The Five-Year Statute of Limitations for Government Enforcement Actions for Civil  Penalties: Recently Settled and Still Unsettled Issues Regarding 28 U.S.C. Section 2462 | Business Law Today from ABA

In recent years, the United States Supreme Court has twice addressed the meaning of the five-year statute of limitations for government enforcement actions for civil penalties.*  On both occasions, in 2013 and 2017, the Court unanimously ruled against the government’s interpretations of 28 U.S.C. Section 2462 and its efforts to stretch or avoid the five-year rule.  Section 2462 provides as follows:

Except 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, if within the same period, the offender or the property is found within the United States in order that proper service may be made thereon.

In 2013, the Supreme Court ruled in Gabelli that for all enforcement actions, including fraud, the statute begins to run when the claim or fraud “first accrued” and not when the fraud was discovered by the government.[1]  Four and a half years later, in 2017, the Supreme Court ruled in Kokesh that the government’s pursuit of a “disgorgement” claim was a “penalty” action under Section 2462 and the government was required to bring the disgorgement claim within five years.[2] 

While Gabelli and Kokesh resolved two issues, other issues under Section 2462 have not yet been ruled upon by the Supreme Court and remain unsettled.  These unsettled issues include important questions concerning the proper interpretation of the statute:

(1) Whether government actions for obey-the-law injunctions are actions covered by the penalty language of Section 2462. One Federal District Court held on December 13, 2017 that the “obey-the-law” injunction sought by the SEC was punitive and penal in nature and covered by the five year rule of Section 2462.[3]  On appeal, the Third Circuit ruled that the SEC injunction statute does not permit the issuance of punitive injunctions and therefore “punitive’ or “penalty” injunctions are not covered by Section 2462 because they cannot be brought at any time–even within five years.[4]

(2) Whether the five-year clock is tolled until the defendant is present in the United States. One Federal District Court has ruled, at the government’s urging, that the five-year clock does not begin to run until the defendant is present in the United States.[5] 

In Gabelli and Kokesh, the Supreme Court set out basic and long-standing principles it has applied to statute of limitations issues since 1805.  These principles include the importance of the certainty created by a fixed time frame to bring an action, the undesirability of allowing cases to be brought at any distant time, the need to avoid stale claims, lost evidence, or faded memories, and the importance to the welfare of society by promoting timely justice and stability in human affairs.

In 1805, the Supreme Court addressed whether an action for debt to recover a penalty is covered by a two-year statute of limitations in Adams v. Woods.[6]  Chief Justice Marshall provided the following insight in ruling for the defendant:

In expounding this law, it deserves some consideration, that if it does not limit actions of debt for penalties, those actions might, in many cases, be brought at any distance of time.  This would be utterly repugnant to the genius of our laws.  In a country where not even treason can be prosecuted after a lapse of three years, it could scarcely be supposed that an individual would remain forever liable to a pecuniary forfeiture.[7]

This has been an important principle for most Congressional lawmaking on statutes of limitations, as well as precedent for the Supreme Court rulings in Gabelli and Kokesh.

I. Background of 28 U.S.C. Section 2464.

The general five-year statute of limitations in the U.S. Code for government enforcement actions for civil penalties is set forth in 28 U.S.C. Section 2462.  Essentially the same statute was first enacted by Congress in 1839 as part of “[a]n act in amendment of the acts respecting the Judicial Systems of the United States.”[8]  The 1839 Act itself was focused in part on defendants receiving service of process before a lawsuit could go forward against the defendant and be adjudicated.  Although there is no legislative history on the statute of limitations provision in the 1839 Act, it was adopted against the backdrop of Chief Justice Marshall’s opinion in Adams v. Woods.

II. Gabelli—Whether the statute of limitations clock starts ticking when the claim first accrued or when discovered by the government

In Gabelli v. SEC, Chief Justice Roberts wrote the unanimous opinion of the Court.  The question presented was as follows:

The Investment Advisers Act makes it illegal for investment advisers to defraud their clients, and authorizes the Securities and Exchange Commission to seek civil penalties from advisers who do so.  Under the general statute of limitations for civil penalty actions, the SEC has five years to seek such penalties.  The question is whether the five year clock begins to tick when the fraud is complete or when the fraud is discovered.[9]

The SEC brought its enforcement action for civil penalties more than 5 ½ years after the alleged fraud had occurred.  The defendants in the District Court action invoked the five-year statute of limitations of Section 2462.  The District Court ruled that it applied and dismissed the SEC’s civil penalty claim as barred by Section 2462.

