The Supreme Court Holds that the “Discovery Rule” Does Not Apply to SEC Enforcement Actions for Financial Penalties and Affirms the Dismissal of SEC Claims as Time-Barred

by Foley Hoag LLP

In Gabelli v. SEC, No. 11-1274 (Feb. 27, 2013), a unanimous Supreme Court issued a much anticipated decision on the statute of limitations for civil enforcement actions in which the SEC seeks monetary penalties, fines or forfeiture.

The Court ruled that the “discovery rule” does not extend the 5-year statute of limitations set by 28 U.S.C. § 2462, which broadly applies to many penalty provisions in federal law. Thus, the district court properly dismissed as time-barred the SEC’s claims for financial penalties against Marc Gabelli, the portfolio manager of Gabelli Global Growth Fund, and Gary Albert, the Chief Operating Officer of Gabelli Fund, LLC, which served as GCCF’s adviser.


In 2008, the SEC brought a civil enforcement action against the Gabelli executives, alleging that between 1999 and 2002, they allowed a GCCF investor to engage in “market timing.” The defendants moved to dismiss, arguing that the SEC alleged fraud only until August 2002 but did not file its complaint until April 2008, more than 5 years later. The district court agreed that the SEC’s claims for financial penalties were time-barred. (The SEC then voluntarily dismissed the action so that it could promptly appeal.)

The Second Circuit reversed the district court, holding that the “discovery rule” applied because the SEC’s allegations “sounded in fraud” and that, as a result, its claims were timely. Sitting by designation, District Judge Jed Rakoff, who famously rejected the SEC’s settlement with Citigroup, authored the opinion for the appeals court.

Supreme Court's Decision

Gabelli and Alpert appealed, and the Supreme Court reversed the Second Circuit, giving three different reasons for rejecting the SEC’s argument that the discovery rule applies to civil enforcement actions seeking monetary penalties, fines or forfeiture.

Historical reasons

The Supreme Court noted that it could not find, and the SEC had not offered, any historical precedent in which courts had applied the discovery rule “where the plaintiff [was] not a defrauded victim seeking recompense, but [was] instead the Government bringing an enforcement action for civil penalties. Although the origins of the 5-year statute of limitations in § 2462 date back to the 1830s, the SEC failed to cite any case before 2008 in which a court “employ[ed] a fraud-based discovery rule in a Government enforcement action for civil penalties.”

Equitable considerations

Although a limitations period typically runs from when the plaintiff suffers an injury — for example, when the car crash happens or the contract is breached — the Supreme Court has long recognized that “something different [is] needed in the case of fraud, where a defendant’s deceptive conduct may prevent a plaintiff from even knowing that he or she had been defrauded.” That is not true for the SEC, however:

The SEC . . . is not like an individual victim who relies on apparent injury to learn of a wrong. Rather, a central “mission” of the Commission is to “investigat[e] potential violations of the federal securities laws.” SEC, Enforcement Manual 1 (2012). Unlike a private party who has no reason to suspect fraud, the SEC’s very purpose is to root it out, and it has many legal tools at hand to aid in that pursuit.

The Supreme Court specifically mentioned many of the “tools” that the SEC frequently touts as critical elements of its enforcement arsenal, including the ability to issue subpoenas, pay monetary awards to whistleblowers, and enter cooperation agreements.

Practical problems

Even if the Supreme Court had been inclined to extend the discovery rule to SEC enforcement actions, doing so would be fraught with practical problems. How would a court determine when the SEC knew or should have known of an alleged fraud? In private actions, the discovery rule looks to the “reasonably diligent” plaintiff, but what is a “reasonably diligent” government agency? Also, the government enjoys considerable privileges, including the attorney-client, deliberative process and law enforcement privileges, which could prevent a defendant (or a court) from inquiring into what the SEC knew and when.

Chorus of Critics

The Supreme Court’s decision was foretold, in a sense, by the chorus of critics who attacked the SEC’s position. The many amici curiae, like the Justices, unanimously agreed that the discovery rule should not be extended. (Not a single amicus supported the SEC.) This consensus was all the more significant because the amici ran the gamut from former SEC officials to defense lawyers who represent clients in SEC enforcement actions; they also included industry groups, bar associations and a libertarian think tank.

At one end, the former SEC officials argued that applying the discovery rule would harm the SEC by subjecting the agency to “intrusive discovery,” distracting its staff and exposing its investigative activities to public scrutiny. At the far end, the National Association of Criminal Defense Lawyers warned that carving out an exception to § 2462 would invite arbitrary and discriminatory enforcement actions against regulated entities and individuals based on allegations of misconduct from years ago.

Yet before Gabelli, other appeals courts had reached the same conclusion as the Second Circuit. For example, nearly 5 years ago, in SEC v. Tambone, a panel of the First Circuit applied the discovery rule, emphasizing the “self-concealing nature” of the fraud at issue. (Tambone also involved market timing.) The panel focused on when the SEC knew, or should have known, about the alleged misconduct. The en banc First Circuit later affirmed that aspect of Tambone. Now, Gabelli has effectively overruled it.

Looking Ahead

Despite its unanimous decision, the Supreme Court hinted that, by statute, Congress could apply the discovery rule to SEC actions. But it also suggested such a legislative decision would run counter to the policies that statutes of limitations serve: promoting certainty and finality concerning potential claims and liabilities.

For more than 100 years, the Supreme Court has lauded statutes of limitations as “vital to the welfare of society” because they provide “security and stability in human affairs.” Applying the discovery rule to SEC actions “would leave defendants exposed to Government enforcement action not only for 5 years after their misdeeds, but for an additional uncertain period into the future.” Fortunately, after Gabelli, that is not the case.

It should be noted that Gabelli addressed only SEC actions for monetary penalties, fines or forfeiture, but not actions for disgorgement or injunctive relief. In its complaint against Gabelli and Alpert, the SEC also sought disgorgement and injunctive relief. The district court ruled that those claims were timely because § 2462 expressly refers to “action[s] . . . for the enforcement of any civil fine, penalty or forfeiture.” Gabelli and Alpert did not challenge that decision before the Supreme Court. Moreover, even with regard to financial penalties, Gabelli does not preclude the SEC from entering agreements with investigated parties to toll the 5-year statute of limitations.


Why was the SEC’s position so roundly rejected in Gabelli? At bottom, the notion that the SEC needs the discovery rule to do its job fell on deaf ears. The SEC is, after all, the same agency that has publicly proclaimed:

[W]e have to be as swift as possible. . . . Timeliness is critical. Corporate institutions are dynamic and ever-changing. People come and go. When a case is brought years after the conduct, the fines and penalties still hurt, but the opportunity to achieve a permanent change in behavior and culture is greatly reduced.

In a world of rapidly changing, global markets, where millions of shares can be traded in a moment and complex financial products are constantly evolving, it seems reasonable for the Supreme Court to expect the SEC to stay one step ahead, not languish more than 5 years behind.


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.

© Foley Hoag LLP | Attorney Advertising

Written by:

Foley Hoag LLP

Foley Hoag 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.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

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.


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 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:

- 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.