detail an analysis aimed at a resolution of the remaining questions that understandably continue to engender criticism of the Rind decision.
SEC civil enforcement actions that seek either or both injunctions and disgorgement are brought pursuant to the Congressional authority granted by section 20(b) of the Securities Act and section 21(d) of the Exchange Act. Section 20(b) provides that whenever "any person is engaged or about to engage in any acts or practices which constitute or will constitute a violation of [the securities laws], the Commission may . . . bring an action . . . to enjoin such acts or practices." 15 U.S.C. § 77t(b) (1988). Section 21(d) contains similarly-worded authority. 15 U.S.C. § 78u(d) (Supp. 1993). The statutes do not state whether a limitation period applies. While Congress can affirmatively state that no limitation period applies to a given federal claim, Anderson v. United States Atomic Energy Comm'n, 313 F.2d 313, 316 (7th Cir. 1963) ("Congress may create a right without a time limitation in which it must be exercised." (citation omitted)); see, e.g., 26 U.S.C. § 6501(c) (providing that where a taxpayer files a false income tax return or no income tax return, or wilfully attempts to evade certain taxes, the United States may assess the tax or begin a "proceeding in court for the collection of such tax . . . at any time " (emphasis added)); see also Chase Secs. Corp. v. Donaldson, 325 U.S. 304, 314, 89 L. Ed. 1628, 65 S. Ct. 1137 (1945) (stating that because the "shelter" of limitation periods is not a fundamental right, they are "good only by legislative grace and . . . subject to a relatively large degree of legislative control"), where Congress has been silent concerning a limitation period, courts usually create one by "borrowing" a period from another statute, Reed v. United Transp. Union, 488 U.S. 319, 323-24, 102 L. Ed. 2d 665, 109 S. Ct. 621 (1989).
1. "Catch-All" Statute of Limitations, 28 U.S.C. § 2462
There would be no need to consider "borrowing" a limitation period, whether from a different statute, or from a different section of the statutes at issue, if I determine that SEC actions seeking disgorgement are encompassed by the federal "catch-all" statute that provides a five-year limitation period, wherever Congress has been silent, for actions that seek to "enforce . . . any civil fine, penalty, or forfeiture." 28 U.S.C. § 2462 (1988). Although it appears that no court has yet addressed the issue, at least not in a reported decision,
numerous legal commentators have recently asserted the statute's applicability in the wake of the Rind decision. Jonathan Eisenberg & Benjamin Haskin, Securities Enforcement: Statute of Limitations Made Applicable to SEC Actions, 8 No. 7 Insights 4 (P-H July 1994) ("Strong arguments also can be made that disgorgement is a 'civil fine, penalty, or forfeiture.'"); Richard L. Stone & Aron Jaroslawicz, Statute of Limitations on Actions Brought by SEC, N.Y.L.J., Oct. 24, 1994, at 1 (concluding that section 2462 "applies to SEC initiated federal suits"); Edward Brodsky, Statute of Limitations and Civil Enforcement, N.Y.L.J., Sept. 21, 1993, at 3, 6 ("Congress has expressly provided an all-encompassing statute of limitations that should control."). This determination would appear to turn on whether disgorgement constitutes a "fine, penalty, or forfeiture."
As indicated by the Supreme Court's interpretation of the statute below, however, the label placed on a monetary liability--whether, for example, "fine," "penalty," "sanction," or "disgorgement"--is not dispositive; instead, the determining consideration concerns whether the amount so labelled serves a remedial or punitive function. Cf. United States v. Halper, 490 U.S. 435, 448, 104 L. Ed. 2d 487, 109 S. Ct. 1892 (1989) (stating that determining whether a civil fine constitutes punishment in the context of the Double Jeopardy Clause "requires a particularized assessment of the penalty imposed and the purposes that the penalty may fairly be said to serve").