The SEC appealed to the U.S. Court of Appeals for the Second Circuit on the grounds that they had brought the civil penalty action within five years of discovering the fraud and that the “discovery rule” should be applied to Section 2462.  The Second Circuit agreed with the SEC.  It grafted onto Section 2462’s language of “five years from the date when the claim first accrued” the “discovery rule” for fraud matters – that the fraud claim accrues when it is discovered or could have been discovered with due diligence.[10]  In sum, the Second Circuit concluded that “for claims that sound in fraud a discovery rule is read into the relevant statutes of limitations.”[11]

The Supreme Court reversed the Second Circuit’s ruling.  The Court unanimously concluded that “[g]iven the lack of textual, historical, or equitable reasons to graft a discovery rule onto the statute of limitations of §2462, we decline to do so.”[12] 

The Court recognized that the “discovery rule” for fraud claims was designed to protect victims of fraud who did not learn that they had been defrauded for some time.  It distinguished fraud victims for whom the discovery rule was created from government enforcement agencies whose responsibility it was to investigate fraud.

Chief Justice Roberts emphasized that in 1805 “Chief Justice Marshall used particularly forceful language in emphasizing the importance of time limits on penalty actions, stating that it ‘would be utterly repugnant to the genius of our laws’ if actions for penalties could ‘be brought at any distance of time.’ Adams v. Woods, 2 Cranch 336, 342, 2 L.Ed. 297 (1805).”[13] Chief Justice Roberts recognized that adopting the discovery rule for Section 2462 would leave defendants exposed for not only the five years but for an additional uncertain period, concluding that “[r]epose would hinge on speculation about what the Government knew, when it knew it, and when it should have known it.”[14]  

Chief Justice Roberts made abundantly clear that the catchall statute of limitations, 28 U.S.C. Section 2462, serves an important purpose: a party should not be able to hold a threat of litigation over another party indefinitely.  This fear seems particularly potent when the party threatening litigation is the United States government. 

III. Kokesh—Whether a claim for disgorgement is a penalty claim under Section 2462

In Kokesh v. SEC, the issue presented under Section 2462 was whether claims for disgorgement as a sanction for federal securities law violations were subject to its five-year limitations period.[15]  Rejecting the Government’s contention that Section 2462 did not apply to claims for disgorgement, the Court echoed the language from Gabelli that “[s]tatutes of limitations ‘se[t] a fixed date when exposure to the specified Government enforcement efforts en[d].’ . . . Such limits are ‘vital to the welfare of society’ and rest on the principle that ‘even wrongdoers are entitled to assume that their sins may be forgotten.’”[16] 

Justice Sotomayor, writing for a unanimous court, set out the allegations against Kokesh:

Charles Kokesh owned two investment-adviser firms that provided investment advice to business-development companies.  In late 2009, the Commission commenced an enforcement action in Federal District Court alleging that between 1995 and 2009, Kokesh, through his firms, misappropriated $34.9 million from four of those development companies.  The Commission further alleged that, in order to conceal the misappropriation, Kokesh caused the filing of false and misleading SEC reports and proxy statements.  The Commission sought civil monetary penalties, disgorgement, and an injunction barring Kokesh from violating securities laws in the future.[17]

The issues surrounding sanctions had arisen after the case went to trial and a jury found that Kokesh had violated a number of securities laws.  The SEC sought both monetary penalties and disgorgement monies as a result of the jury’s findings.  The District Court considered both sanctions in the light of the Section 2462 statute of limitations.

First, the District Court found that Section 2462’s five-year limitations period prevented the award of penalties for conduct more than five years before the SEC’s complaint was filed.  Therefore, the District Court ordered a civil penalty of $2,354,593, the amount Kokesh received during the five-year period.

Second, the District Court considered whether Section 2462’s five-year limitations period applied to disgorgement claims.  The SEC sought $34.9 million for disgorgement, of which $29.9 million would relate to conduct more than five years prior to the complaint.  The SEC argued that disgorgement was not a “penalty” under Section 2462.  The District Court agreed and awarded a disgorgement amount of $34.9 million plus $18.1 million in prejudgment interest.

Kokesh appealed and the Tenth Circuit affirmed, ruling that Section 2462 does not apply to SEC disgorgement claims.  The Supreme Court agreed to hear the case to resolve the disagreement among the Circuits.[18] 

The Supreme Court held that “[d]isgorgement, as it is applied in SEC enforcement proceedings, operates as a penalty under §2462.  Accordingly, any claim for disgorgement in an SEC enforcement action must be commenced within five years of the date the claim accrued.”[19] 

The Kokesh Court looked at a ‘penalty’ as a “punishment, whether corporal or pecuniary, imposed and enforced by the state, for a crime or offen[s]e against laws.’  Huntington v. Attrill, 146 U.S. 657, 667 (1892).”[20]  The Court then gave three reasons why disgorgement in an SEC enforcement context is a penalty.  First, disgorgement is imposed for violating public laws.  Second, disgorgement is imposed for punitive purposes.  Third, disgorgement is not compensatory and frequently the funds go to the United States Treasury as a deterrent.

