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Don’t Believe The Hype On SEC Statute Of Limitations

The statute of limitations is a fundamental legal principle setting a fixed period of time to file a lawsuit after a claim arises. Last term in Gabelli v. SEC, the Supreme Court unanimously rejected the SEC’s attempt to expand that time limit.  The Court sensibly reaffirmed that statutes of limitations “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.”

The SEC is now pushing Congress to double its existing five-year time limit (applicable to Foreign Corrupt Practices Act offenses and many others) to ten years.  Senator Jack Reed (D-RI), a high-ranking member of the Senate Banking Committee, reportedly intends to introduce legislation this fall.

But the SEC already has several arrows in its quiver, such as the discovery rule and the fraudulent concealment doctrine, to extend the five-year statute of limitations in many cases.  Moreover, a statute of limitations is largely a meaningless legal principle in most corporate SEC enforcement actions given that cooperation, and not necessarily the law and the facts, dictate the outcome in many corporate enforcement actions and thus motivate most corporations under SEC scrutiny to sign tolling agreements suspending the statute of limitations or to waive statute of limitations defenses altogether.

In short, the SEC faces few meaningful time constraints in bringing corporate enforcement actions.  For instance, the SEC’s most recent Foreign Corrupt Practices Act enforcement action – in May against the French oil giant Total S.A. – was based on conduct that allegedly occurred between 1995 and 1997 and which the SEC began investigating in 2003.

The gray cloud and uncertainty that SEC scrutiny represents, hangs over companies and its shareholders for far too long and can have wide-ranging, negative business implications.  Justice is not promoted by extending this period of uncertainty by doubling the statute of limitations to ten years.

The SEC not surprisingly supports this proposal.  Simply put it would make the SEC’s job easier.  However, ease of enforcement has never been a proper consideration in a legal system based on due process and the rule of law.  Grasping for something that might stick, SEC officials have stated that such an extension of the statute of limitations is warranted “given the complexity” of the cases and the “nature of the frauds” it investigates.

Don’t believe the hype.

The reason the SEC often fails when put to its burden of proof on statute of limitations issues has little to do with the“complexity” of the underlying conduct, but more often simple lack of diligence.  For instance, in dismissing the SEC’s complaint against executive officers of Microtune, Inc. a judge blasted the SEC’s lack of diligence in investigating the alleged misconduct.  The judge was especially critical of the SEC’s acknowledgement that, “often for resource reasons,” the agency “wait[s] until the company does its own investigation before we complete ours.”  Likewise, in dismissing with prejudice the SEC’s monetary claims against executive officers of Noble Corp., another judge ruled that the “SEC has not pled any facts that support the inference that it acted diligently” in bringing the case.

Ask any practitioner with matters before the SEC and, in a candid moment, they will tell you that SEC inquiries often drag on unnecessarily for years, including long stretches of complete inactivity.  They will also tell you that delays due to unreturned phone calls and other purported “resource” issues, including employee turnover, are the norm.  Indeed, the Wall Street Journal recently reported that in the past year “four of the [SEC]’s divisional chiefs have stepped down” along with “four of the 11 regional [SEC] directors.”  Enforcement delays caused by SEC enforcement officials seeking more lucrative jobs in the private sector are a poor excuse for allowing the gray cloud of SEC scrutiny to linger over companies and its shareholders.

As the Supreme Court reaffirmed in Gabelli, statutes of limitations “provide security and stability to human affairs” and it “would be utterly repugnant to the genius of our laws if actions for penalties could be brought at any distance of time.”

Having lost before the Supreme Court, the SEC is trying to convince Congress that bringing stale claims is not so repugnant after all, and that it needs more time to bring its enforcement actions.

Congress should reject this request and reaffirm the SEC’s need to pursue it’s cases with diligence.

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