U.S. Supreme Court Rules That the Government Does Not Have an Unlimited Amount of Time in Which to Bring Civil Penalty Actions

by Dechert LLP
Contact

In a unanimous decision written by Chief Justice John G. Roberts, Jr., the United States Supreme Court has ruled that the Government does not have an unlimited amount of time to bring civil penalty actions based on fraud. In Gabelli v. Securities and Exchange Commission, 11-1274 (U.S. Feb. 27, 2013), the Supreme Court ruled that 28 U.S.C. § 2462, the five-year statute of limitations applicable to civil penalty actions brought by the Government, starts running on the date the allegedly fraudulent conduct occurred and is not subject to a discovery rule in cases based on fraud. Section 2462 states that “[e]xcept as otherwise provided by Act of Congress,” an action for a civil penalty “shall not be entertained unless commenced within five years from the date when the claim first accrued.” The Securities and Exchange Commission (the “SEC”) had argued that a civil penalty claim sounding in fraud accrues when the Government discovers or reasonably should have discovered the violation. But the Court squarely rejected the SEC’s argument, noting the “lack of textual, historical, or equitable reasons to graft a discovery rule onto the statute of limitations of § 2462.”1

The SEC originally brought claims against Marc Gabelli, a former portfolio manager of Gabelli Global Growth Fund (the “GGGF”), and Bruce Alpert, the Chief Operating Officer of Gabelli Funds, LLC, alleging, among other things, that Gabelli and Alpert had aided and abetted a violation by Gabelli Funds of Section 206 of the Investment Advisers Act of 1940, 15 U.S.C. §§ 80b-6(1)-(2). According to the SEC, Gabelli Funds had violated Section 206 by allowing one investor to engage in frequent trading of mutual fund shares in exchange for a small investment in a Gabelli hedge fund without disclosing the trading or investment to the GGGF board of directors. Although Gabelli Funds had caused the trading at issue to end in August 2002, the SEC did not file its complaint until April 2008. The SEC sought to avoid the bar of Section 2462’s five-year statute of limitations by arguing that it had not discovered the alleged fraud until late 2003, after then-New York Attorney General Eliot Spitzer announced his investigation of market timing in mutual funds.

At the motion to dismiss stage of the case, the United States District Court for the Southern District of New York dismissed as time-barred the SEC’s civil penalty claim for aiding and abetting a violation of Section 206.2 But, on appeal by the SEC, the United States Court of Appeals for the Second Circuit reversed the District Court and held that, for purposes of Section 2462’s statute of limitations, a claim sounding in fraud does not accrue until the SEC discovers it or reasonably should have discovered it.3

The Supreme Court granted certiorari on September 25, 2012, and oral argument was held on January 8, 2013. In its 9-0 decision, the Court explained that “the most natural reading” of Section 2462 is that “a claim based on fraud accrues—and the five-year clock begins to tick—when a defendant’s allegedly fraudulent conduct occurs.”4 The Court noted that since the 1800s, it has been the “standard rule” that an action accrues “when the plaintiff has a complete and present cause of action.”5 Moreover, the Court said, statutes of limitation are vital to the welfare of society and advance the basic policies of repose and elimination of stale claims.6 That is particularly so in cases involving the pursuit of penalties, since they are not intended to compensate but are instead intended to punish and label wrongdoers.7

According to the Court, the discovery rule is an exception to the general rule of accrual, and can suspend the running of a limitations period where a plaintiff has been injured by fraud and remains ignorant of it, without any fault or want of diligence or care on his or her part.8 But, the Court explained, the discovery rule has not been and should not be applied in a case like this one, where the plaintiff is not a victim seeking recompense for a latent injury, but is instead the Government bringing an enforcement action.9 Unlike the situation of an individual victim who may not know he or she has been wronged until an injury becomes apparent, the Government is charged with rooting out potential claims. That is particularly so here, where the SEC has as its mission to investigate potential violations of the federal securities laws and has “many legal tools at hand to aid in that pursuit.”10

The Court further explained that the discovery rule proposed by the SEC would present particular challenges for the courts, because it would require courts to determine exactly when the Government knew or should have known of a fraud.11 This would be a very challenging inquiry to force upon courts given that many individuals and agencies might have knowledge of potential wrongdoing, issues concerning agency priorities and resource constraints play a role in the government’s determinations about whether to bring enforcement actions, and governmental privileges might come into play if discovery were sought on the issues of when the Government knew or should have known about wrongdoing.12 Given the challenges associated with applying the discovery rule to Government penalty actions, the Court held that Congress is better suited than courts are to determine whether such a rule should apply.13

The Supreme Court’s decision is a blow to the enforcement powers of all Government agencies. The Government can no longer pursue expired civil penalty claims sounding in fraud simply by pleading reliance on the discovery rule. And companies and individuals can take some comfort in the fact that conduct that occurred more than five years ago cannot form the basis of a penalty claim, unless the Government can establish fraudulent concealment, equitable estoppel or equitable tolling.14

Dechert LLP represents Petitioner Bruce Alpert in this matter.

Footnotes

1 Gabelli v. SEC, No. 11-274, slip op. at 11 (U.S. Feb. 27, 2013).

2 SEC v. Gabelli, No. 08-CV-3868, 2010 WL 1253603 (S.D.N.Y. Mar. 17, 2010).

3 SEC v. Gabelli, 653 F.3d 49, 59-61 (2d Cir. 2011). Note that this decision was based solely on the pleadings and was not a decision on the merits of the dispute.

4 Gabelli v. SEC, No. 11-274, at 4.

5 Id. at 5 (internal quotation marks and citation omitted).

6 Id.

7 Id. at 8-9.

8 Id. at 6.

9 Id. at 6-8.

10 Id. at 8.

11 Id. at 9-11.

12 Id.

13 Id. at 11.

14 Note that defendants deny any wrongdoing and the case is yet to be tried. After the case is remanded, defendants will have the opportunity to refute the SEC's claims.

 

Written by:

Dechert LLP
Contact
more
less

Dechert LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.