Marc J. Gabelli and Bruce Alpert v. Securities and Exchange Commission, 568 U.S. __ (2013),
February 27, 2013

Unanimous Supreme Court Limits SEC Ability To Seek Civil Penalties

On February 27, 2013, a unanimous Supreme Court held that the Securities and Exchange Commission’s (“SEC”) five-year statute of limitations to seek civil penalties for securities fraud begins running when the fraud occurred, not when it was discovered.

Factual Background

In 2008, the SEC brought a civil enforcement action against Marc Gabelli, former portfolio manager of mutual fund Gabelli Global Growth Fund (the “Fund”), and against Bruce Alpert, chief operating officer for the Fund’s investment adviser (collectively “Gabelli”). The SEC’s complaint alleged that, from 1999 until 2002, Gabelli allowed a Fund investor to engage in “market timing” in the Fund, which allowed the investor to achieve realize significantly greater returns that the average long-term investor in the Fund. The SEC alleged that, while Gabelli banned others from engaging in market timing and made statements that such practices would not be tolerated, it did not disclose its single investor’s market timing practice.

Analysis And Holding

The Investment Advisers Act of 1940 (the “Act”) authorizes the SEC to bring enforcement actions against violators of the Act and those who aid and abet those violations. The SEC may seek civil penalties as part of such enforcement actions, subject to a five-year statute of limitations under 28 U.S.C. § 2462: “Except as otherwise provided by Act of Congress, an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued…”

The SEC alleged that Gabelli aided and abetted violations of the Act and sought civil penalties. The District Court granted Gabelli’s motion to dismiss. Since the SEC alleged that Gabelli’s market timing lasted until August 2002, the District Court found that the SEC’s April 2008 claim for civil penalties was barred by the five-year statute of limitation under Section 2462. The Second Circuit Court of Appeals reversed. It accepted the SEC’s argument that, because the underlying violations sounded in fraud, the “discovery rule” tolled the Section 2462 statute of limitations. The Second Circuit explained that, under the discovery rule, the statute of limitations “does not accrue until that claim is discovered, or could have been discovered with reasonable diligence, by the plaintiff.”

In a unanimous opinion authored by Chief Justice John Roberts, the Supreme Court reversed the Second Circuit. The Court declined to apply the discovery rule to government penalty actions, finding that “the SEC as enforcer is a far cry from the defrauded victim the discovery rule evolved to protect.” The Court explained that, unlike individual victims lacking reason to suspect fraud, the SEC’s “central mission” is to investigate potential federal securities law violations, and it is equipped with multiple “legal tools” to do so. The Court also raised concerns about exposing defendants to Government enforcement action for uncertain periods of time more than five years after the alleged misdeeds. The Court concluded, “Given the lack of textual, historical, or equitable reasons to graft a discovery rule onto the statue of limitations of §2642, we decline to do so.”

Please click here for a copy of the Supreme Court decision.

Note: The Court did not address the SEC’s claims for injunctive relief and disgorgement, which the District Court found timely and not subject to §2642. The Court also did not address the fraudulent concealment doctrine or other equitable tolling principles.

– Keesal, Young & Logan Securities Group

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