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Under the discovery rule, accrual is delayed until the plaintiff has discovered his cause of action. Where a plaintiff has been injured by fraud and remains in ignorance of it without any fault or want of diligence or care on his part, the bar of the statute does not begin to run until the fraud is discovered. Fraud is deemed to be discovered when, in the exercise of reasonable diligence, it could have been discovered.
The Investment Advisers Act makes it illegal for investment advisers to defraud their clients, and authorizes the Securities and Exchange Commission to seek civil penalties from advisers who do so. Under the general statute of limitations for civil penalty actions, the SEC has five years to seek such penalties. Gabelli Funds was an investment adviser to a mutual fund formerly known as Gabelli Global Growth Fund. Petitioner Bruce Alpert was Gabelli Funds' chief operating officer, and petitioner Marc Gabelli used to be GGGF's portfolio manager. Respondent, the Securities and Exchange Commission filed a civil enforcement action against petitioners, seeking civil penalties under the Investment Advisers Act of 1940, 15 U.S.C.S. § 80b-9. The district court dismissed the penalty claim as time-barred under § 2462 since the complaint alleged that market timing occurred through August 2002, but the suit was not filed until April 2008. The court of appeals reversed, applying the discovery rule.
Was the court of appeals’ application of the discovery rule proper?
The Court reversed the court of appeal’s decision and found that the § 2462 limitations period began when the allegedly fraudulent conduct occurred. The Supreme Court noted that this was the most natural reading of the statute, since, in common parlance, a right accrued when it came into existence. The Supreme Court further noted that the discovery rule had never been applied in the context when the plaintiff was not a defrauded victim but was instead the government bringing an enforcement action for civil penalties. Thus, the application of the discovery rule in this context was particularly inappropriate because unlike a private party who had no reason to suspect fraud, the respondent’s very purpose was to root out certain fraud. Grafting the discovery rule onto § 2462 in this context would raise concerns that government enforcement actions could be brought at any time.