A guest post from Kevin Muhlendorf (Wiley Rein and a former SEC Enforcement Division attorney and DOJ Fraud Section prosecutor) and Michelle Bradshaw (Wiley Rein). See here for an FCPA Flash podcast episode with Muhlendorf regarding issues similar to those addressed in this post.
The Supreme Court has now twice rebuked the Securities and Exchange Commission (“SEC” or “Commission”) in unanimous opinions on statutes of limitations. See Gabelli v. Securities and Exchange Commission, 568 U.S. 442 (2013); see also Kokesh v. Securities and Exchange Commission, 137 S. Ct. 1635 (2017).
Its February 2013 Gabelli decision, coupled with its June 2017 Kokesh decision, provide individuals and corporations facing an SEC enforcement action, including FCPA related investigations, with a strong shield. These recent opinions have led to the vexing question: how should individuals and corporations now approach the inevitable request from SEC staff for a tolling agreement.
First, a little background. The Supreme Court has deemed statutes of limitations “vital to the welfare of society.” Gabelli, 568 U.S. at 449 (internal quotation marks and citations omitted). The purpose of a statute of limitations is to “promote justice by preventing surprises through the revival of claims that have been allowed to slumber until evidence has been lost, memories have faded, and witnesses have disappeared.” Id. at 448 (internal quotation marks and citations omitted). SEC enforcement actions involving civil penalties thus have a five-year statute of limitations under 28 U.S.C. § 2462. In Gabelli, the Court held that the statute of limitations clock starts running when the allegedly fraudulent conduct occurs, rejecting the SEC’s expansive position that it begins when the fraud is discovered. Most recently, the Court clarified in Kokesh that disgorgement in the context of securities enforcement is a penalty for purposes of § 2462 and thus is subject to the five-year statute of limitations. Accordingly, the SEC has five years from when the alleged fraud occurs to bring an enforcement action seeking fines and disgorgement.
These two pro-defense holdings are significant in the SEC enforcement arena, and markedly so with alleged FCPA violations, because the underlying behavior often involves very old conduct. Thus, Steve Peikin, the co-director of the SEC’s Enforcement Division, recently gave a speech in which he expressed his belief that Kokesh “will have particular significance” in FCPA cases, especially because SEC FCPA actions are not tolled while the SEC seeks foreign evidence, as they are for the Department of Justice under 18 U.S.C. § 3292. He noted that “[w]hile the ultimate impact of Kokesh on SEC enforcement as a whole – and FCPA enforcement specifically – remains to be seen, we have no choice but to respond by redoubling our efforts to bring cases as quickly as possible.” Of course, that pressure to speed up investigations is relieved if potential SEC defendants sign tolling agreements.
At bottom, acceding to an SEC request for a tolling agreement is often a one-way bargain – the SEC can continue its investigation at a languid pace, and the individual or entity is not given any real benefit, except the continued specter of living under a lengthy investigation, the timing of which is solely in the hands of the government. Often lost on the enforcers is the personal or operational toll that living under the uncertainty of a lengthy government investigation causes – a toll that statutes of limitations were partly designed to alleviate. While the assumed benefit to a tolling agreement is that the SEC will not preemptively charge in order to avoid forfeiting its ability to later do so, that suggests that absent agreeing to a tolling agreement, the SEC would prematurely charge a half-baked case. That seems a bluff worthy of calling.
Corporations, more so than individuals, traditionally shy away from truly challenging SEC enforcement actions, especially FCPA actions. In the forty years of FCPA enforcement, no corporation has ever fully litigated the FCPA and taken the Commission to trial. Although every inquiry is fact dependent, there is an established pattern of corporations proving their cooperation to reach a settlement, and that often involves one or more tolling agreements. However, Kokesh and Gabelli should at least alter the calculus that goes into making that decision. Those with a valid statute of limitations defense to some or all of the potential claims against them should zealously guard that defense and press the SEC as to how it will prevail on violations occurring outside the five-year window.
