Does the general federal statute of limitations, 28 U.S.C. § 2462, apply to government enforcement actions seeking “disgorgement?” The SEC says no - disgorgement is an equitable remedy and, as such, is not subject to the five-year limitation. The Eleventh Circuit disagrees. It considers disgorgement to be the same as forfeiture, which is expressly covered by the limitations period. See SEC v. Graham, No. 14-13562, 2016 WL 3033605 (11th Cir. May 26, 2016). The answer to this dispute could determine whether there is an indefinite look-back period within which the SEC may file claims seeking disgorgement relief.
Typically, the SEC seeks equitable and punitive relief in enforcement actions. For years, the SEC avoided a strict five-year statute of limitations by using the “discovery” doctrine. This doctrine allowed the agency to begin counting the five-year limit from when it “discovered” wrongdoing. This approach ended with Gabelli v. SEC, 133 S. Ct. 1216 (2013), in which the Supreme Court held the discovery doctrine applies only to plaintiffs who have been wronged, not to government entities that have suffered no harm. Accordingly, the five-year limitation now strictly applies to enforcement actions by the government. However, the Court only addressed claims seeking some kind of punishment – e.g., fines, penalties, or forfeitures. Disgorgement is an equitable remedy, so does the limitations period apply to governmental actions seeking only disgorgement?
The Eleventh Circuit Equates Disgorgement to Forfeiture
Whether disgorgement constitutes a forfeiture is central to whether an SEC disgorgement action is subject to the five-year statute of limitations, because it applies to an SEC suit that seeks a “civil fine, penalty, or forfeiture.” 28 U.S.C. § 2462. Disgorgement is not specifically listed in 28 U.S.C. § 2462. If disgorgement qualifies as a “forfeiture” or “penalty,” then the same limitations period would apply to an SEC disgorgement claim. That is what the Eleventh Circuit concluded in SEC v. Graham.
More than five years before the SEC brought its action, Barry Graham and his partners raised over $300 million to build condominiums in Florida. The SEC considered the sale of the ownership interests and the promise of returns to qualify as the sale of a security. According to the SEC, the transactions therefore needed to be registered or exempt from registration under the Securities Act of 1933. Because the sales were not properly registered and were part of a Ponzi scheme, the SEC filed suit and sought disgorgement by Graham and his partners of monies received from investors.
In reaching its decision equating disgorgement to forfeiture, the Eleventh Circuit reviewed the legal definitions of both words and concluded they described the same thing. The court observed that Black’s Law Dictionary defines disgorgement as ‘“[t]he act of giving up something (such as profits illegally obtained) on demand or by legal compulsion.” "disgorgement", Black’s Law Dictionary (10th ed. 2014). The court also noted that Forfeiture is “[t]he loss of a right, privilege, or property because of a crime, breach of obligation, or neglect of duty.” "forfeiture", Black’s Law Dictionary (10th ed. 2014). The Eleventh Circuit concluded that the terms mean the same thing, noting that the Supreme Court has used both terms interchangeably. SEC v. Graham, No. 14-13562, 2016 WL 3033605, at *5 (11th Cir. May 26, 2016) (citing United States v. Ursery, 518 U.S. 267, 284 (1996)) (“Forfeitures serve a variety of purposes, but are designed primarily to confiscate property used in violation of the law, and to require disgorgement of the fruits of illegal conduct.”).
The SEC’s argument was that disgorgement includes only direct proceeds from wrongdoing while forfeiture can include both disgorgement of the original funds obtained and any profit earned on those funds. Under the SEC’s reasoning, if a person stole $100 and earned $20 on those funds, disgorgement would entitle the SEC to require return only of the $100, while forfeiture would entitle the SEC to obtain surrender not only of the $100 but also the $20 in profit.
Despite arguing disgorgement is not a penalty in Graham and other cases, the SEC has admitted disgorgement is a penalty. In SEC v. Telsey, Fed. Sec. L. Rep. (CCH) P 97,000 (Bankr. S.D. Fla. 1992), the SEC argued that disgorgement orders are not dischargeable in bankruptcy “because they have a deterrent purpose and thus are a ‘fine, penalty, or forfeiture.’” In Johnson v. SEC, the D.C. Circuit characterized the SEC as having admitted in Telsey that disgorgement is a penalty, in which case it would have been subject to the five-year limitations period. See Johnson v. SEC, 87 F.3d 484, 491, n. 10 (1996).
Other Circuits Side with the SEC
Other Circuits have sided with the SEC’s view that disgorgement claims are not subject to the statute of limitations. The Ninth Circuit went even further and held that the limitations period does not apply to any SEC enforcement action. The court reasoned that an SEC enforcement action furthers public “rights” and “interests” unlike a private party, and therefore is not bound by 28 U.S.C. § 2462. See SEC v. Rind, 991 F.2d 1486, 1491-92 (9th Cir. 1993) (“The fact that [Congress] did not enact an express statute of limitations for lawsuits instituted by the [SEC], therefore, must be interpreted as deliberate.”). The Ninth Circuit analogized SEC claims to EEOC actions, which are subject to discretionary judicial time limitations. Finding no Congressional intent to subject SEC enforcement actions to a firm limitations period and determining that setting time limits for such claims harms the “public interest”, the Ninth Circuit concluded the general statute of limitation should not apply to “civil enforcement actions” brought by the SEC. The court followed that assertion stating, “We hasten to add that our holding here will not open the door to the prosecution of stale claims. A court can and should consider the remoteness of the defendant's past violations in deciding whether to grant the requested equitable relief.” Id. at 1492.
Other Circuits have not stretched so far as to hold that no civil enforcement actions are time barred, but they have addressed disgorgement. The D.C. Circuit has ruled the five-year statute of limitations does not apply to SEC disgorgement claims.See Riordan v. SEC, 627 F.3d 1230, 1234-35 (D.C. Cir. 2010). Similarly, the Sixth Circuit has reasoned that, because disgorged amounts may not exceed the amount of illicit gain, disgorgement is remedial in nature and not punitive – and therefore is not subject to the limitations period. SEC v. Quinlan, 373 Fed.Appx. 581, 589 (6th Cir. 2010). See also SEC v. Contorinis, 743 F.3d 296 (2d Cir. 2014) (“disgorgement is imposed not to punish, but to ensure illegal actions do not yield unwarranted enrichment even to innocent parties”).
The Eleventh Circuit’s ruling in Graham conflicts with the rulings of the Second, Sixth, Ninth, and D.C. Circuits. The Supreme Court at some point may need to resolve this circuit split.