November 6, 2018
Appeal from the United States District Court for the District
of New Jersey (D.C. No. 2:16-cv-01619) District Judge:
Honorable Jose L. Linares
Staroselsky [Argued] Sarah Prins United States Securities
& Exchange Commission Counsel for Appellant.
C. Ford [Argued] Ford O’Brien LLP Counsel for Appellee.
Before: HARDIMAN, KRAUSE, and GREENBERG, Circuit Judges.
HARDIMAN, CIRCUIT JUDGE
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. SEC, 137 S.Ct. 1635
(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).
Guy Gentile, the owner of an upstate New York broker-dealer,
was involved in two pump-and-dump schemes to manipulate penny
stocks 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.
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.
"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.
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. 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. SEC
v. Gentile, No. 2:16-cv-01619, 2017 WL 6371301, at *1
(D.N.J. Dec. 13, 2017).
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.
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.
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
(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).
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 (1993)).
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 SEC 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.
remedies are found in 15 U.S.C. § 78u(d). The
Commission's general authority to seek injunctions
against ongoing or threatened violations, § 78u(d)(1),
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
78u(d)(1) injunctions that simply reference or restate the
text of statutory prohibitions are called
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,