SEC v. Gentile
Posted on Categories Court Decisions, Securities/Commodities Regulation

By James L. Komie

An “obey-the-law” injunction sought by the SEC is not time-barred as a matter of law by the 5-year statute of limitations for civil enforcement actions seeking a “penalty.”

SEC vs. Gentile, No. 18-1242 (3rd Cir., 9/26/19).

This case examines whether an SEC civil enforcement action requesting a so-called “obey-the-law” injunction and an order barring defendant from the penny stock industry is untimely under the 5-year statute of limitations for enforcement actions seeking a “penalty.” The district court – applying the U.S. Supreme Court’s 2017 decision in Kokesh v. SEC (summarized in SOLA 2017-22) – held that such relief was punitive in nature, rather than remedial, and thus a penalty covered by the 5-year statute of limitations. The Third Circuit reverses. In a lengthy and scholarly opinion examining the nature of injunctive relief, the Court holds that the remedies sought by the SEC are injunctive in nature and thus seek to prevent future harm, rather than punish the defendant, and thus are not penalties. “[I]njunctions may properly issue only to prevent harm – not to punish the defendant.”

The focus of injunctive relief is future harm and an injunction should not issue, unless the SEC shows “such future violation may occur.” Similarly, the injunction must be narrowly drawn to serve its remedial purpose, rather than to punish defendant or deter others through its severity. As such, on remand, the district court is not to “rubber stamp” the SEC’s request for an obey-the-law injunction, but rather must weigh, on a complete record, whether the proposed injunction “serves no preventative purpose, or is not carefully tailored to enjoin only that conduct necessary to prevent a future harm.”

(J. Komie: In a clever trick, the Third Circuit somewhat sidesteps the issue of whether obey-the-law injunctions are punitive in nature and thus penalties covered by the 5-year statute of limitations by remanding to the district court with the directive to issue an injunction only if it isn’t punitive in nature.) (EIC: We covered this case in three prior summaries, SOLAs 2018-03, 2019-13 and 2019-27. In SOLA 2019-43, we reported that SCOTUS will be considering this very issue, having granted review of the Ninth Circuit’s decision in Liu v. SEC.)

(SOLA Ref. No. 2019-45-06)

NOTICE: The court decision synopsis published above represents an abbreviated description of the actual decision and is re-printed here for its educational value. The author's effort is to report concisely the substance of the decision or a selected portion of the decision; commentary or analysis is generally reserved for the italicized section at the bottom of the summary. Subscribers to SAC's Online Litigation Alert (SOLA), from which this synopsis is excerpted, have immediate access to the full decision, in addition to the synopsis. 

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