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Are SEC Tolling Agreements Actually Enforceable?

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A guest post from Russell Ryan (King & Spalding and former Assistant Director of the SEC’s Division of Enforcement).

Most readers of FCPA Professor are well aware that tolling agreements are commonplace in Foreign Corrupt Practices Act investigations.  Investigations in this space are notoriously lengthy and protracted, in part because misconduct can remain hidden for years and a good portion of the relevant evidence and witnesses is typically located overseas.

For example, last week’s SEC settlement with a global biopharmaceutical company addressed conduct from as far back as ten years ago, with virtually all of the relevant transactions and events being more than five years old.  And last month’s settlement with another global pharmaceutical company addressed conduct dating back between four and eight years ago.  Although the SEC settlement orders in these cases don’t say so, the companies presumably signed tolling agreements at some point, and possibly a long series of them over a period of years.

Last week on LinkedIn, I finally put pen to paper on a question surrounding tolling agreements that has nagged me for the past decade or so:  Are these SEC tolling agreements actually enforceable?

In general, the SEC and DOJ have five years from the date of misconduct to file enforcement action.  But there are separate statutes for civil and criminal cases, and they are worded somewhat differently. 

The criminal statute, codified at 18 U.S.C. § 3282, reads like an ordinary statute of limitations:

“Except as otherwise expressly provided by law, no person shall be prosecuted, tried, or punished for any offense, not capital, unless the indictment is found or the information is instituted within five years next after such offense shall have been committed.”

Contrast that language with the civil statute applicable to the SEC (and many other civil enforcement agencies), which is codified at 28 U.S.C. § 2462:

“Except as otherwise provided by Act of Congress, an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced 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.”

Mostly because of the difference in language between these two statutes, my curiosity about the enforceability of tolling agreements focuses primarily on the civil statute rather the criminal statute. 

The question first hit me many years ago while helping a client respond to a wide-ranging FCPA investigation focused on a number of companies in the same industry.  Several months into the investigation, the SEC staff member requested that my client sign an agreement that would toll the statute of limitations not just prospectively but beginning back to the date on which the SEC had sent its first informal communication to the client.

I’d never been asked to agree to a retroactive tolling period before (nor have I since) and, if memory serves, we more or less politely ignored the request and it was never brought up again by the SEC staff.  But it got me thinking about what such an agreement would purport to do, and whether a future SEC staffer might ask for an agreement that retroactively tolled the statute of limitations starting ten years earlier — or even from the beginning of time — or simply ask a future client to peremptorily waive all protection from the statute of limitations entirely.

After all, the SEC has tremendous leverage when asking companies to enter into tolling agreements.  Companies know if they don’t agree they are likely to be given unreasonably short periods of time to respond to subpoenas and other investigative demands, they are likely to have limited time at the end of the investigation to engage in defense advocacy or negotiate an acceptable settlement, and they are likely to be viewed as non-cooperative in general.  It’s no exaggeration that some companies would likely agree to sign almost anything with respect to timeliness in order to avoid these consequences.

But the routine use of retroactive tolling agreements would, it struck me, allow an executive branch administrative agency to use private contracts to essentially decodify the statute of limitations, effectively giving the agency power to nullify the statute entirely if it were so inclined.  Could that possibly be legal?

Eventually I realized that even prospective tolling agreements purport to override the statute.  That may be fine with ordinary statutes of limitations, but 28 U.S.C. § 2462, as alluded to above, is no ordinary statute of limitations. 

Instead, as I explain in my article, section 2462 arguably reads more like a statute that strips power and jurisdiction from federal tribunals whenever they are asked to adjudicate a dispute that involves conduct or transactions more than five years old.  And if it is such a jurisdiction-stripping statute, it’s hard to see how the SEC can create or reinstate the tribunal’s jurisdiction through a mere contract with a private party.

“In its most natural reading, section 2462 literally forbids federal courts to ‘entertain’ a category of cases unless a specific condition exists. Congress of course has constitutional power to do this, and has done it in many other statutes. In section 2462, the relevant category of cases is those where the plaintiff seeks a fine, penalty, or forfeiture, and the required condition that must be met is that the underlying claim first accrued no more than five years earlier.

It’s also significant that Congress specifically provided for two exceptions to this categorical prohibition against “entertaining” such cases – one explicit and one derived by inverse implication. Thus, the initial clause of the statute allows a separate “Act of Congress” to grant an exception to the categorical ban that would otherwise apply. And the last clause effectively grants an exception when the relevant “offender or property” is not “found within the United States in order that proper service may be made thereon.” 

Note that Congress did not insert a third exception for cases in which parties to the proceeding have previously agreed that the tribunal can simply ignore the statute.  Yet that’s in effect what SEC tolling agreements purport to do.

In the context of section 2462, tolling agreements serve essentially as contractual permission slips, signed by the SEC and a private party, that purport to empower courts to do something that Congress has plainly said they cannot do – namely, to “entertain” a case that seeks a fine, penalty, or forfeiture based on a claim that first accrued more than five years earlier. Where the SEC and private litigants get this power to contractually empower judicial defiance of a statute – and why federal courts routinely go along, often without even asking to see the tolling agreement – has long been a mystery to me.”

But as I also concede in my article, it’s really not that simple.  I invite everyone to read the article and decide for themselves whether tolling agreements can lawfully empower courts to defy 28 U.S.C. § 2462 (or similarly empower the SEC itself to defy the statute in its in-house administrative cases).

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