The Supreme Court made it clear in a footnote that “nothing in this opinion should be interpreted as an opinion on whether courts possess authority to order disgorgement in SEC disgorgement proceedings or on whether courts have properly applied disgorgement principles in this context.”[21]  Three years later, in June 2020, the Court in Liu v. SEC answered these question in an 8-1 decision, holding that “a disgorgement award that does not exceed a wrongdoer’s net profits and is awarded for victims is equitable relief permissible under” securities laws.[22]  The Court also found that lower courts had gone beyond equitable principles in awarding disgorgement by: (1) “ordering the proceeds of fraud to be deposited in Treasury funds instead of distributing them to victims;” (2) “imposing joint-and-several disgorgement liability;” and (3) “declining to deduct even legitimate expenses from the receipts of fraud.”[23]

IV. Gentile—Whether obey-the-law injunctions fall within Section 2462

The SEC frequently brings an action for an obey-the-law injunction alongside its enforcement action for civil penalties and disgorgement.  If the SEC establishes that a defendant has violated the securities laws, they have routinely asked courts to impose an obey-the-law injunction, which enjoins the defendant from violating the securities laws in the future.  Since everyone is required to obey the law in the first place, the question arises whether the purpose of these type of injunctions are to penalize and stigmatize the defendant.  This issue has arisen in the context of Section 2462 and whether the claim for an obey-the-law injunction is really another type of penalty under Section 2462, which would require the claim for injunction to be brought within five years.

Six months after the Supreme Court decision in Kokesh on June 5, 2017, one district court addressed the issue of whether an obey-the-law injunction is a penalty and must be sought within five years under Section 2462.[24]  There, the SEC had filed suit against defendant Gentile in March 2016 for securities violations relating to two schemes manipulating penny stocks that allegedly occurred some eight to nine years earlier, between April 2007 and June 2008.  The SEC sought two remedies: an obey-the-law injunction and a bar to engaging in any penny stock offerings in the future—arguing that these remedies were ‘equitable’ and therefore outside the scope of legal remedies specified in Section 2462. 

Chief Judge Linares of the District Court of New Jersey determined that the issue of whether the claims for relief were time-barred under the five-year statute of limitations in Section 2462 turned on whether the relief sought was a “penalty . . . pecuniary or otherwise” within the meaning of Section 2462.  He concluded that the injunctions sought were “punitive in nature” and a penalty under Section 2462:

The Court disagrees with [Plaintiff SEC’s] arguments.  First, and most importantly, both injunctions sought by Plaintiff are punitive in nature.  Indeed, the “obey-the-law” injunction would simply require Defendant to obey the already established federal laws and regulations relating to securities.  Should the Court enter such an order, Defendant would not be required to do anything more than obey the law; a basic understanding of all citizens and those involved with securities.  However, such an order would also stigmatize Defendant in the eyes of the public.[25]

It is instructive to compare Chief Judge Linares’ post-Kokesh views on whether obey-the-law injunctions are penalties under Section 2462 with the pre-Kokesh views of the U.S. Court of Appeals for the Eleventh Circuit in SEC v. Graham.[26]

The Eleventh Circuit reviewed the District Court decision of Judge James Lawrence King who had ruled that Section 2462 barred the untimely relief sought by the SEC for disgorgement and an obey-the-law injunction.[27]  As to disgorgement, the District Court held that disgorgement was essentially an action for ‘forfeiture’ under Section 2462 and therefore barred by the five-year rule.  As to the obey-the-law injunction, the District Court rejected the SEC’s argument that no statute of limitations applies to injunctions since the word ‘injunction’ is not found in Section 2462.  Instead, the District Court looked to Gabelli and the concern expressed by the Supreme Court for “leav[ing] defendants exposed to government enforcement action not only for five years after their misdeeds, but for an additional uncertain period in the future.  [Gabelli] at 1223.”[28] The District Court concluded that “the injunctive relief sought by the SEC in this case forever barring defendants from future violations of federal securities laws can be regarded as nothing short of a penalty ‘intended to punish.’”[29] 

The Eleventh Circuit agreed with the District Court that disgorgement was a ‘forfeiture’ subject to Section 2462.  Kokesh later held that ‘disgorgement’ was a ‘penalty’ under Section 2462 rather than a “forfeiture, but still subject to Section 2462.”

