SEC v. Guy Gentile
939 F.3d 549
| 3rd Cir. | 2019Background
- Guy Gentile allegedly ran two pump-and-dump schemes involving penny stocks in 2007–2008; criminal charges filed in 2012 were later dismissed as untimely.
- The SEC filed a civil enforcement action in 2016 seeking: an "obey-the-law" injunction, disgorgement, civil penalties, and a permanent ban from the penny-stock industry.
- After Kokesh v. SEC (holding SEC disgorgement is a "penalty" under 28 U.S.C. § 2462), the SEC dropped its disgorgement and civil-penalty claims and pursued only injunctional relief.
- The district court dismissed the SEC's remaining claims as time-barred under § 2462, concluding the requested injunctions were penalties.
- The Third Circuit vacated that dismissal, holding properly issued § 78u(d)(1) injunctions and § 78u(d)(6) penny-stock bars are equitable, preventive relief (not § 2462 penalties), and remanded for the district court to determine whether the requested injunctions are permissible and properly tailored.
Issues
| Issue | Plaintiff's Argument (SEC) | Defendant's Argument (Gentile) | Held |
|---|---|---|---|
| Whether SEC "obey-the-law" injunctions are "penalties" under 28 U.S.C. § 2462 | Injunctions can have punitive effect and thus fall within Kokesh's definition of "penalty" | Kokesh's definition of "penalty" should apply equally to injunctions and bars, making them time-barred | A properly issued and framed § 78u(d)(1) injunction is preventive equitable relief, not a § 2462 penalty |
| Whether § 78u(d)(6) penny-stock industry bars are injunctive or punitive | Bars function as punishment and restrict business without compensating victims | Bars are a form of injunctive relief authorized in proceedings under § 78u(d)(1) | § 78u(d)(6) penny-stock bars are injunctive in nature and, when properly tailored, are not § 2462 penalties |
| Whether Kokesh undermines equitable rule that injunctions deter the defendant, not punish generally | Kokesh treats deterrence as punitive, blurring the line between injunctions and penalties | Preventive injunctions deterring the specific defendant are traditional equity and not "penalties" for § 2462 | Kokesh does not convert properly preventive injunctions into penalties; general deterrence cannot justify an injunction |
| Whether "obey-the-law" injunctions (which restate statutory prohibitions) are inherently punitive | Such injunctions add stigma and restrain activity and thus function as penalties | Obey-the-law injunctions are permissible if narrowly tailored and supported by a proper showing of likelihood of future harm | Obey-the-law injunctions are not categorically punitive but must be carefully tailored and supported by a proper showing of future harm; otherwise they must be denied on equitable grounds, not time-barred |
Key Cases Cited
- Kokesh v. SEC, 137 S. Ct. 1635 (2017) (held SEC disgorgement is a "penalty" under § 2462)
- Hecht Co. v. Bowles, 321 U.S. 321 (1944) (equitable injunctions require traditional discretionary principles)
- Aaron v. SEC, 446 U.S. 680 (1980) (SEC must show sufficient evidentiary predicate to justify injunction)
- Grupo Mexicano de Desarrollo, S.A. v. Alliance Bond Fund, Inc., 527 U.S. 308 (1999) (historical scope of equity jurisdiction)
- SEC v. Commonwealth Chem. Sec., Inc., 574 F.2d 90 (2d Cir. 1978) (counseled circumspection in issuing SEC injunctions)
- SEC v. Bonastia, 614 F.2d 908 (3d Cir. 1980) (factors for assessing injunctions; upheld obey-the-law injunction in context)
- United States v. EME Homer City Generation, LP, 727 F.3d 274 (3d Cir. 2013) (injunction that functions as monetary relief may be improper equitable relief)
- Tull v. United States, 481 U.S. 412 (1987) (distinguishing equitable relief from civil penalties)
- eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006) (modern standards for equitable relief)