In SEC v. Microtune, Inc., Civil Action no.
3:08-CV-1105 (N.D. Tx.) the court concluded that the Commission's option
backdating claims and virtually of its remedies were time barred. In reaching
this conclusion the court held that the Commission had not diligently pursued
its claims. The court also ruled that the Commission's requests for
injunctions, officer and director bars and the repayment of incentive based
compensation under SOX Section 304 were in the nature of penalties and thus
barred by the five year limitation period of 28 U.S.C. Section 2462.
In Microtune the Commission brought an enforcement
action against the company and two of its former executives, CEO Douglas Bartek
and CFO and General Counsel Nancy Richardson. According to the SEC, stock
options of the company were fraudulently backdated between 2000 and mid-2003.
The complaint requested the Commission's usual remedies - permanent
injunctions, disgorgement, officer director bars, civil monetary penalties and
the repayment of discretionary compensation under SOX 304. The individual
defendants moved for summary judgment based on Section 2462 arguing that the
claims are time barred.
The court concluded that all claims and remedies, except
disgorgement are barred by Section 2462. First, the SEC claimed that the
doctrine of fraudulent concealment precluded granting the motion. To prevail on
this claim the SEC must establish that the defendant's wrongdoing was concealed
from it either through active concealment by the defendants or because the
nature of the conduct was such that it was self-concealing the court held. The
SEC must demonstrate that it acted diligently once it is on inquiry notice -
that is, that it "knew of or should have known of the facts giving rise to his
claim . . . "
In this case the court concluded that the limitation
period has not been tolled. The court rejected the SEC's contention that
securities fraud claims are inherently self-concealing. In this regard silence
or the "simple fact that a fraud was unknown to the plaintiff is not enough to
establish that a fraud itself is self-concealing." Rather, the fraud must be
incapable of being known even in the exercise of due diligence to be
self-concealing. While there is a conflict of fact on the question of whether
defendants concealed their conduct through affirmative acts that does not
preclude summary judgment the court held.
Rather, a party seeking to toll the statute of
limitations under the fraudulent concealment doctrine must also show that it
acted diligently. Thus once the SEC had notice it was required to diligently
purse and file its claims. Here it is not in dispute that during the
limitations period the SEC was put on inquiry notice. In 2003 the Commission
received evidence which it concedes was sufficient to put it on inquiry notice.
At that time the Commission questioned certain witnesses but took no further
action until the company brought its option practices to the attention of the
agency in 2006, announcing an internal investigation. The Commission waited
until the completion of that inquiry to finalize its investigation, filing suit
in 2008.
On this record the court concluded that the SEC failed to
act diligently. While the Commission's claim that it waited for the conclusion
of the internal investigation as a matter of resource allocation, the court
noted that "[w]hile perhaps an understandable method of allocating Commission
resources, such justification does not excuse the SEC's apparent inactivity
from mid-2004 to mid-2006, when further investigation would have uncovered the
full extent of Microtune's backdating and would have allowed the SEC to bring a
complaint against Microtune much earlier than 2008." In reaching this
conclusion the court rejected the SEC's argument that it was entitled to five
more years from the date of inquiry notice to file suit.
Finally, the court held that the statute of limitations
only applies to the remedies which are in the nature of a penalty. Clearly it
does not apply to the disgorgement request. Whether the other requested relief
is a penalty is a facts and circumstances assessment which must be made in each
case.
In this instance the injunctions and requests for officer
and director bars are in the nature of a penalty. The collateral consequences
are significant. Perhaps more importantly, the conduct occurred years ago.
Neither remedy specifically addresses the past conduct nor is it tied to
preventing future harm due to the low likelihood that either defendant would
engage in similar conduct in the future.
Likewise, the repayments sought under Section 304 are
also in the nature of a penalty. While the Commission argued that this remedy
is in the nature of disgorgement, in fact it is not tied to any ill-gotten gain
or any wrongful conduct. The amount is not keyed to harm caused to the company
or wrongdoing. Rather, the Commission simply seeks the repayment of all sums
paid. As such it is in the nature of a penalty and is time barred.
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