Sec. & Exch. Comm'n v. Kovzan, Case No. 11–2017–JWL.

• Decision Date: 04 August 2011
• Docket Number: Case No. 11–2017–JWL.
• Citation: 807 F.Supp.2d 1024
• Parties: SECURITIES AND EXCHANGE COMMISSION, Plaintiff, v. Stephen M. KOVZAN, Defendant.
• Court: U.S. District Court — District of Kansas

807 F.Supp.2d 1024

SECURITIES AND EXCHANGE COMMISSION, Plaintiff,

v.Stephen M. KOVZAN, Defendant.

Case No. 11–2017–JWL.

United States District Court, D. Kansas.

Aug. 4, 2011.

Rick A. Fleming, Office of the Securities Commissioner, Topeka, KS, David Williams, Erica Y. Williams, Helaine Schwartz, Jeffrey Tao, Securities & Exchange Commission, Washington, DC, for Plaintiff.

Stephen L. Hill, Jr., F.G. Maxwell Carr–Howard, Lyndsey J. Conrad, Husch Blackwell LLP, Kansas City, MO, Andrew B. Weissman, Christopher A. Wilber, Nicole R. Rabner, Wilmer Cutler Pickering Hale & Dorr, LLP, Washington, DC, J. David Zetlin–Jones, Wilmer Cutler Pickering Hale & Dorr, LLP, New York, NY, for Defendant.

MEMORANDUM AND ORDER

JOHN W. LUNGSTRUM, District Judge.

In this case, the Securities Exchange Commission (“SEC”) has brought various claims against defendant Stephen M. Kovzan under the federal Securities Act of 1933 (“Securities Act”), 15 U.S.C. § 77a et seq., and the federal Securities Exchange Act of 1934 (“Exchange Act”), 15 U.S.C. § 78a et seq. The matter is presently before the Court on defendant's motion to dismiss the amended complaint (Doc. # 23). For the reasons set forth below, the motion is granted in part and denied in part. The motion is granted with respect to Counts One, Two, Three, Four, and Nine to the extent they are based on the conduct alleged in Paragraph 50 of the amended complaint, and with respect to Count Six to the extent it is based on the conduct alleged in Paragraphs 55(b), 56(c), and 57 of the amended complaint; and those claims are hereby dismissed. The motion is denied in all other respects.

I. Background

Beginning in 2000, defendant served as Vice President of Financial Operations and as Chief Accounting Officer (“CAO”) at NIC Inc. (“NIC”), a company located in Olathe, Kansas. In August 2007, defendant became NIC's Chief Financial Officer (“CFO”). Jeffery Fraser, one of NIC's founders, served as NIC's Chief Executive Officer (“CEO”) and Chairman of the Board of Directors from May 2002 until 2008.

In this civil enforcement action, the SEC brings claims against defendant under the Securities Act and the Exchange Act, seeking civil money penalties, an injunction against further violations, a prohibition against defendant's acting as an officer or director of a publicly-traded company, and disgorgement of any ill-gotten gains. The SEC's claims are centered on its allegations that from 2002 to 2005 Mr. Fraser received over $1.18 million in perquisites that were not reported by NIC as his income, including (a) the costs for Mr. Fraser to commute by private aircraft from his home in Wyoming to NIC's headquarters in Kansas, and (b) reimbursements for other personal expenses, including for homes, vacations, cars, electronics, and other items. The SEC alleges that defendant was involved with the preparation and signing of public filings with the SEC from 2002 to 2006 that were materially false and misleading because they failed to disclose Mr. Fraser's perquisites as income.

II. Standards Governing a Motion to Dismiss

The Court will dismiss a cause of action for failure to state a claim only when the factual allegations fail to “state a claim to relief that is plausible on its face,” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007), or when an issue of law is dispositive, see Neitzke v. Williams, 490 U.S. 319, 326, 109 S.Ct. 1827, 104 L.Ed.2d 338 (1989). The complaint need not contain detailed factual allegations, but a plaintiff's obligation to provide the grounds of entitlement to relief requires more than labels and conclusions; a formulaic recitation of the elements of a cause of action will not do. See Bell Atlantic, 550 U.S. at 555, 127 S.Ct. 1955. The Court must accept the facts alleged in the complaint as true, even if doubtful in fact, see id., and view all reasonable inferences from those facts in favor of the plaintiff, see Tal v. Hogan, 453 F.3d 1244, 1252 (10th Cir.2006). Viewed as such, the “[f]actual allegations must be enough to raise a right to relief above the speculative level.” Bell Atlantic, 550 U.S. at 555, 127 S.Ct. 1955. The issue in resolving a motion such as this is “not whether [the] plaintiff will ultimately prevail, but whether the claimant is entitled to offer evidence to support the claims.” Swierkiewicz v. Sorema N.A., 534 U.S. 506, 511, 122 S.Ct. 992, 152 L.Ed.2d 1 (2002) (quoting Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974)).