However, as to obey-the-law injunctions, the Eleventh Circuit reversed the District Court’s ruling and stated that “[b]ecause injunctions are equitable, forward-looking remedies and not penalties within the meaning of §2462, we conclude that the five year statute of limitations is inapplicable to injunctions such as the one the SEC sought in this case.2”[30]  Footnote 2 in the Graham case condemned obey-the-law injunctions as follows:

We note that the injunction the SEC requested in the operative complaint sought to prevent the defendants from violating federal securities laws, otherwise known as an “obey-the-law” injunction.  Repeatedly we have said that, in the context of SEC enforcement actions and otherwise, “obey-the-law” injunctions are unenforceable.  See SEC v. Smyth, 420 F.3d 1225, 1233 n. 14 (11th Cir. 2005); Fla. Ass’n of Rehab Facilities v. Fla. Dep’t of Health & Rehab, Servs., 225 F.3d 1208, 1222-23 (11th Cir. 2000) (citing cases holding that obey-the-law injunctions are unenforceable).  In particular, “an injunction which merely tracks the language of the securities statutes and regulations,” as the injunction in this case presently is described, “will not clearly and specifically describe permissible and impermissible conduct” as required by Federal Rule of Civil Procedure 65(d). SEC v. Goble, 682 F.3d 934 952 (11th Cir. 2012).  We “condemn these injunctions because they lack specificity and deprive defendants of the procedural protections that would ordinarily accompany a future charge of a violation of the securities laws.”  Id. at 949. . . .[31]

In reaching its conclusion that obey-the-law injunctions are not penalties under Section 2462, the Eleventh Circuit did not have the benefit of the Supreme Court’s discussion of what the word ‘penalty’ means under Section 2462 in its 2017 opinion in Kokesh.  The Eleventh Circuit also relied on its own precedent that Section 2462 only applied to claims for legal relief and not equitable remedies.  To support this, it cited to cases involving ongoing violations like discharging materials into wetlands in violation of law.  These cases are distinguishable since the government must be able to enjoin and stop ongoing violations, and statutes of limitations seem irrelevant to ongoing violations.

The SEC filed a notice of appeal in the Gentile case on February 7, 2018 in the U.S. Court of Appeals for the Third Circuit.  The appeal was argued on November 6, 2018 and decided on September 26, 2019.  The Third Circuit framed the issue and its holding as follows:

At issue in this appeal are two different remedies sought by the SEC: an injunction against further violations of certain securities laws and an injunction barring participation in the penny stock industry. The District Court held that those remedies—like the disgorgement remedy at issue in Kokesh—were penalties. We see these questions of first impression differently and hold that because 15 U.S.C. § 78u(d) does not permit the issuance of punitive injunctions, the injunctions at issue do not fall within the reach of § 2462.[32]

In other words, obey-the-law injunctions are not permitted at all if they are ‘punitive’ or a ‘penalty;’ and therefore, any statute of limitations is irrelevant.  Section 78u(d)(1) states:

Whenever it shall appear to the Commission that any person is engaged or is about to engage in acts or practices constituting a violation of any provision of this chapter, [or] the rules or regulations thereunder . . . it may in its discretion bring an action in [district court] to enjoin such acts or practices, and upon a proper showing a permanent or temporary injunction or restraining order shall be granted without bond.[33]

The Third Circuit concluded that under this provision “injunctions may properly issue only to prevent harm” when “there is a reasonable likelihood of future violations,” but “not to punish the defendant.”[34]

The Court remanded the case to the District Court to determine whether the obey-the-law injunction sought against Gentile was ‘preventive’ or ‘punitive.’  In so doing, it provided the District Court with the following guidance:

We stress that the District Court, on remand, should not rubber-stamp the Commission’s request for an obey-the-law injunction simply because it has been historically permitted to do so by various courts. . . If the District Court, after weighing the facts and circumstances of this case as alleged or otherwise, concludes that the obey-the-law injunction sought here serves no preventive purpose, or is not carefully tailored to enjoin only that conduct necessary to prevent a future harm, then it should, and must, reject the Commission’s request. We note that the District Court has already addressed some of the relevant concerns involved in its opinion. We are also troubled by the fact that the Commission appears to seek two injunctions that attempt to achieve the same result.[35]

Of course, Chief Judge Linares already found that the obey-the-law injunction sought by the government against Gentile was “punitive in nature.”  How all this plays out going forward in other future cases remains to be seen. If Gentile remains good law, it does not seem likely that the government will be able to obtain obey-the-law injunctions as a matter of course going forward, especially in cases where the wrongful conduct occurred and concluded years earlier.

