Sec. & Exch. Comm'n v. Gentile

• Decision Date: 26 September 2019
• Docket Number: No. 18-1242,18-1242
• Parties: SECURITIES AND EXCHANGE COMMISSION, Appellant v. Guy GENTILE
• Court: U.S. Court of Appeals — Third Circuit

939 F.3d 549

SECURITIES AND EXCHANGE COMMISSION, Appellant

v.Guy GENTILE

No. 18-1242

United States Court of Appeals, Third Circuit.

Argued November 6, 2018

Opinion Filed: September 26, 2019

Daniel Staroselsky [Argued] Sarah Prins, United States Securities & Exchange Commission, 100 F Street, N.E., Washington, D.C. 20549, Counsel for Appellant

Adam C. Ford [Argued] Ford O’Brien LLP, 575 Fifth Avenue, 17th Floor, New York, NY 10017, Counsel for Appellee

Before: HARDIMAN, KRAUSE, and GREENBERG, Circuit Judges.

OPINION OF THE COURT

HARDIMAN, Circuit Judge.

A five-year statute of limitations applies to any "action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise." 28 U.S.C. § 2462. In Kokesh v. S.E.C. , ––– U.S. ––––, 137 S. Ct. 1635, 198 L.Ed.2d 86 (2017), the Supreme Court held that "[d]isgorgement in the securities-enforcement context" is a "penalty" subject to that five-year limitations period. Id. at 1639. At issue in this appeal are two different remedies sought by the SEC: an injunction against further violations of certain securities laws and an injunction barring participation in the penny stock industry. The District Court held that those remedies—like the disgorgement remedy at issue in Kokesh —were penalties. We see these questions of first impression differently and hold that because 15 U.S.C. § 78u(d) does not permit the issuance of punitive injunctions, the injunctions at issue do not fall within the reach of § 2462. We will vacate the District Court’s order dismissing the Commission’s enforcement action and remand the case for the District Court to decide whether the injunctions sought are permitted under § 78u(d).

I¹

Appellant Guy Gentile, the owner of an upstate New York broker-dealer, was involved in two pump-and-dump schemes to manipulate penny stocks² from 2007 to 2008. In both schemes, Gentile promoted and "manipulated the market for ... stock by placing trades and trade orders that created the false appearance of liquidity, market depth, and demand for the stock." Am. Compl. ¶ 3, No. 2:16-cv-01619 (D.N.J. Oct. 6, 2017), ECF No. 47 (Complaint); see id. ¶ 7.

The United States Attorney’s Office for the District of New Jersey filed a sealed criminal complaint against Gentile in June 2012 and he was arrested a few weeks later. Gentile agreed to cooperate against his confederates, but the deal fell apart in 2016 after the Government rejected Gentile’s demand for a non-felony disposition. United States v. Gentile , 235 F. Supp. 3d 649, 651 (D.N.J. 2017). A grand jury indicted Gentile, but the District Court dismissed the indictment as untimely. Id. at 656.

Gentile "maintains an active presence in the securities industry" as the CEO of a Bahamas-based brokerage and the beneficial owner of a broker-dealer. Compl. ¶ 82. Since his criminal charges were dismissed, he has expressed an intention to expand that brokerage and hire new employees. Id. ¶ 14 (alleging Gentile announced plans to "increas[e] staff by 60 to 80 employees by year-end 2017, target[ ] 30 per cent growth, and reactivat[e] ‘stalled’ expansion plans"). And he has been quite candid about his view of the Commission’s enforcement action. He called it a "witch hunt," and stated in the news and on social media that he "did nothing wrong" and "never scammed anyone." Id. ¶ 80.

The Commission disagrees. In this civil enforcement action, filed eight years after Gentile’s involvement in the second scheme, it alleges violations of several provisions of the Securities and Exchange Acts.³ It initially sought: (1) an injunction prohibiting Gentile from violating those provisions in the future; (2) disgorgement of wrongful profits; (3) civil money penalties; and (4) an order barring him from the penny stock industry. Following Kokesh , the Commission dropped its requests for disgorgement and penalties. That left only its requests for an "obey-the-law" injunction and a prohibition on Gentile’s participation in penny-stock offerings. S.E.C. v. Gentile , No. 2:16-cv-01619, 2017 WL 6371301, at *1 (D.N.J. Dec. 13, 2017).

The District Court granted Gentile’s motion to dismiss. Id. at *4. Applying Kokesh , the Court found that the remedies the Commission sought were penalties under § 2462. Id. at *3–4. And because Gentile’s illegal activity ceased in 2008, id. at *1, the Court dismissed the case as untimely.