III. Statute of Limitations

A. Discovery Rule

The SEC filed this action on January 12, 2011. Defendant argues that all claims relating to conduct before January 12, 2006, should be dismissed as barred by the five-year statute of limitations found at 28 U.S.C. § 2462. That statute provides:

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....

Id. The SEC agrees that Section 2462 applies here, but it argues that the statute of limitations is subject to a “discovery rule” for fraud claims. The SEC argues that if such a rule is applied, the action is timely, based on its allegations that it first received inquiry notice of the fraud at issue here in June 2007, that it subsequently exercised due diligence in investigating, and that it could not have discovered the facts underlying the fraud until several years after receiving inquiry notice. Thus, the Court must determine whether Section 2462 should be subject to a discovery rule in this context.

The Supreme Court recently described the discovery rule as follows:

[I]n the statute of limitations context, the word “discovery” is often used as a term of art in connection with the “discovery rule,” a doctrine that delays accrual of a cause of action until the plaintiff has “discovered” it. The rule arose in fraud cases as an exception to the general limitations rule that a cause of action accrues once a plaintiff has a complete and present cause of action. This Court long ago recognized that something different was needed in the case of fraud, where a defendant's deceptive conduct may prevent a plaintiff from even knowing that he or she has been defrauded. Otherwise, “the law which was designed to prevent fraud” could become “the means by which it is made successful and secure.” Bailey v. Glover, 21 Wall. [88 U.S.] 342, 22 L.Ed. 636 (1874)]. Accordingly, “where a plaintiff has been injured by fraud and remains in ignorance of it without any fault or want of diligence or care on his part, the bar of the statute does not begin to run until the fraud is discovered.” Holmberg v. Armbrecht, 327 U.S. 392, 397, 66 S.Ct. 582, 90 L.Ed. 743 (1946) (internal quotation marks omitted; emphasis added). And for more than a century, courts have understood that fraud is deemed to be discovered when, in the exercise of reasonable diligence, it could have been discovered.

Merck & Co. v. Reynolds, ––– U.S. ––––, 130 S.Ct. 1784, 1793–94, 176 L.Ed.2d 582 (2010) (other citations and internal quotations omitted, emphasis in original). Most often cited is this statement of the rule from Holmberg:

[T]his Court long ago adopted as its own the old chancery rule that where a plaintiff has been injured by fraud and “remains in ignorance of it without any fault or want of diligence or care on his part, the bar of the statute does not begin to run until the fraud is discovered, though there be no special circumstances or efforts on the part of the party committing the fraud to conceal it from the knowledge of the other party.” Bailey v. Glover, 21 Wall. [88 U.S.] 342, 348, 22 L.Ed. 636; and see Exploration Co. v. United States, 247 U.S. 435, 38 S.Ct. 571, 62 L.Ed. 1200 [ (1918) ]; Sherwood v. Sutton, Fed. Cas. No. 12,782, 5 Mason 143 [21 F.Cas. 1303 (C.C.D.N.H.1828) ].

This equitable doctrine is read into every federal statute of limitation.

Holmberg, 327 U.S. at 397, 66 S.Ct. 582.¹ The Tenth Circuit, in reliance on Holmberg and Bailey, has consistently applied this discovery doctrine (sometimes called equitable tolling) in cases involving private securities fraud claims. See, e.g., Anixter v. Home–Stake Prod. Co., 977 F.2d 1549, 1551 (10th Cir.1992); State of Ohio v. Peterson, Lowry, Rall, Barber & Ross, 651 F.2d 687, 692 (10th Cir.1981); Esplin v. Hirschi, 402 F.2d 94, 103 (10th Cir.1968).

Although the Tenth Circuit has not addressed the application of the discovery rule in the context of Section 2462, a few other circuits have done so. Defendant relies most heavily on 3M Company v. Browner, 17 F.3d 1453 (D.C.Cir.1994), in which the D.C. Circuit Court refused to apply the discovery rule and applied Section 2462 to bar a review of penalties imposed by the Environmental Protection Agency for violations of an environmental statute. The court noted that the case did not involve any issue of discovering latent injuries, for which the discovery rule was developed. See id. at 1460. The court also noted that in the 19th Century, when the predecessor to Section 2462 was enacted, a claim generally “accrued” at the time of the violation. See id. at 1462. The court further stated that application of the statute of limitations should not be influenced by the agency's particular difficulties in enforcing the environmental statute, as such consideration might require hearings to determine whether the agency adequately lived up to its responsibilities. See id. at 1461.

Trawinski v. United Technologies, 313 F.3d 1295 (11th Cir.2002), involved a private enforcement action for violations of the Energy Policy and Conservation Act, which claims were governed by the statute of limitations in Section 2462. The Eleventh Circuit cited 3M in stating (without further analysis) that “[t]his discovery rule, which might be applicable to statutes of limitations in...