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Second Circuit Upholds Enforceability of SEC Tolling Agreements

In Securities & Exchange Comm’n v. Fowler, No. 20-1081, 2021 WL 3083655 (2d Cir. July 22, 2021), the United States Court of Appeals for the Second Circuit upheld a lower court judgment awarding the Securities and Exchange Commission (“SEC”) civil penalties, disgorgement, and injunctive relief in a securities fraud action against a broker engaged in unsuitable and unauthorized high-frequency trading.  The district court entered its judgment following a jury trial finding the defendant guilty of violations of Section 10(b) of the Securities Exchange Act of 1934, Rule 10b-5 promulgated under Section 10(b) of the Exchange Act, and Sections 17(a)(1), 17(a)(2), and 17(a)(3) of the Securities Act of 1933.  On appeal, defendant asserted that the action was subject to a five-year statute of limitations imposed by 28 U.S.C. § 2462 despite the parties having entered into tolling agreements.  Defendant also argued that the civil penalties assessed against him were excessive, and the disgorgement award failed to properly account for legitimate business expenses as required by Liu v. Securities & Exchange Comm’n, 140 S. Ct. 1936 (2020).  After reviewing its text and legislative history, the Second Circuit concluded in this matter of first impression that § 2462 is non-jurisdictional and, therefore, the district court had the power to hear the case in light of the parties’ tolling agreements.  The decision is important because it reaffirms the enforceability of tolling agreements between the SEC and its investigative quarries.  The court also rejected defendant’s arguments alleging improper civil penalty and disgorgement calculations.

The SEC began investigating defendant, a financial advisor for J.D. Nicolas, in 2014 for conduct that began in 2011.  His trading strategy entailed reviewing news reports to identify events he determined stocks had not yet fully absorbed into their price and invested his clients in those stocks.  Defendant’s approach resulted in high turnover rates, significant transaction fees, and unauthorized trades.  In 2016, the SEC and defendant entered into two agreements that operated to toll the five-year statute of limitations for the SEC to file an action against defendant that would have expired in 2016 until February 28, 2017.  The SEC brought its action on January 9, 2017.

The jury convicted defendant of making false and misleading statements to investors, recommended an unsuitable high-frequency trading strategy, and engaged in unauthorized trading.  On February 28, 2020, the district court entered a judgement ordering defendant to disgorge $132,076.40 and pay civil penalties of $1,950,000.

On appeal, defendant pursued his statute of limitations argument by challenging the district court’s very power to hear the case.  He cited to 28 U.S.C. § 2462, which provides, “[e]xcept as otherwise provided by Act of Congress, 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.”  Defendant argued that 28 U.S.C. § 2462 is jurisdictional, meaning courts only have the power to hear cases brought within five-years regardless of tolling agreements entered into between parties.  If so, the SEC’s action would have been time-barred.

In rejecting defendant’s challenge, the Second Circuit cited Supreme Court precedent and  explained that filing deadlines “should not be described as jurisdictional” absent a “clear indication that Congress wanted the rule to be jurisdictional.”  Henderson ex rel. Henderson v. Shinseki, 562 U.S. 428, 435-36 (2011).  Without “a clear statement, . . . courts should treat [statutes of limitations] as nonjurisdictional.” United States v. Kwai Fun Wong, 575 U.S. 402, 409 (2015).  Defendant asserted that the phrase in § 2462 “shall not be entertained” exhibited Congress’ clear intention to render the statute jurisdictional because the Supreme Court has described subject matter jurisdiction as “the classes of cases a court may entertain.” Fort Bend Cnty. v. Davis, 139 S. Ct. 1843, 1848 (2019).  However, the Second Circuit noted that the Court has also explained that most statutes of limitations are non-jurisdictional, “even when the time limit is important (most are) and even when it is framed in mandatory terms (again, most are); indeed, that is so however emphatic[ally] expressed those terms may be.”  Wong, 575 U.S. at 410.  For that reason, the court found that the phrase “shall not be entertained,” upon which defendant heavily relied, did not itself tell the court that Congress intended § 2462 to be jurisdictional.

The court then considered the legislative history of § 2462, noting subtle shifts in the statutory language from “shall not be maintained” to “shall not be entertained” and a House of Representatives Committee report that confirmed those changes were made “in phraseology” only.  The Second Circuit thus found no intent to engineer a substantive legal change in the statute, and concluded this case was not “the exceptional one in which a century’s worth of precedent and practice in American courts rank a time limit as jurisdictional.”  Sebelius v. Auburn Reg’l Med. Ctr., 568 U.S. 145, 155 (2013) (quotation marks omitted). The court therefore held that § 2462 is a non-jurisdictional statute of limitations, the parties’ tolling agreements were enforceable, and the district court had the authority to hear the case.

By holding that 28 U.S.C. § 2462 is non-jurisdictional, the Second Circuit has for the first time in a precedential decision preserved an important tool for the SEC in managing its long-term investigations.  The court also rejected the remainder of defendant’s arguments that the civil penalties should not have been applied on a per-customer basis, were unconstitutionally excessive, and the disgorgement award failed to account for legitimate business expenses.  The clean sweep is an important win for the SEC, whose broad enforcement powers have come under fire in recent high-profile appellate and Supreme Court cases.

Copyright © 2021, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XI, Number 215
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About this Author

Associate

Christopher Bosch is an associate in the Government Contracts, Investigations & International Trade Practice Group in the firm's New York office. He graduated magna cum laude from Fordham Law School.

212-653-8185
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