Chief Judge Linares retired from the bench several months before the Third Circuit’s ruling and opinion in Gentile.  On remand, the case was reassigned to District Judge Brian R. Martinotti who was then called upon to consider Gentile’s motion to dismiss.  On September 29, 2020, Judge Martinotti issued a 31-page opinion granting the motion to dismiss on the ground that “the allegations of the Amended Complaint are insufficient to state a plausible claim for [injunctive] relief.”[36]  The court then added that it would, “however, []permit the SEC one final opportunity to amend their complaint.”[37] The SEC declined to do so and the case was closed. 

V. Straub—Whether a defendant’s presence in the United States is required for Section 2462 to start to run

Notwithstanding that Section 2462 does not provide for tolling when the defendant is outside the United States, one district court judge, at the government’s urging, ruled that Section 2462 does not take effect unless the defendant is present in the United States.[38]

On December 29, 2011, the SEC filed an enforcement action in federal district court in the Southern District of New York against defendants Elek Straub, Andras Balogh and Tomas Morvai, three former senior executives of the Hungarian telephone company Magyar Telekom, Plc. (“Magyar”).  All three defendants were Hungarian citizens who worked and resided in Hungary.  The complaint alleged that more than five years earlier, in 2005 and 2006, the defendants engaged in a scheme to bribe Macedonian government officials in order to receive favorable treatment for Magyar’s Macedonian cellphone subsidiary, which was jointly owned by Magyar and the Macedonian government.  The action was brought under the civil anti-bribery and accurate books and records provisions of the Foreign Corrupt Practices Act, 15 U.S.C. Sections 78dd-1, et seq.  The suit sought civil penalties, disgorgement and an obey-the-law injunction.  The action was filed more than five years after the claims first accrued.

The defendants moved to dismiss the SEC’s claims on the grounds that they were time barred under Section 2462.  On February 8, 2013, the District Court issued an opinion in which it adopted the government’s position that the claims were not time barred.

It is undisputed that more than five years have elapsed since the SEC’s claims first accrued.  (See Opp’n 23-24; Reply 10.)  The parties nevertheless disagree as to the plain meaning of §2462 and, given that Defendants were not physically located within the United States during the limitations period, whether the statute limitations has run on the SEC’s claims.  The SEC argues that the statute of limitations has not run because the statute applies only “’if, within the same period, the offender . . . is found within the United States.’”  (Opp’n 23-224 (quoting 28 U.S.C. §2462).)  Thus, according to the SEC, because the Defendants were not “found” in this country at any point during the limitations period in question, the Court’s inquiry should end.  (Id. at 24.)  The Court agrees.

*          *          *

Here, the operative language in Section 2462 requires, by its plain terms, that an offender must be physically present in the United States for the statute of limitations to run.[39]

A close reading of Section 2462 shows that the District Court got it backwards.  Instead of concluding that because the defendants could not be found in the United States for service of process within the five year limitations period, the case could not be brought, the Court ruled just the opposite – that the case could be brought at any time in the future after the five year period had elapsed.  This leaves open the possibility that the SEC can bring suit 20 years, 30 years, or even more after the claim first accrued.

The language of Section 2462 is drafted in a way that makes reasonably clear that “an action, suit or proceeding for the enforcement of any civil fine, penalty or forfeiture, pecuniary or otherwise, shall not be entertained unless” certain things occur.  The two things that must occur to allow the lawsuit to be entertained are (1) the suit must be “commenced within five years from the date when the claim first accrued” and (2) “if within the same [five-year] period, the offender or the property is found within the United States in order that proper service may be made thereon.”  Unless these two things take place, the statute dictates that the lawsuit “shall not be entertained.” Yet the District Court neither acknowledged nor applied this clear structure.

The Court also disregarded the fact that under the Hague Convention the SEC could have served the defendants anytime it wanted within the five-year limitations period.  In fact, it was under the Hague Convention that the SEC made its service some six plus years after the claim ‘first accrued.’

On February 27, 2013, approximately three weeks after the District Court issued its opinion on Section 2462 in the Straub case, the Supreme Court issued its opinion in Gabelli.  Of particular relevance to the Straub issue was the statement in the opinion by Chief Justice Roberts that the ‘discovery rule’ “would leave defendants exposed to Government enforcement action not only for five years after their misdeeds, but for an additional uncertain period into the future.”[40] 

