Eleventh Circuit Holds That SEC Cannot Seek Disgorgement or Declaratory Relief for Conduct Outside Statute of Limitations
 

On May 26, 2016, in SEC v. Graham, the Eleventh Circuit became the first circuit to hold that claims brought by a government agency for disgorgement and declaratory relief are subject to the five-year statute of limitations set forth in 28 U.S.C. § 2462.  The panel held that disgorgement and declaratory relief the SEC sought were functionally identical to “forfeiture” and “penalties,” respectively, as defined by Section 2462, but that the injunctive relief sought by the SEC was not time-barred.  Graham appears to create a circuit split that would prompt Supreme Court review, as prior courts have found that disgorgement was not subject to the limitations period in Section 2462.
In Graham, the SEC had appealed the Court’s dismissal of an SEC complaint, which alleged that defendants violated federal securities law by selling unregistered securities, on the grounds that the SEC’s claims were time-barred. 13-cv-10011-JLK. But an Eleventh Circuit panel affirmed in part, finding that a claim for disgorgement is subject to the five-year statute of limitations under Section 2462 because disgorgement of ill-gotten gains is a kind of forfeiture, a remedy expressly covered by Section 2462.

The panel reasoned that the ordinary meaning of disgorgement—the act of giving up something on demand or legal compulsion—is synonymous with forfeiture as defined in Supreme Court opinions and legal dictionaries—the loss of a right, privilege, or property due to a crime, breach of obligation, or neglect of duty.  In finding “no meaningful difference” between disgorgement and forfeiture, the panel rejected the SEC’s argument that disgorgement and forfeiture are fundamentally different.  The panel also held that the declaratory relief sought by the SEC (essentially a public finding of wrongdoing) was intended to punish defendants and, thus, was subject to the five-year statute of limitations under Section 2462, rejecting SEC’s argument that it was seeking declaratory relief as a means to obtain other remedies, because some of the other remedies were subject to Section 2462 and because the SEC did not need declaratory relief to obtain an injunction against the defendants.  Notably, the panel found that injunctive relief is not covered by the time limitations of Section 2462. 

The Eleventh Circuit panel’s decision has created a circuit split at least as to disgorgement, as every other federal district and appellate court has held that Section 2462 does not apply to disgorgement.  For example, in 1994, a district court in the Southern District of New York, in SEC v. Lorin, held that forfeiture and disgorgement reflect different characteristics and purposes.  Disgorgement, the Court held, is an equitable remedy that prevents unjust enrichment, while criminal forfeiture is a statutory legal penalty that is imposed as a punishment. 869 F. Supp. 1117.  Similarly, in 2010, the D.C. Circuit held that Riordan v. SEC does not construe Section 2462 to apply to disgorgement, if the disgorged amount is “causally related to the wrongdoing”. 627 F.3d 1230.

Nevertheless, it is not clear that the circuit split will prompt Supreme Court review.  That is because while the Eleventh Circuit’s decision is unquestionably helpful to defendants, the practical impact of SEC v. Graham could be limited.  In recent years, the SEC has worked to accelerate the pace of its investigations including through the implementation of internal procedures mandated by Dodd-Frank.  Indeed, while federal circuits may continue to debate the meaning and nature of disgorgement, a government agency’s pursuit of disgorgement of ill-gotten gains beyond the five-year limitations period should be rare.