I will not label disgorgement a "fine, penalty, or forfeiture" in light of the operation of disgorgement, which merely deprives one of wrongfully obtained proceeds. SEC v. Texas Gulf Sulphur Co., 446 F.2d 1301, 1308 (2d Cir.) ("Restitution of the profits on these transactions merely deprives the appellants of the gains of their wrongful conduct."), cert. denied, 404 U.S. 1005, 30 L. Ed. 2d 558, 92 S. Ct. 561 (1971). As such, disgorgement merely returns the wrongdoer to the status quo before any wrongdoing had occurred. Similarly, Rule 10b-5 actions, which are the actions brought by private parties who have been injured by another's violation of the securities laws, return plaintiffs to the status quo before any securities laws had been violated. In contrast, fines, penalties, and forfeitures alter the status quo before the unlawful activity took place. A simple example demonstrates this difference. An individual who stole an item might be required to return the item, serve time in jail, and pay an amount of money to the government. Returning the item puts the individual where he or she would have been had he or she not stolen the item, and is therefore similar to disgorgement. Simultaneously, the victim of the theft is generally returned to where he or she would have been had the theft not occurred. Serving time in jail and paying money to the government, meanwhile, do not serve the purpose of returning the affected parties to the status quo, and therefore serve the purpose of fines, penalties, and forfeitures.
This distinction is implicit in the Supreme Court's Meeker v. Lehigh Valley R.R., 236 U.S. 412, 35 S. Ct. 328, 59 L. Ed. 644 (1915), decision, where the Court addressed a dispute concerning the predecessor statute to the existing "catch-all" statute. The case involved a claim pursuant to section 16 of the Interstate Commerce Act, which authorized private parties to recover the damages they sustained as a result of unreasonable rates and unjust discrimination perpetrated by private parties in the provision of transportation services. The Court found that the action was not subject to the limitation period in the statute, which referred to suits seeking a "penalty or forfeiture,"
because those terms "refer to something imposed in a punitive way for an infraction of a public law, and do not include a liability imposed solely for the purpose of redressing a private injury, even though the wrongful act be a public offense and punishable as such." Id. at 423. Meeker makes clear that the damages sought in Rule 10b-5 actions do not constitute a fine, penalty, or forfeiture. SEC actions seeking disgorgement differ slightly from 10b-5 actions in that they do not attempt to redress a private injury, but rather aim to separate the securities law violator from his or her unlawfully obtained profits. Consequently, the amount sought in the two types of actions can diverge in that the wrongdoer's profits will not necessarily equal the victim's losses.
E.g., Litton Indus., Inc. v. Lehman Bros. Kuhn Loeb Inc., 734 F. Supp. 1071, 1075 (S.D.N.Y. 1990). Meeker, however, allows for the conclusion that disgorgement does not constitute a fine, penalty, or forfeiture by explaining that "strictly remedial" liabilities do not fall under the "catch-all" statute because they are not "punitive." Meeker, 236 U.S. at 423. As discussed above, disgorgement is similar to the redressing of a private injury in that both serve to return affected parties to the status quo before the unlawful activity at issue had taken place. That goal appears, by definition, to be remedial. See also SEC v. Bilzerian, 29 F.3d 689, 696 (D.C. Cir. 1994) (holding that disgorgement does not constitute punishment for the purposes of the Double Jeopardy Clause because "the disgorgement order did not ask [defendant] to give up anything in excess of the amount of his illicit gains"), aff'd 814 F. Supp. 116 (D.D.C. 1993); SEC v. Blatt, 583 F.2d 1325, 1335 (5th Cir. 1978) (holding that "disgorgement is remedial and not punitive"); SEC v. E & H Oil Co., Fed. Sec. L. Rep. (CCH) P97,652, No. 75 Civ. 0638, 1980 WL 1444, *3 (W.D. La. Sept. 26, 1980) (holding that "disgorgement is remedial in nature"). Moreover, that merely requiring one to "give back" wrongfully obtained proceeds is not punitive is made evident by contrasting it against statutes that do indubitably levy liabilities that are punitive. The Insider Trading Sanctions Act, for example, authorizes the SEC to pursue a monetary liability against those engaging in insider trading activity of up to three times the profit gained (or loss avoided). 15 U.S.C. § 78u-1(a)(2) (1988). Those payments are punitive--and not remedial--because they are amounts not limited to either the damage caused by the wrongdoer or the proceeds he or she wrongfully obtained. Cf. United States v. Halper, 490 U.S. 435, 449, 104 L. Ed. 2d 487, 109 S. Ct. 1892 (1989) (ruling that "where a fixed-penalty provision subjects an . . . offender to a sanction overwhelmingly disproportionate to the damages he has caused[,]" the penalty constitutes punishment for the purposes of the Double Jeopardy Clause).
