The Clock Is Ticking

Editor's note: When the Securities and Exchange Commission (SEC) and other government regulatory agencies pursue civil enforcement actions against those accused of financial fraud, they often attempt to recover monetary penalties and fines for periods of time even outside the limitations period. This effort is being met with resistance by the courts, which are not necessarily buying the argument that statutes of limitations should be tolled by the discovery rule when the injured party is the government, or that it does not apply if the wrongdoers are not present in the United States and cannot be timely served. The authors, who note that the Supreme Court of the United States, in Gabelli v. SEC, 133 S.Ct. 1216 (2013), and the District Court for the Southern District of New York, in SEC v. Straub (Straub II), No. 11 Civ. 9645 (RJS), 2016 WL 5793398 (S.D.N.Y. Sep. 30, 2016), dealt with these issues, continue their discussion herein.

In Gabelli, the U.S. Supreme Court explained that the discovery rule exists, in part, to “preserve the claims of parties who have no reason to suspect fraud;” however, the government is not one of those parties. The Supreme Court noted that “[t]he SEC's very purpose, for example, is to root out fraud, and it has many legal tools at hand to aid in that pursuit.” Gabelli, 133 S.Ct. at 1222.Another reason cited by the Supreme Court is the type of relief sought by the government. The Court explained that the discovery rule “helps to ensure that the injured receive recompense” and, in enforcement actions, the government is not seeking recompense but, rather, intends to punish the defendants by way of civil penalties, forfeitures, and fines. Id. at 1223. Third, the Court noted that allowing the government to use the discovery rule would result in “speculation about what the Government knew, when it knew it, and when it should have known it.” Id. This query would be significantly harder than determining when an individual knew or reasonably should have known about an alleged fraud, especially because the government would likely assert various privileges that would make it impossible to make this determination. Finally, the Court declined to apply the discovery rule of 28 U.S.C. § 2462 partly because it had “no mandate from Congress” that such a toll was proper under § 2462, and in such cases the historical approach has been to assume no such toll exists. Id at 1224. (Section 2462 provides that the government has five years to bring a civil enforcement action for violations that otherwise have no specific time limit.)

The Straub II Decision: No Outside-the-Country Toll Under § 2462

In Straub, the SEC brought claims under the Foreign Corrupt Practices Act (FCPA) against three Hungarian business executives who allegedly bribed Macedonian government officials in exchange for favorable business deals. The defendants moved to dismiss the action as untimely under § 2462, since more than five years had transpired since the alleged bribes had taken place. But the district court denied their motion, holding that the five-year limitation period under Section 2462 is only applicable if the defendants were physically present at some point during that five-year period. SEC v. Straub (Straub I), 921 F. Supp. 2d 244, 259-261. This decision rested on a plain reading of § 2462, which provides that the government must commence an enforcement action “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.” Because no such allegation existed, the district court held that the five-year limitations period under § 2462 never ran and that the SEC's claims could advance to the discovery stage of the litigation. Id. at 261.

Years later, two of the defendants moved for summary judgment after discovery revealed that they had visited the United States in the five years following the alleged bribes. The defendants argued that, based on the district court's ruling in Straub I, these visits triggered the five-year limitations period and, hence, the SEC's claims against them were time-barred. The SEC opposed the motion because it argued that, while these visits may have triggered the limitations period under § 2462, the defendants' subsequent departure from the United States tolled the limitations period. The SEC pointed to the clause “within the same period” in § 2462 as indicating that the defendant must be physically present in the United States for the entire five-year period for the statute to fully run. And it argued that public policy favored this interpretation, otherwise “an offender could cause the entire five-year statutory period to run just by setting foot in the United States for a fleeting moment.”

The district court rejected the SEC's position, and held that a plain reading of the statute conveyed that “within the same period” means at any time during the five-year period (even if the defendant's presence was “fleeting”), not for the entire five-year period as the SEC contended. Straub II, 2016 WL 5793398 at *15-19. The court noted that none of the language typically associated with tolling provisions is present in § 2462, indicating that Congress did not intend for this limitations period to be subject to tolling. The court also noted that the legislative history supports this interpretation. The court then held that the SEC's policy arguments were “overstated” since the SEC can satisfy its burden under § 2462 by filing a complaint against the defendant within the five-year period and making a good-faith effort to serve the defendant through international service procedures.

Do Any Tolls Apply to § 2462?

Even though Gabelli and Straub II provide much-needed clarity concerning the purpose and application of the limitations period under § 2462, there is still some doubt as to whether any tolls apply to § 2462. The Supreme Court in Gabelli suggested that equitable tolling doctrines that are commonplace in private civil litigation may be unavailable to the government in civil enforcement actions governed by § 2462, and that courts should be wary of allowing tolls to statutes of limitation where there is no Congressional mandate to this effect. Nevertheless, since Gabelli, federal courts have found that the government may toll § 2462's limitations period under certain equitable tolling doctrines.

