Supreme Court to Resolve Split on Timing for SEC Penalty Actions

Today, the Supreme Court granted a petition for certiorari in Gabelli v. Securities and Exchange Commission (11-1274). In the appeal from a Second Circuit opinion, the Court will decide whether a governmental claim for penalties accrues on the date that the underlying violation occurs, or when the SEC discovers (or reasonably could have discovered) the violation, for purposes of the 5-year statute of limitations for governmental penalty actions embodied in 28 U.S.C. s. 2462. The precise question presented is:

“When Congress has not enacted a separate controlling provision, does the government’s claim first accrue for purposes of applying the five-year limitations period under 28 U.S.C. s. 2462 when the government can first bring the action for a penalty?”

The Second Circuit, in an opinion adopting the SEC’s position, held that the discovery rule applies to SEC enforcement actions rooted in fraud. Under that rubric, the SEC could bring an enforcement action within five years of learning about a fraud, which, in many cases, can be far more than five years after the underlying violation occurred. The Supreme Court’s decision to take the case follows closely on the heels of the Fifth Circuit’s August 7, 2012 decision in SEC v. Bartek, previously discussed here. In Bartek, the Fifth Circuit held that the statute of limitations for penalties in SEC enforcement actions began to run on the date of the underlying in violation, and that the discovery rule does not apply to 28 U.S.C. s. 2462. The Bartek decision therefore created a clear Circuit split that the Supreme Court is poised to resolve next term.

 


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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