By refusing to subject securities law violators to liability both to the SEC for disgorgement and private parties for the recovery of damages, courts have ensured that disgorgement serves as a remedial, and not as a punitive, measure.
E.g., SEC v. Texas Gulf Sulphur Co., 446 F.2d 1301, 1308 (2d Cir.) (terming disgorgement "remedial relief" while rejecting the contention that disgorgement constituted a "penalty assessment," by noting that the [defendants] are protected "against double liability [in that] any private judgments against these [defendants] arising out of the events of this case are to be paid from" the amount disgorged to the SEC), cert. denied, 404 U.S. 1005, 30 L. Ed. 2d 558, 92 S. Ct. 561 (1971); Litton Indus., Inc. v. Lehman Bros. Kuhn Loeb Inc., 734 F. Supp. 1071, 1076 (S.D.N.Y. 1990) (explaining that a securities law violator will not be subject to liability to both the SEC and private parties because such liability would be "clearly punitive in its effect and would constitute an impermissible penalty assessment"). Courts have limited the amount disgorged in a number of other ways, thereby further preventing disgorgement from assuming punitive traits. E.g., SEC v. Unioil, 293 U.S. App. D.C. 37, 951 F.2d 1304, 1306 (D.C. Cir. 1991) ("The court may exercise its equitable power only over property causally related to the wrongdoing . . . [because] disgorgement may not be used punitively. Therefore, the SEC generally must distinguish between legally and illegally obtained profits."); SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082, 1104-05 (2d Cir. 1972) (stating that in addition to ordering disgorgement of proceeds, it would order interest at the legal rate in effect in the state as opposed to the profit earned on the proceeds, because ordering disgorgement of the profit earned on the proceeds would constitute a "penalty assessment"); Litton Indus., Inc. v. Lehman Bros. Kuhn Loeb Inc., 734 F. Supp. 1071, 1077 (S.D.N.Y. 1990) (permitting violators to deduct the expenses they incurred in obtaining their proceeds from the amount of those proceeds, because failing to so permit would "constitute a penalty assessment and go beyond the restitutionary purpose of the disgorgement doctrine").
The decision of the Bankruptcy Court for the Southern District of Florida in SEC v. Telsey, 144 Bankr. 563 (Bankr. S.D. Fla. 1992) would appear to be at odds with my finding that disgorgement is not subject to 28 U.S.C. § 2462 (1988), but can actually be easily reconciled with my decision. In Telsey, the SEC contended, and the court agreed, that disgorgement
sought by the SEC constituted a "fine, penalty, or forfeiture" so as to except the amount owed by the defendant from discharge under the Bankruptcy Code. Id. at 564. The inquiry in which the Telsey court engaged to make its ruling, however, was not the "punitive v. remedial" analysis that the Supreme Court provided in Meeker v. Lehigh Valley R.R., 236 U.S. 412, 59 L. Ed. 644, 35 S. Ct. 328 (1915), for the purpose of ascertaining whether a liability constitutes a "fine, penalty, or forfeiture" under 28 U.S.C. § 2462; instead, the Telsey court appropriately referred to other authority, because it was, as it pointed out, investigating whether a debt constitutes "a fine, penalty, or forfeiture" within the meaning of [section] 523(a)(7) " of the Bankruptcy Code. Telsey, 144 Bankr. at 565 (emphasis added). That authority led the Telsey court to classify the disgorgement as "a fine, penalty, or forfeiture" on the basis of Telsey's not being "an 'honest but unfortunate debtor.'" Telsey, 144 Bankr. at 565 (quoting Grogan v. Garner, 498 U.S. 279, 286, 111 S. Ct. 654, 112 L. Ed. 2d 755 (1991) (in turn quoting Local Loan Co. v. Hunt, 292 U.S. 234, 244, 78 L. Ed. 1230, 54 S. Ct. 695 (1934))).
