On January 8, the Supreme Court of the United States heard oral arguments in Gabelli v. S.E.C., 133 S. Ct. 97 (2012) on the question: By when must the government initiate an action to enforce a civil fine, penalty, or forfeiture? The tenor of the arguments was heated — with Justices across the ideological spectrum taking issue with the position of the U.S. Securities and Exchange Commission (“SEC”) that governmental agencies may seek to enforce civil penalties without regard to how much time has elapsed between the allegedly wrongful conduct and the commencement of the enforcement action. The Court appears poised to give greater weight to the fairness of repose than to the government’s need for time to investigate after the discovery of fraud. It is also entirely possible that the High Court will reach beyond SEC enforcement actions to collar the time within which government agencies of all stripes must begin actions to assess civil penalties. This possible extension of Gabelli may be of particular interest to individuals and companies facing possible scrutiny from the Internal Revenue Service (“IRS”). A handful of Circuits have previously unhinged the Service’s enforcement actions for fraud under 26 U.S.C. §§ 6700 and 6701 from any time constraints, and that rule of law may now come under fire.
The Gabelli oral argument centered around a general statute of limitations that applies to civil government actions to enforce statutes that do not specify a period of repose. Title 28, U.S.C. § 2462 provides that “an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued.” In Gabelli, the SEC brought a civil action against Marc Gabelli, the portfolio manager for the Gabelli Global Growth Fund (“GGGF”), a mutual fund, and Bruce Albert, chief operating officer of Gabelli Funds (an investment adviser to GGGF). The SEC sought to enforce alleged violations of the Securities Exchange Act of 1934 and the Investment Advisers Act of 1940 more than five years after an alleged market timing scheme had ended but less than five years after the scheme was discovered. The SEC maintained that because the allegations sounded in fraud, the government’s claims did not “accrue” until the government discovered the violations. While the Second Circuit agreed with this position, the Supreme Court indicated last week that it will likely not.
At argument, Chief Justice Roberts noted that while private litigants may get the benefit of the discovery rule in fraud cases, “it’s when it’s the sovereign that’s bringing the action that the concerns about repose are particularly presented.” Oral Arguments, Gabelli v. S.E.C., No. 11-1274 at 47 (U.S. Jan. 8, 2013) [http://www.supremecourt.gov/oral_arguments/argument_transcripts/11-1274.pdf]. Justice Scalia expressed concern that the government’s position was akin to a “no statute of limitations” rule. Justice Breyer commented that the government’s position would “effectively abolish the statute of limitations” in fraud cases governed by § 2462, which applies not only to the SEC, but potentially to any federal agency. Mr. Lewis Liman, counsel for Petitioners, pointed out an important distinction which would still leave the government wide latitude with respect to non-penalty actions: § 2462 pertains to civil fines, penalties, and forfeitures only, and so does not establish or impose a statute of limitations for governmental remedial actions, such as disgorgement or injunctive relief.
One agency that might be affected by the Supreme Court’s opinion is the IRS. Circuit Courts of Appeal have declined to apply § 2462 to IRS penalties assessed under 26 U.S.C. §§ 6700 and 6701 pursuant to reasoning similar to that espoused by the SEC in Gabelli. Section 6700 imposes a penalty for promoting abusive tax shelters, while § 6701 prescribes penalties for aiding and abetting the understatement of tax liability. The Fifth Circuit, in Sage v. United States, cited language that echoes the discovery rule and determined that the assessment of penalties under § 6700 is constrained by no statute of limitations because the assessment occurs “only after the IRS becomes aware that an individual’s activities are prohibited.” The IRS could presumably wait a lifetime, under this reasoning, to assess penalties. The limitations period on collecting the civil penalty would begin to run only after the IRS assessed a fine. In Mullikin v. United States, the Sixth Circuit cited Sage when it issued a similar holding regarding § 6701, reasoning that Congress did not intend a limitations period to apply. The Second and Eighth Circuits have similarly held that § 2462 is inapplicable to § 6700.
If the Supreme Court rules in Gabelli that an underlying civil penalty “accrues” when fraudulent conduct takes place, and affords the government no reprieve via the discovery rule, these Circuits’ decisions (which hold that the penalty accrues only once assessed) would be called into serious question. As Chief Justice Marshall reasoned in 1805, “In a country where not even treason can be prosecuted after a lapse of three years, it could scarcely be supposed that an individual would remain forever liable to a pecuniary forfeiture.”