The United States Supreme Court has agreed to decide an important question about when an action “accrues” for purposes of the federal statute of limitations that applies to civil enforcement actions brought by the U.S. Securities and Exchange Commission (“SEC”). The court granted certiorari to review the decision of the United States Court of Appeals for the Second Circuit in SEC v. Gabelli, 653 F.3d 49 (2011). In Gabelli, the Second Circuit held that that the five-year limitation period set forth in 28 U.S.C. § 2462 did not bar an action based upon fraud, because a claim based on fraud does not “accrue” until the government could have discovered the action. The decision, expected by June 2013, could have major ramifications for the SEC’s ability to seek to impose civil penalties for alleged fraud violations that it does not investigate until long after the alleged wrongdoing occurred.
The statutory provision at issue is a catch-all limitations period that applies to any action for a civil penalty or fine brought by the United States. It provides in relevant part that, “[e]xcept as otherwise provided by Act of Congress,” such an action must be “commenced within five years from the date when the claim first accrued[.]” 28 U.S.C. § 2462. Since the Court of Appeals for the D.C. Circuit’s landmark decision in SEC v. Johnson, 87 F.3d 484 (D.C. Cir. 1996), Section 2462 is the primary limitations period that governs civil enforcement actions brought by the SEC that seek to impose a penalty.
In Gabelli, the SEC brought an enforcement action alleging, among other things, that two individuals who worked for the portfolio manager of a mutual fund aided and abetted violations of the Investment Advisers Act of 1940. The SEC claimed that the defendants secretly permitted one investor to engage in
non-disclosed “market timing” transactions that were detrimental to other investors in the fund. The defendants argued that the claims were barred by Section 2462 because their actions occurred (and thus the claim “accrued”) more than five years before the Complaint. The defendants further argued that the plain language of the statute did not provide for a “discovery” rule, which would delay the accrual of a claim until the government discovered facts sufficient to give it notice of the alleged wrongdoing. The district court agreed with the defendants and dismissed the Advisers Act claims.
The Second Circuit reversed, accepting the SEC’s argument that the claim did not accrue, and the limitations period did not begin to run, until after the SEC discovered facts regarding the alleged fraud. Despite the absence of any discovery rule in the text of Section 2462, the Second Circuit held that “it would be unnecessary for Congress to expressly mention the discovery rule in the context of fraud claims, given the presumption that the discovery rule applies to these claims unless Congress directs otherwise.” Id. at 60.
Among the arguments that the defendants in Gabelli made in seeking certiorari was that the purpose of a limitations period is to ensure that a defendant will not be confronted with stale claims and evidence, years after the period began to run. If a civil enforcement claim does not accrue until the SEC discovers the violation — i.e., until after the SEC begins to look for it — these protections against lost evidence and faded witness memories will be lost. Indeed, the requirement to preserve certain books and records may have lapsed before the SEC “discovers” a claim. The concerns articulated by defendants in Gabelli are the same ones that led the D.C. Circuit to conclude 16 years ago that Section 2462 applied to SEC actions seeking to impose a penalty.
The Gabelli defendants further argued that a discovery rule is particularly inappropriate when the SEC does not allege that the defendants took any affirmative steps to conceal their fraud. It is also questionable whether the SEC, which has wide-ranging investigative powers and substantial resources, ought to benefit from the discovery rule, which normally applies to claims brought by private citizens or entities who do not have the same opportunity to detect wrongdoing and harm at an early point in time.
In granting certiorari, the Court will help resolve a split of authority in the lower federal courts as to the accrual of claims under Section 2462. See, e.g., SEC v. Bartek, No. 11–10594, 2012 WL 3205446, *3 (5th Cir. Aug. 7, 2012) (unpublished opinion) (rejecting discovery rule in Section 2462 because “Congress did not include language to toll the statute based on an accrual discovery rule”). The decision could restrict the ability of the SEC to pursue civil penalties for alleged violations long after the challenged conduct took place in circumstances where it has not obtained tolling agreements from those it is investigating. The case also may shed light on related issues, such as whether and under what circumstances the statute of limitations in an SEC enforcement action may be subject to equitable tolling, and whether (as the Bartek court held), equitable remedies such injunctions and officer-and-director bars in some cases also may be subject to Section 2462. The case will likely be argued in early 2013, and decided before the end of June.
*This alert was co-authored by Herb Janick and Patrick Strawbridge.
This article was originally published by Bingham McCutchen LLP.