In light of Gabelli, the Straub defendants requested the District Court to certify an interlocutory appeal under 28 U.S.C. Section 1292(b) to the Second Circuit regarding the statute of limitations ruling.  The District Court did not disagree that the legal issue in dispute was “a controlling question of law as to which there is substantial ground for difference of opinion” under Section 1292(b).[41]  However, the Court denied the Straub defendants’ motion to certify an interlocutory appeal because an immediate appeal would not “materially advance the ultimate termination of the litigation” under Section 1292(b).[42]  The Court stated that “even if reversal would eliminate the SEC’s claim for civil penalties, the claims for disgorgement and injunctive relief would still survive . . . Further, in seeking these equitable remedies, the SEC will still need to establish Defendants’ liability.”[43] 

Of course, had this litigation and request for interlocutory appeal occurred in 2018 or 2019, the Kokesh decision on disgorgement, the Gentile case, and the discussions in the Graham decisions on obey-the-law injunctions may have gotten the issue to the Second Circuit and possibly the Supreme Court.  The Straub case went forward with several years of discovery and then motions for summary judgment.  A critical issue in the motions for summary judgment was the five-year statute of limitations of Section 2462 and whether the District Court erred when it ruled that “the operative language in §2462 requires, by its plain terms, that an offender must be physically present in the United States for the statute of limitations to run.”[44]

The issue for the District Court became much more complicated because discovery had shown that two of the three defendants had been in the U.S. for a short period of time during the five-year period, as the Court acknowledged:

Discovery has since revealed, however, that, despite the SEC’s allegations at the pleading stage, two of the defendants – Straub and Morvai – were physically present in the United States in 2005.  Specifically, Straub traveled to New York and Boston during the week of September 6, 2005 (Def. 56.1 ¶ 1), and Morvai traveled to San Francisco on June 23, 2005 and, on a separate trip, to New York on October 21, 2005 on his way to Connecticut (id. ¶ 2).  These undisputed facts require the Court to now consider what effect, if any, these visits have on the running of Section 2462’s statute of limitations.[45]

In deciding how Section 2462 should be applied in these circumstances, the District Court wrote a complicated ten-page analysis.  It was a far cry from the straightforward and “set[ting] a fixed date” opinion of Chief Justice Roberts in Gabelli.  The District Court began its analysis by concluding “that Section 2462 does not apply to the SEC’s claims to the extent those claims seek injunctive relief or disgorgement − it applies only to the SEC’s claim for penalties.”[46]  As we now know from Kokesh, the District Court in the Straub case got disgorgement wrong, and as the Third Circuit ruled in Gentile, obey-the-law injunctions sought by the SEC that are ‘punitive’ and a ‘penalty’ are not permitted to be issued by federal courts at any time.

The District Court then addressed the fact that two of the defendants (Straub and Morvai) were in the United States for a few days each during the five-year period while one of the defendants (Balogh) was not. The Court found that:

actions covered by Section 2462 are subject to a five year statute of limitations that applies if the defendant is present in the United States at any time during that five year period, which begins to run on the date the subject claim accrues and does not toll while the defendant is absent from the United States.  The Court also finds that the limitations period does not apply at all if the defendant is not present in the United States at any point during the five year period. . .[47]

This rather bizarre result − that a foreign defendant who is in the U.S. for a few days or a “fleeting” moment gets the benefit of Section 2462 while a foreign defendant who is not in the U.S. at all does not get its benefit − cannot be justified by the language Congress enacted.

The District Court erred when it “ruled that ‘found in the United States’ means ‘physically present’ within the United States.”[48]  The phrase in Section 2462 that states “if within the same period, the offender or the property is found within the United States in order that proper service may be made thereon” means something quite different than ‘physically present.’  It means the government must ‘find’ the defendant in order to serve him, and the defendant likewise must be ‘found’ by the government in the United States in order to be served.  Merely being ‘physically present’ in the U.S. does not mean the government has ‘found’ the defendant to effect service; and absent finding the defendant and properly serving him, the enforcement action cannot truly commence. 

As discussed earlier, Section 2462 does not allow an enforcement action to be entertained unless it is commenced in five years and if – within the same period – the government can find the defendant to effect proper service.  In the 1839 statute, Congress gave the government five years to find the offender in the United States in order to make proper personal service on him.  Congress did not provide the government with a limitless time frame. 

The SEC argued that Section 2462 means that the statute of limitations “tolls whenever the defendant is absent from the United States.”[49]  The District Court rejected this argument because

the statute contains none of the language typically associated with tolling provisions, such as references to a period being “tolled,” “suspended,” “excluded,” “extended,” or “enlarged.” (See Def. Mem. at 21-23 (collecting tolling provisions from Defendants’ impressive survey of 135 federal statutes of limitations)).

