Alert April 16, 2013

Federal Court Rules That Failure to Meet Statutory 180-Day Deadline After Wells Notice Does Not Bar Filing of Enforcement Action

The United States District Court for the Eastern District of New York held that the 180-day deadline in Section 929U of the Dodd-Frank Act imposes only an internal deadline on the SEC to file enforcement actions after issuing a Wells Notice, and does not act as a statute of limitations for enforcement actions.  Section 929U provides that, within 180 days of providing a written Wells Notice to any person, the SEC “shall either file an action against such person or provide notice to the Director of the Division of Enforcement of its intent to not file an action.”  Section 929U also provides that, if the Director of the Division of Enforcement or his designee determines that a particular investigation is “sufficiently complex,” the SEC may extend this deadline for “one or more additional successive 180-day periods.”

In September 2011, the SEC filed an enforcement action against NIR Group, LLC and Corey Ribotsky for allegedly defrauding investors in connection with securities transactions.  Before filing this action, the SEC issued a Wells Notice and subsequently obtained extensions within which to file the complaint.  Defendants moved to dismiss the complaint based upon on the SEC’s failure to allege compliance with Section 929U, but Defendants abandoned their motion to dismiss after the SEC was granted leave to file an amended complaint.  Instead, Defendants moved to compel discovery of SEC counsel’s testimony, as well as internal SEC documents, related to the SEC’s requests for extension of the 180-day deadline.  Defendants argued that these documents are relevant to its claim or defense because the time limit under Section 929U acts as a “de facto statute of limitations on enforcement actions.”  In response, the SEC moved to quash Defendants’ subpoena.

Magistrate Judge Gary R. Brown granted the SEC’s motion to quash, holding that the information sought by Defendants is not relevant to any claim or defense in the enforcement action, because the SEC’s failure to comply with the 180-day provision in the statute would not be a defense to the action.  Citing Supreme Court authority addressing instances of untimely compliance with other statutory deadlines and a decision by the District Court for the Southern District of Florida representing the sole authority to date addressing the Section 929U deadline, the Court held that the expiration of the 180-day deadline in Section 929U does not create a jurisdictional bar to SEC enforcement actions.  The court noted, however, that although the statute does not  grant defendants the right to dismiss an SEC enforcement action that is brought more than 180 days after the issuance of a Wells Notice, the statute may allow targets of a Wells Notice to bring an administrative proceeding or file a declaratory judgment action seeking an order to compel the SEC to act.  Finally, the Court held that, even assuming that the requested documents were relevant, they would be subject to various protections, including the attorney work-product privilege.

SEC v. The Nir Group, No. CV 11-4723 (E.D.N.Y. Mar. 24, 2013).