In The Fifth Circuit, Time Is Not On The SEC's Side

This summer, individual defendants received a dose of good news, at least in the United States Court of Appeals for the Fifth Circuit, when the Fifth Circuit ruled that the injunctions against future securities law violations and officer and director bars that the U.S. Securities and Exchange Commission (SEC) sought constituted "penalties" subject to the five-year statute of limitations under 28 U.S.C. § 2462. In SEC v. Bartek,1 the Fifth Circuit considered Section 2462, which governs SEC actions seeking penalties for the enforcement of securities law violations, and held that the common law "discovery rule" did not apply to those actions, foreclosing the SEC's ability to take a potentially unlimited amount of time to discover and seek penalties for violations of securities laws. The Supreme Court will now decide whether the rule of Bartek will apply nationally the Court recently agreed to review a Second Circuit case, SEC v. Gabelli, in which the Second Circuit reached the opposite conclusion and applied the "discovery rule" to an SEC action arising from the market-timing scandal of the early 2000s.2 Thus, by June 2013, the Supreme Court will decide whether the Second Circuit or the Fifth Circuit's view will prevail.

Bartek comes on the heels of the SEC's well publicized efforts to enhance its pursuit of securities law violations, with a significant focus on individual accountability particularly as a result of alleged misconduct associated with the 2008 financial crisis. The SEC's arsenal of potential remedies against individuals includes disgorgement, monetary fines, bars against serving as officers and directors of publicly-traded companies, injunctions against future violations of securities laws, and, for individuals who are enjoined, permanently barring or suspending them for a period of time from the securities industry.

As we approach the five-year anniversary of the financial crisis, it will become increasingly difficult for the SEC to allege securities law violations that fall within Section 2462 leaving the SEC to argue that the penalties it seeks should be subject to exceptions or fall outside of Section 2462. In Bartek, the Fifth Circuit rejected two such arguments, distancing itself from the Second Circuit's Gabelli decision applying the "discovery rule" to Section 2462, but following a D.C. Circuit decision3 classifying certain sanctions as "penalties" and subject to Section 2462.

SEC v. Bartek

Bartek arose from an alleged stock option back-dating scheme at Microtune, Inc. that occurred between 2000 and 2003. The SEC alleged that two former Microtune officers had engaged in misconduct specifically, fraud and aiding and...