By Dawn Causey, Tom Pinder and Andrew DoersamThe laws surrounding the federal statute of limitations have been well established for years. But recently, the Securities Exchange Commission and the Consumer Financial Protection Bureau have attempted to go back on years of legal jurisprudence and upend those laws, prompting pushback from the courts.
It’s been common practice for the SEC to pursue civil monetary penalties and disgorgement of unlawful gains from those alleged to have violated federal securities laws. In 2013, the Supreme Court held in Gabelli v. SEC that civil monetary penalties are subject to a five-year statute of limitations. The SEC argued that the five-year period is triggered on the date that the SEC discovered the wrongdoing, but the court ruled that the five-year period is triggered when the defendant’s alleged wrongful conduct occurred, shooting down the SEC’s notion that an indefinite time period can elapse before the five-year period is triggered.
Instead of accepting the court’s decision and adjusting its conduct accordingly, the SEC revisited the issue this year in Kokesh v. SEC, claiming this time that the statute of limitations does not apply to actions for disgorgement. In this case, the Supreme Court once again ruled that the SEC’s disgorgement is limited to the five-year statute of limitations under 28 U.S.C. § 2462.
In a unanimous decision written by Justice Sonia Sotomayor, the court asserted that statute of limitations is “vital to the welfare of a society” and that even “wrongdoers are entitled to assume that their sins may be forgotten.” By holding that the five-year period applies to claims for disgorgement, the court lifted the weight off defendants’ shoulders by providing them certainty as to when the SEC can push to obtain civil penalties. Additionally, the Kokesh case was a reminder to the SEC that it cannot simply ignore Gabelli by seeking disgorgement in circumstances where the SEC would have pushed for a monetary penalty.
Sotomoyor also clarified in a footnote that the high court was not ruling on whether courts possess the authority to order disgorgement in SEC enforcement proceedings—thus casting doubt on whether court-ordered disgorgements in SEC enforcement actions should even be permitted.
The CFPB has been equally as obstinate in its push to upend the established statute of limitations, arguing unsuccessfully in the PHH case that no statute of limitations applies to claims it brings in administrative proceedings, except under Section 2462.
Since then, the CFPB has not given up its quest for a statute of limitations-free utopia for administrative proceedings. The agency sent a letter to the D.C. Circuit Court citing the Kokesh decision and proposing that Section 2462 provides the limitations period for CFPB disgorgement awards. But by the CFPB’s logic, the Real Estate Settlement Procedures Act’s statute of limitations only applies to actions brought in court, which means that its administrative proceeding is not an action.
In effect, the CFPB is embracing a statute of limitations for disgorgement, but not for administrative actions. PHH said it best in its reply to the CFPB’s letter that the agency’s “freelancing merely underscores that [CFPB Director Richard Cordray] answers to no one but himself.”
At the end of the day, the SEC and CFPB are attempting to upset settled law on the statute of limitations despite repeated reprimands from the courts. Hopefully the Kokesh decision will be the last time they decide to re-tread the same ground.
Dawn Causey is general counsel at ABA, where Tom Pinder is SVP for litigation and Andrew Doersam is a paralegal.