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April 18, 2018 SEC Fraud

SEC Whistleblower Law and the Securities Whistleblower Act

The SEC Whistleblower Statute and Statute of Limitations

In July 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was signed into law by President Obama.  Section 922 of the Act states that the SEC will be required to pay a reward to individuals who provide original information to the SEC resulting in monetary sanctions exceeding $1 million in civil or criminal proceedings (commonly referred to as the SEC whistleblower act or program).

The purpose of this SEC whistleblower act and reward program is to “motivate those with inside knowledge to come forward and assist the Government to identify and prosecute persons who have violated securities laws and recover money for victims of financial fraud.”  Section 748 amends the Commodity Exchange Act to create a whistleblower incentive program and whistleblower protection provision that are substantially similar to the SEC whistleblower act and reward program.

Statute of Limitations

Statute of Limitations, which is either set by statute of common law, is the maximum time after an event that legal proceedings based on that event may be initiated.

The Statute of Limitations for Retaliation Claims Brought Under the SEC Whistleblower Act

15 USCS § 78u-6 (h)(1)(B)(iii) regarding statute of limitations states:

(I) In general. An action under this subsection may not be brought–(aa) more than 6 years after the date on which the violation of subparagraph (A) occurred; or(bb) more than 3 years after the date when facts material to the right of action are known or reasonably should have been known by the employee alleging a violation of subparagraph (A).

(II) Required action within 10 years. Notwithstanding sub clause (I), an action under this subsection may not in any circumstance be brought more than 10 years after the date on which the violation occurs.

In sum, the statute of limitations under the provisions of the Dodd-Frank Act has been dramatically expanded. For SEC fraud whistleblowers, an action must be filed either within six years after the date when the violation occurs or within three years after the date “facts material to the right of action are known or reasonably should have been known by the employee,” but not more than 10 years after the date of the violation.  This long limitations period not only expands employers’ potential liability under the Act, it could create problems for employers who do not typically maintain employee records for 10 years.  The statute of limitations for whistleblowers reporting violations of commodities laws to the CFTC is a more moderate two year period.

The Statute of Limitations in SEC Whistleblower Cases

While there is an express statute of limitations for bringing retaliation provisions under the SEC whistleblower act for whistleblowers who engage in SEC-related whistleblower conduct or other SOX-protected activity, there is no express statute of limitations in the SEC Whistleblower Act for the actual conduct itself. Arguably, the statute of limitations is five years.

The Dodd-Frank Act or the SEC Whistleblower statute, at section 922, states “The Securities Exchange Act of 1934 (15 U.S.C. § 78a et seq.) is amended by inserting after section 21E . . . [Section 21F, the Securities Whistleblower provisions].”  Essentially, the Dodd-Frank Act inserts the SEC whistleblower provisions into the Exchange Act, without stating an express statute of limitations.  Additionally, the federal securities laws do not have an express statute of limitations for SEC enforcement actions (other than a five year limitation for actions seeking a civil penalty for insider trading).  However, as shown below, there is case law indicating that a five year statute of limitations may apply to SEC enforcement actions to the extent they seek civil penalties.

Case law where the SEC has brought enforcement actions seeking civil penalties indicates that 28 U.S.C. § 2462 is a catch-all statute of limitations for federal civil penalties. 28 U.S.C. § 2462 provides that:

“an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued.”

Johnson v. SEC, 87 F.3d 484, 488 (D.C. Cir. 1996) held that Section 2462 applies to any “form of punishment imposed by the government for unlawful or proscribed conduct, which goes beyond remedying the damage caused to the harmed parties by the defendant’s action.”

In SEC v. Thomas W. Jones and Lewis E. Daidone, No. 05 Civ. 7044 (RCC) (S.D.N.Y. Feb. 26, 2007), the judge dismissed claims brought by the SEC for civil penalties and an injunction as time-barred.  In so holding, the court found that because the Advisers Act does not contain a limitations period, “to the extent the SEC’s claims are subject to a statute of limitations, the catch-all limitations period in 28 U.S.C. § 2462 applies.” The further noted that under § 2462, any “action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise” is barred “unless commenced within five years from the date when the claim first accrued.” 28 U.S.C. § 2462. The court held that the SEC’s claim for civil money penalties “is unquestionably a penalty and, as such, is subject to the five-year limitations period of § 2462.”

SEC Whistleblower Statute and Discovery Rule

Courts have disagreed on whether the discovery rule (rule which tolls, or delays, the start to the statute of limitations until the harm or fraud is discovered) applies to the five-year catch-all limitation period above.  The courts in the District of Columbia, Second, Fifth, Sixth and Eleventh Circuits have held that the discovery rule does not apply to the SEC catch-all statute, 28 U.S.C. § 2462; these courts will likely hold that the discovery rule then does not apply to the SEC whistleblower statute of limitations.  Thus, in those Circuits, an agency’s enforcement action and a whistleblower’s SEC action accrues at the time of the violation, and not upon discovery of the harm.

However, the Northern District of Illinois (Seventh Circuit) in SEC v. Buntrock, 2004 U.S. Dist. LEXIS 9495 (N.D. Ill. May 25, 2004) held that the court’s general adoption of the “discovery of violation” rule in securities fraud cases should be extended to claims for civil penalties in securities fraud actions governed by the five-year statute of limitations in Section 2462.  In other words, the court held that the five-year statute of limitations for civil penalties does not accrue when the fraud occurs, but rather when the plaintiff or SEC fraud whistleblower learns, or should have learned through the exercise of ordinary diligence in the protection of one’s legal rights, enough facts to enable him, by such further investigation as the facts would induce in a reasonable person, to sue within five years.

The court further stated that this “conclusion also is consistent with the D.C. Circuit’s decision in 3M Co. v. Browner, 17 F.3d 1453 (D.C. Cir. 1994) because the court there was not faced with a claim for penalties in the context of a fraud suit. In fact, the D.C. Circuit acknowledged in a footnote that accrual of the statute of limitations could be affected by the ‘fraudulent concealment doctrine.'”

Since that decision, other courts have consistently held that the “discovery rule” doesn’t apply to Section 2462 (the SEC whistleblower statute of limitations).  See, e.g., SEC v. Alexander, 248 F.R.D. 108, 2007 U.S. Dist. LEXIS 71568 (E.D.N.Y. 2007) (citing the Buntrock and refusing to follow).  However, SEC v. Jones, 2006 U.S. Dist. LEXIS 22800, Fed. Sec. L. Rep. (CCH) P93855 (S.D.N.Y. Apr. 25, 2006), followed Buntrock and found that the statute of limitations in section 2462 (the SEC whistleblower statute of limitations) was tolled while the alleged fraud remained concealed.

In addition, in 3M Co. v. Browner, 305 U.S. App. D.C. 100, 17 F.3d 1453 (D.C. Cir. 1994), although the court seemingly did not limit its holding to cases in which violations are undetected because of fraud, see id. at 1461 (noting an agency’s inability to discover violations, “for whatever reasons,” does not avoid problems statutes of limitations were designed to cure), it did recognize the possible applicability of the fraudulent concealment doctrine to toll the statute of limitations. Id. at 1461, n.15.

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