Rejecting SEC requests for tolling agreements is both non-traditional and not without peril. Boards will undoubtedly fear that the SEC will construe resisting a tolling agreement as a lack of cooperation. Yet, leaving open the possibility of asserting a valid defense should not mean that an entity (or individual) is uncooperative, any more than asserting the attorney-client privilege does. Neither the cooperation section of the SEC Enforcement Manual nor the Seaboard Report suggest failure to sign a tolling agreement is indicative of a lack of cooperation, nor should they. See SEC Enforcement Manual § 6 (2017); see also Report of Investigation, Securities Exchange Act Release No. 44969, 76 S.E.C. Docket 220 (Oct. 23, 2001). Further, it is an option to sign a cooperation agreement requiring tolling, and there are certainly perceived benefits to doing so. But mandating tolling agreements to establish cooperation would undermine the purpose of having statutes of limitations, and acting as if tolling agreements are mandated is no better.
Corporations, like individuals, should now exercise their new-found leverage in considering whether, and for how long, to enter into tolling agreements. Regardless, both entities and individuals must carefully evaluate the language of any tolling agreement and make sure they are not giving up more than they intend. The SEC’s case currently pending against two individuals related to the Och-Ziff FCPA matter starkly illustrates this point. See Securities and Exchange Commission v. Cohen, Civil Action No. 1:17-cv-00430 (E.D.N.Y. Jan. 26, 2017). In addition to arguing that Kokesh eliminates the SEC’s claims, one of the defendants, Cohen, has joined issue with the SEC over the scope of his tolling agreements, and whether they cover any action or proceeding against him or only the one identified in the Formal Order in effect at the time. The motion to dismiss on those issues is briefed and currently awaiting oral argument.
Rejecting a request for a tolling agreement may not only change the landscape as to monetary payments, but as to any SEC equitable action. One recent court case in the wake of Kokesh found that even non-monetary relief, such as “obey the law” injunctions and penny-stock bars can be punitive, and pursuant to 28 U.S.C. § 2462, untimely if not filed within five years. See Securities and Exchange Commission v. Gentile, No. 16-1619, 2017 WL 6371301 (D.NJ. Dec. 13, 2017). In Gentile, the district court dismissed an SEC complaint based on Kokesh, even where the SEC sought “equitable remedies” not including disgorgement. Notably, the Enforcement Manual instructs staff otherwise, stating “certain claims are not subject to the five-year statute of limitations under Section 2462, including claims for injunctive relief.” SEC Enforcement Manual § 3.1.2 (2017) (emphasis added). Finally, in line with the reasoning in Gentile, the D.C. Circuit recently remanded a case, instructing the Commission to determine whether Kokesh is relevant to its analysis in affirming a FINRA order barring an individual’s registration or association with FINRA affiliated members. See Saad v. Securities and Exchange Commission, 873 F.3d 297 (D.C. Cir. 2017). While the issue in Saad was not one related to a statute of limitations, it further illustrates that type of non-monetary relief that could be considered punitive and therefore subject to Kokesh’s limitations.
Although it is still early, Kokesh will clearly have a significant impact on SEC enforcement actions, especially if more courts follow the reasoning of Saad and Gentile. In theory, Kokesh should impact both individuals and corporations. Whether that proves true or not depends largely on how emboldened those under SEC investigation really are by these rulings. If putative defendants continue to fear that refusing a tolling agreement will jeopardize settlement negotiations and result in an unnecessary SEC enforcement action, then Kokesh and Gabelli will not ultimately change the landscape in the vast majority of SEC enforcement actions. However, given the benefit of time and additional rulings like Saad and Gentile, the SEC should face increased pressure to justify, in the way of concrete benefits and narrowed scope, requests for tolling agreements.
FCPA Institute - Nashville (May 3-4, 2018)
A unique two-day learning experience ideal for a diverse group of professionals seeking to elevate their FCPA knowledge and practical skills through active active. Learn more, spend less. CLE credit is available.