Supreme Court Adopts Strict Interpretation of the Statute of Limitations for SEC Civil Penalty Enforcement Actions

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On February 27, 2013, the United States Supreme Court unanimously adopted a strict interpretation of the five-year period in which the Securities and Exchange Commission (“SEC”) may seek to impose a civil penalty on a registered investment adviser. In Gabelli v. SEC, No. 11-1274, the Supreme Court made clear that when the government acts in an enforcement capacity seeking civil penalties, it cannot benefit from the more lenient “discovery rule” standard available to private plaintiffs. The Gabelli decision has broad implications for enforcement actions brought by the SEC and other federal agencies because the particular five-year statute of limitations at issue applies to a wide variety of civil fines and penalties.

The defendants in Gabelli were the portfolio manager of a mutual fund and the Chief Operating Officer of the fund’s investment adviser. Between 1999 and 2002, the defendants allegedly allowed a fund investor to engage in “market timing” in the fund and then misrepresented that fact to the fund’s board of directors and other investors. The SEC brought a civil suit seeking penalties against the defendants for aiding and abetting fraud in violation of the Investment Advisers Act of 1940. Although the SEC began its investigation in the fall of 2003, it did not file suit until April 2008.

The statutory provision at issue, 28 U.S.C. § 2462, provides that “except as otherwise provided by Act of Congress,” any action “for the enforcement of any civil fine, penalty, or forfeiture” must be “commenced within five years from the date when the claim first accrued.” Based on that provision, the defendants moved to dismiss the SEC’s claims for civil penalties on the ground that the statute of limitations had expired. The district court agreed and dismissed the case. The Second Circuit reversed, holding that the so called “discovery rule” – under which a cause of action sounding in fraud does not accrue until the plaintiff discovers the fraud – applied. Thus, the five-year clock did not begin ticking until the SEC had discovered its cause of action.

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