Federal appeals court limits disgorgement in SEC enforcement cases

The Securities and Exchange Commission has long required violators of federal securities laws to disgorge their ill-gotten gains, even when the alleged violation occurred many years before the SEC enforcement action. But recently, the U.S. Court of Appeals for the Eleventh Circuit limited the SEC’s ability to utilize this heavy remedy by holding that a five-year statute of limitations applies to SEC claims for disgorgement.


In SEC v. Graham, the SEC alleged that five defendants violated federal securities laws between 2004 and 2008 by selling condominiums that were functioning, in reality, as unregistered securities. The defendants allegedly fronted a massive Ponzi scheme in which they raised more than $300 million from approximately 1,400 investors around the country but failed to pay out the returns that they had guaranteed.

In the U.S. District Court for the Southern District of Florida, the SEC requested that the court:
  1. Declare that the defendants had violated federal securities laws.
  2. Permanently enjoin the defendants from violating federal securities laws in the future.
  3. Direct the defendants to disgorge all profits from their illegal ventures, with prejudgment interest.
  4. Order the defendants to repatriate any funds held outside the district court’s jurisdiction.
  5. Require three of the defendants to pay civil money penalties. 
The defendants moved for summary judgment on the grounds that the sale of their condominiums were not investment contracts, and thus were not governed by securities laws, and that the statute of limitations barred all of the SEC’s requested forms of relief. In an enormous blow to the SEC, Judge James Lawrence King entered summary judgment against the SEC and entirely dismissed its alleged Ponzi scheme case on statute of limitations grounds. The court admonished the SEC for its failure “to meet its serious duty” to timely bring enforcement actions.

With regard to the disgorgement claim, the court held that the SEC’s remedy of disgorgement “can truly be regarded as nothing other than a forfeiture (pecuniary or otherwise)” which was subject to a five-year statute of limitations.

The Eleventh Circuit Opinion

On appeal, Judge Jill Pryor of the Eleventh Circuit Court of Appeals affirmed the District Court’s decision that a five-year statute of limitations applied.

Future Impact

Graham creates a circuit split with the D.C. and Ninth Circuits about whether the five-year statute of limitations applies to disgorgement in SEC civil enforcement actions. The SEC may elect to bring future enforcement actions in the D.C. and Ninth Circuits rather than in the Eleventh Circuit or in other circuits where the law is not yet settled. Given the broad scope of the securities laws, defendants could be dragged into a federal court far from home.

Graham is also likely to pressure the SEC to pursue investigations with haste and resolve enforcement actions more quickly. In turn, individuals and entities targeted by the SEC should be prepared to robustly challenge any continued SEC efforts to pursue disgorgement if the statute of limitations has run.

To combat Graham, the SEC will likely seek to enter tolling agreements earlier and more frequently in a larger percentage of investigations, and seek to have defendants suspend or waive the statute of limitations altogether. The SEC also may attempt to place a stronger emphasis on the factor of cooperation as an incentive for individuals under SEC scrutiny to sign tolling agreements.

It is not yet certain whether other circuit courts fill follow Graham and further develop the split, or if the Supreme Court will intervene and clarify the issue to create a uniform precedent. Regardless, defendants and their counsel should be especially diligent about statute of limitations issues when the SEC seeks disgorgement as a remedy.

Graham highlights the need for persons who come under scrutiny by the SEC to consult legal counsel with knowledge and experience in securities enforcement matters.

For questions regarding the Eleventh Circuit’s ruling or other securities enforcement issues, please contact one of the attorneys listed below.

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