Supreme Court Limits Statute of Limitations in Securities Fraud Cases

Posted on White Collar News by author

In Gabelli et al. v. SEC, 586 U.S.__ (2013), the U.S. Supreme Court issued an important unanimous opinion curtailing the SEC’s enforcement authority. More specifically, in April 2008, the SEC filed a Complaint alleging investment adviser fraud against Marc J. Gabelli, the portfolio manager of the mutual fund Gabelli Global Growth Fund, and Bruce Alpert, the chief operating officer for the Fund’s adviser,Gabelli Funds, LLC. Significantly, the Complaint, which inter alia sought civil penalties against the Defendants, alleged misconduct that occurred from 1999 until August 2002. Under 28 U.S.C. sec. 2462, however, the general statute of limitations for civil penalties cases is “five years from the date when the claim first accrued.” At the district court level, the Defendants moved to dis­miss the Complaint, arguing in part that the SEC’s civil penalties claim was untimely. The Defendants in­voked the five-year statute of limitations in §2462 and pointed out that the Complaint alleged illegal activity up until August 2002; therefore, under the Defendants’ reasoning, any complaint for civil penalties must have been filed no later than August 2007, and therefore the SEC’s 2008 complaint was time barred . The District Court agreed and dis­missed the civil penalty claim. On appeal, the Second Circuit re­versed, agreeing with the SEC that because the underlying violations sounded in fraud, the “discovery rule” applied. Under the so-called “discovery rule,” the statute of limitations did not begin to run until the SEC dis­covered or reasonably could have discovered the fraud, thus potentially extending the limitations period for many years beyond the five year period called for in the statute. Ultimately, the Supreme Court rejected the Second Circuit’s reasoning, and held that the five-year clock began to tick when the fraud occurred, and not when it was discovered by the SEC.