On February 27, 2013, the United States Supreme Court put a stop to the Securities and Exchange Commission's (SEC) practice of bringing civil enforcement actions outside the five-year statute of limitations. In an opinion by Chief Justice Roberts, the Court unanimously held that the statute-of-limitations clock runs from the date the wrongful conduct occurs, not from the date the government discovers the conduct.1
Under the Investment Advisers Act of 1940, the SEC may seek civil penalties against firms and individuals that violate the Act. In seeking such civil enforcement, the SEC is bound by a statute of limitations, codified in 28 U.S.C. § 2462, which precludes the government from filing civil enforcement actions more than five years after the claim accrues. In the case of an ongoing fraud, the statute begins to run at the time of the last act committed in furtherance of the fraud. The statute of limitations notwithstanding, the SEC routinely files claims more than five years after a fraud occurs, contending that the statute of limitations should run from the date the SEC discovered the fraud, not the date of the fraud itself.2
Such was the case in Gabelli v. Securities and Exchange Commission. In Gabelli, the SEC contended that the defendants allowed an investor in one of their mutual funds to engage in market timing from 1999 to 2002, to the detriment of other investors. The SEC discovered the market timing in 2003, but neglected to bring a civil enforcement action immediately as it had ongoing discussions with the defendants. It finally filed an action in 2008, five years after the SEC discovered the market timing, but six years after the actual events in question. The defendants moved to dismiss the case, contending that it was untimely filed.
The SEC argued, as it had in other cases, that it should be permitted to rely on the "discovery rule," a common law exception to statutes of limitations for cases involving fraud. Under the "discovery rule," the statute of limitations will not run until a plaintiff discovers the fraud or could have discovered the fraud through reasonable diligence. The U.S. Court of Appeals for the Second Circuit agreed.
The Supreme Court reversed, soundly rejecting any claim that the government may rely on the exception. Normal litigants, the Court stated, do not typically look for fraud in every transaction. On the other hand, the government, specifically the SEC, exists for precisely that purpose, and has powerful tools to support its mission. A mission, the Court noted, that is grounded in punishment, not the ability of a victim to recover funds or property. Furthermore, the discovery rule requires a court to make a determination as to when a plaintiff should have had knowledge of a fraud. The Court wondered how the courts would conduct such an analysis, considering the size and complexity of agencies; the interactions between various agencies; the budgets and resource allocations; and myriad other concerns.
While the Court expressly declined to extend its ruling to cases where a defendant is alleged to have taken steps to actively conceal its actions from the government, the reasoning of the opinion could arguably apply there with equal force.3 In particular, key questions about when the government, charged with an investigative function, should become aware of a fraud, regardless of concealment, remain. Thus, Gabelli can support an argument the government must strictly adhere to the five-year limitations period, regardless of the circumstances.
The opinion contains one additional significant limitation: It does not apply either to actions for disgorgement or injunctive relief.4
Gabelli joins the Court's other recent statute of limitations case, Credit Suisse Securities v. Simmonds, decided in 2012.5 In Credit Suisse, the Court held that the statute of limitations, two years, on a private plaintiff's Rule 16(b) action starts to run from the date of the improper profit. The Court reaffirmed that exceptions to that rule should be construed narrowly, and should be permitted only where the plaintiff could show that reasonable diligence would not have revealed the wrong.6 Together, Gabelli and Credit Suisse signal a trend toward a stricter reading of statutes of limitations and to narrower readings of the exceptions.
Despite the inference in Gabelli that the SEC must adhere to the five-year limitations period, it can be anticipated that the SEC may test the boundaries by arguing that it is excused from strict adherence to the limitations period, due to actions of active concealment by defendants.
For Further Information
If you have any questions about this Alert, please contact Marvin G. Pickholz, Eric R. Breslin, Mauro M. Wolfe, Melissa S. Geller, any member of the White-Collar Criminal Defense, Corporate Investigations and Regulatory Compliance Practice Group or the attorney in the firm with whom you are regularly in contact.
Gabelli v. Sec. and Exch. Comm'n, 568 U.S. _____ (2013), 2013 WL 691002 (Feb. 27, 2013).
See e.g., Sec. and Exch. Comm'n, v. Bartek, 484 Fed.Appx. 949, 2012 WL 3205446 (Aug. 7, 2012).
See Id. at *4 n.2.
Id. at *4 n.1.
Credit Suisse Secs. (USA) LLC v. Simmonds, 132 S. Ct. 1414 (2012).
Id. at 1420.