U.S. Supreme Court Issues Two Important Securities-Law Opinions

On February 27, 2013, the U.S. Supreme Court issued a pair of important securities-law decisions, one requiring the SEC to act more swiftly in pursuing fraud charges, and the other making it significantly easier for private plaintiffs to pursue securities fraud claims on a class-wide basis.

In Gabelli v. Securities and Exchange Commission, a unanimous Supreme Court established a five-year deadline for the SEC to pursue claims after the occurrence of an alleged fraud. The SEC had argued that the five-year clock should not start ticking until the date on which it discovered the alleged fraud, which may be significantly after the date on which the defendant's misconduct took place. The Supreme Court rejected this argument. Unlike private plaintiffs, the SEC is not entitled to rely on the "discovery" rule to extend its limitations period.

In Amgen Inc. v. Connecticut Retirement Plans and Trust Funds, the Supreme Court held that plaintiff shareholders of Amgen Inc. could pursue securities fraud claims against the biotechnology company on a class-wide basis, without first having to prove that the company's alleged misrepresentations materially inflated its stock price. The 6-3 ruling resolves a circuit split over whether the element of "materiality" should be considered at the class certification stage.

Both of these decisions will have an immediate impact on securities litigation. The Gabelli decision will likely result in increased SEC activity, including more rigorous SEC examinations, faster-paced investigations, and potentially more actions being filed. The Amgen decision removes a barrier that discouraged the filing of securities cases in certain circuits, but may set up a new battle — whether the fraud-on-the-market doctrine, a key foundation of securities class actions, should be revised or abandoned altogether.

Gabelli v. SEC

In Gabelli, the SEC alleged that two officials at Gabelli Funds, LLC, a registered investment advisor, aided and abetted a fraud between 1999 and 2002 by permitting a large investor to secretly engage in "market timing" in a quid pro quo arrangement. In 2008, the SEC filed claims against the two officials under the Investment Adviser Act, seeking disgorgement, injunctive relief, and a civil monetary penalty. The defendants argued that the SEC's claims were time-barred under 28 U.S.C. § 2462, which provides that "an action, suit or proceeding for the enforcement of any civil fine, penalty or forfeiture ... shall not be entertained unless commenced within five years from the date when the claim first accrued."

The district court agreed that the SEC's request for a monetary penalty was time-barred, and it dismissed that claim. The Second Circuit reversed, reinstating the SEC's civil-penalty claim. The appellate court held that the SEC is entitled to the benefit of the "discovery rule," which means that its deadline to file a civil-penalty claim did not begin until it discovered (or reasonably could have discovered) the fraud.

The Supreme Court reversed the Second Circuit's decision. In a unanimous opinion authored by Chief Justice Roberts, the Court held that when the government seeks a civil penalty, "the five-year clock...begins to tick when the fraud occurs, not when it is discovered."

Chief Justice Roberts explained that the SEC does not need the protections afforded by the discovery rule. The rule was created to protect...