Supreme Court Rules SEC Has Five Years to Seek Penalties

In an important decision, the Supreme Court held that the SEC has five years from when a fraud occurred to file an action to seek civil penalties. 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.

In a unanimous decision, the Supreme Court of the United States ruled in Gabelli v. SEC that the U.S. Securities and Exchange Commission (SEC) has five years from when a fraud occurred, and not from the SEC's discovery of the fraud, to seek civil penalties in enforcement actions. Gabelli v. SEC, 568 U.S. ___ (2013).

In 2008 the SEC brought an action against defendants for aiding and abetting the antifraud provisions of the Investment Advisers Act of 1940, based on allegations of allowing market timing in a mutual fund. Gabelli, 568 U.S. at *2-*3. The complaint sought an injunction, disgorgement and a civil penalty. Because the complaint was filed more than five years after the last alleged violation, the district court dismissed the penalty claim under 28 U.S.C. Section 2462's five-year statute of limitations. On appeal, the U.S. Court of Appeals for the Second Circuit reversed, holding that the discovery rule should be read into Section 2462 for claims based on fraud. The Second Circuit ruled that, under Section 2462, a fraud claim did not "accrue" until the SEC discovered it or could have discovered it based on "reasonable diligence."

In the Gabelli decision, the Supreme Court declined to read the discovery rule into Section 2462 based on the plain language of the statute and strong policy reasons. Gabelli, 568 U.S. at *9-*11. The Supreme Court explained that the most natural reading of the statute was that a claim accrues when the plaintiff has a cause of action. The Court stressed that this reading furthers the purpose of the statute of limitations to reduce stale claims and create more certainty for defendants about their potential liabilities. The Court also found that historically the discovery rule had not been used to assist the government to recover penalties in enforcement actions. Instead, the rule has been used to assist "defrauded victims" to recover compensation "where a defendant's deceptive conduct may prevent a plaintiff from even knowing that he or she has been defrauded." Because private plaintiffs are not "in a...