Risk Management and Crisis Response Blog

U.S. Court Upholds Five-Year Limitation Period for SEC Disgorgement Remedies

Jun 30, 2016 3 MIN READ

The United States Court of Appeals for the Eleventh Circuit held in its late May judgment in SEC v. Graham that the five-year limitation period set out in 28 USC §2462 applies to the US Securities and Exchange Commission (“SEC”) claims for disgorgement or declaratory relief. In the case, Graham and several co-defendants were accused of violating federal securities law by selling condominiums that were functioning, in reality, as unregistered securities. Charges were brought more than five years after the alleged wrongdoing. The United States Court of Appeals for the Eleventh Circuit, agreeing with the defendants, held that the five-year limitation period applied to disgorgement as an equitable remedy.

Disgorgement, which obliges alleged wrongdoers to surrender their ill-gotten gains, is relied upon by the SEC as an available remedy in a broad array of circumstances including  proceedings under the US Foreign Corrupt Practices Act (“FCPA”). For example, in February telecommunications company VimpelCom Ltd. agreed to the SEC’s third-largest ever FCPA disgorgement, with $167.5 in disgorged funds being surpassed only by $177 million paid by KBR, Inc. in 2009 and $350 million paid by Siemens AG in 2008. For further details regarding the VimpelCom settlement, refer to our Update. Funds collected through disgorgement are often set aside to be distributed as restitution to those impacted by the conduct.

FCPA investigations may take several years and therefore, where investigations are prolonged, disgorgement may not be an available remedy to the SEC following the Graham decision. However, it remains to be seen whether the Eleventh Circuit decision will impact the pace of FCPA investigations. Interestingly, the US Department of Justice has recently taken action to improve FCPA enforcement efforts, including an increase in the Fraud Section’s FCPA prosecution unit by more than 50%, the establishment of three new FBI squads dedicated to FCPA enforcement, the strengthening of relationships with foreign enforcement authorities and the establishment of a pilot program  intended to standardize the benefits of self-reporting potential violations of the FCPA, cooperating with authorities and, where necessary, implementing appropriate remediation measures. For further details regarding these enforcement efforts, refer to our earlier Post.

Application of the limitation period may also affect the circumstances in which the SEC seeks to enter into tolling agreements with potential defendants. Tolling agreements, in which the party under investigation agrees not to assert a statute of limitations defence for a specified time period, are generally entered into in the course of settlement negotiations to allow time for the sharing of information in furtherance of reaching a settlement. The SEC Enforcement Manual explicitly notes in its discussion on such agreements that certain claims including disgorgement are not subject to the limitation period. The application of a limitation period to the availability of disgorgement as a remedy may provide potential defendants with less incentive to enter into tolling agreements.

FCPA developments including the potential remedies that the SEC may seek are relevant to Canadian companies listed on US securities exchanges. These reporting issuers, even though Canadian, are subject to SEC jurisdiction and therefore could face regulatory enforcement under US securities and anti-corruption legislation. Canadian companies are also subject to Canadian anti-corruption legislation under the Corruption of Foreign Public Officials Act. As a result, Canadian companies listed on US securities exchanges face the possibility of multi-jurisdictional investigations and enforcement efforts (for example, both the SEC and the Canadian enforcement authorities investigated certain activities of  Nordion, with the company ultimately entering into a settlement agreement with the SEC). Accordingly, it is important that Canadian companies appropriately assess potential corruption risks and develop a robust and effective compliance program specifically designed to address the company’s unique circumstances.