RULING DENYING RELIEF DEFENDANTS' MOTION TO DISMISS CERTAIN CLAIMS IN THE SECOND AMENDED COMPLAINT

Janet Bond Arterton, U.S.D.J.

Plaintiff United States Securities and Exchange Commission (the "SEC") brought this civil enforcement action against Defendant Iftikar Ahmed ("Mr. Ahmed") alleging fraud in the purchase or sale of securities in violation of Section 10(b) of the Exchange Act and Rule 10b-5 (Count One); fraud in the offer or sale of securities in violation of Section 17(a) of the Securities Act (Count Two); fraud by an Investment Adviser in violation of Sections 206(1) and 206(2) of the Advisers Act (Count Three); an undisclosed principal transaction in violation of Section 206(3) of the Advisers Act (Count Four); and fraud on pooled investment vehicle investors in violation of Section 206(4) of the Advisers Act and Rule 206(4)-8 (Count Five). The SEC additionally seeks relief in the form of equitable disgorgement against each respective Relief Defendant in Counts Six through Fourteen. Relief Defendants Shalini Ahmed ("Ms. Ahmed") and her three minor children I.1, I.2 and I.3, Shalini Ahmed 2014 Grantor Retained Annuity Trust, DIYA Holdings LLC and DIYA Real Holdings LLC ("Defendants") now move [Doc. # 224] to dismiss all claims against them in the Second Amended Complaint [Doc. # 208] ("Am. Compl.") that arise from events alleged to have occurred prior to May 6, 2010 on the ground that such claims are time-barred.1 For the following reasons, Defendants' motion is denied.

I. Background

The SEC brought this action against Iftikar Ahmed on May 6, 2015 after Mr. Ahmed was criminally charged in the District of Massachusetts for unrelated allegations of insider trading. See SEC v. Ahmed, 123 F.Supp.3d 301, 306 n.1 (D. Conn. 2015). Plaintiff also included Relief Defendants in this action who it claims are the beneficiaries or custodians of at least some of the proceeds of Defendant's wrongful acts. Plaintiff alleges that Mr. Ahmed defrauded the venture capital firm of which he was a partner, Oak Investment Partners ("Oak"), as well as pooled investment funds managed by Oak, and companies held in those funds' portfolios, out of more than $65 million. (Am. Compl. ¶ 1.) According to Plaintiff, Mr. Ahmed employed fraudulent devices and misrepresentations in connection with several of Oak's investments by "frequently misrepresent[ing] and alter[ing] the price[s] of... investment[s] ... misrepresent[ing] the exchange rate at which foreign currency purchase price[s] [were] to be converted to the U.S. currency purchase price [s]," inflating costs and company performance, and fabricating or altering invoices for purported expenses. (Id. ¶¶ 2-3.)

Defendants' motion focuses on securities transactions that occurred prior to May 6, 2010, i.e., five years prior to the filing of the Complaint May 5, 2016, which Defendants contend are beyond of the applicable statute of limitations and thus time barred. (Def.'s Mem. Supp. Mot. to Dismiss [Doc. # 224] at 2-3.) Specifically, Defendants challenge the disgorgement sought by the SEC relating to the following alleged transactions or conduct:

II. Discussion

Defendants maintain that the five-year statute of limitations period imposed by 28 U.S.C. § 2462 applies to actions seeking disgorgement, and thus all claims for disgorgement which relate to transactions that occurred prior to May 6, 2010 are barred. Plaintiff responds that by its own terms Section 2462 applies only to a "civil fine, penalty, or forfeiture," and that the equitable remedy of disgorgement is none of these, and therefore its claims for disgorgement are not barred by the statute of limitations. 28 U.S.C. § 2462.

A. Defendants' Standing to Assert the Statute of Limitations Defense

The SEC argues that Defendants do not have standing to contest whether the SEC may seek disgorgement from them. (Pl's Opp'n to Def.'s Mot. to Dismiss [Doc. # 240] at 17.) In the SEC's view, "Defendants are merely nominees for [Mr. Ahmed], and thus the ill-gotten gains the SEC seeks to disgorge from Mr. Ahmed belong to him" and not Defendants. Defendants respond that in order for the SEC to obtain a disgorgement remedy, it must first prove that Defendants "(1) have received ill-gotten funds; and (2) do not have a legitimate claim to those funds." (Def.'s Reply Supp. Mot. to Dismiss [Doc. # 250] at 7.) Thus, they argue they have standing to assert the statute of limitations defense as to disgorgement on the underlying claims. (Id. at 8.)

