The SEC asked the court to impose an injunction against future harm against a defendant whose alleged illegal activities had ceased in 2008.
A district court dismissed a complaint brought by the SEC seeking injunctions when over a decade had lapsed since the alleged illegal activity. On remand from the Third Circuit, which had found that the requested remedies were not time-barred, the court was tasked with determining whether the requested injunction and penny stock bar were justified. They were not, the court said, finding that the basis for the Commission's contention that future violations were likely was weak and that, above all, the passage of time since the violations weighed heavily against imposing an injunction.The court concluded that the Commission failed to state a plausible claim for relief and granted the defendant's motion to dismiss (SEC v. Gentile, September 29, 2020, Martinotti, B.).
Penny stock schemes. The complaint alleged that Guy Gentile, engaged in two penny-stock manipulation schemes. The schemes took place in 2006-2007: the first scheme involved a gold and silver exploration company and the second scheme involved a natural gas producer. Any alleged criminal activity had ended as of mid-2008.
In 2010 the U.S. Attorney's Office for the District of New Jersey filed a criminal complaint against Gentile charging him with conspiracy to commit wire fraud. After Gentile entered into a cooperation agreement, the complaint was dismissed, but a grand jury later returned and indictment which was dismissed in 2017 on statute of limitations grounds. In the meantime, Gentile's co-defendants pleaded guilty to conspiring to commit securities fraud.
A long and winding road. The SEC filed its initial complaint against Gentile in March 2016, but the case was stayed until the indictment was dismissed. An amended complaint was filed in October 2017 alleging violations of the antifraud provisions and seeking an "obey-the-law" injunction and a bar from participating in penny stock options. Following the Supreme Court’s ruling in Kokesh v. SEC, the district court dismissed the case, finding that those remedies were punitive in nature and were thus barred by the 5-year statute of limitations in 28 U.S.C. § 2462.
The Third Circuit vacated and remanded the district court's judgment, holding, in an issue of first impression, that the penny stock bar and "obey the law" injunction were not "penalties" for the purposes of § 2462. The appellate court concluded that penny stock bars are a species of injunction and that the goal of preventing future harm distinguishes SEC injunctions from the disgorgement remedy at issue in Kokesh. The panel stressed that lower courts must assess if the injunction has a preventive purpose and is carefully tailored to enjoin only the conduct necessary to prevent a future harm. The Supreme Court later denied certiorari for Gentile's petition asking whether the statute of limitations in 28 U.S.C. § 2462 applies to "obey the law" injunctions and penny stock bars.
Too much time gone by. On remand from the Third Circuit, then, the main issue was whether the injunctions sought were justified under the Exchange Act. Gentile's argument was that the Commission failed to allege both that a substantive securities violation occurred and that there was a reasonable likelihood that he would again engage in illegal conduct. Since the alleged violations occurred in 2008 at the latest, a finding of liability would be punitive and therefore time-barred. Among other arguments, the Commission urged that the cessation of illegal activity is but one factor that a court could consider.
In an unpublished opinion, the court concluded that the Commission failed to state a plausible claim for relief. Since the alleged illegal conduct ceased in 2008, the SEC, the court observed, asked the court to enter an injunction preventing future harm against an individual who has not engaged in illegal securities activity for over a decade. While the Commission asserted that Gentile's denial of, and rejection of any responsibility for, wrongdoing supported the conclusion that he was likely to violate the laws in the future, the facts alleged to support this claim were, the court said, "feeble" and based on Gentile's comments during an interview characterizing the investigation as a "witch hunt." Finally, numerous other courts have denied injunctive relief where, as in this case, the injunction is sought long after the alleged violation. The court accordingly granted Gentile's motion to dismiss but gave the SEC one more chance to amend its complaint.
The case is No. 2:16-cv-01619.
Attorneys: Andrew M. Calamari for the SEC. Adam C. Ford (Ford O'Brien LLP) for Guy Gentile.
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