Supreme Court Confirms Five-Year Statute of Limitations for SEC Penalties

“… the only federal crimes that have no statute of limitations are capital offenses that warrant the death penalty and certain terrorism, child abduction, and sex offenses. If the SEC were allowed an indefinite period of time in which to bring enforcement actions, the fraud alleged in those cases would be on par with the most serious of federal crimes. Today’s decision by the Supreme Court in Gabelli v. SEC rejects such an absurd result.” (Morvillo Abramowitz)

The Supreme Court gave the Securities and Exchange Commission a valuable lesson in watching the clock last week.

Federal law gives the SEC five years to seek civil penalties against individuals accused of committing securities fraud. But the agency often files charges more than five years after alleged violations have occurred, arguing that the clock should start when investigators discover the wrongdoing.

That’s not how the law works, ruled the high court in Gabelli v. SEC. For your reference, here’s a roundup of commentary and analysis regarding the Supreme Court decision:

U.S. Supreme Court Rules That the Government Does Not Have an Unlimited Amount of Time in Which to Bring Civil Penalty Actions (Dechert LLP)

“In a unanimous decision written by Chief Justice John G. Roberts, Jr., the United States Supreme Court has ruled that the Government does not have an unlimited amount of time to bring civil penalty actions based on fraud. In Gabelli v. Securities and Exchange Commission, the Supreme Court ruled that … the five-year statute of limitations applicable to civil penalty actions brought by the Government, starts running on the date the allegedly fraudulent conduct occurred…” Read on>>

Supreme Court Rejects Discovery Rule on Statute of Limitations for SEC Civil Penalty Enforcement Actions (Skadden, Arps, Slate, Meagher & Flom LLP):

“The SEC alleged that two mutual fund managers allowed one of the fund’s investors to engage in market timing in the fund in exchange for an investment in a separate hedge fund, but the SEC filed the action more than five years after the conduct was alleged to have taken place. The Court explained that limitations periods ordinarily begin to run upon a party’s injury, but in cases of fraud — when the injury itself is concealed — courts have developed the discovery rule to protect individuals, who are after all not required to be in a constant state of investigation.” Read on>>

Use It or Lose It: U.S. Supreme Court Holds the SEC Must Bring Civil Enforcement Actions Within Five Years of Wrongful Conduct (Duane Morris LLP):

“Under the Investment Advisers Act of 1940, the SEC may seek civil penalties against firms and individuals that violate the Act. In seeking such civil enforcement, the SEC is bound by a statute of limitations … which precludes the government from filing civil enforcement actions more than five years after the claim accrues. In the case of an ongoing fraud, the statute begins to run at the time of the last act committed in furtherance of the fraud. The statute of limitations notwithstanding, the SEC routinely files claims more than five years after a fraud occurs, contending that the statute of limitations should run from the date the SEC discovered the fraud, not the date of the fraud itself.” Read on>>

Supreme Court: Statute of Limitations in SEC Fraud Cases Begins to Run When Fraud Occurs, not When Discovered (Morrison & Foerster LLP):

“… the SEC argued that the discovery rule should apply not only in the case of a defrauded private plaintiff but also in an enforcement action brought by the government. The Court rejected this argument, agreeing that there should be a fixed date for when potential exposure to enforcement proceedings must end: ‘even wrong-doers are entitled to assume that their sins may be forgotten.’” Read on>>

Supreme Court Unanimously Limits SEC’s Ability To Bring Civil Penalty Claims For Conduct Older Than Five Years (Orrick):

“The decision is significant for at least three reasons. First, Section 2462 applies to both district court litigation and agency enforcement proceedings…Second, the Supreme Court explicitly states that it is not addressing whether and how the equitable tolling doctrine might apply in fraud cases… Lastly, the Court did not address the question of what constitutes a civil penalty, ‘pecuniary or otherwise.’” Read on>>

Supreme Court Rules SEC Has Five Years to Seek Penalties (McDermott Will & Emery):

“Although the ruling was limited to civil penalties, the decision might prompt lower courts to apply a five-year limitations period to other types of relief sought by the SEC. The decision will also put more pressure on the SEC to move faster in its investigations.” Read on>>

Supreme Court Update: Two Securities Law Decisions This Week, and Another to Come (Akerman Senterfitt):

“The Court’s ruling could have ramifications far beyond the securities context, given the fact that Section 2462 applies to other agencies. Any time a government agency seeks fines, penalties or forfeiture in its enforcement (as opposed to victim) capacity, absent another statutory mandate, the agency must take action within five years of the act itself regardless of its discoverability.” Read on>>

Supreme Court Adopts Strict Interpretation of the Statute of Limitations for SEC Civil Penalty Enforcement Actions (Ropes & Gray LLP):

“While on its face the Gabelli decision has broad implications for a variety of enforcement actions, there are some notable limitations. At oral argument, both Gabelli and the SEC agreed that the statute’s five-year limitation period did not apply to equitable remedies such as disgorgement or injunctive relief, and the Supreme Court did not address actions for these other remedies in its decision. The decision also appears to leave the door open for the government to argue that the five-year period should be suspended where a defendant takes affirmative steps, beyond the actual fraud itself, to conceal the existence of the fraud and prevent the government from bringing a timely claim.” Read on>>

Supreme Court in Gabelli: Clock Starts Ticking When Fraud Occurs, Not When It’s Discovered (Morvillo Abramowitz Grand Iason & Anello P.C.):

“Because the five year limitation period also applies to other government agencies in other contexts, the Court’s decision is tremendously important. With respect to the decision’s impact on the SEC, it may spur a rash of filings as the agency rushes to bring cases related to the economic crisis of 2008 within the five year deadline. Yet the Court’s ruling is clear that the five year rule is to be strictly observed, even if that means some wrongdoing goes unpunished. An open issue that remains is whether the SEC can seek an extension of the five year statute of limitation where a defendant acts to affirmatively conceal the fraudulent conduct.” Read on>>

Supreme Court Knocks Out Last Prop of OSHA Rule on Statute of Limitations (McDermott Will & Emery):

“Although the Gabelli decision did not directly deal with the Occupational Safety and Health (OSH) Act, it effectively eliminates what might have remained of the OSH Review Commission’s 1993 Johnson Controls decision, which had endorsed the use of a discovery rule in Occupational Safety and Health Administration (OSHA) recordkeeping cases.” Read on>>

Find additional Securities Fraud updates at JD Supra Law News>>