The Court issued a preliminary injunction freezing "[t]he assets, funds, or other property held by or under the direct or indirect control of Defendant Iftikar Ahmed and Relief Defendants ... whether held in any of their names or for their direct or indirect beneficial interests, wherever located, up to the amount of $118,246,186." (See Ruling and Order [Doc. #113].) The Second Circuit affirmed this preliminary injunction by Summary Order dated November 4, 2016. See S.E.C. v. I-Cubed Domains, LLC, No. 15-2658-CV, 664 Fed.Appx. 53, 2016 WL 6561484 (2d Cir. Nov. 4, 2016). However, final determinations of whether those assets are in fact owned by Defendants, independently of Mr. Ahmed, await trial, and as long as the question of ownership remains open, Defendants have standing to contest whether these assets should be subject to disgorgement.3

B. Applicability of Section 2462 to Claims for Disgorgement4

Section 2462 sets forth a general limitations period for civil suits seeking certain sanctions under the United States Code. See Gabelli v. S.E.C., 568 U.S. 442, 133 S.Ct. 1216, 1219, 185 L.Ed.2d 297 (2013). It reads:

28 U.S.C. § 2462 (emphasis added). Thus, Section 2462's statute of limitations period on its face applies only to civil fines, penalties or forfeitures. Nonetheless, Defendants argue that disgorgement is also covered by this statute of limitations period, even though not specified in the statute, because "the term `forfeiture' in Section 2462 is not limited to any specific statutory provision using that label, and can be deemed to include claims labeled as seeking `disgorgement' where such claims essentially seek the same form of relief" (Def.'s Mem. Supp. Mot. to Dismiss at 7).

i. Disgorgement as an Equitable Remedy

The terms disgorgement and forfeiture must be interpreted "in light of [Section 2462's] history ... [and according to] the meaning generally accepted in the legal community at the time of enactment." Office of Workers' Comp. Programs v. Greenwich Collieries, 512 U.S. 267, 275, 114 S.Ct. 2251, 129 L.Ed.2d 221 (1994) (interpreting the meaning of the term "burden of proof" in the Administrative Procedure Act); see also Perrin v. United States, 444 U.S. 37, 42, 100 S.Ct. 311, 62 L.Ed.2d 199 (1979) (the court "look[s] to the ordinary meaning of the term `bribery' at the time Congress enacted [the Travel Act] in 1961" because language in statutes must "be interpreted as taking [its] ordinary, contemporary, common meaning."). Section 2462 was codified in 1948 but its predecessor statutes date back to the 1790s and its statutory language has changed little since. 3M Co. v. Browner, 17 F.3d 1453, 1458 n. 7 (D.C. Cir. 1994). Consequently, for guidance, the Court looks to the meaning of these two terms as they were understood at the end of the 18th century when Congress enacted the initial version of this statute.

In SEC v. Cavanaugh, the Second Circuit recognized that although "the term `disgorgement' has entered common legal parlance only recently ... the ancient remedies of accounting, constructive trust, and restitution have compelled wrongdoers to `disgorge'-i.e., account for and surrender-their ill-gotten gains for centuries" with "chancery courts [having] possessed the power to order equitable disgorgement in the eighteenth century." 445 F.3d 105, 119-20 (2d Cir. 2006). Thus, since the antecedents of Section 2462, disgorgement has been "understood to be an equitable remedy allowing chancery courts to order the repayment of ill-gotten gains." S.E.C. v. Saltsman, No. 07CV4370NGGRML, 2016 WL 4136829, at *25 (E.D.N.Y. Aug. 2, 2016) (citing Cavanagh, 445 F.3d at 116-20)).

Forfeiture, on the other hand, was a legal remedy with two generally accepted meanings. Id. It was an in rem statutory civil remedy to recover property used in criminal activity, including violations of customs and revenue laws. Austin v. United States, 509 U.S. 602, 612, 113 S.Ct. 2801, 125 L.Ed.2d 488 (1993); United States v. 92 Buena Vista Ave., 507 U.S. 111, 118-19, 113 S.Ct. 1126, 122 L.Ed.2d 469 (1993). Therefore, "[t]he owner of the seized property could be completely innocent of any wrongdoing, and the value of the property taken have no necessary relation to any loss to others or gain to the owner." S.E.C. v. Kokesh, 834 F.3d 1158, 1164-65 (10th Cir. 2016).

Second, forfeiture was used as a synonym for a fine. Austin, 509 U.S. at 614 n.7, 113 S.Ct. 2801 ("[D]ictionaries [from the end of the 18th century] confirm that `fine' was understood to include `forfeiture' and vice versa.").5 Reflecting the distinction between the equitable and legal remedies, "early disgorgements and forfeitures proceeded before different tribunals and on different legal theories." Saltsman, 2016 WL 4136829, at *25 (citing Stevens v. Gladding, 58 U.S. (17 How.) 447, 450, 15 S.Ct. 155 (1854) ("[E]quity cannot relieve against common law or statute penalties and forfeitures"); Horsburg v. Baker, 26 U.S. (1 Pet.) 232, 236, 7 S.Ct. 125 (1828) ("[A] Court of Chancery is not the proper tribunal for enforcing forfeitures.")).

