The Graham ruling and the Step Backward for the SEC

Due to a the ruling in SEC v. Graham, issued on May 12, 2014, the SEC’s enforcement program, which has struggled to gain footing, may have taken a step backward. The Court dismissed all of the claims brought by the SEC based on the five year statute of limitations in 28 U.S.S Section 2462.

The claims centered on the unregistered offerings of investments in a real estate development called Cay Clubs and Marinas. The case is centered on a scheme created by the defendants that supposedly impacted 1,400 investors and raised an amount over $30 million. For a little less than four years from 2004-2008, Cay Clubs offered and sold condominiums as an investment to private investors. The investors were promised that the condominiums, which were located in condominium projects that had been abandoned previously, would appreciate significantly. The terms of the deal were such that, upon signing the deal, the investors were guaranteed an immediate return of 15% of the purchase price, paid at closing, and ensured rental income from the company for the use of the condominiums.

The investors were promised many benefits would be theirs as a result of their investment in the condominium units. Due to the collapse of the real-estate markets in 2007, however, the defendants abandoned the condominium development and many of the units sold to investors went into foreclosure.

After investigating the transactions for seven years, the SEC filed a complaint in January 30, 2013. The complaint, which was filed 5 years after Cay Clubs had ceased to offer and sell the condominium units, alleged that the company violated anti-fraud and registration provisions of federal securities laws.

During the summary judgment stage, the Court considered whether it had subject matter jurisdiction to bring the SEC’s case forward against each defendant. It concluded that it did not have jurisdiction.

Section 2462 is a jurisdictional statute of limitations. Subject matter jurisdiction, which is the court’s statutory power to adjudicate the case was at issue in this case, as this particular type of statute of limitations is “more absolute” and can operate to remove the court’s power to adjudicate claims that are not brought within the time limit specified by the jurisdictional statute.

As a result, the Court concluded that, looking at the plain language of the statute which states that 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,” the claim must be brought by the day on which the last act giving rise to the plaintiff’s complete and present cause of action occurs. In this case, the last act would be the date on which the defendant last sold or offered the alleged security. The language of the statute clearly states that after that date, the claim cannot be entertained.

The SEC had the burden of establishing jurisdiction, which it failed to meet in this case. As a result, the action was dismissed without prejudice.

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