On February 27, 2013, in Gabelli v. Securities Exchange Commission, No. 11-1274, the U.S. Supreme Court unanimously concluded that the five-year statute of limitations applicable to actions brought by the SEC seeking civil penalties begins to run when the alleged fraudulent activity occurs rather than when it is discovered. The Supreme Court’s ruling overturned the August 1, 2011 decision by the U.S. Court of Appeals for the Second Circuit which held that the statute of limitations does not begin to run for such actions until the SEC discovers, or could have discovered with reasonable diligence, the alleged fraud (the so-called “discovery rule”). In its opinion, the Supreme Court reasoned that it had never applied the discovery rule “where the plaintiff is not a defrauded victim seeking recompense, but is instead the Government bringing an enforcement action for civil penalties.” According to the Supreme Court’s opinion, the discovery rule aims to protect private parties who may be unaware that they have been harmed. However, the Supreme Court’s opinion stated that the SEC, whose purpose is to discover wrongdoings, has many tools to aid in the pursuit of such actions and that the SEC is not a defrauded victim, which the discovery rule is intended to protect. The Supreme Court’s opinion noted that the decision did not address doctrines that toll the statute of limitations when a defendant takes steps to conceal its allegedly fraudulent conduct from the SEC. For a further discussion of the Supreme Court’s decision, please see the March 5, 2013 Davis Polk Client Memorandum, U.S. Supreme Court Confirms that Limitations Period for Certain Federal Enforcement Actions Begins When Fraud Occurs; Application In FCPA Matters Remains Unclear.

The Gabelli Case

The SEC filed a complaint in April 2008 claiming that Marc Gabelli, the portfolio manager of a mutual fund advised by Gabelli Funds, LLC (the “Adviser”), and Bruce Alpert (together with Marc Gabelli, the “Petitioners”), the chief operating officer of the Adviser, secretly permitted an investor in the mutual fund to engage in market timing transactions from 1999 until 2002 to the detriment of other fund investors. The SEC claimed that, because of the secret nature of the Petitioners’ wrongdoing (as well as misrepresentations made by the Petitioners to the mutual fund’s board of directors and the other mutual fund investors), the SEC did not discover the fraud until late 2003. The SEC’s complaint sought, among other things, civil penalties in connection with the Petitioners’ alleged aiding and abetting violations of the antifraud provisions of the Advisers Act. The Petitioners moved to dismiss the Advisers Act claims on the grounds that the alleged violations occurred (and therefore the related claims first accrued) more than five years before the SEC filed its complaint and, therefore, the claims were time-barred under 28 U.S.C. §2642. For a further discussion of the Gabelli Case, please see the October 17, 2012 Investment Management Regulatory Update.