Courts continue to view these two remedies as distinct, with different characteristics and purposes. The Supreme Court recently noted that unlike forfeiture, disgorgement is an equitable remedy that "applies only to specific assets," Kaley v. United States, ___ U.S. ___, 134 S.Ct. 1090, 1102 n.11, 188 L.Ed.2d 46 (2014). Moreover, the Second Circuit has clearly articulated the differences between the two terms. See e.g., S.E.C. v. Contorinis, 743 F.3d 296, 306 (2d Cir. 2014) ("disgorgement is an equitable remedy that prevents unjust enrichment" whose "underlying purpose is to make lawbreaking unprofitable for the law-breaker" while "forfeiture [is] a statutory legal penalty imposed as punishment");6 S.E.C. v. Lorin, 869 F.Supp. 1117, 1122 (S.D.N.Y. 1994) (disgorgement "merely deprives one of wrongfully obtained proceeds" and "returns the wrongdoer to the status quo before any wrongdoing had occurred," whereas forfeiture "alter[s] the status quo before the unlawful activity took place")7 (citing S.E.C. v. Texas Gulf Sulphur Co., 446 F.2d 1301, 1308 (2d Cir. 1971)).8

Significantly, Section 2462 has been interpreted as applying only to punishments. See Meeker v. Lehigh Valley R. Co., 236 U.S. 412, 423, 35 S.Ct. 328, 59 S.Ct. 644 (1915) ("The words `penalty or forfeiture' in [the antecedent to] this section refer to something imposed in a punitive way"); S.E.C. v. Power, 525 F.Supp.2d 415, 426 (S.D.N. Y 2007) (stating that "[t]he primary consideration when determining whether a claim seeks a `penalty' to which Section 2462 applies is whether the remedy at issue is `punitive' or `remedial' in nature."). It is therefore critical that courts in the Second Circuit have found that disgorgement is not punitive, whereas forfeiture is. See S.E.C. v. DiBella, 409 F.Supp.2d 122, 127 (D. Conn. 2006) (stating that "[p]enalties and forfeitures are meant to be punitive ... [whereas] [d]isgorgement... merely dispossesses the wrongdoer of the profits earned from illegal conduct.").9 As a result of this distinction, Contorinis found that because "forfeiture is punitive in nature, it would be irrational to impose it upon innocent third parties, whereas disgorgement's purpose — the prevention of unjust enrichment — would be thwarted if securities law violators were able to pass their illicit gains off to affiliates." Contorinis, 743 F.3d at 307.10

Accordingly, because Section 2462's statute of limitations covers only fines, penalties or forfeitures, all of which are punitive, the Court concludes that its statute of limitations does not apply to claims for disgorgement, which is not punitive but remedial.

ii. Gabelli and Defendants' Argument That § 2462 Applies to Claims for the Equitable Remedy of Disgorgement

Defendants rely on the Supreme Court's decision in Gabelli to support their contention that the SEC is precluded from seeking disgorgement of Defendants' ill-gotten gains for conduct that occurred more than five years before the complaint was filed because the remedy it seeks is in the nature of a forfeiture. However, Gabelli specifically stated that the timeliness of disgorgement and other equitable remedies was not before it, see Gabelli, 133 S.Ct. at 1220 n.1, and only held that the discovery rule would not extend the five-year statute of limitations applicable to the SEC's claims for civil penalties under Section 2462 "which go beyond compensation, are intended to punish, and label defendants wrongdoers" Id. at 1223.11

Defendants argue that even though Gabelli did not address Section 2462 in the context of disgorgement, its rationale with respect to forfeiture claims applies equally to disgorgement. (Def.'s Reply Supp. Mot. to Dismiss at 4.) Gabelli reasoned that applying the discovery rule to Section 2462 would vitiate the statute of limitations because "[i]t would leave defendants exposed to Governmental enforcement action not only for five years after their misdeeds, but for an additional uncertain period into the future." 133 S.Ct. at 1223. Defendants urge the Court to extend this rationale to the remedy of disgorgement, citing S.E.C. v. Graham, 21 F.Supp.3d 1300 (S. D Fla. 2014) aff'd, 823 F.3d 1357, 1363-64 (11th Cir. 2016).12

