Supreme Court Rejects SEC's Position Concerning Statute of Limitations in Securities Fraud Actions

by Cadwalader, Wickersham & Taft LLP

On February 27, 2013, the Supreme Court of the United States issued its decision in Gabelli v. SEC,1 holding that, in an action by the government for civil penalties, the five-year statute of limitations provided by 28 U.S.C. § 2462 begins to run when the alleged fraud takes place, not when it is discovered. In the unanimous opinion authored by Chief Justice Roberts, the Court rejected the SEC's argument that because the underlying violations of the Investment Advisers Act "sounded in fraud," accrual of the statute of limitations should be delayed under the "discovery rule" until the fraud was discovered or reasonably could have been discovered.  Because section 2462 governs many penalty provisions throughout the U.S. Code, the Court's decision has broader implications beyond securities law.

Defendants in the SEC's action were Marc Gabelli, former portfolio manager at Gabelli Global Growth Fund ("GGGF"), and Bruce Alpert, former chief operating officer at Gabelli Funds, LLC, an investment adviser to GGGF. The SEC charged the two with aiding and abetting a GGGF investor's fraudulent use of "market timing," a trading strategy that exploits time delays in the valuation of mutual funds. The SEC alleged that fraudulent conduct had occurred through August 2002, but the agency did not file its complaint until April 2008. The district court found that the SEC's claim for civil penalties was time-barred under section 2462 due to expiry of the five-year statute of limitations. On appeal, the Second Circuit reversed, holding that for fraud-based claims the statute of limitations does not begin to run until the plaintiff (in this case, the SEC) discovers, or reasonably could have discovered, the fraudulent conduct in question.2

The Supreme Court rejected the SEC's argument, finding that application of the "standard rule," under which a claim accrues when the plaintiff has a complete and present cause of action, was supported by a plain reading of section 2462:  "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."3 The Court cited dictionary definitions for the word "accrue" that dated back to 1850, and found that the standard rule had governed since the predecessor to section 2462 was enacted in the 1830s.  In addition, the Court determined that the policy considerations underlying all statutes of limitations-repose, the elimination of stale claims, and certainty as to the parties' rights and liabilities-were best served through adherence to the five-year limitations period fixed by the statute.4

In support of its holding, the Court also distinguished the types of actions brought by the SEC and other regulatory enforcement agencies from those brought by private litigants. Courts have recognized a discovery rule in private actions in part due to the need to protect the rights of victims "who do not know they are injured and who reasonably do not inquire as to any injury."5 As the Court explained, "Most of us do not live in a state of constant investigation."6 The government, however, is a different type of litigant. The Court observed that a central mission of the SEC is to investigate potential securities law violations, and that it has subpoenas, whistleblower bounties, cooperation agreements, and other legal tools to aid in this effort.7

Finally, the Court explained that unlike damages in private lawsuits, civil penalties in government actions go beyond compensation and are intended to punish. Therefore, to allow such claims to be brought at any indefinite time in the future-depending on when the plaintiff knew or reasonably should have known of the fraud in question-would, quoting Chief Justice Marshall, "be utterly repugnant to the genius of our laws."8 The Court also found that it would be difficult to ascertain when "the government" had obtained knowledge of a violation that would be sufficient to mark the accrual of a claim. Would the relevant inquiry relate to information possessed by a particular decision maker, an agency as a whole, or across the entire federal bureaucracy?9

The Supreme Court's decision in Gabelli v. SEC provides certainty to parties that government agencies will not pursue civil penalty actions beyond the statute of limitations.10 The decision, however, does not allow potential defendants to rest completely at ease, as conduct falling outside of section 2462 and similar provisions still may subject them to claims for injunctive relief and disgorgement. In addition, Gabelli does not apply to cases in which the defendant allegedly has engaged in the fraudulent concealment of his misdeeds. The government can be expected to continue exercising its discretion in the charging of years- or even decades-old conduct through these means.

1 Gabelli v. SEC, 568 U.S. ___ (2013), WL 691002, available online at
2  SEC v. Gabelli, 653 F.3d 49, 58-61 (2nd Cir. 2011).
3  Gabelli v. SEC at 4 (quoting 28 U.S.C. § 2462).
4  Id. at 5.
5  Id. at 7.
6  Id. at 7.
Id. at 8.
8  Id. at 9 (quoting Adams v. Woods, 2 Cranch 336, 342 (1805)).
9  Id. at 9-10.
10  The Gabelli decision also may discourage the government from seeking to stretch the language of section 2462 in other ways. For example, in SEC v. Straub, an FCPA case against former Magyar Telekom executives, the government sought a very broad interpretation of 2462, arguing that it should be tolled for defendants located outside the United States but who are nevertheless readily served. The district court agreed, and the defendants promptly filed an interlocutory appeal in which they argued, "It seems doubtful that Congress intended to toll the statute indefinitely" in such circumstances, as the SEC contends. If the defendants' interlocutory appeal is certified, it will be interesting to observe whether the Second Circuit's analysis of section 2462 reflects Gabelli, and in particular the decision's language emphasizing the important role of statues of limitations in providing certainty and stability.

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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