Statute of Limitations for Government Enforcement Actions Seeking Civil Penalties Starts When Conduct Occurs, Not When Discovered

by White & Case LLP

In Gabelli v. SEC, 568 US ___ (2013), a unanimous Supreme Court reversed the Second Circuit and held that the five-year statute of limitations for Government civil penalty enforcement actions under 28 U.S.C. §2642 begins to run from the date the alleged fraudulent conduct occurs regardless of whether the Government was aware of the conduct at the time. This decision establishes that when the Securities and Exchange Commission (SEC) is seeking to impose civil penalties, it cannot take advantage of the "discovery rule" to toll the operative statute of limitations contained in 28 U.S.C. §2462. This ruling will have far-reaching implications for other federal agencies in civil penalty cases.

In April 2008, the SEC filed a civil enforcement action against Bruce Alpert and Marc Gabelli alleging that they allowed one investor in the Gabelli Global Growth Fund (GGGF) to engage in "market timing" practices in the fund from 1999 until 2002, which allowed the investor to exploit the time delay in GGGF's daily valuation system. The Gabelli defendants successfully moved in the District Court to dismiss claims for civil penalties under §80b-9 as time-barred because §2642 requires an action for civil penalties to be brought within five years "from the date when the claim first accrued." The Second Circuit reversed, holding that, because the SEC's claims sounded in fraud, the statute of limitations did not begin to run until the claim was discovered by the SEC.

In reversing and remanding the case, Chief Justice Roberts, writing for a unanimous Court, began the analysis by focusing on the plain language of 28 U.S.C. §2462, which provides in part that "an action . . . for the enforcement of any civil fine, penalty, or forfeiture . . . shall not be entertained unless commenced within five years from the date when the claim first accrued." The Court found that the plain meaning of this provision is that the five-year statute of limitations begins to run when a defendant's allegedly fraudulent conduct occurs. The Court further observed that such a reading sets a "fixed date when exposure to the specified [g]overnment enforcement ends," advancing policies of repose and elimination of stale claims "that are vital to the welfare of society."

The Court rejected the SEC's argument that the discovery rule should apply to toll the statute of limitations until the Government has discovered its cause of action, noting that the Court has never applied the discovery rule where the plaintiff is the Government bringing an enforcement action for civil penalties. The Court found that "[t]here are good reasons why the fraud discovery rule has not been extended to Government enforcement actions for civil penalties." The Court observed that the discovery rule was crafted to preserve the claims of individuals who often have no idea they have been injured. Although most injuries are apparent, deceptive injuries caused by fraud often leave victims unaware of the harm. Unlike a private party who has no reason to assume malfeasance and proactively investigate potential claims, the Court observed that the SEC's "central" mission is to "investigat[e] potential violations of the federal securities laws" and it has been provided myriad tools to accomplish this mission. Moreover, the Court observed that it would be challenging for a reviewing court to determine when the Government knew or reasonably should have known of a fraud for purposes of applying the discovery rule. Accordingly, the Court held that the discovery rule did not apply to Government penalty actions governed by 28 U.S.C. §2462. The Court left open the possibility that the statute of limitations under 28 U.S.C. §2462 could be tolled if the alleged conduct was fraudulently concealed.

The decision in Gabelli will have wide-ranging effect. First, because 28 U.S.C. §2462 governs many civil penalty provisions throughout the US Code, the Gabelli decision will influence enforcement decisions and actions of many different federal agencies. Among other things, the SEC and other agencies will likely seek tolling agreements from parties under investigation much earlier in investigations in order to preserve their ability to investigate suspected misconduct—and parties will face difficult strategic decisions about whether to force the government's hand earlier in investigations. Second, given that the five-year anniversary of the Financial Crisis is fast approaching, this decision will impact related enforcement decisions made by federal agencies seeking civil penalties. Finally, it is important to note the Court's reasoning in Gabelli was not limited to this particular statute. Rather, the Court wrote in broad terms about how civil penalty statutes should be read, and made clear in the final paragraph of the decision that the Supreme Court will not lightly imply terms that would suspend a statute of limitation in cases in which Congress has not made itself clear in the statute for fear that "otherwise the court would make the law instead of administering it." Slip Op. at 11 (citing Amy v. Watertown (No. 2), 130 US 320, 324 (1889)). Thus, Gabelli is likely to affect other similarly worded civil penalty statutes involving other federal agencies.

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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