This article was reprinted with permission from FCPA
February's issue of the month is the statute of
limitations in SEC enforcement actions.
28 U.S.C. 2462 provides as follows.
"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 if, within the
same period, the offender or the the property is found within the United States
in order that proper services may be made thereon."
28 U.S.C. 2462 was at the heart of Judge Sullivan's
recent order in an SEC FCPA enforcement action (SEC v. Straub) in
which he denied the motion to dismiss brought by former Magyar
Telekom executives. (See here for
the prior post). As highlighted in this
post yesterday regarding the same case, 28 U.S.C. 2462 is a ground on which the
defendants are seeking an interlocutory appeal to the Second Circuit.
28 U.S.C. 2462 is also at the heart of Round 2 of the
briefing in the SEC's FCPA enforcement actions against Mark Jackson and
David Ruehlen. (See here for
the post earlier this week).
Yesterday, in a unanimous decision authored by Chief
Justice Roberts, the Supreme Court, in Gabelli
v. SEC, rejected the SEC's expansive interpretation of 28 U.S.C. 2462
in cases involving civil penalties. I previously flagged (see here) the Gabelli case
as one to watch given that the limitations period in most SEC
FCPA enforcement actions would seemed to be stretched. Indeed,
dig into the details of most FCPA enforcement actions and one quickly
discovers that the conduct at issue is old - in some cases very old.
This post provides a summary of the Supreme Court's
decision and analyzes its relevance to SEC FCPA enforcement.
In 2008, the SEC brought a civil enforcement
actions against Bruce Alpert and Marc Gabelli under the Investment
Advisors Act which makes it illegal for investment advisors to
defraud their clients, and authorizes the SEC to seek civil penalties.
The SEC's complaint alleged that from 1999 to 2002, Alpert and
Gabelli allowed an investor to engage in "market timing" in an
investment fund they operated. The defendants moved to dismiss,
arguing in part, that the SEC's claim was untimely under § 2462. The
trial court agreed and dismissed the SEC's civil penalty claim as time
barred. The Second Circuit reversed and accepted the SEC's argument
that "because the underlying violations sounded in fraud, the 'discovery rule'
applied to the statute of limitations. " As explained by the Second
Circuit, "under the discovery rule, the statute of limitations or a particular
claim does not accrue until that claim is discovered, or could have been
discovered with reasonably diligence, by the plaintiff."
On appeal to the Supreme Court, the defendants argued
that a "claim based on fraud accrues - and the five year clock begins to tick -
when a defendants' allegedly fraudulent conduct occurs." The Supreme
Court found that this position "is the most natural reading of the statute"
and declined to read a discovery rule into § 2462.
In doing so, the Supreme Court rejected the SEC's
argument that a discovery rule should be read into § 2462 under which accrual
is delayed until a plaintiff has 'discovered' the cause of action. The
Supreme Court stated that a discovery rule has merit where the plaintiff is a
defrauded victim seeking recompense, but that a discovery rule does not have
merit when the plaintiff is the SEC in an enforcement action seeking civil
In pertinent part, the Supreme Court noted as follows
(internal citations omitted).
"There are good reasons why the fraud discovery rule has
not been extended to Government enforcement actions for civil penalties. The
discovery rule exists in part to preserve the claims of victims who do not know
they are injured and who reasonably do not inquire as to any injury. Usually
when a private party is injured, he is immediately aware of that injury and put
on notice that his time to sue is running. But when the injury is self-concealing,
private parties may be unaware that they have been harmed. Most of us do not
live in a state of constant investigation; absent any reason to think we have
been injured, we do not typically spend our days looking for evidence that we
were lied to or defrauded. And the law does not require that we do so. Instead,
courts have developed the discovery rule, providing that the statute of
limitations in fraud cases should typically begin to run only when the injury
is or reasonably could have been discovered.
The same conclusion does not follow for the Government in
the context of enforcement actions for civil penalties. The SEC, for example,
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 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. It can demand that securities brokers and dealers submit detailed
trading information. It can require investment advisers to turn
over their comprehensive books and records at any time. And even without filing
suit, it can subpoena any documents and witnesses it deems relevant or material
to an investigation.
[...] Charged with this mission and armed with these
weapons, the SEC as enforcer is a far cry from the defrauded victim the
discovery rule evolved to protect.
In a civil penalty action, the Government is not only a
different kind of plaintiff, it seeks a different kind of relief. The discovery
rule helps to ensure that the injured receive recompense. But this case
involves penalties, which go beyond compensation, are intended to punish, and
label defendants wrongdoers."
In two footnotes, the Supreme Court noted two issues
that were not before it. First statute of limitations for
SEC claims for injunctive relief and disgorgement were not before the
court. Second, tolling doctrines such as when a defendants takes steps
beyond the challenged conduct itself to conceal the conduct from the plaintiff
were not before court.
It should also be mentioned that the specific clause in §
2462 in dispute in SEC v. Straub - found within the United States - was
not addressed by the Supreme Court.
Subject to these potential limitations, the Supreme
Court's decision in Gabelli is significant from a Foreign Corrupt
Practices Act enforcement perspective - at least in terms of individual enforcement
actions as individuals are more likely than corporate defendants to put the SEC
to its burden of proof and assert valid and legitimate defenses based on
fundamental legal concepts.
From the perspective of SEC FCPA enforcement against
corporations, the Gabelli case is, unfortunately unlikely to
have much impact. Cooperation will continue to be the name of
the game and corporations facing FCPA scrutiny will likely continue
to waive statute of limitations arguments or otherwise toll statute of limitations
as evidence of their cooperation.
I say unfortunate because there is a reason why the
law has statute of limitations. As stated by the Supreme Court in Gabelli:
"Statute of limitations are intended to 'promote justice
by preventing surprises through the revival of claims that have been allowed to
slumber until evidence has been lost, memories have faded, and witnesses have
disappeared. They provide 'security and stability to human affairs.
[They] are 'vital to the welfare of society [and] 'even wrongdoers are
entitled to assume that their sins may be forgotten.'"
Citing former Chief Justice John Marshall, the Court in Gabelli stated
that it "would be utterly repugnant to the genius of our laws if actions
for penalties could 'be brought at any distance of time."
Even though, for the reasons stated above, the Gabelli decision
may not be directly on point to pending challenges in SEC FCPA enforcement
actions, you can be sure that the above language will be cited in future briefs
in those cases.
subscribers can access enhanced versions of the opinions and annotated versions
of the statutes cited in this article:
28 U.S.C. § 2462
SEC v. Straub,
2013 U.S. Dist. LEXIS 22447 (S.D.N.Y., Feb. 8, 2013)
Gabelli v. SEC, No. 11-1274, 2013 U.S. LEXIS
1861 (Feb. 27, 2013)
Read more articles on the FCPA by Mike
Koehler at FCPA
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