The Telsey court further acknowledged that its holding was not based on strict statutory construction, but rather "comported with its sense of equity [and] the object and policy of [section] 523(a)(7)." Telsey, 144 Bankr. at 565. This, analysis, the Telsey court explained, it is authorized to do pursuant to the Supreme Court's Kelly v. Robinson, 479 U.S. 36, 43, 93 L. Ed. 2d 216, 107 S. Ct. 353 (1986), decision, which states that in the context of section 523 of the Bankruptcy Code, courts should not be restricted by the words of the statute, but should instead examine the statute's object and policy. Those considerations simply differ from the ones discussed in Meeker. Telsey, furthermore, might simply reflect the concept recognized by the Supreme Court in United States v. Halper, 490 U.S. 435, 447 n.7, 104 L. Ed. 2d 487, 109 S. Ct. 1892 (1989), that, "for the defendant even remedial sanctions carry the sting of punishment." Consequently, Telsey cannot suggest that the disgorgement sought by the SEC constitutes a "fine, penalty, or forfeiture" under 28 U.S.C. § 2462 (1988). Let me now turn to whether a limitation period on the type of SEC actions at issue in this case should be "borrowed," either from another statute or from different provisions of the two statutes at issue.
2. Borrowing a Limitation Period
The SEC contends that courts should not borrow a limitation period here because Congress' failure to specify a limitation period indicates its intent that no limitation period apply. SEC Supplemental Memorandum at 1, n.3 (terming Congress' failure to provide a limitation period "deliberate"). Defendants, on the other hand, point out that the provisions authorizing injunctions do not on their face appear to provide for injunctive relief based on past violations of the relevant securities laws, which are the type of violations alleged in the instant case, let alone disgorgement of the profits derived from past violations. Consequently, they may argue, Congress failed to supply a limitation period only because it never provided the SEC with the authority to pursue the type of civil enforcement actions it does here and, therefore, never considered the need to limit the time within which they could be brought.
The defendant in Rind apparently relied on this argument, urging the Ninth Circuit to adopt a limitation period for SEC enforcement actions in the same manner that the Supreme Court had done in connection with Rule 10b-5 actions in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 115 L. Ed. 2d 321, 111 S. Ct. 2773 (1991). Rind, 991 F.2d at 1488. The Rind court refused to do so, explaining that while the private right of action at issue in Lampf was created by the courts and not by Congress, the SEC's "enforcement powers are a product of congressional design and not judicial imagination." Id. at 1490. See also SEC v. O'Hagan, 793 F. Supp. 218, 221 (D. Minn. 1992) ("An SEC enforcement action is . . . express, not implied, regardless of whether judicial interpretation has broadened the rule which the SEC seeks to enforce."). This holding of the Rind decision has received particularly strong criticism. One commentator, Edward Brodsky, offered in a thoughtful discourse, "[Rind's] assumption that Congress deliberately omitted a statute of limitations must be seen as a fiction . . . . Congress had no need to consider the statute of limitations applicable to the SEC when it enacted the securities laws, for the SEC's mandate did not include suing to punish alleged violators for past violations." Edward Brodsky, Statute of Limitations and Civil Enforcement, N.Y.L.J., Sept. 21, 1993, at 3, 6.
Although Rind is correct in stating that the Securities Act and the Exchange Act do expressly authorize SEC enforcement actions, it remains true that those statutes do not state that such actions can be based on past violations of the laws, as opposed to existing and prospective violations. Instead, courts permitted that enforcement activity based upon a finding that the actions "effectuated" the statutes' purpose of deterring future violations. SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082, 1104 (2d Cir. 1972) ("The deterrent effect of an SEC enforcement action would be greatly undermined if securities laws violators were not required to disgorge . . . profits."). See also SEC v. Texas Gulf Sulphur Co., 446 F.2d 1301, 1308 (2d Cir.) ("It would severely defeat the purposes of the [Exchange Act] if a violator . . . were allowed to retain the profits from his violation."), cert. denied, 404 U.S. 1005, 30 L. Ed. 2d 558, 92 S. Ct. 561 (1971). The argument that Congress as a result never had reason to consider imposing a limitation period, however, simplifies the manner in which courts have "authorized" enforcement actions concerning past violations. A more careful reading