Fifth Circuit Holds SEC Claims Against Bartek Untimely
In Securities and Exchange Commission v. Bartek, the Fifth Circuit held that the federal “catch all” statute of limitations for government enforcement actions - 28 U.S.C. § 2462 - begins to run when the violation occurs, not when the government discovered the violation.1 The court also held that the statute, which bars actions seeking a “civil fine, penalty or forfeiture,” covers injunctions under certain circumstances.2
In 2008, the Securities and Exchange Commission (SEC) brought an action against the defendants, alleging that from 2000 to 2003, defendants improperly backdated stock options in violation of federal securities laws and regulations. In addition to monetary penalties, the SEC sought permanent injunctions and officer and director bars against the defendants. The defendants asserted that the five-year statute of limitations had run, and that the permanent injunctions and officer and director bars were “penalties” within the meaning of the statute. The district court agreed and granted summary judgment in favor of defendants.
The Discovery Rule does not Apply to § 2462
On appeal, the SEC maintained that it did not discover the allegedly improper backdating scheme until 2003, and thus its enforcement action was timely. The Fifth Circuit squarely rejected this argument.3 The court noted that § 2462 includes a tolling limitation where the defendant is outside of the United States, precluding service of process. The court explained that “Congress did not include language to toll the statute based on an accrual discovery rule,” which it clearly could have incorporated. The court further explained that “the date of the underlying violation has been accepted without question as the date when the claim first accrued, and therefore, as the date on which the statute began to run.” Because the alleged underlying securities violations accrued in 2000, the SEC’s claims were time barred.
Meaning of Penalties under § 2462
The SEC also argued that permanent injunctions and officer and director bars were equitable remedies – not “penalties” under § 2462 – and thus not subject to § 2462. The Fifth Circuit rejected this interpretation. The court concluded that the “severity and permanent nature of the sought-after remedies” were punitive, not equitable, and were thus subject to § 2462’s five-year statute of limitations.
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1 Section 2462 provides that “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….” 28 U.S.C. § 2462.
2 A copy of the opinion is available at http://www.ca5.uscourts.gov/opinions/unpub/11/11-10594.0.wpd.pdf.
3 The court did not address whether the discovery rule might apply in cases involving inherently self-concealing behavior because those circumstances were not present in this case.