The Securities and Exchange Commission recently took a big hit to its enforcement program after a federal court in the Eastern District of New York dismissed its enforcement case with prejudice at the pleadings stage, including its claim for injunctive relief, on statute of limitations grounds.
In SEC v. Cohen, et. al., decided last month, the Court ruled that the traditional remedies sought by the SEC, including disgorgement, civil penalties and permanent injunctions, were all governed by the recent U.S. Supreme Court’s decision in Kokesh v. SEC and the five-year statute of limitations set forth in 28 U.S.C. § 2642. (The Kokesh decision held that disgorgement under 28 U.S.C. § 2642 constitutes a penalty and is thus subject to a five year statute of limitations, but did not address, and thus left unresolved, the issue of injunctive relief). Accordingly, the Cohen Court determined that the SEC’s claim for an obey-the-law permanent injunction was, in part, penal and thus, consistent with Kokesh, applied the five year statute of limitations under section 2642 to find that it was time-barred, along the disgorgement and civil penalty remedies, effectively killing the SEC’s case in its entirety.
This stunning loss for the SEC follows a similar, recent decision in SEC v. Gentile, in which the Court also dismissed the SEC’s claim for injunctive relief on statute of limitations grounds. The SEC has appealed that decision and it is now pending before the Third Circuit Court of Appeals.
The significance of the Cohen decision cannot be underestimated.
First, it demonstrates the willingness of yet another federal court judge to opine under Kokesh that injunctive relief may, depending upon the particular manner in which it is being applied by the SEC, constitute a penalty for purposes of section 2642’s five-year statute of limitations. Every such decision may embolden other jurists in SEC cases facing similar facts.
Second, the Cohen decision effectively guts the last of the standard SEC remedies in cases filed five years after the alleged illegal conduct. Whereas prior to Cohen and Gentile, the SEC could still pursue a defendant in an enforcement action and ultimately obtain permanent injunctions (and additional negative publicity), such is no longer the case under Cohen and Gentile.
Third, it provides yet another bullet in SEC defense counsel’s arsenal to either persuade the SEC during the investigative stage to drop the case or, in a litigated context, to dismiss it with prejudice in its entirety.
In the meantime, we will wait to see how the Third Circuit rules in the Gentile case, and no doubt assume that the SEC will be carefully examining its investigative pipeline of cases to fish or cut bait on those quickly approaching the five-year mark.
If you have received an SEC Subpoena or are under investigation by the SEC, it is critical that you protect your legal rights by engaging an experienced SEC defense lawyer. David R. Chase was previously a SEC enforcement attorney and knows how the SEC investigates, prosecutes and resolves its cases. The Law Firm of David R. Chase, an SEC law firm located in South Florida, is headed by SEC defense lawyer, David Chase, who represents those under SEC investigations around the country. You may contact SEC defense lawyer Mr. Chase toll-free at: 800-760-0912 for a confidential and no cost initial consultation, or at firstname.lastname@example.org.