of the case law reveals that the holdings were simply the result of Congress having authorized the equitable remedy of injunctions for current and prospective violations. That proposition is supported by ample precedent. In enacting such a statute, the courts reasoned, Congress invoked all equitable powers of the courts, which includes disgorgement and injunctions based on past violations. SEC v. Materia, 745 F.2d 197, 200 (2d Cir. 1984) ("'When Congress entrusts to an equity court the enforcement of prohibitions contained in a regulatory enactment, it must be taken to have acted cognizant of the historic power of equity to provide complete relief in light of the statutory purposes.'" (citations omitted) (quoting Mitchell v. Robert DeMario Jewelry, Inc., 361 U.S. 288, 291-92, 4 L. Ed. 2d 323, 80 S. Ct. 332 (1960))), cert. denied, 471 U.S. 1053, 85 L. Ed. 2d 477, 105 S. Ct. 2112 (1985); SEC v. Manor Nursing Ctrs., Inc., 458 F.2d 1082, 1103 (2d Cir. 1972) ("Once the equity jurisdiction of the district court has been properly invoked by a showing of a securities law violation, the court possesses the necessary power to fashion an appropriate remedy."); SEC v. Texas Gulf Sulphur Co., 446 F.2d 1301, 1307 (2d Cir.) ("The courts of appeals have upheld the equity power of the district courts to authorize as ancillary relief the appointment of receivers under the Securities Exchange Act of 1934 . . . even though no specific statutory authority exists for such action. . . In other contexts the Supreme Court has upheld the power of the Government without specific statutory authority to seek restitution, and has upheld the lower courts in granting restitution, as an ancillary remedy in the exercise of the courts' general equity powers to afford complete relief." (citations omitted)), cert. denied, 404 U.S. 1005, 30 L. Ed. 2d 558, 92 S. Ct. 561 (1971); see also J. I. Case Co. v. Borak, 377 U.S. 426, 433, 12 L. Ed. 2d 423, 84 S. Ct. 1555 (1964) ("It is for the federal courts 'to adjust their remedies so as to grant the necessary relief' where federally secured rights are invaded." (quoting Bell v. Hood, 327 U.S. 678, 684, 90 L. Ed. 939, 66 S. Ct. 773 (1946))). Moreover, as the Second Circuit pointed out in SEC v. Texas Gulf Sulphur Co., 446 F.2d 1301, 1307 (2d Cir.), cert. denied, 404 U.S. 1005, 30 L. Ed. 2d 558, 92 S. Ct. 561 (1971), the Supreme Court, in Mills v. Electric Auto-Lite Co., 396 U.S. 375, 391, 24 L. Ed. 2d 593, 90 S. Ct. 616 (1970), held "We cannot fairly infer from the Securities Exchange Act of 1934 a purpose to circumscribe the courts' power to grant appropriate remedies. Although Mills involved relief sought by private litigants, Texas Gulf Sulphur found the Mills' holding "fully applicable in enforcement actions by the SEC." Texas Gulf Sulphur, 446 F.2d at 1308 (citations omitted).
Thus, it can be argued that when Congress granted the SEC the authority to seek equitable relief, it was aware that injunctions and disgorgement based on past violations were remedies it was enabling the SEC to obtain. As a result, Congress' failure to provide a limitation period may reflect its desire that there be no limitation. Such an argument, standing alone, would fail because it constitutes an attempt to equate silence with explicit rejection of a limitation period. As noted above, where Congress has been silent, courts routinely "borrow" a limitation period from a different statute, (or a different provision of the same statute), rather than concluding that Congress desired no period. In addition, however, the SEC notes that when Congress passed the Insider Trading Sanctions Act of 1984, which authorized penalties and a limitation period for specified securities activity, 15 U.S.C. § 78u-1(d)(5) (1988), Congress "explicitly declined to extend application of the limitations period to [other] actions brought by the Commission." SEC Initial Memorandum at p. 11. The relevant portion of the Insider Trading Act states that it "shall not be construed to bar or limit in any manner any action by the Commission . . . under any other provisions of this title." Id. The SEC argues that, in so writing, Congress has exhibited its desire that the other actions authorized in that title, which include the enforcement actions at issue here, be free of a limitation period. This situation is analogous to that addressed by the Second Circuit in Capozzi v. United States, 980 F.2d 872, 875 (2d Cir. 1992). There, the court stated that where Congress explicitly specified in four provisions of the Internal Revenue Code that no limitation period applied to the actions authorized by those provisions, the fact that Congress failed to so specify in the provision at issue constituted a "forceful" argument that Congress did not intend the actions authorized by that provision to be free of a limitation period.
