U.S. Supreme Court Rejects SEC’s Bid For More Time To Bring Civil Fraud Enforcement Action

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On February 27, the U.S. Supreme Court held that the clock on the five-year statute of limitations for the SEC to pursue civil fraud claims under the Investment Advisers Act begins to run when the fraud occurs, and not when it is discovered, because the “discovery rule” does not apply to government enforcement actions for civil penalties. Gabelli v. SEC, No. 11-1274, 2013 WL 691002 (Feb. 27, 2013). The Court’s holding followed an investment adviser’s appeal from a Second Circuit decision that, under the discovery rule, the statute of limitations had not accrued until the fraud was discovered or could have been discovered with reasonable diligence because the claims sounded in fraud. The Court reversed the Second Circuit’s decision and remanded for further proceedings on the basis that extending the fraud discovery rule to government civil penalty enforcement actions would improperly leave defendants exposed to government action for an uncertain period beyond the five years after their alleged misdeeds. The Court explained that the discovery rule is meant to preserve the claims of parties who have no reason to suspect fraud, but that the government, here the SEC, is different insofar as it is specifically tasked with rooting out fraud and possesses several legal tools to that end. The Court also observed that, unlike a standard victim of fraud seeking only recompense, the government also seeks remedies intended to punish.