District Court of Southern Florida to SEC: Seven-Year Investigation a Bit (Too) Long for My Jurisdiction – Enforcement Action Against Alleged Ponzi Schemers Dismissed
The SEC must institute an enforcement action within five years of the accrual of the claims, including enforcement actions wherein the Securities and Exchange Commission (SEC) seeks only injunctive relief. In an opinion including sometimes harsh language directed to the SEC, Judge James Lawrence King of the United States District Court for the Southern District of Florida last week left little doubt as to his view of the SEC’s some seven-year delay in instituting its enforcement action pending before him:
This is a case in which the SEC – the agency whose principal mission it is to ‘protect investors and the markets by investigating potential violations of the federal securities laws’ – failed to meet its serious duty to timely bring this enforcement action.1
The SEC’s claims against the five individual defendants were therefore dismissed with prejudice. Of particular significance are the Court’s rulings both that the five-year statute of limitations contained in 28 USC § 2462 divested it of subject matter jurisdiction, and also that the holding of SEC v. Gabelli is properly extended to enforcement actions in which the SEC seeks injunctive relief only.
If it Sounds Too Good to be True: “Retire Rich and Young in Paradise…”
The Ponzi scheme described here by the Court, as alleged by the SEC, is familiar. According to the SEC, some 1,400 “unsuspecting investors” were cheated out of $300 million by defendants relating to the sale of unregistered securities, claimed to be purported real estate investments in condominiums. Defendants promised investors, among other things, immediate return on their investments, “instant equity,” and “astronomical rates of appreciation.” Investors were promised that they would receive such rewards “with no headaches,” and would instead “retire rich and young in paradise.” Slip op.at 6.
Of course, as alleged by the SEC, this was just another Ponzi scheme. Returns, if any, paid to early investors were simply funded by the “investments” of later investors. In addition, “with the collapse of the real estate and credit markets beginning in or about late 2007, defendants abandoned development efforts on the properties and many investors’ units went into foreclosure.” As noted by the Court, “[S]o the story goes.” Id.
Time Passes Quickly...
The SEC began its investigation in 2006, and there appeared to be little dispute that the alleged fraudulent activities of defendants ended in the latter part of 2007. The SEC, however, did not file its five-count complaint against the individual defendants until January 30, 2013. Against each defendant, the SEC sought the following injunctive relief:
Declaratory relief finding that violation of the securities laws had occurred;
Injunctive relief barring future violations of the securities laws;
An accounting and the repatriation and disgorgement of all “ill-gotten gains.”
Defendants moved for summary judgment on all counts, arguing that the SEC’s injunctive claims were time-barred by the five-year limitations period of 28 USC § 2462.
Limitation of 28 USC § 2462 as “Jurisdictional” and Gabelli Extended
The Court first concluded that the time limitation of 28 USC § 24622 was a type of “jurisdictional” limitation period – a “more absolute” type – that operates to remove from the Court’s authority those claims not brought within the time limit specified by such statute – here a five-year time limit. The Court reasoned that this limitations statute belongs with those “that by their very text speak to the power of a court to act in a given case as opposed to the type that ‘seek primarily to protect defendants against stale or unduly delayed claims.’”
Relying on Gabelli, the Court then held first that because the SEC’s claims were based upon the offer and sale of what it alleged to be securities, “the latest point at which the SEC’s claim could accrue is the date on which a defendant last sold or offered the alleged security.” Slip op. at 11. Because all sales activity had ceased by the latter part of 2007 and the SEC had not filed its complaint until January 30, 2013, absent some other factor, the action is barred.
The SEC, therefore, argued that because it sought “only” injunctive relief, 28 USC § 2462 did not apply, and its injunctive action was timely, even though filed over five years from accrual. The court disagreed, extending the reasoning of Gabelli to actions seeking (only) injunctive relief:
In essence, the SEC’s argument in this case is that because the words “declaratory relief,” “injunctive,” and “disparagement” do not appear in 28 USC § 2462, no statute of limitation applies. The principles underlying the Supreme Court’s decision in Gabelli, however, counsel against accepting the SEC’s argument. Penalties, “pecuniary or otherwise,” are at the heart of all forms of relief sought by the SEC in this case.
Slip op. at 15.
With at least one federal district court now having extended the holding of Gabelli to injunctive claims, it behooves counsel for defendants in all enforcement actions – including injunctive actions – to carefully determine an accrual date for the SEC’s claims and consider whether a jurisdictional challenge may lie.
To read the court's full opinion of SEC v. Graham, please click here.
1 SEC v. Graham, et al., No. 13-10011-CIV-King (S.D. Fla. May 12, 2014), Slip op. at 25, quoting SEC v. Gabelli, __ U.S.__, 133 S. Ct. 1216, 1222 (2013).
2 The language under review in 28 USC § 2462 is as follows: “an action, suit or proceeding for the enforcement of any civil fraud, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within 5 years from the date when the claim first accrued….”