For example, the court in SEC v. Wyly, 950 F. Supp. 2d 547 (S.D.N.Y. 2013), found it possible post-Gabelli for the SEC to toll § 2462's limitations period under the fraudulent concealment doctrine. Similarly, the courts in SEC v. Amerindo Investment Advisors, Inc., No. 05 Civ. 5231 RJS, 2014 WL 405339 (S.D.N.Y. Feb. 3, 2014), and SEC v. Strebinger, 114 F. Supp. 3d 1321 (N.D. Ga. 2015), held that the SEC may still rely on the continuing-violations doctrine to toll civil enforcement actions under § 2462. Even so, the recent decision in Straub II may discourage courts from applying tolling doctrines to § 2462, since that decision provides that § 2462's plain text and legislative history support the conclusion that Congress did not specifically intend for its limitation period to be subject to tolls.

Even if no tolls apply, outdated language in § 2462 may still allow government agencies to commence enforcement actions outside the five-year limitations period. As the district court held in Straub I, § 2462 expressly provides that the defendant must be “found within the United States” at some point within the applicable five-year period for this statute to even apply. In Straub II, the district court traced this language to predecessor statutes from the 18th and 19th centuries, during times where this precondition made sense because the government was unable to serve a defendant that resided abroad. But today, there are established procedures to serve defendants residing abroad, and the government regularly works with foreign governments and regulators to ensure that defendants are properly served under those procedures.

For this reason, the court noted in Straub II that § 2462 may be outdated. It remains to be seen whether Congress will reexamine § 2462 to prevent government agencies from using this outdated language to essentially toll their commencement of civil enforcement actions.

Conclusion

The decisions in Gabelli and Straub II reinforce the longstanding principle that a party should not be allowed to threaten another party with litigation forever, or even for an indefinite period of time. This limiting principle is even more important in the context of an individual facing a lengthy investigation and potential lawsuit by the government. The passage of time typically stales litigation, as memories of witnesses fade and evidence deteriorates, making it unreasonably difficult for defendants to answer the claims against them and for courts to make factual determinations. Also, it is generally unfair to prevent those who are under the government microscope from knowing that there will be a definite endpoint to their scrutiny. They are entitled to a measure of repose.

For these reasons, it makes sense to limit tolling to express statutory exceptions or to exceptional circumstances where tolling is necessary to prevent an inequitable result. As the Supreme Court noted in Gabelli, government agencies already enjoy so many advantages with respect to gathering information and building their cases against defendants, they should not also receive the benefit of extended statutes of limitations.

*****

Jonathan B. New, a member of Business Crime Bulletin's Board of Editors, is a former federal prosecutor and a partner in the New York office of BakerHostetler. Marco Molina is an associate in the firm.

Editor's note: When the Securities and Exchange Commission (SEC) and other government regulatory agencies pursue civil enforcement actions against those accused of financial fraud, they often attempt to recover monetary penalties and fines for periods of time even outside the limitations period. This effort is being met with resistance by the courts, which are not necessarily buying the argument that statutes of limitations should be tolled by the discovery rule when the injured party is the government, or that it does not apply if the wrongdoers are not present in the United States and cannot be timely served. The authors, who note that the Supreme Court of the United States, in Gabelli v. SEC, 133 S.Ct. 1216 (2013), and the District Court for the Southern District of New York, in SEC v. Straub (Straub II), No. 11 Civ. 9645 (RJS), 2016 WL 5793398 (S.D.N.Y. Sep. 30, 2016), dealt with these issues, continue their discussion herein.

In Gabelli, the U.S. Supreme Court explained that the discovery rule exists, in part, to “preserve the claims of parties who have no reason to suspect fraud;” however, the government is not one of those parties. The Supreme Court noted that “[t]he SEC's very purpose, for example, is to root out fraud, and it has many legal tools at hand to aid in that pursuit.” Gabelli, 133 S.Ct. at 1222.Another reason cited by the Supreme Court is the type of relief sought by the government. The Court explained that the discovery rule “helps to ensure that the injured receive recompense” and, in enforcement actions, the government is not seeking recompense but, rather, intends to punish the defendants by way of civil penalties, forfeitures, and fines. Id. at 1223. Third, the Court noted that allowing the government to use the discovery rule would result in “speculation about what the Government knew, when it knew it, and when it should have known it.” Id. This query would be significantly harder than determining when an individual knew or reasonably should have known about an alleged fraud, especially because the government would likely assert various privileges that would make it impossible to make this determination. Finally, the Court declined to apply the discovery rule of 28 U.S.C. § 2462 partly because it had “no mandate from Congress” that such a toll was proper under § 2462, and in such cases the historical approach has been to assume no such toll exists. Id at 1224. (Section 2462 provides that the government has five years to bring a civil enforcement action for violations that otherwise have no specific time limit.)

The Straub II Decision: No Outside-the-Country Toll Under § 2462

In Straub, the SEC brought claims under the Foreign Corrupt Practices Act (FCPA) against three Hungarian business executives who allegedly bribed Macedonian government officials in exchange for favorable business deals. The defendants moved to dismiss the action as untimely under § 2462, since more than five years had transpired since the alleged bribes had taken place. But the district court denied their motion, holding that the five-year limitation period under Section 2462 is only applicable if the defendants were physically present at some point during that five-year period. SEC v. Straub ( Straub I ), 921 F. Supp. 2d 244, 259-261. This decision rested on a plain reading of § 2462, which provides that the government must commence an enforcement action “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.” Because no such allegation existed, the district court held that the five-year limitations period under § 2462 never ran and that the SEC's claims could advance to the discovery stage of the litigation. Id. at 261.

