SEC enforcement actions seeking only “obey the law” injunctive relief and similar prospective business conduct bars that serve no retributive or remedial purpose are penal in nature and subject to the five-year statute of limitation of 28 U.S.C. § 2462.
SEC vs. Gentile, No. 16-1619 (D. N.J., 12/13/17).
The SEC civil action alleges violations of Sections 5 and 17 of the Securities Act and Section 10(b) of the Securities Exchange Act, arising out of a series of alleged penny stock manipulation schemes that the Commission conceded had ended in June 2008. Defendant moved to dismiss on the grounds that the 2016 action, for “obey the law” injunctive relief and a penny stock bar, was, like a previously-dismissed companion SEC criminal action, untimely.
The Meaning of “Penal”
According to the Court, an action may be dismissed on limitations grounds if the complaint, itself, shows that the claim has not been brought within the statute of limitations. Under Section 2462, an action seeking a remedy that is penal in nature must be brought within five years. The Court, finding that the relief sought is penal, grants the motion. Under the U.S. Supreme Court’s 2017 decision in Kokesh v. SEC, 137 S.Ct. 1635 (2017) (summarized in SOLA 2017-22), a remedy is penal when it goes beyond compensation for the injury involved and serves “no retributive or remedial purpose” other than to punish. The Second Circuit has observed that injunctive relief is often much more than “mildly prophylactic,” and the collateral consequences of it can be very grave.
“Obey the Law” - If the SEC Gets to You in Time
Turning to the relief sought – an “obey the law” injunction and a penny stock bar – the Court concludes that, even though defendant would not be required to do more than obey the law as any citizen should, because the requested injunction stigmatizes defendant in the eyes of the public, with no retributive effect, restoration of the status quo, or restitution to any identified victim, its only purpose is penal. The only person impacted would be defendant, and “the only purpose for such an order would be to penalize him for his alleged involvement in the  schemes.”
A Penny Stock Bar Is Barred
The same analysis applies to the requested penny stock bar. Contrary to the Commission’s argument that defendant has failed to take responsibility for the alleged schemes, indeed vehemently proclaims his innocence, and maintains an active presence in the securities industry from which he is likely to commit similar violations, the Court concludes that the penny stock bar would restrict defendant’s business structure and methodology, in perpetuity, “simply because he was alleged to have violated securities laws.”
(D. Franceski: To SEC enforcement practitioners, this may seem a surprising rebuke of the government’s case, especially at this early stage where the allegations of serious wrongdoing in the complaint might be expected to engender some greater deference than the Court seems to give them. SEC requests for “obey the law” injunctions and similar fraudulent conduct bars, in both negotiated and litigated cases, have been commonplace -- though if this opinion stands, that may no longer be the case where timeliness is an issue.)
(SOLA Ref. No. 2018-03-07)
NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA), from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis.
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