In holding the obey-the-law injunction was a penalty, the Court first noted that the injunction would not require Gentile to do anything the public at large is not already obliged to do, but it would stigmatize him. Nor would the injunction restore the status quo ante or compensate any victim of Gentile’s schemes. Similarly, the Court found the penny stock bar would punish Gentile by "restrict[ing] [his] business structure and methodology, in perpetuity ," without benefitting any victim or remediating the schemes’ effects. Id. at *4. Though it "underst[ood] [the Commission’s] desire to protect the public from predatory conduct," the Court could not conclude "that, under the limited set of facts currently before it, the requested injunctions are anything more than a penalty." Id. The Commission filed this appeal.

II

The default federal statute of limitations requires that "an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise," be brought within five years of the claim’s accrual. 28 U.S.C. § 2462. In Kokesh , the Supreme Court held disgorgement, "as it is applied in SEC enforcement proceedings, operates as a penalty under § 2462." 137 S. Ct. at 1645. The Court defined a "penalty" as a "punishment, whether corporal or pecuniary, imposed and enforced by the State, for a crime or offen[s]e against its laws." Id. at 1642 (alteration in original) (quoting Huntington v. Attrill , 146 U.S. 657, 667, 13 S.Ct. 224, 36 L.Ed. 1123 (1892) ). The Court’s definition of "penalty" was informed by two principles. First, whether a sanction is a penalty turns in part on whether the wrongdoing it targets was perpetrated against the public, rather than an individual. Id. Second, "a pecuniary sanction operates as a penalty only if it is sought ‘for the purpose of punishment, and to deter others from offending in like manner’—as opposed to compensating a victim for his loss." Id. (quoting Huntington , 146 U.S. at 668, 13 S.Ct. 224 ).

The Court held SEC disgorgement "readily" satisfies these criteria because (1) it is imposed for violations of public laws; (2) it is imposed for punitive purposes; and (3) in many cases the disgorged money is not used to compensate victims. Id. at 1643–44. The Commission protested that disgorgement sometimes does compensate victims, but the Court was unpersuaded. While "sanctions frequently serve more than one purpose," a "civil sanction that cannot fairly be said solely to serve a remedial purpose, but rather can only be explained as also serving either retributive or deterrent purposes, is punishment." Id. at 1645 (quoting Austin v. United States , 509 U.S. 602, 610, 621, 113 S.Ct. 2801, 125 L.Ed.2d 488 (1993) ).

According to Gentile, the Supreme Court’s definition of "penalty" applies equally to injunctions prohibiting future lawbreaking and participation in penny stock offerings. There is no question the Commission’s action is to enforce what Kokesh described as "public laws." Id. at 1643; see S.E.C. v. Teo , 746 F.3d 90, 101–02 (3d Cir. 2014). So this case turns on whether the remedies the Commission seeks are imposed for punitive reasons.

III

Both remedies are found in 15 U.S.C. § 78u(d).⁴ The Commission’s general authority to seek injunctions against ongoing or threatened violations, § 78u(d)(1), states:

Whenever it shall appear to the Commission that any person is engaged or is about to engage in acts or practices constituting a violation of any provision of this chapter, [or] the rules or regulations thereunder ... it may in its discretion bring an action in [district court] to enjoin such acts or practices, and upon a proper showing a permanent or temporary injunction or restraining order shall be granted without bond.

Section 78u(d)(1) injunctions that simply reference or restate the text of statutory prohibitions are called "obey-the-law" injunctions.

The Commission’s authority to seek a penny-stock industry bar is found in § 78u(d)(6)(A) :

In any proceeding under paragraph (1) against any person participating in, or, at the time of the alleged misconduct who was participating in, an offering of penny stock, the court may prohibit that person from participating in an offering of penny stock, conditionally or unconditionally, and permanently or for such period of time as the court shall determine.

Paragraph (6) does not use the word "enjoin" like paragraph (1) does, so first we must determine whether § 78u(d)(6) penny-stock industry bars are a species of injunction. Several considerations convince us they are.

First, take the text. Section 78u(d)(6) authorizes a court to "prohibit" a defendant from participating in penny stock offerings. Just like a typical injunction, this is a judicial order "to refrain from doing a particular thing .... which operates as a restraint upon the party in the exercise of his real or supposed rights." 2 Joseph Story, Commentaries on Equity Jurisprudence § 861, at 154 (1836). It is "wholly preventive, prohibitory, or protective," 4 John Norton Pomeroy, A Treatise on Equity Jurisprudence § 1337, at 3206 (4th ed. 1919), and it "directs the conduct of a party ... with the backing of [the court’s] full coercive powers." Nken v. Holder , 556 U.S. 418, 428, 129 S.Ct. 1749, 173 L.Ed.2d 550 (2009) (quoting Weinberger v. Romero-Barcelo , 456 U.S. 305, 312, 102 S.Ct. 1798, 72 L.Ed.2d 91 (1982) ).

The statute’s structure also suggests the penny stock bar is injunctive. It is only "in a[ ] proceeding [for an injunction under § 78u(d)(1) ]" that the statute empowers courts to issue the bar. Consistent with that close...