Sec Held To Five-Year Statute Of Limitations For Civil Penalty Claims

On February 27, 2013, in Gabelli v. Securities and Exchange Commission,1 a unanimous Supreme Court rebuffed an effort by the Securities and Exchange Commission to expand the limitations period for civil penalty claims beyond the five-year period set by statute. The SEC argued that its penalty claim accrued when it discovered the misconduct, and not when the misconduct occurred. The Court disagreed, holding that such a "discovery rule," used in private actions for damages, does not apply to Government actions for penalties.

While the Gabelli decision could increase the number of SEC cases brought this year that relate to the nearly five-year-old financial crisis, the holding will probably not impact the SEC's enforcement agenda significantly since it does not squarely apply to claims for equitable relief, such as injunctions and disgorgement. In addition, while the SEC will still be able to obtain penalties in settled actions based on older conduct, Gabelli may work to reduce such penalties. More significant for the SEC is that the broad reasoning of Gabelli suggests that the Court may not endorse the SEC's view that there is no statute of limitations for equitable relief.

Background

In April 2008, the SEC brought two actions charging that an investor in a Gabelli mutual fund had received favorable treatment that was not disclosed to other investors: (1) a settled administrative proceeding against Gabelli Funds, LLC, an investment advisor headed by Mario Gabelli; and (2) a contested action filed in the Southern District of New York against a portfolio manager, Mario Gabelli's son, as well as the chief operating officer of Gabelli Funds, LLC. These matters were among the last of many SEC actions in the last decade involving active buying and selling of shares in mutual funds to allegedly exploit short-term pricing inefficiencies, a practice often referred to as "market timing" that was brought to light by then Attorney General Eliot Spitzer on September 3, 2003. The SEC alleged that the Gabelli defendants had permitted one of the mutual fund's investors to engage in active trading in the fund's shares as a quid pro quo for the investor's agreement to keep money in a hedge fund run by one of the defendants. According to the SEC, this favored treatment was highly profitable to the investor, but was secret, and not disclosed to other shareholders or the fund's board, so the SEC did not discover the fraud until late 2003.2

In the federal court action, the SEC sought to enjoin the individual defendants from future violations, and to obtain disgorgement of their...