On February 27, 2013, the Supreme Court issued its much-anticipated decision in Gabelli v. SEC, unanimously rejecting the SEC’s view that government agencies can bring enforcement actions seeking civil penalties for fraudulent conduct outside the applicable statute of limitations period. The unanimous decision in Gabelli is a significant public defeat for the SEC, and while the opinion’s immediate impact should be relatively modest, over the longer term, the opinion may have a significant practical effect.

Introduction -

The SEC had argued that, in enforcement actions where government agencies seek civil penalties for fraud, a “discovery rule” should apply. While acknowledging that a five-year statute of limitations generally applies to such actions, the SEC claimed that that five-year period should not begin until the government agencies discovered the fraud, rather than when the fraud allegedly took place. The Supreme Court disagreed, reasoning there was no textual, historical or equitable support for such a rule. Although a “discovery rule,” subject to statutes of repose, makes sense in the context of private victims suing for fraud, the Court observed that it makes little sense in the context of government agencies specifically charged with rooting out fraud.

While the unanimous decision in Gabelli is a significant public defeat for the SEC, the opinion’s immediate impact should be relatively modest, given that most pending SEC enforcement cases were brought within five years of the conduct at issue. Over the longer term, however, the opinion may have a significant practical effect. By providing a clear statement on statute of limitations, the opinion may prompt government enforcement agencies to rethink their approach to investigating years-old conduct (other than where statutes of limitations are much longer, such as the 10-year limitations for FIRREA claims). In the meantime, the opinion provides a welcome degree of predictability to targets of those agencies. While Gabelli leaves certain questions unanswered, it is unquestionably helpful to those who have been frustrated by efforts of government agencies to pursue fraud investigations for years-old conduct.