Last week, the Supreme Court dealt a blow to the Securities and Exchange Commission by ruling unanimously that the Commission cannot seek civil penalties over conduct that occurred more than five years before investigators took action. In other words, the five-year statute of limitations begins to run when the fraud occurs and not when it is discovered. The SEC will not be the only agency impacted by this decision as a large number of government agencies file civil actions. I just received a discussion of the case from our friends at Gibson Dunn, which filed an amicus brief in support of the Petitioner on behalf of SIFMA and the U.S. Chamber of Commerce. Here is an excerpt:
On February 27, 2013, the U.S. Supreme Court unanimously concluded that the five-year limitations period for federal enforcement actions seeking civil penalties, such as those brought by the SEC, begins to run when the alleged fraud occurs, not when it is discovered. In an opinion authored by Chief Justice Roberts in Gabelli v. Securities and Exchange Commission, No. 11-1274, the Court reversed a contrary decision by the Second Circuit and held that the fraud “discovery rule” should not be grafted onto 28 U.S.C. § 2462, a general statute of limitations that governs penalty provisions throughout the U.S. Code.
Gabelli Funds is a registered investment adviser that, among other things, advises the Gabelli family of mutual funds. In 2008, the SEC brought a civil enforcement action against Gabelli, its Chief Operating Officer, and a former portfolio manager, alleging that they allowed an investor to engage in “market timing” in a Gabelli fund. The SEC asserted violations of 15 U.S.C. §§ 80b-6(1) and (2) and sought civil penalties under § 80b-9. Because it was undisputed that the alleged market timing ceased in 2002, the Gabelli defendants sought to dismiss the SEC’s claims as barred by the five-year statute of limitations period set forth in 28 U.S.C. § 2462. The district court agreed and dismissed the SEC’s civil penalty claim as time barred. But the Second Circuit reversed, holding that because the underlying violations sounded in fraud, the statute of limitations period did not start running until the claim was “discovered” by the SEC.
The U.S. Supreme Court granted Gabelli’s petition for a writ of certiorari and, after briefing and argument, unanimously reversed the Second Circuit’s judgment in an opinion authored by Chief Justice Roberts. The Court focused on the plain language of § 2462, which states that “an action . . . for the enforcement of any civil fine, penalty, or forfeiture . . . shall not be entertained unless commenced within five years from the date when the claim first accrued.” “[T]he most natural reading of th[at] statute,” the Court concluded, is that the claim first “accrues” when it “comes into existence”–that is, when the “defendant’s allegedly fraudulently conduct occur[red].”
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