On August 7, 2012, the Fifth Circuit issued its decision (available here) in SEC v. Bartek. The SEC had filed a lawsuit against Douglas Bartek and Nancy Richardson (“defendants”), who were the CEO and CFO of Microtune, respectively, for alleged securities laws violations relating to backdating stock options. Specifically, the SEC
alleges that from 2000 to 2003, the Defendants improperly backdated stock options that the company granted to newly hired and existing employees and executives. Allegedly, Microtune failed to properly expense those options and Bartek allegedly selected grant dates using a two- week look-back procedure to find and use dates of the lowest stock price as the supposed option grant date. Bartek and Richardson backdated grants to newly hired executives and employees; backdated large “block” grants to officers and rank-and-file employees; and granted backdated options, cancelling those options when the company’s stock price dropped, and subsequently regranted the same options at a lower exercise price. . . . According to the SEC, the alleged backdating scheme resulted in Microtune’s failure to record and report over $22.5 million of gross compensation expenses, thus understating expenses and overstating income in various filings made with the Commission.
The SEC filed suit on June 30, 2008. On summary judgment, Judge Boyle of the Northern District of Texas, granted summary judgment on Defendants’ statute of limitations defense in Defendants’ favor and denied remedies sought by the SEC for the alleged violations (permanent injunctions, civil penalties, and officer/director bars), finding that these forms of relief were penalties under 28 U.S.C. § 2462 (and thus subject to its time limitation).
The SEC appealed, and the Fifth Circuit found in favor of the Defendants. The key issue before the Fifth Circuit was whether the SEC’s claims were subject to the discovery rule under 28 U.S.C. § 2462, which reads:
Except as otherwise provided by Act of Congress, 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 if, within the same period, the offender or the property is found within the United States in order that proper service may be made thereon.
The district court held that the SEC’s claims first accrued when the alleged violation occurred, not when the SEC alleges that it discovered the violation—i.e., the district court rejected the SEC’s argument that the discovery rule applies. (The SEC alleged that it did not have notice of the violations until its August 2003 investigation of revenue recognition practices at Microtune, and that the statute of limitations should have accordingly began to run in 2003).
The Fifth Circuit found that § 2462 does not contain a discovery rule exception. “[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. . . . Th[e] discovery rule, which might be applicable to statutes of limitations in state tort actions, has no place in a proceeding to enforce a civil penalty under a federal statute. The statute of limitations begins with the violation itself—it is upon violation, and not upon discovery of harm, that the claim is complete and the clock is ticking.” (citations and quotations omitted).
Next, the Fifth Circuit rejected the SEC’s claim that permanent injunctions and officer/director bars were equitable remedies and not penalties under § 2462. (Equitable remedies are not subject to § 2462’s time limitations.) “Based on the severity and permanent nature of the sought-after remedies, the district court did not error in denying the SEC’s request on grounds that the remedies are punitive, and are thus subject to § 2462’s time limitations.”
Bartek was represented by Lawrence Gaydos, Jeremy Kernodle, Ronald Breaux, and Nina Cortell, all of Haynes & Boones, L.L.P.
Richardson was represented by Susan Resley, of Morgan, Lewis & Bockius, L.L.P.; and Zeno Baucus, Edward Davis Jr., Justin Lichterman, Rachel McKenzie, Rebecca Mroz, and Joshua Rosenkranz, all of Orrick, Herrington & Sutcliffe, L.L.P.
The SEC was represented by SEC attorneys Toby Galloway and Hope Augustini.