The Supreme Court agreed to here a potentially significant case for the SEC as well as other government agencies regarding the application of Section 2442 of Title 28, the five year statute of limitations for penalties. That Section provides in pertinent part that “except as otherwise provided by Act of Congress” any penalty action brought by the government must be “commenced within five years from the date when the claim first accrued.” The critical issue which the High Court agreed to hear is whether the commencement of the limitation period begins in a fraud action on discovery by the SEC or other government agency or at the time of the events. Gabelli v. SEC, No. 11-1274 (Cert. granted Sept. 25, 2012).
The Commissions case centered on claimed false statements by Marc Gambelli, the portfolio manager of Gabelli Global Growth Fund, and Bruce Alpert, the COO of the Fund’s adviser, Gabelli Funds, LLC. From 1999 until 2002 the defendants permitted trader Headstart to engage in “time zone arbitrage” according to the SEC, a form of market timing. At the same time defendants banned at least 48 other accounts from engaging in market timing. The deal with Headstart was not disclosed to the Fund’s board of directors who were thus decieved. Even after Headstart halted the practice, the defendants continued to mislead the board and investors, according to the SEC.
The Commission filed its complaint in April 2008. The underlying investigation began in the Fall of 2003 following the publicized inquiry of the New York Attorney General into market timing. At one point the SEC had sought tolling agreements. The complaint alleged violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2).
The district court granted in part the motion to dismiss by the defendants. On the statute of limitations question the Court concluded that the claim for a civil penalty was time barred. The Second Circuit reversed. On the Section 2442 statute of limitations issue the Circuit Court held that the claim did not accrue until September 2003 when the complaint alleges the Commission discovered the claim. The statute of limitations does not accrue until the claim is discovered or could have been discovered, the Circuit Court explained. The fact that the SEC did not plead facts showing that the defendants concealed the claim is not relevant to the case here. That contention goes to the doctrine of fraudulent concealment which is distinct from the question in this case.
In requesting that the High Court hear the case, Petitioners focused on the fact that the decision by the Second Circuit conflicts with the long standing interpretation of Section 2462: “For the more than 150 years that Section 2462 and its predecessors have existed, all federal agencies that seek to bring a penalty claim have been subject to a clear rule: unless the defendant has engaged in conduct to conceal his own wrongdoing and thus to frustrate the bringing of a timely claim . … the agency must bring a penalty claim within five years of when the violation first occurred and the agency first had a legal right to sue.” This position is supported by decisions in four circuits,, the Petitioners told the Court. It is also consistent with the manner in which the Supreme Court has interpreted other statutes of limitation.
In opposing review by the Court, the SEC claimed to be aligned with an equally uniform and long standing rule. According to the Commission: “This case, however, does not provide the Court with a suitable opportunity to determine when, as a general matter, a claim ‘first accrue[s]’ for purposes of Section 2462. Whatever the proper test for determining the accrual date for other sorts of claims, the Commission’s claims here are for fraud. This Court has repeatedly recognized that, unless Congress specifies a different rule, the limitations period in a suit for fraud does not begin to run until the plaintiff discovers, or in the exercise of reasonable diligence could have discovered, the facts underlying his claim.”
Last month the Fifth Circuit rejected the Commission’s position on Section 2462 claim. In reaching its conclusion the Court held that Gabelli involved an inherently self-concealing fraud that differed from the action before it which was an options backdating case. SEC v. Bartek, No 11-1-594 (5th Cir. Decided Aug. 7, 2012)(here).
Gabelli will be heard by the Supreme Court later this term.