SEC Enforcement DefenseOn May 26th, the Eleventh Circuit held that declaratory relief and disgorgement sought by the SEC are subject to the 5-year statute of limitations under 28 U.S.C. § 2462, but injunctive relief is not.  The court’s holding that § 2462 applies to disgorgement creates two circuit splits:  one with the D.C. Circuit, which has held that the 5-year statute of limitations codified in § 2462 does not apply to claims for disgorgement; and one with the Fifth Circuit, which has held that § 2642 does apply to injunctive relief.


Section 2462 bars the government from bringing suit to enforce “any civil fine, penalty, or forfeiture” more than five years after the claim first accrued.  The SEC has long taken the position that § 2462 only applies to claims for statutory civil penalties.  Defendants in enforcement actions have challenged that position and are beginning to make some headway.

As a brief refresher, as previously discussed here, in May 2014, the Southern District of Florida addressed an issue that the Supreme Court specifically declined to address in Gabelli v. SEC – whether the 5-year statute of limitations in § 2462 applied to the SEC’s claims for disgorgement.  The SEC filed the action in Graham in 2013, following a protracted investigation spanning more than seven years.  The SEC sought declaratory relief, injunctive relief, civil money penalties, a sworn accounting, and the repatriation and disgorgement of all ill-gotten gains.  The defendants moved for summary judgment on grounds that the 5-year statute of limitations codified in § 2462 barred the SEC’s claims.  The district court granted summary judgment for the defendants, finding that § 2462 applied to injunctive relief, declaratory relief, and disgorgement. Many commentators considered the district court’s decision to be an outlier.

Eleventh Circuit’s Ruling

The Eleventh Circuit affirmed the district court’s application of § 2462 to declaratory relief and disgorgement, but not injunctive relief.  The court reasoned that declaratory relief and disgorgement are both backward-looking remedies, and, therefore, fall within the purview of § 2462.  Considering the SEC’s claim for declaratory relief, the court quoted language from Gabelli, recognizing that civil penalties “go beyond compensation, are intended to punish, and label defendants wrongdoers.”  A public declaration that the defendants violated the law, the court explained, “does little other than label the defendants as wrongdoers.”

In addition, the Eleventh Circuit agreed with the district court that disgorgement “can truly be regarded as nothing other than a forfeiture . . . , which remedy is expressly covered by § 2462.”  The court looked to the definition of forfeiture, finding that the available definitions “illustrate that forfeiture occurs when a person is forced to turn over money or property because of a crime or wrongdoing.”  According to the court, there is “no meaningful difference in the definitions of disgorgement and forfeiture”; moreover, disgorgement is backward-looking because it is “imposed as redress for wrongdoing.”

The Eleventh Circuit did not, however, find that § 2462 applies to all claims for equitable relief and vacated the district court’s ruling that the injunctive relief was time-barred.  The court rejected the district court’s finding that the SEC injunction was “nothing short of a penalty.”  Unlike penalties, which “address a wrong done in the past,” and, therefore, are, by definition, backward-looking in nature, injunctions are typically forward-looking.  Accordingly, they do not constitute a penalty and are not subject to § 2462.  In a footnote, the Eleventh Circuit once again decried the SEC’s use of its “obey the law” injunctions, reiterating its view that such injunctions, which merely track the language of the statutes and regulations instead of specifically describing impermissible conduct, are unenforceable.

Legal Impact

The Eleventh Circuit’s ruling splits with other circuits on these issues.  Its ruling on injunctions is at odds with the Fifth Circuit’s holding in SEC v. Bartek, 484 Fed. Appx. 949, 956 (5th Cir. Aug. 7, 2012) that injunctions are penalties subject to § 2462’s bar.

The Eleventh Circuit is also the first federal appellate court to hold that § 2462’s bar applies to disgorgement.  In Riordan v. SEC, 627 F.3d 1230 (D.C. Cir. 2010), the D.C. Circuit continued a line of cases from that circuit holding that disgorgement orders are not penalties, “at least so long as the disgorged amount is causally related to the wrongdoing.”  In a pre-Gabelli case, the Ninth Circuit held that no statute of limitations applied to SEC enforcement actions, including when the action seeks disgorgement, which is equitable in nature.  See SEC v. Rind, 991 F.2d 1486 (9th Cir. 1993).  It remains to be seen how the Ninth Circuit will rule in the post-Gabelli era and how other circuits will rule when faced with similar issues.  But, in circuits where the court of appeals has not definitively ruled on the issue, it’s not uncommon for the district courts within those circuits to take different approaches.

In another interesting development, the Internal Revenue Service recently opined in an Office of Chief Counsel Memorandum that disgorgement payments to the SEC are not deductible pursuant to § 162(f) of the Internal Revenue Code, which disallows deductions “for any fine or similar penalty paid to a government for the violation of any law.”  The IRS reasoned that disgorgement can serve as a direct substitute for a civil penalty and equated disgorgement to forfeiture, for which Section 162(f) never allows a deduction.

Despite the Eleventh Circuit’s holding in Graham, or perhaps because of it, until we hear further from the Supreme Court, we can expect the SEC to continue to argue that § 2462’s 5-year statute of limitations does not apply to relief other than civil penalties, including declaratory relief and disgorgement.  We can also expect defendants and industry groups like SIFMA to  argue with new vigor that it does.  Before long we will likely have some additional movement on these issues, with Timbervest v. SEC, No. 15-1416, which presents similar issues that are currently pending before the D.C. Circuit.