In light of the time that had passed during which the SEC routinely obtained disgorgement based on past securities laws violations, Thomas L. Riesenberg, Application of Statutes of Limitations to SEC Disgorgement Actions, 8 No. 2 Insights 17 (P-H Feb. 1994) (stating that "disgorgement has become the rule rather than the exception in Commission enforcement actions"), and the fact that courts were consistently not holding the SEC to limitation periods in such actions, Congress' restriction of the above limitation period to insider trading activity warrants the finding that Congress desired to keep the SEC free from limitation periods in these actions.
a. Limitation Period Inappropriate Where Government Is Pursuing A Public Right
Even if I found that Congress had no such desire, and held instead that Congress had simply been silent on the matter, it would be incorrect in this situation to observe the regular practice of "borrowing" a limitation period. That practice is suspended, in accordance with the common law doctrine nullum tempus occurrit regi (time does not run against the king), United States v. Thompson, 98 U.S. 486, 489, 25 L. Ed. 194 (1879), where the government is pursuing a public right or interest. As stated by the Supreme Court in E. I. Dupont De Nemours & Co. v. Davis, 264 U.S. 456, 462, 68 L. Ed. 788, 44 S. Ct. 364 (1924) (citations omitted), where the Court refused a request to "borrow" a limitation period from a different part of the federal statute at issue, "An action on behalf of the United States in its governmental capacity . . . is subject to no time limitation, in the absence of congressional enactment clearly imposing it." See also United States v. Summerlin, 310 U.S. 414, 416, 84 L. Ed. 1283, 60 S. Ct. 1019 (1940) ("It is well settled that the United States is not bound by the state statutes of limitations or subject to the defense of laches in enforcing its rights."); United States v. Beebe, 127 U.S. 338, 344, 32 L. Ed. 121, 8 S. Ct. 1083 (1888) ("The principle that the United States are [sic] not bound by any statute of limitations . . . in a suit brought by them as a sovereign government to enforce a public right, or assert a public interest, is established past all controversy or doubt." (citations omitted)); Capozzi v. United States, 980 F.2d 872, 875 (2d Cir. 1992) ("No statute of limitations will block federal government actions unless Congress clearly and specifically says so." (citations omitted)). The doctrine does not apply, however, when the government is functioning merely as a "conduit for the enforcement of private rights which could have been enforced by the private parties themselves." Marshall v. Intermountain Elec. Co., 614 F.2d 260, 262 n.3 (10th Cir. 1980). Thus we must determine whether the government in cases such as this is truly pursuing a public right or interest.
The SEC contends that its "enforcement actions are brought . . . to vindicate a public right." SEC Initial Memorandum at 8. The SEC can distinguish its enforcement actions from the lawsuits that private parties pursue by noting that SEC actions, pursuant to Congressional authorization, 15 U.S.C. §§ 77t(b), 78u(d), can seek not only money from parties but also injunctions that bar the parties from engaging in violations of the relevant securities laws. Seeking such injunctions, which are something that apparently benefits the public as a whole, arguably renders SEC suits ones that pursue vindication of a public right or interest. This difference, by itself, however, appears inadequate to support such a conclusion in light of the Supreme Court's decision in Occidental Life Insurance Co. v. EEOC, 432 U.S. 355, 53 L. Ed. 2d 402, 97 S. Ct. 2447 (1977). There, the Court addressed the issue of whether a limitation period applied to a civil action brought by the EEOC against an employer, which action sought back pay for a discharged employee as well as an injunction prohibiting the employer from engaging in further violations of the Civil Rights Act of 1964. The Court did not find it necessary to consider that the EEOC might be free from a limitation period on the basis that it sought the injunction.
The dissent, however, after finding that the action was not one where the United States was suing to vindicate a public right because the EEOC sought backpay for a private party who could have brought her own action, emphasized that the simultaneous pursuit of the injunction did not alter its analysis. Id. at 383 (Rehnquist, J. dissenting). The dissent explained, "While injunctive relief may appear more 'broad based,' it nonetheless is redress for individuals. The United States gains nothing tangible as a result of the suit." Id.
