The SEC Whistleblower Law and the Statute Of
Limitations: Reporting Securities Fraud Under the Securities
Whistleblower Act in a Timely Manner
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.
To read further
about the SEC Whistleblower Statute of Limitations, click
here.
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 whistleblowers who engage in SEC-related
whistleblower conduct or other SOX-protected activity, 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. To learn more about how
our
law firm represents whistleblowers alleging securities or
commodities fraud against the government, click here.
The Statute of Limitations in SEC Whistleblower
Cases/Actions
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 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.
For more Information on whistleblower claims and to
speak with a whistleblower attorney, please contact Shauna Itri
at sitri@bm.net or
215-875-3049. To read further about What
Whistleblower Clients Can Expect From Our Lawyers, click
here.
If you have discovered evidence of government
fraud, contact an experienced False Claims Act attorney before
blowing the whistle. You may be entitled to a substantial reward
and the legal protections afforded to whistleblowers under state
and federal laws. The attorneys of Berger & Montague are
nationally recognized experts in Whistleblower/Qui Tam actions with
over a decade of experience pursuing these complex fraud cases. For
more information or to schedule your confidential consultation, use
the form on this page or call us at 1-800-424-6690.
For further reading:
SEC Prepare for Whistleblower Payouts under Dodd-Frank Act
SEC Whistleblower Statute: Section 922 of the Dodd-Frank Act
Read Further About Securites and Commodities Fraud and Our
Attorneys
Federal and State Whistleblower Laws Relating to the SEC
Whistleblower Programs
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