A Boutique Securities Enforcement and Business Litigation Firm

Supreme Court Issued An Unanimous Opinion In Gabelli, Holding That Five-year Statute Of Limitations For Civil Penalties Sought By The Sec

Wed 27 Feb, 2013 | Opinion by Carl Schoeppl   vCard

On February 27, 2013, the Supreme Court issued a unanimous opinion in Gabelli v. SEC, 568 U.S. 442 (2013), holding that the five-year statute of limitations for civil penalties sought by the SEC in its enforcement actions begins to run when the fraud occurs, not when it is discovered. In Gabelli, the Supreme Court rejected the SEC’s request to apply the discovery rule to claims for civil penalties under 28 U.S.C. § 2462, which establishes a five-year statute of limitations for an “action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture,” and thus set a fixed date upon which exposure to the SEC’s enforcement of civil penalties ends. Establishing a fixed date advances the basic policies of all limitations provisions: repose, elimination of stale claims, and certainty about a plaintiff’s opportunity for recovery and a defendant’s potential liabilities. In declining to graft the discovery rule onto the statute of limitations of § 2462, the Supreme Court explained that unlike a private party who has no reason to suspect fraud, the SEC’s very purpose is to root out fraud, and it has many legal tools at its disposal to aid in that pursuit ranging from demanding registered broker-dealers and investment advisers to turn over their comprehensive books and records at any time, issuing investigative subpoenas for documents and testimony from witnesses, seeking authority to pay whistleblowers for information, and offering cooperation agreements to violators for information about others. Charged with this mission and armed with these weapons, the SEC as a regulatory enforcer was viewed by the Supreme Court as a far different kind of plaintiff than the defrauded victim seeking recompense the discovery rule had evolved to protect. The Supreme Court further observed that not only is the Government a different kind of plaintiff, it seeks a different kind of relief in the form of civil penalties which go beyond compensation, but instead is intended to punish wrongdoers.

Implications

The Supreme Court’s decision in Gabelli raises significant implications for parties being investigated by the SEC. This decision may result in the SEC’s Division of Enforcement staff expediting investigations where conduct falling outside of § 2462 is at issue, utilizing tolling agreements to preserve civil penalty claims, and possibly seeking higher civil penalty amounts for conduct occurring within the limitations period to offset time-barred civil penalty claims.