Injunctions issued by the U.S. Securities and Exchange Commission against ongoing or threatened violations of securities law are not penalties, and therefore are not subject to the statute of limitations applying to securities enforcement actions, the U.S. Court of Appeals for the Third Circuit ruled Thursday.

The Third Circuit said a New Jersey federal judge erred by dismissing the SEC's proposed injunctions against broker-dealer Guy Gentile. The appeals court sent the case back to the district court for a determination on whether a bar on punitive injunctions applies to the remedies sought by the SEC.

U.S. District Judge Jose Linares held the SEC's proposed injunctions barring Gentile from violating certain securities laws and from participation in the penny stock industry amount to penalties. That would make those actions subject to a 2017 U.S. Supreme Court ruling, Kokesh v. SEC, holding that securities enforcement penalties are subject to a five-year statute of limitations.

The action stemmed from allegations that Gentile was involved in two "pump-and-dump" schemes to manipulate penny stocks in 2007 and 2008. In both schemes, Gentile was accused of manipulating the market by tracing trades and trade orders that created the false appearance of liquidity, market depth and demand for the stocks. A sealed criminal complaint was filed against Gentile in June 2012. Gentile agreed to cooperate against his confederates but the deal fell through in 2016 after the government rejected his demand for a nonfelony disposition. A grand jury indicted Gentile, but Linares dismissed the indictment as untimely.

Separately, the SEC brought a civil enforcement action against Gentile seeking the injunctions, as well as disgorgement of wrongful profits and civil monetary penalties. After the Supreme Court issued Kokesh, the SEC dropped its requests for disgorgement and penalties. But Linares dismissed the case in December 2017.

On appeal, the Third Circuit held that because punitive injunctions are barred by an SEC statute, the injunctions at issue do not fall under the five-year statute of limitations applying to civil fines, penalties and forfeitures.

"Injunctions may not be supported by the desire to punish the defendant or deter others, so courts abuse their discretion when they issue or broaden injunctions for those reasons," Judge Thomas Hardiman wrote, joined by Judges Cheryl Ann Krause and Morton Greenberg. "We therefore hold SEC injunctions that are properly issued and valid in scope are not penalties and thus are not governed by [the statute imposing the five-year statute of limitations on enforcement actions]."

In ruling that injunctions cannot be penalties subject to the five-year statute of limitations, the Third Circuit joins the Eleventh Circuit, which issued a similar ruling in 2016. However, the Fifth Circuit held in a nonprecedential 2012 opinion that SEC injunctions could be penalties subject to the statute of limitations. The Sixth, Eighth and Tenth circuits all declined to say if injunctions can be penalties, and the D.C. Circuit evaluates the issue on a case-by-case basis.

Gentile is no stranger to the headlines. In 2017, according to multiple press accounts, Gentile accused his girlfriend, Kristina Kuchma, of driving his Mercedes-Benz into the swimming pool at his home in the Bahamas right after he broke up with her.

Gentile's lawyer, Adam Ford of Ford O'Brien in New York, declined to comment.

Daniel Staroselsky, senior litigation counsel at the SEC, argued for the government at the Third Circuit. An SEC representative did not respond to a request for a comment about the ruling. A spokesman for the U.S. Attorney's Office for the District of New Jersey, Matthew Reilly, said his office had no comment on the ruling.