Finding support in the Occidental Life dissent, litigants and legal commentators have contended that SEC actions seeking disgorgement do not constitute the pursuit of a public interest or right because the SEC regularly turns over the disgorged proceeds to the victims of the violations; as a result, they assert, SEC enforcement actions serve as simple substitutes of the Rule 10b-5 actions that the victims might otherwise bring and consequently vindicate the rights of those private victims and not the public as a whole. E.g., SEC's Brief at 19, Rind, (No. 91-55972) (addressing Rind's argument) (available in William R. McLucas & Linda C. Quinn, Selected Judicial Developments, at 379 (PLI Corporate Law and Practice Course Handbook Series No. 768, Mar. 6-7, 1992)), Thomas L. Riesenberg, Application of Statutes of Limitations to SEC Disgorgement Actions, 8 No. 2 Insights 17 (P-H Feb. 1994). The SEC concedes that it often provides the defendants' disgorged proceeds to their victims, but counters by attempting to distinguish between SEC actions seeking disgorgement and private lawsuits praying for compensation, pointing out that "disgorgement focuses not on the amount of injury suffered by the victim but on the amount of profit obtained by the wrongdoer." SEC's Brief at 3, Rind (No. 91-55972) (available in William R. McLucas & Linda C. Quinn, Selected Judicial Developments, at 363-64 (PLI Corporate Law and Practice Course Handbook Series No. 768, Mar. 6-7, 1992)). While it is true that the "amount of profit obtained by the wrongdoer" often differs from the "amount of injury suffered by the victim," the SEC's reliance on this difference is undermined in part by the Supreme Court decision of Affiliated Ute Citizens v. United States, 406 U.S. 128, 31 L. Ed. 2d 741, 92 S. Ct. 1456 (1972). There, the Court stated that in a private action for redress of securities law violations where the amount obtained by the wrongdoer exceeds the victim's injury, the measure of damages will be fixed at the higher amount. Id. at 155. Hence, in every such case, there no longer will be a disparity between the amount the wrongdoer would have to pay the SEC in a civil enforcement action as opposed to an individual plaintiff who pursued a private action.
Indeed, if it were true, as the SEC alleges, that in pursuing civil enforcement actions, it is not acting as a mere proxy for private parties, then it would seem that entities who have violated securities laws would be susceptible to both the disgorgement sought by the SEC in a civil enforcement action and the compensation sought by other parties in Rule 10b-5 actions. This, however, simply is not so. Litton Indus., Inc. v. Lehman Bros. Kuhn Loeb Inc., 734 F. Supp. 1071, 1076 (S.D.N.Y. 1990) ("Once ill-gotten gains have been disgorged to the SEC, there remains . . . no basis for further disgorgement in a private action."); National Westminster Bancorp NJ v. Leone, 702 F. Supp. 1132, 1140 (D.N.J. 1988) ("Plaintiff may not recover from defendants any profits already disgorged to SEC in the prior action . . . ."); SEC v. Penn Cent. Co., 425 F. Supp. 593, 599 (E.D. Pa. 1976) ("To the extent that defendants have made restitution [to the victims], the amounts paid would serve to offset part or all of an [SEC] judgment for disgorgement.").
