SEC Injunctive Authority Survives Limitations Challenge—For Now


SEC HQs

A lower court “obey the law” injunction survived in SEC v. Collyard, as the Eighth Circuit denied a challenge based on limitations grounds under the five-year period established by 28 U.S.C. §2462. This provision is applicable to actions "for the enforcement of any civil fine, penalty, or forfeiture." Shortly before the Eighth Circuit panel rendered its decision, the Supreme Court held in Kokesh v. SEC that “[d]isgorgement, as it is applied in SEC enforcement proceedings, operates as a penalty under §2462.” The Eighth Circuit concluded in a narrowly-drawn opinion that the lower court’s injunction was not a penalty because it only required the defendant to comply with the law and was based on evidence of his likelihood to violate that law. The trial court also intended “to protect the public prospectively” from the defendant's harmful conduct rather than to punish him.

The SEC charged Paul D. Crawford, a former registered broker whose license was suspended for selling unregistered securities, with violating the broker-dealer registration provisions of the Exchange Act. According to the SEC complaint, Crawford acted as an unregistered broker between February 2004 and November 2006, and the Commission filed suit in December 2011. The Enforcement Division conceded that the Kokesh decision barred its disgorgement claim, but argued that the injunctive relief should stand because §2462 does not bar equitable remedies.

The Eighth Circuit rejected this blanket assertion, noting that the high court in Kokesh applied the provision to disgorgement proceedings despite the fact that disgorgement authority flows from a court’s “inherent equity power to grant relief ancillary to an injunction.” In reviewing the order, the appellate panel did not approach the larger question of whether injunctions generally can be penalties under §2462. Rather the court concluded that this particular relief was not a penalty due to its prospective and remedial nature. The panel stated that “this injunction—nonpecuniary and requiring only obedience with the law—likely does little to deter people other than Crawford,” and added that “[n]ot every injunction that specifically deters an individual is imposed to punish.”

This case could be an interesting one for Supreme Court review if the high court has the appetite for another securities case. Collyard presents two questions. The first is the proper statute of limitations applicable to SEC claims for injunctive relief in light of Kokesh. The Eighth Circuit appears to assume that the forward-looking nature of the injunction sufficiently insulates it from classification as a punitive measure, citing the Tenth Circuit’s language in its review of the Kokesh case that “[w]e fail to see how an order to obey the law is a penalty.”

Injunctions in securities cases do not operate in a vacuum. As former Chief Justice Warren Burger observed nearly 40 years ago, these injunctions are "a drastic remedy, not a mild prophylactic." The entry of an injunction can preclude the recipient from several securities law benefits under the so-called “bad actor” provisions, and may require public disclosure under various rules for the life of the injunction. In addition, the enjoined party could face a summary contempt proceeding for a purported violation of the covered statute based on conduct that had no connection with the subject matter of the earlier action.

The second question involves the continuing viability of the “obey the law” injunction as entered in Collyard in general. The SEC routinely makes use of these provisions in their enforcement practice, and most circuits do not take issue with them. Some courts, particularly the Eleventh Circuit, have been sharply critical of these remedies. As the court stated in 2012, these provisions are unenforceable because “they lack specificity and deprive defendants of the procedural protections that would ordinarily accompany a future charge of a violation of the securities laws. These injunctions that refer to or track statutory language fail to comply with the requirement in Rule 65(d) of the Federal Rules of Civil Procedure that injunctions must “describe in reasonable detail — and not by referring to the complaint or other document — the act or acts restrained or required."

The Eleventh Circuit revisited both of these questions in a pre-Kokesh2016 decision. The court had it both ways, indicating that injunctions generally are not subject to the penalty limitations period because of their equitable and forward-looking nature, while emphasizing in a footnote its continuing disdain for “obey the law” orders.

The SEC has suffered significant court setbacks in their enforcement program recently, and its current use of injunctive relief may well be subject to future high court review. Injunctions are the agency’s oldest remedies, and remain one of the SEC’s most powerful enforcement tools. The application of the §2462 limitations period to injunction claims, or the invalidation of “obey the law” injunctions could have a tremendous impact on the way the SEC begins and ends its enforcement cases.