Today’s post is from Russ Ryan (King & Spalding).
As readers of this blog well know, SEC settlements in FCPA cases are most often memorialized by settled administrative orders that, among other things, require the respondent to pay monetary sanctions and to cease and desist from committing or causing future violations of the statutes and rules charged. On occasion, however, the SEC instead files a settled FCPA case in federal court, as is its choice. Indeed, when individual FCPA defendants refuse to settle – corporations nearly always settle – the SEC typically sues them in federal court rather than in an administrative proceeding.
When the SEC proceeds in federal court, it invariably demands – in addition to monetary sanctions – that the court issue a time-unlimited “obey-the-law” injunction that forever prohibits the defendant from violating the statutes and rules charged in the complaint. Those who settle invariably agree to these injunctions, and courts generally issue them with little or no independent scrutiny of the evidence (if any) that purports to prove their necessity.
These injunctions are no small matter. In one leading Supreme Court case, Chief Justice Burger famously characterized them as “a drastic remedy, not a mild prophylactic.” Yet the SEC obtains at least a couple hundred of them in any given year, so one can conservatively assume that literally thousands of individuals and businesses are currently subject to one. And don’t forget that due to Rule 65(d) of the Federal Rules of Civil Procedure, the actual number of those enjoined is exponentially higher because federal injunctions bind not only the named defendants but also their “officers, agents, servants, employees, and” – wait for it – “attorneys.”
As I recently explained in my monthly column on LinkedIn, this world of ubiquitous injunctions could change if the SEC and courts take heed of a recent non-FCPA case out of the Third Circuit in which the SEC tried hard to justify an injunction but neither the district court nor the court of appeals was fully sold on it. The agency finally gave up last month and the case, SEC v. Gentile, was finally closed after many years of investigation and litigation.
The litigation included a dismissal of the SEC’s complaint by the district court in 2017, vacatur of that dismissal by the Third Circuit in 2019, a second dismissal by the district court in September 2020 (with leave for the SEC to amend its complaint if it wished), and finally the SEC’s capitulation. The original dismissal was based on the statute of limitations – the alleged misconduct dated back to 2007 and 2008 – but the Third Circuit agreed with the SEC that “properly issued and framed” injunctions are not subject to any statute of limitations.
It soon became clear that this was a Pyrrhic appellate victory for the SEC, because the Third Circuit opinion defined a “properly issued and framed” injunction in terms that could not plausibly be met in that case or, for that matter, most other SEC cases. The court emphasized that the “sole function” of a lawful injunction “is to forestall future violations.” Thus, “injunctions may properly issue only to prevent harm – not to punish the defendant.”
The court quoted the relevant provision of the Securities Exchange Act of 1934 that authorizes SEC injunctions only against someone who “is engaged or is about to engage” in acts or practices constituting a violation. It then noted a decision last year in which it had found nearly identical language in the Federal Trade Commission Act “unambiguous” in prohibiting the FTC from obtaining an injunction without proof that a violation is ongoing or impending. That FTC provision, the court said in the earlier case, “does not permit the FTC to bring a claim based on long-past conduct without some evidence that the defendant ‘is’ committing or ‘is about to’ commit another violation.” That’s a pretty straightforward textualist interpretation that would presumably resonate with a majority of the current Supreme Court.
The Gentile court could have also noted, but didn’t, that parallel provisions elsewhere in the federal securities laws are worded more generously than the injunction provision of the Securities Exchange Act that governs in FCPA cases (and the similarly-worded provision of the Securities Act of 1933). For example, the parallel provision of the Investment Company Act of 1940 explicitly contemplates injunctions against any person who “has engaged or is about to engage” in violative conduct (emphasis added), and the parallel provision of the Investment Advisers Act of 1940 permits injunctions against any person who “has engaged, is engaged, or is about to engage” in violative conduct (emphasis again added). Likewise, the cease-and-desist provisions of all of these statutes (including Section 21C of the Exchange Act, which appears only a few sections away from the above-quoted injunction provision) expressly permit cease-and-desist orders to be based on past violations. Thus, Congress has clearly known for some time how to authorize prophylactic remedies based on past violations rather than on only ongoing or imminent ones, so its failure to expressly authorize Exchange Act injunctions based on past violations should weigh heavily against inferring any intention to do so implicitly.
The Gentile court also expressed skepticism more generally about the validity of the types of obey-the-law injunctions typically granted to the SEC not just in FCPA cases but all others. Although other courts including the Eleventh Circuit have occasionally expressed similar skepticism in years past, federal district courts still routinely grant SEC requests for obey-the-law injunctions, especially in settled cases.
If followed, the Gentile case could become a big problem for the SEC, particularly in FCPA cases. Most FCPA cases are filed many years after the alleged misconduct has ceased and the relevant actors have separated from the company, often with all-new management or ownership having taken over in the interim. As I noted in a prior guest post, the conduct in these cases is often so aged that the SEC relies on tolling agreements to avoid its five-year statutory time limit for filing them. In such circumstances, it’s hard to see how the SEC can plausibly allege, much less prove, that the defendant “is engaged or is about to engage” in a violation.
It should be acknowledged, as this blog has noted before, that FCPA cases do have a tendency to involve repeat offenders, so that could be a factor in the SEC’s favor. But if the Third Circuit’s approach to injunctions is followed by other courts, even a disproportionate frequency of repeat offenders as a categorical matter is not likely to be enough to prove that any particular injunction in a specific FCPA case is “properly issued and framed.”
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