SEC v. Bartek: Officer/Director Bans Barred by Statute of Limitations
In SEC v. Bartek, the Fifth Circuit Court of Appeals held that the discovery rule exception does not apply to the federal statute of limitations (codified at 28 U.S.C. § 2462), and that an injunction permanently barring defendants from serving as officers or directors at any public company is a penalty under § 2462. 2012 WL 3205446 (Fifth Cir. Aug 7, 2012). The court held that because there was no discovery rule exception in the statute and because the remedy sought by the plaintiff was a penalty, the claims were barred by § 2462.
Douglas Bartek was the founder and CEO of Microtune, a company that manufactured silicon tuners. Nancy Richardson was the general counsel and CFO of Microtune. In 2008, the Securities and Exchange Commission (“SEC”) brought suit against Bartek and Richardson for violations of the antifraud and books and records provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934.
According to the SEC, Bartek and Richardson failed to properly expense backdated stock options granted to officers and employees of Microtune from 2000 to 2003. Allegedly, Bartek retroactively selected grant dates, using the date of the lowest stock price over the previous two weeks as the supposed option grant date. The SEC claimed that the alleged backdating scheme caused Microtune to understate over $22.5 million of compensation expenses and overstate income in filings to the SEC. The SEC sought civil penalties and permanent injunctions barring Bartek and Richardson from serving as officers or directors at any public company.
Bartek and Richardson filed a motion to dismiss, arguing that the claims were barred by the five-year federal statute of limitations for enforcement of civil penalties. 28 U.S.C. § 2462. The district court granted the motion. On appeal, the SEC argued that the discovery rule exception should apply to § 2462 and therefore that the claims did not begin to accrue until the SEC first discovered the violations in 2003. Application of the discovery rule means that a claim begins to accrue “upon discovery of harm” instead of when the violation occurred.
To determine whether the discovery rule applied to § 2462, the Fifth Circuit considered the text of the statute and case law. The court found no support for a discovery rule exception in the text of § 2462. With respect to case law, the Fifth Circuit court began its analysis by noting that it had previously held that “[i]t is abundantly clear that both the courts and Congress have construed the ‘first accrual’ language of § 2462 to mean the date of the violation.” (citing United States v. Core Labs., Inc., 759 F.2d 480, 482 (5th Cir. 1985)). The court also noted that the 9th, 11th, and D.C. Circuits have “similarly held that § 2462 does not incorporate a discovery rule.” Finally, the court applied the Supreme Court’s holding that “the general meaning of when a right accrues is when that claim comes into existence. (citing United States v. Lindsay, 346 U.S. 568, 569 (1954)). Thus, the court ruled that the discovery rule did not apply to § 2462.
The SEC also argued that the permanent officer and director bars it sought against Bartek and Richardson were not penalties, but were instead equitable remedies. Equitable remedies, unlike penalties, are not subject to the time limitations of § 2462. The court explained that “[i]n determining whether the sanction is a penalty [under § 2462], a court must objectively consider the degree and extent of the consequences to the subject of the sanction.” The court found that the injunctions were penalties because they “would have a stigmatizing effect and long-lasting repercussions” and because they wouldn’t remedy past harm. Therefore, the SEC’s permanent injunction claims against Bartek and Richardson were subject to the time limitations of § 2462.
Because there was no discovery rule exception to § 2462 and because the injunctions sought by the SEC were penalties, the court affirmed the dismissal of the SEC’s claims against Bartek and Richardson.
The primary materials for this case may be found on the DU Corporate Governance website.