrieved individuals), which Kokesh cited as a hallmark of a penalty. The Court added that the injunctive relief would “mark Defendants as lawbreakers,” which further supported its conclusion that this was punitive relief. While the Court made clear that it was not adopting a bright-line regarding whether injunctions always are punitive in nature for purposes of Section 2462, its reasoning suggests this would typically be the case for the types of injunctions the SEC seeks.
In the wake of Kokesh, this opinion contributes to a growing circuit split over whether injunctions are penalties subject to Section 2462. The Eleventh Circuit, for example, held that injunctions are not punitive since they relate to future conduct, rather than punishing past conduct. SEC v. Graham, 823 F.3d 1357, 1361 (11th Cir. 2016). Other federal courts have rejected such a bright-line rule, opting instead to consider the specific nature of the injunction and how it affects the defendant. In one such case that Judge Garaufis acknowledged is in “tension” with his opinion, the Eighth Circuit recently concluded that an SEC injunction is not a penalty under Section 2462. See SEC V. Collyard, 861 F.3d 760, 764 (8th Cir. 2016); but see SEC v. Gentile, No. 16-1619 (D.N.J. 2017) (finding that an obey-the-law injunction is indeed a penalty for the purposes of Section 2462’s statute of limitations).
The dismissal in this case thus marks another development in post-Kokesh jurisprudence, and provides critical insight into how the Supreme Court’s Kokech ruling will continue to impact future litigation by the SEC.