U.S. Supreme Court Clarifies Limitations Period for Federal Enforcement Actions

February 27, 2013

On February 27, 2013, the U.S. Supreme Court unanimously concluded that the five-year limitations period for federal enforcement actions seeking civil penalties, such as those brought by the SEC, begins to run when the alleged fraud occurs, not when it is discovered.  In an opinion authored by Chief Justice Roberts in Gabelli v. Securities and Exchange Commission, No. 11-1274, the Court reversed a contrary decision by the Second Circuit and held that the fraud "discovery rule" should not be grafted onto 28 U.S.C. § 2462, a general statute of limitations that governs penalty provisions throughout the U.S. Code.

Gabelli Funds is a registered investment adviser that, among other things, advises the Gabelli family of mutual funds.  In 2008, the SEC brought a civil enforcement action against Gabelli, its Chief Operating Officer, and a former portfolio manager, alleging that they allowed an investor to engage in "market timing" in a Gabelli fund.  The SEC asserted violations of 15 U.S.C. §§ 80b-6(1) and (2) and sought civil penalties under § 80b-9.  Because it was undisputed that the alleged market timing ceased in 2002, the Gabelli defendants sought to dismiss the SEC’s claims as barred by the five-year statute of limitations period set forth in 28 U.S.C. § 2462.  The district court agreed and dismissed the SEC’s civil penalty claim as time barred.  But the Second Circuit reversed, holding that because the underlying violations sounded in fraud, the statute of limitations period did not start running until the claim was "discovered" by the SEC.

The U.S. Supreme Court granted Gabelli’s petition for a writ of certiorari and, after briefing and argument, unanimously reversed the Second Circuit’s judgment in an opinion authored by Chief Justice Roberts.  The Court focused on the plain language of § 2462, which states 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."  "[T]he most natural reading of th[at] statute," the Court concluded, is that the claim first "accrues" when it "comes into existence"–that is, when the "defendant’s allegedly fraudulently conduct occur[red]."  Slip op. at 4. 

The Court rejected the Government’s argument that the discovery rule should apply, explaining that the discovery rule "has never applied . . . in this context, where the plaintiff is not a defrauded victim seeking recompense, but is instead the Government bringing an enforcement action for civil penalties."  Id. at 6.  In reaching its conclusion, the Court focused on the significant differences between victims of fraud–"who may be unaware that they have been harmed," slip op. at 7–and the SEC, whose "central mission . . . is to investigate potential violations of the federal securities laws."  Id. at 8.  "Unlike the 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," including the power to subpoena documents and witnesses and to pay monetary awards to whistleblowers.  Id. 

In addition, the Court expressed concern about the difficulties that courts and litigants would face in seeking to determine when the Government first "knew," or "reasonably should have known," of a fraud.  Id. at 9-11.  Such difficulties would undermine the certainty and stability that are the very purpose of a limitations period.  As the Court emphasized, statutes of limitations and repose "promote justice," "provide security and stability to human affairs," and are "vital to the welfare of society." Id. at 5.

Although the Court’s decision does not answer all the unsettled questions in this area–for example, whether other tolling doctrines (such as fraudulent concealment, equitable estoppel, or continuing violations) might extend a limitations period beyond five years–the decision provides clarity as to the limitations period for federal agency actions to enforce penalties subject to the § 2462 limitations period.

The Court’s decision is of significant importance to all businesses subject to governmental enforcement actions, and to the securities industry in particular because it protects the stability and predictability on which the securities markets and their participants depend.  Had the SEC’s proposed discovery rule prevailed, companies and individuals would never have been free from unknown and undiscovered SEC claims–creating a cloud of potential liability over every participant in the financial markets and raising the cost of business transactions.

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Gibson Dunn filed an amicus brief in support of Gabelli on behalf of the Securities Industry and Financial Markets Associations and the Chamber of Commerce of the United States of America. 

Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.