When the Securities and Exchange Commission seeks penalties in a civil enforcement action, a question arises as to the applicable statute of limitations. Defendants typically have taken the view that the five-year limitations period under 28 U.S.C. § 2462 applies to penalty claims, and begins to run immediately upon the commission of the purported unlawful act. In response, the SEC has argued for application of a "discovery" rule under which, at least with respect to alleged conduct involving fraud, the five-year period under § 2462 does not begin to run until the agency discovers, or through reasonable diligence should discover, the conduct. On February 27, 2013, in Gabelli v. Securities and Exchange Commission, No. 11-1274, the Supreme Court resolved that issue against the SEC, and held that § 2462 is not subject to a "discovery" rule.
The relevant facts of Gabelli are straightforward. In April 2008, the SEC brought a civil enforcement action, seeking monetary penalties, disgorgement and injunctive relief, against two executives involved in the operation of a mutual fund. The basis for the SEC's action was alleged misconduct that ended no later than August 2002. The district court ruled that the five-year limitation period under § 2462 barred the SEC's claim for monetary penalties. The Second Circuit reinstated the monetary penalty claim, holding that because the SEC's allegations "sound[ed] in fraud," that claim did not accrue for purposes of § 2462 until the SEC discovered, or through the exercise of reasonable diligence should have discovered, defendants' supposed misconduct.
The Supreme Court unanimously reversed. Initially, the Court noted that the most natural reading of § 2462 -- which states that "an action . . . 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" -- did not suggest a "discovery" rule. The Court also noted that the "discovery" rule is inconsistent with the fundamental policies of repose, elimination of stale claims and certainty that underlie statutes of limitations.
Apart from statutory language and policy considerations, the Court found no warrant to apply a "discovery" rule to penalty actions by the SEC. The Court started from the premise that the "discovery" rule typically applies only in actions by injured private plaintiffs who seek recompense for fraud. By contrast, the Court noted, in civil penalty actions the SEC is not an aggrieved victim seeking compensation but rather is a government agency seeking to punish alleged unlawful conduct -- a context in which a defendant's interest in repose has particular force. The Court pointed out that, unlike private plaintiffs who "do not typically spend [their] days looking for evidence that [they] were lied to or defrauded," the SEC's fundamental purpose is to ferret out misconduct. The Court also noted the various tools available to the SEC for that purpose, including the rights to inspect books and records of securities industry participants, issue investigative subpoenas compelling both production of documents and testimony, and provide bounties to "whistleblowers" who come forward with information about alleged wrongdoing. Finally, the Court reasoned that the "particular challenges" of "[d]etermining when the Government, as opposed to an individual, knew or reasonably should have known of a fraud" counseled against applying the "discovery" rule.
The Supreme Court in Gabelli held that § 2462 is not subject to a "discovery" rule, but left open a number of issues concerning the timeliness of penalty claims in civil enforcement actions. Because the SEC abandoned equitable tolling arguments it had made in the lower courts, the Supreme Court did not consider whether or how principles of equitable tolling might extend the five-year period under the § 2462. Moreover, Gabelli did not present the question whether claims for injunctive relief or disgorgement are "penalties" subject to the time limit of § 2462. Thus, while Gabelli strengthens § 2462 as a weapon in the arsenal of defendants facing civil enforcement actions by the SEC -- and, presumably, other federal agencies as well -- issues concerning the statute of limitations in such cases will continue to be litigated.