*          *          *

Moreover, the Court’s own research has revealed virtually no cases even suggesting, much less holding, that Section 2462’s limitations period tolls while a defendant is absent from the United States. . .[50]

Yet the District Court ruled that the five-year period of Section 2462 did not run while one defendant was outside the United States.  This generates the confusion of there being no apparent difference between ‘being tolled’ and ‘not starting to run.’  The District Court then held that even though two of the defendants were in the U.S. during the five-year period, albeit briefly, Section 2462 only applied to claims that first accrued in the five-year period before defendants’ presence in the United States.  For those claims that accrued after the defendants’ presence in the U.S., the five-year limitations period of Section 2462 did not apply.

Three summary points about all these contortions: First, several years earlier, a unanimous Supreme Court in Gabelli espoused a simple and straightforward approach to analyzing Section 2462 and being able to “set[ ] a fixed date when exposure to the specified government enforcement efforts ends” and thereby avoid leaving the government’s options open “for an additional uncertain period into the future.”[51]

Second, the District Court in Straub appears not to have considered Section 2462 in the context of the 1839 Act.  Section 1 of the 1839 Act provided jurisdiction for the courts to proceed to decide lawsuits even if all parties had not been properly served, so long as the court proceeded only with respect to “the parties who may be properly before it” and did not issue any judgment that would  “prejudice other parties” not before the court—such as those who were “not regularly served with process” because they were “not inhabitants of nor found within the district.”[52]  Congress was focused on not having cases proceed and adjudicated against defendants unless they had been found and properly served.

Third, as set forth earlier, Chief Justice Roberts and a unanimous Supreme Court stressed the importance of Chief Justice Marshall’s views on this issue:

Chief Justice Marshall used particularly forceful language in emphasizing the importance of time limits on penalty actions, stating that it “would be utterly repugnant to the genius of our laws” if actions for penalties could “be brought at any distance of time.”  Adams v. Woods, 2 Cranch 336, 342, 2 L.Ed. 297 (1805).[53]

The District Court in Straub, however, found defendants’ reliance on this language to be ‘absurd’ since Congress had enacted indefinite tolling provisions in other and more recent specific statutes dealing with Customs and IRS violations.[54]  The Straub Court’s point actually proves just the opposite.  If Section 2462 did not run while defendants were out of the country, there would be no reason for Congress to have provided for specific Customs and IRS claims a tolling provision for persons outside the United States.  The fact that Congress enacted tolling provisions in a few specific instances where defendants are out of the country does not impact on the importance of the general rule in Section 2462 of having a fixed period of time, without the possibility of bringing the action at any indefinite period of time in the future. 

Ultimately, Straub was settled before trial and therefore the District Court’s decision was not appealed. Thus, the issue of tolling the limitations period when defendants are not in the United States remains unsettled.

VI. Conclusions

We are now 180 years after the predecessor statute to Section 2462 was first enacted by Congress. The Supreme Court has addressed the meaning of the statute twice in recent years.  District Courts and Circuit Courts are still addressing the open issues as to its meaning and scope.  Issues remain unsettled and the Supreme Court may well have to step in again to provide clarity.  Hopefully, the five-year rule will remain intact as originally intended.  As the Supreme Court has opined regarding statutes of limitations: “They provide ‘security and stability to human affairs.’ . . . We have deemed them ‘vital to the welfare of society,’ . . . and concluded that ‘even wrongdoers are entitled to assume that their sins may be forgotten.’”[55] 

On January 1, 2021, the 1,480 page, $740 billion National Defense Authorization Act for Fiscal Year 2021 (“NDAA”) became law after the House (on December 28, 2020) and Senate (on January 1, 2021) overwhelmingly voted to override President Trump’s veto of the law.  Section 6501 of the NDAA, which was buried deep in a miscellaneous part of the bill dealing with other matters, contained amendments to the Securities Exchange Act of 1934 sought by the SEC to attempt to modify and alter rulings by the Supreme Court and other federal courts in cases like Kokesh, Liu and Gentile. These amendments, essentially hidden in a defense bill in the middle of a pandemic, raise questions about respect for the rulings of the federal courts and Supreme Court.

Of particular note for this article, none of the amendments made to the law by the NDAA changed the text of 28 U.S.C. Section 2462.  What the amendments did, among other things, was to create special statute of limitations rules for SEC disgorgement and equitable relief actions, including a 10-year statute of limitations for the SEC to bring scienter-based disgorgement claims and equitable relief claims, and added a provision that tolls the statute of limitations for disgorgement and equitable claims while the alleged wrongdoer is outside the United States (“shall not count towards the accrual of that period”).

This means the SEC has made the statute of limitations for disgorgement and equitable claims a separate rule outside of Section 2462 and covered by its clause “except as otherwise provided by Act of Congress.”  Of course, we are left wondering why the SEC – and the few in Congress willing to do its bidding – paid so little attention to the wisdom of Chief Justices Marshall and Roberts, some 200 years apart, as to the vital role that statutes of limitations play in our laws and history.

