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The Supreme Court rejected the SEC's effort to extend the
five year statute of limitations for imposing a civil penalty by engrafting a
discovery exception onto the statute. Chief Justice Roberts, writing for a
unanimous Court, held that under Section 2462 of Title 28, the statute of
limitations begins when there is a cause of action. The decision is a straight
forward reading of the plain statutory language. Gabelli v. SEC, No.
11-1274 (S.Ct. Decided February 27, 2013).
The case: The
Commission's case centered on alleged false statements by Marc Gambelli, the
portfolio manager of Gabelli Global Growth Fund, and Bruce Alpert, the COO of
the Fund's adviser, Gabelli Funds, LLC. From 1999 until 2002 the defendants
permitted trader Headstart Advisers, Ltd. to engage in "time zone arbitrage"
according to the SEC, a form of market timing. At the same time defendants
banned others from utilizing the practice. The arrangement with Headstart was
not disclosed to the Fund's board of directors who were thus deceived. Even
after Headstart halted the practice, the defendants continued to mislead the
board and investors, according to the SEC.
The Commission filed its complaint in April 2008. The
underlying investigation began in the Fall of 2003 following the publicized
inquiry of the New York Attorney General into market timing. At one point the
SEC sought tolling agreements. The complaint alleged violations of Securities
Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1)
The lower court rulings: The
district court granted in part a motion to dismiss by the defendants based on
Section 2462. That Section provides in pertinent part that "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 . . ." Based on this language the Court concluded that the claim
for a civil penalty was time barred.
The Second Circuit reversed. On the Section 2462 statute
of limitations issue the Circuit Court held that statute of limitations does
not being until the claim is discovered or could have been discovered. Here
that was not until September 2003 when the complaint alleges the Commission
discovered the claim. The fact that the SEC did not plead facts showing that
the defendants concealed the claim is not relevant to the case here. That contention
relates to the doctrine of fraudulent concealment which is distinct from the
question in this case, according to the Circuit Court. While the discovery rule
does not apply to most claims, it does apply to the fraud claim in this action,
the Court held.
The Supreme Court: Quoting
the text of Section 2462 Chief Justice Roberts stated that "the 'standard rule'
is that a claim accrues "when the plaintiff has a complete and present cause of
action,' quoting Wallace v. Kato, 549 U.S. 384, 388 (2007). That rule
has governed since the 1830s when the predecessor to the current Section was
written. It is also consistent with the definition of the word "accrued" in
standard legal dictionaries. This reading of the text also ensures a fixed date
when exposure under the statute begins. That is "vital to the welfare of
society" as the Court has long held. Indeed, even wrongdoers are "entitled to
assume that their sins may be forgotten" the Chief Justice noted.
Nevertheless, the SEC argued for a "discovery rule" under
which the time period would not commence until the claim is discovered or
reasonably could have been discovered. While that theory traces to the
eighteenth century, it has never been applied in a context where the plaintiff
has not been defrauded. Here the plaintiff is not an injured party who might
not know of his or her claim but a government enforcement agency. While a
private plaintiff cannot be reasonably expected to spend all of his or her time
investigating to determine if a cause of action has accrued, that is not the
case with a government enforcement agency. "Rather, a central 'mission' of the
Commission is to 'investigat[e] potential violations of the federal securities
laws' . . . 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 that pursuit."
Not only is the government a different kind of plaintiff
- this statute applies not just to the SEC but the government in general - it
seeks a different kind of relief. The discovery rule aids the plaintiff who
seeks recompense for an injury. The SEC in contrast is seeking penalties
designed to punish. In this context it has long been held that time limits are
important. The discovery rule advocated by the government would undercut this
Finally, the application of a discovery rule would be
particularly difficult here. Determining when the government as opposed to an
individual knew or reasonably should have known something could be a daunting
task. This is particularly true since agencies often have overlapping
responsibilities and an array of privileges which might be asserted to block
the necessary discovery. While Congress has in some instances expressly
provided for such an inquiry that has typically been when the government is an
injured victim seeking a recovery. In sum, the Court has long held that the
running of a statute of limitations can only be suspended absent express
language in the statute in limited circumstances and with "great caution." In
view of the plain text here, this is not one of those times the Chief Justice
Court's decision today may speed some Commission investigations and bar the
agency from obtaining penalties in others. It could increase the number of
cases where the staff seeks a tolling agreement. That, however, would seem to
undercut the policy of restricting the use of those agreements and seeking to
speed the investigative process which underlies the reorganization of the
Enforcement Division initiated in 2009.
At the same time it could have a spill over impact on the
Commission's equitable remedies. Traditionally those are not subject to the
statute of limitations. Yet in certain instances where the conduct is old -
beyond the reach of Section 2462 for example - courts have held that granting
an injunction effectively becomes punitive in which case the request may be
time barred. This may be particularly true when a remedy such as an
officer/director bar or a bar from the securities business is sought. The Fifth
Circuit reached this conclusion last year in a years old option backdating
case, SEC v. Bartek, No 11-1-594 (5th Cir. Decided Aug. 7,
2012). There the Court rejected the SEC's reading of Section 2462 and declined
to follow the Second Circuit's ruling in Gabell. Rather the Court
adopted an analysis of Section 2462 which presages that of the Supreme Court.
It then held the Commission's request for a penalty was dime barred. The Court
also declined to enter and injunction or an officer/director bar in view of the
subscribers can access enhanced versions of the opinions and annotated versions
of the statutes cited in this article:
28 U.S.C. § 2462
Gabelli v. SEC, No. 11-1274, 2013 U.S. LEXIS
1861 (S.Ct., Feb. 27, 2013)
Wallace v. Kato, 549 U.S. 384 (2007)
SEC v. Bartek, No 11-10594, 2012 U.S. App. LEXIS 16399 (5th
Cir., Aug. 7, 2012)
For more commentary on developing securities
issues, visit SEC Actions, a blog by Thomas
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