Last week we heard from RUSH. This week we’re tuning in to The Supremes.

On January 8, 2013, the U.S. Supreme Court heard arguments in Gabelli v. Securities and Exchange Commission, No. 11-1274, concerning when the clock begins to run on the five-year statute of limitations for civil penalty claims by the SEC and other federal agencies. The 200-year-old statute at the heart of the dispute (28 U.S.C. §2462) provides: “Except as otherwise provided by Act of Congress, 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 . . . .” Taking their cue from the Supremes that, “No, you just have to wait,” the SEC argues that “accrued” means when the government discovered, or reasonably could have discovered, the alleged wrongdoing (in this case, market timing by two executives of investment adviser Gabelli Funds, LLC ). On the other hand, the two executives want to know, “How long must I wait, How much more can I take?arguing that “accrued” means when the government can first bring the action (typically when the alleged wrongdoing occurs), regardless of whether the government knows about it.

What can be divined from the oral argument? The justices appeared skeptical of the government’s position. It was pointed out that this was not a position that had ever been taken by any other government agency, and not by the SEC until 2004, even though the statute had been on the books for almost 200 years. Justice Breyer went so far as to press, “All I’m asking you for is one case [prior to 2004],” but the government’s attorney could not provide one.

Some of justices also commented that it would almost be impossible for a defendant to prove that the government “should have known” about something. There would be no bright-line rules to such an approach. Whether an agency “should have known” could potentially depend on any number of circumstances, for example whether the agency had 100 or 1,000 people reviewing things to shed light on a violation or even whether the agency was overworked or underfunded at the time of the violation. In other words, SEC, “Think it over.”

Given that the statute of limitations is already a generous five years and that the Court might be described by some as tending to favor bright-line rules, it would seem possible that the Court may rule against the SEC on this one. Such a result would restrict the ability of the SEC to pursue civil penalties for securities law violations long after the alleged conduct took place. And even though the SEC has been relatively diligent in pursuing enforcement actions related to the most recent economic crisis, such a ruling could shut the door to similar actions still yet to come. Stay tuned.