* Mr. Rauh is a former U.S. Attorney for the District of Columbia, a former senior partner at Skadden Arps, and presently the principal in the Rauh Law Offices.  Mr. Rauh was counsel to Elek Straub in one of the cases discussed in this article.  Ms. Rauh is an associate at the Buckley, LLP law firm.

[1] Gabelli v. SEC, 133 S.Ct. 1216 (2013). 

[2] Kokesh v. SEC, 137 S.Ct. 1635 (2017).

[3] SEC v. Gentile, Civ. Action No. 2:16-cv-01619-JLL-JAD, 2017 WL 6371301 (D.N.J. 2017) (Jose L. Linares, C.J.).

[4] SEC v. Gentile, 939 F.3d 549 (3rd. Cir. 2019).

[5] SEC v. Straub, et al., No. 11-cv-09645-RJS, 2016 WL 5793398 (S.D.N.Y. 2016) (Richard J. Sullivan, J.).

[6] 2 Cranch 336, 342, 2 L.Ed. 297 (1805). 

[7] Id.

[8] Law of Feb. 28, 1839, Sess. III, Ch. 36, 5 stat. 322 (1839) (the “1839 Act”). 

[9] Gabelli v. SEC, 133 S.Ct. at 1218-1219 (2013).

[10] SEC v. Gabelli, 653 F.3d 49, 59 (2011). 

[11] Gabelli v. SEC, 133 S.Ct. at 1220.

[12] Id. at 1224.

[13] Id. at 1223.

[14] Id. at 1223.

[15] 137 S.Ct. 1635 (2017).

[16] Id. at 1641 quoting Gabelli v. SEC, 133 S.Ct. 1216, 1221 (2013).

[17] Id. at 1641.

[18] Compare SEC v. Graham, 823 F.3d 1357, 1363 (11th Cir. 2016) (Section 2462 applies to disgorgement) with Riordan v. SEC, 627 F.3d 1230, 1234 (D.C. Cir. 2010) (Section 2462 does not apply to disgorgement).

[19] Kokesh v. SEC, 137 S.Ct. at 1645.

[20] Id. at 1642. 

[21] Id. at 1642, fn.3. 

[22] Liu v. SEC, 140 S. Ct. 1936, 1937 (2020).

[23] Id. at 1946.

[24] SEC v. Gentile, Civ. Action No. 2:16-cv-01619-JLL-JAD, 2017 WL 6371301 (D.N.J. Dec. 13, 2017).

[25] Id. at *4.

[26] SEC v. Graham, 823 F.3d 1357 (11th Cir. 2016).

[27] SEC v. Graham, 21 F. Supp. 3d 1300 (S.D.Fla. 2014).

[28] Id. at 1309.

[29] Id. at 1310.

[30] SEC v. Graham, 823 F.3d at 1362. 

[31] Id. at 1364, fn 2.

[32] SEC v. Gentile, 939 F.3d 549, 552 (3rd. Cir. 2019).

[33] Id. at 554 (quoting 15 U.S.C. § 78u(d)(1)) (emphasis added).

[34] Id. at 556.

[35] Id. at 565.

[36] SEC v. Gentile, No. 2:16-cv-1619 (BRM) (JAD) at 31 (D.N.J. Sep. 29, 2020). 

[37]  Id.

[38] SEC v. Elek Straub, Andras Balogh, and Tomas Morvai, No. 1:11-cv-09645 (S.D.N.Y.) (Richard J. Sullivan, J.). 

[39] SEC v. Straub, 921 F.Supp. 2d 244, 259, 260 (2013).

[40] SEC v. Gabelli, 133 S.Ct. at 1223 (emphasis added).

[41] SEC v. Straub, 2013 WL 4399042, at *5 (S.D.N.Y. Aug. 5, 2013).  

[42] Id.

[43] Id. (emphasis added).

[44] SEC v. Straub, 221 F. Supp. 2d at 260.

[45] SEC v. Straub, 2016 WL 5793398, at *13 (S.D.N.Y. Sep. 30, 2016).

[46] Id. at *15. 

[47] Id. at *19.

[48] Id. at *15. 

[49] Id. at *16. 

[50] Id. at *16, *17.

[51] Gabelli v. SEC, 133 S.Ct. at 1221, 1223.

[52] 1839 Act, § 1. 

[53] Gabelli v. SEC, 133 S.Ct. at 1223.

[54] SEC v. Straub, 2016 WL 5793398 at *18.

[55] Gabelli v. SEC, 133 S.Ct. at 1221 (citations omitted).

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