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Appeals Court Says SEC Injunction Unenforceable

A federal appeals court (11thCir) ruled that an SEC injunction entered in an enforcement action was unenforceable because it did not specify the prohibited conduct. The injunction was a typical "obey the law" injunction, according to the court, which permanently enjoined the defendant from violating the statutes and regulations cited in the SEC's complaint, including various securities antifraud provisions.

The SEC obtained a judgment against a company director, which reflected the profits he allegedly reaped from insider trading in the shares of his company. As remedies, the SEC sought a permanent injunction barring the director from further violations of the securities laws and disgorgement of his insider trading profits.

An injunction must be framed so that those enjoined know exactly what conduct the court has prohibited and what steps they must take to conform their conduct to the law, the appeals panel reasoned. The SEC's injunction did no more than instruct the director to obey the law, according to the court. The sweeping injunction reached any violation of the securities laws and regulations he may commit.

If the SEC believes that the director has committed a violation, it has the right to move the district court for an order to show cause why he should not be adjudged in civil contempt and sanctioned. It would not matter where the violation occurred. For example, since the injunction applies to violations of Exchange Act Rule 10b-5, if the defendant violated the antifraud rule in connection with the purchase or sale of securities in California, the district court could make him come to Atlanta to show cause, issued at the SEC's behest, and explain why he should not be jailed or fined for the violation.

In this hypothetical, the appeals panel said that, because the actor committed the violations in California and had no presence in Georgia , the district court and the SEC could not obtain jurisdiction over him if the SEC sued him in the Northern District of Georgia. By persuading the district court to sign the consent decree it presented in its stipulation with the corporate director, the court said the SEC apparently believes that the due process clause would present no hurdle to the enforcement of the injunction it has obtained. The clause would effectively bar the prosecution of an independent suit in Atlanta based on the California violation, but it would not bar a contempt proceeding in Atlanta based on the same violation.

The SEC also apparently believes that the Federal Rules of Civil Procedure would have little application in a contempt proceeding in Atlanta . If the SEC sued the defendant in California , he would have the benefit of all of the rights the rules provide a civil litigant, not to mention his Seventh Amendment right to a trial by jury. This would not be so in a contempt proceeding, according to the court, since the court would issue a show-cause order on the SEC's motion and promptly convene a hearing to permit the defendant to rebut the SEC's proof that he violated the law. Whether the court would delay the hearing to afford the defendant his rights under the rules, including discovery and a trial of the issues the court would ordinarily submit to a jury were the SEC to sue him in a separate action rather than seek enforcement of the injunction, are issues a district court should consider in deciding whether to sign an obey-the-law consent decree such as the one the SEC drafted in this case.

This case came before the appeals panel because the director contended that the procedure the district court employed in determining the profits he should disgorge denied him due process. He could not challenge the injunction because, in signing the stipulation that the court could enter a decree, he waived any right he might have to appeal from the entry of the injunction.

Although the injunction was not before the appeals panel for review, it is still before the district court, which retained jurisdiction to enforce it. Because the injunction is still before the district court, the appeals panel reasoned that it would be remiss if it did not inform the court that the injunction is unenforceable.