The SEC's position appears to be further vitiated by the fact that not only does the SEC, as a matter of practice, turn over disgorged proceeds to the victims of the given violation, but in several proceedings, courts have actually required that the victims receive the disgorged proceeds. SEC v. Blatt, 583 F.2d 1325, 1335 n.30 (5th Cir. 1978) (discussing how the district court appointed a trustee to distribute the disgorged funds to the victims); SEC v. Blavin, 557 F. Supp. 1304, 1316 (E.D. Mich. 1983) (directing the SEC to "prepare a plan for the disposition of funds ordered disgorged [, which] plan should provide, wherever possible, for restitution of these funds to persons who lost money at [defendant's] hands"), aff'd, 760 F.2d 706 (6th Cir. 1985); SEC v. Manor Nursing Centers, Inc., 340 F. Supp. 913, 936 (S.D.N.Y. 1971), aff'd, 458 F.2d 1082 (2d Cir. 1972) (appointing a receiver and ordering that the disgorged proceeds be distributed to the victims). Notwithstanding what appears to be the practical equivalence of SEC actions and those that private parties can bring, the SEC's position finds great support in the fact that its statutory authorization to bring civil enforcement actions does not require it to turn disgorged proceeds over to the private investors who have been damaged by the violator's activity; rather, disgorged proceeds can very well end up in the United States Treasury, for example, (1) where numerous victims suffered relatively small amounts thereby making distribution of the disgorged proceeds to them impractical, e.g., SEC's Brief at 21, Rind (No.91-55972) (available in William R. Lucas & Linda C. Quinn, Selected Judicial Developments, at 381 (PLI Corporate Law and Practice Course Handbook Series No. 768, Mar. 6-7, 1992)); (2) where the victims cannot be identified, see e.g., SEC v. Blavin, 760 F.2d 706, 713 (6th Cir. 1985) (stating that funds remaining after "identifiable private parties" have been compensated "shall revert to the United States Treasury"), aff'g 557 F. Supp. 1304 (ED. Mich. 1983); and (3) where there are no victims entitled to damages, see e.g., SEC v. Bilzerian, 29 F.3d 689 at 693, 697 (D.C. Cir. 1994) ("Whether or not [defendant's] securities violations injured others is irrelevant to the question whether disgorgement is appropriate."), aff'g 814 F. Supp. 116 (D.D.C. 1993); SEC v. Tome, 833 F.2d 1086, 1096 (2d Cir. 1987) (approving of disgorgement "whether or not any investors may be entitled to money damages"), cert. denied, 486 U.S. 1014, 100 L. Ed. 2d 212, 108 S. Ct. 1750 (1988). In this way, the SEC's actions differ from actions brought by the EEOC, discussed in Occidental Life, where the back pay sought against an employer, must, by statutory definition, be turned over to the individual who of course could have brought a private action. This difference persists despite the fact that the SEC's authorization does not go so far as to prohibit it from so distributing disgorged proceeds. As a result, unlike the situation described by the dissent in Occidental Life, the United States is not precluded from gaining something "tangible" as a result of the type of SEC suits at issue here.
I therefore find that the SEC action at issue here operates to vindicate a public interest and, accordingly, that it is improper to "borrow" a limitation period. The element of SEC actions that I find dispositive in terming them public interest actions is their allowance for the United States to itself obtain a monetary benefit.
The fact that SEC actions often benefit private parties does not persuade me that they cannot simultaneously serve the public interest. See also Comment, Christopher R. Dollase, The Appeal of Rind: Limitations of Actions in Securities and Exchange Commission Civil Enforcement Actions, 49 Bus. Law. 1793, 1814 (1994) ("There does not need to be a complete demarcation between public interest and benefits to individuals."). Several cases have recognized, in other contexts, the dual benefit that SEC actions create. SEC v. Tome, 833 F.2d 1086, 1096 (2d Cir. 1987) ("The paramount purpose of . . . disgorgement is to make sure that wrongdoers will not profit from their wrongdoing." (emphasis added)), cert. denied, 486 U.S. 1014, 100 L. Ed. 2d 212, 108 S. Ct. 1750 (1988); SEC v. Commonwealth Chem. Sec., Inc., 574 F.2d 90, 102 (2d Cir. 1978) ("The primary purpose of disgorgement is not to compensate investors. Unlike damages, it is a method of forcing a defendant to give up the amount by which he was unjustly enriched." (emphasis added)); cf. SEC v. Penn Cent. Co., 425 F. Supp. 593, 599 (E.D. Pa. 1976) ("The fact that one consequence of the action may be to benefit private parties does not detract from the public purpose of effectuating the goals of the securities laws." (emphasis added)).
Because I find the SEC enforcement action at issue in this case free from a limitation period, I grant the SEC's motion to strike defendants' affirmative defense that asserts a limitation period.
The SEC's motion to voluntarily dismiss the following claims against Laff with prejudice is granted: the Third and Sixth causes of action, in their entirety, and the First, Second, Fourth and Seventh causes of action as far as these claims relate to all transactions in Big O Tires, Inc., Cliff Engle Ltd., Digital Metcom, Inc., Fountain Powerboat Industries, Inc. and Tunex International, Inc., to transactions in Flores de New Mexico, Inc. prior to August 27, 1986, and to transactions in TS Industries, Inc. prior to July 1, 1987; and
The SEC's motion to strike defendants' affirmative defense asserting a limitation period is granted.
Dated: New York, New York
November 21, 1994
Harold Baer, Jr.