However, there is substantial authority within the Second Circuit that Section 2462's statute of limitations does not apply to claims for disgorgement and none suggesting otherwise.13 Even the post-Gabelli decisions demonstrate that Gabelli has not thus far altered this consensus. Most recently, the district court in Securities and Exchange Commission v. Straub14 declined to depart from "the weight of the authority in this jurisdiction hold[ing] that disgorgement, being a traditional equitable remedy, is not covered by Section 2462." No. 11 CIV. 9645 (RJS), 2016 WL 5793398, at *14 (S.D.N.Y. Sept. 30, 2016) (citing Wyly, 56 F.Supp.3d at 402). In S.E.C. v. Amerindo Investment Advisors, defendants unsuccessfully sought reconsideration of the court's grant of summary judgment to plaintiff on claims involving disgorgement in light of Gabelli because "the statute of limitations at issue in Gabelli applies only to civil penalties, and does not prevent a finding of liability or an awarding of other kinds of remedies." No. 05 CIV. 5231 RJS, 2014 WL 405339, at *9 (S.D.N.Y. Feb. 3, 2014), aff'd, 639 Fed. Appx. 752 (2d Cir. 2016) (defendants had waived their Section 2462 statute of limitations argument but the Second Circuit opined that "[t]he district court properly imposed disgorgement ... and correctly limited civil penalties to gains only from frauds occurring within the five-year statute of limitations for civil penalties.") (internal quotation marks omitted). See also S.E.C. v. Spongetech Delivery Systems, Inc., 10-CV-2031 DLI RML, 2015 WL 5793303, at *11 (E.D.N.Y. Sept. 30, 2015) (dictum) ("[u]nlike disgorgement, civil penalties are subject to the five-year statute of limitations in 28 U.S.C. § 2462, which concerns the enforcement of civil fines.").

Thus, while there has been no determination yet by the Second Circuit whether Section 2462's statute of limitations applies to claims for disgorgement,15 the reasoning in the many district court cases which have held that Section 2462 does not apply to disgorgement, buttressed by Second Circuit cases with analogous analysis, persuade this Court that Defendants' motion must be denied.

iii. This Court Declines to Follow Graham

In Graham, the Eleventh Circuit found "no meaningful difference in the definitions of disgorgement and forfeiture" and therefore held that "[b]ecause forfeiture includes disgorgement, § 2462 applies to disgorgement." S.E.C. v. Graham, 823 F.3d 1357, 1363-64. This Court disagrees and finds convincing the three reasons articulated by Judge Nicholas G. Garaufis in S.E.C. v. Saltsman for rejecting that holding in Graham: (1) "the Graham court failed to consider the varied historical meaning of the two terms, the continued differences between the two remedies, and the statutory context of Section 2462";16 (2) even the dictionary definitions the Graham court relied upon appear to have different meanings;17 and (3) every court to consider the underlying district court's ruling on disgorgement has rejected it.18 Saltsman, 2016 WL 4136829, at *27-28.

It is well established that a statute must be interpreted "not in a vacuum, but with reference to the statutory context, structure, history, and purpose." See e.g., Abramski v. United States, ___ U.S. ___, 134 S.Ct. 2259, 2267, 189 L.Ed.2d 262 (2014) (internal quotations and citation omitted). Nonetheless, Graham appears to have garnered its understanding of the words "forfeiture" and "disgorgement" solely from modern day usage of the terms given that the dictionaries it cited were all published in the 21st century.19 See Graham, 823 F.3d at 1363. Graham cites Black's Law Dictionary, which defines disgorgement as "[t]he act of giving up something (such as profits illegally obtained) on demand or by legal compulsion." Black's Law Dictionary (10th ed. 2014). Forfeiture, on the other hand, is defined as "[t]he loss of a right, privilege, or property because of a crime, breach of obligation, or neglect of duty." Id. Not only are these contemporary definitions, but despite appearing similar at first glance, they still reflect a continued distinction between the concepts of forfeiture and disgorgement. The definition of forfeiture links the behavior of an individual to the "loss of a right, privilege, or property" indicating that such loss is a consequence for that individual's actions. This is the essence of a punishment. On the other hand, disgorgement compels an individual to give up something, without necessarily any connection between the behavior of the individual and the act of giving that something up. Thus, these terms are not interchangeable, a further indication of Congress's "conscious choice to include one and not the other." See Saltsman, 2016 WL 4136829, at *28.

This Court declines to be guided by Graham, which has been described as an "outlier."20 Accordingly, it concludes that Section 2462 does not apply to disgorgement.

III. Conclusion21

For the foregoing reasons, Defendants' Motion to Dismiss Certain Claims in the Amended Complaint is DENIED.

IT IS SO ORDERED.