Advisories July 26, 2018

Government & Internal Investigations / Securities Litigation Advisory: Decision Dismissing SEC FCPA Claims Extends Recent Supreme Court Rulings Curtailing SEC Enforcement Authority

Executive Summary
Minute Read

A federal court has extended the fence the U.S. Supreme Court put around the Securities and Exchange Commission. Our Government & Internal Investigations and Securities Litigation Groups examine the ruling and how it could broaden the scope of tolling agreements.

  • “Obey the law” injunctions are subject to five-year statute of limitations
  • Procedural aspects applying to Foreign Corrupt Practices Act claims
  • When does the limitations period begin?

In a recent decision, SEC v. Cohen, et al., No. 17-cv-430 (E.D.N.Y. July 7, 2018), Judge Nicholas Garaufis applied the five-year statute of limitations under 28 U.S.C. § 2462 to dismiss Securities and Exchange Commission (SEC) enforcement claims under the Foreign Corrupt Practices Act (FCPA). In doing so, Judge Garaufis confirmed that the Supreme Court’s recent application of Section 2462’s five-year limitations period to the SEC’s requests for civil penalties and disgorgement in its traditional anti-fraud enforcement actions also extends to its FCPA enforcement activity.

Importantly, Judge Garaufis also concluded that the SEC’s requests for prospective injunctive relief—so-called “obey the law” injunctions—which have traditionally been understood primarily as forward-looking and equitable in nature, are subject to Section 2462’s five-year limitations period. To arrive at this result, the court applied the Supreme Court’s reasoning in SEC v. Kokesh, 137 S. Ct. 1635 (2017), to find that, like disgorgement, prospective injunctions are at least partially punitive, rather than merely remedial. Additionally, they are aimed at redressing public, rather than individual, harm. 

The Cohen opinion is also important in providing guidance on the procedural aspects of Section 2462’s application to the SEC’s FCPA claims. First, the court concluded that it is appropriate to consider a statute of limitations defense under Section 2462 at the motion to dismiss stage. Judge Garaufis disagreed with the SEC’s argument that Section 2462 is directed primarily to remedies, which must await a finding of liability. To the contrary, the court reasoned that the statute prohibits district courts from “entertaining” any time-barred claim, warranting a decision on the pleadings if they make clear that an FCPA claim is time-barred.

Applying Gabelli v. SEC, 568 U.S. 442 (2013), the court also determined that an FCPA claim accrues—and hence that Section 2462’s five-year limitations begins to run—when a defendant pays a bribe to obtain or to retain business, not when he realizes financial benefits from unlawful, corrupt payments. In this regard, the Supreme Court in Gabelli reasoned that, because the SEC’s core enforcement function is to uncover corrupt financial activity, a fixed limitations period is required.

Finally, given the court’s conclusion that the SEC’s suite of FCPA enforcement remedies—from civil penalties to disgorgement to an “obey-the-law” injunction—are fundamentally punitive, Judge Garaufis also determined that the statute of limitations under Section 2462 is not subject to any form of equitable tolling. Indeed, the court concluded that tolling agreements are legally ineffective unless the allegedly corrupt activity purportedly subject to tolling is clearly within the scope of the subject matter specified in an agreement. In the Cohen case, a defendant had signed a tolling agreement specifying certain allegedly corrupt activity but not other alleged corruption that was part of the SEC’s subsequent investigation and that was included in its complaint. Judge Garaufis found that the SEC’s tolling agreement failed to preserve the latter corruption contentions. In short, in the absence of a clearly applicable tolling agreement, the SEC is required to bring its FCPA claims within five years of the allegedly corrupt activity.

More broadly, dismissal of the SEC’s FCPA enforcement claims in Cohen represents an extension of the Supreme Court’s reasoning that the SEC’s remedial regime is inherently punitive and that, barring contractual tolling, the SEC is obliged to bring these claims within five years of the date of offense, rather than when the defendant realized his ill-gotten gains or when the SEC discovered the violation through a whistleblower or otherwise.

How the SEC responds to this decision in future cases—including the possibility that it may further particularize as well as broaden the scope of tolling agreements to cover a more extensive range of misconduct—will be a development to closely monitor.

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