Years later, two of the defendants moved for summary judgment after discovery revealed that they had visited the United States in the five years following the alleged bribes. The defendants argued that, based on the district court's ruling in Straub I, these visits triggered the five-year limitations period and, hence, the SEC's claims against them were time-barred. The SEC opposed the motion because it argued that, while these visits may have triggered the limitations period under § 2462, the defendants' subsequent departure from the United States tolled the limitations period. The SEC pointed to the clause “within the same period” in § 2462 as indicating that the defendant must be physically present in the United States for the entire five-year period for the statute to fully run. And it argued that public policy favored this interpretation, otherwise “an offender could cause the entire five-year statutory period to run just by setting foot in the United States for a fleeting moment.”

The district court rejected the SEC's position, and held that a plain reading of the statute conveyed that “within the same period” means at any time during the five-year period (even if the defendant's presence was “fleeting”), not for the entire five-year period as the SEC contended. Straub II, 2016 WL 5793398 at *15-19. The court noted that none of the language typically associated with tolling provisions is present in § 2462, indicating that Congress did not intend for this limitations period to be subject to tolling. The court also noted that the legislative history supports this interpretation. The court then held that the SEC's policy arguments were “overstated” since the SEC can satisfy its burden under § 2462 by filing a complaint against the defendant within the five-year period and making a good-faith effort to serve the defendant through international service procedures.

Do Any Tolls Apply to § 2462?

Even though Gabelli and Straub II provide much-needed clarity concerning the purpose and application of the limitations period under § 2462, there is still some doubt as to whether any tolls apply to § 2462. The Supreme Court in Gabelli suggested that equitable tolling doctrines that are commonplace in private civil litigation may be unavailable to the government in civil enforcement actions governed by § 2462, and that courts should be wary of allowing tolls to statutes of limitation where there is no Congressional mandate to this effect. Nevertheless, since Gabelli, federal courts have found that the government may toll § 2462's limitations period under certain equitable tolling doctrines.

For example, the court in SEC v. Wyly , 950 F. Supp. 2d 547 (S.D.N.Y. 2013), found it possible post- Gabelli for the SEC to toll § 2462's limitations period under the fraudulent concealment doctrine. Similarly, the courts in SEC v. Amerindo Investment Advisors, Inc., No. 05 Civ. 5231 RJS, 2014 WL 405339 (S.D.N.Y. Feb. 3, 2014), and SEC v. Strebinger , 114 F. Supp. 3d 1321 (N.D. Ga. 2015), held that the SEC may still rely on the continuing-violations doctrine to toll civil enforcement actions under § 2462. Even so, the recent decision in Straub II may discourage courts from applying tolling doctrines to § 2462, since that decision provides that § 2462's plain text and legislative history support the conclusion that Congress did not specifically intend for its limitation period to be subject to tolls.

Even if no tolls apply, outdated language in § 2462 may still allow government agencies to commence enforcement actions outside the five-year limitations period. As the district court held in Straub I, § 2462 expressly provides that the defendant must be “found within the United States” at some point within the applicable five-year period for this statute to even apply. In Straub II, the district court traced this language to predecessor statutes from the 18th and 19th centuries, during times where this precondition made sense because the government was unable to serve a defendant that resided abroad. But today, there are established procedures to serve defendants residing abroad, and the government regularly works with foreign governments and regulators to ensure that defendants are properly served under those procedures.

For this reason, the court noted in Straub II that § 2462 may be outdated. It remains to be seen whether Congress will reexamine § 2462 to prevent government agencies from using this outdated language to essentially toll their commencement of civil enforcement actions.

Conclusion

The decisions in Gabelli and Straub II reinforce the longstanding principle that a party should not be allowed to threaten another party with litigation forever, or even for an indefinite period of time. This limiting principle is even more important in the context of an individual facing a lengthy investigation and potential lawsuit by the government. The passage of time typically stales litigation, as memories of witnesses fade and evidence deteriorates, making it unreasonably difficult for defendants to answer the claims against them and for courts to make factual determinations. Also, it is generally unfair to prevent those who are under the government microscope from knowing that there will be a definite endpoint to their scrutiny. They are entitled to a measure of repose.

For these reasons, it makes sense to limit tolling to express statutory exceptions or to exceptional circumstances where tolling is necessary to prevent an inequitable result. As the Supreme Court noted in Gabelli, government agencies already enjoy so many advantages with respect to gathering information and building their cases against defendants, they should not also receive the benefit of extended statutes of limitations.

*****

Jonathan B. New, a member of Business Crime Bulletin's Board of Editors, is a former federal prosecutor and a partner in the New York office of BakerHostetler. Marco Molina is an associate in the firm.