Under Section 2462 of Title 28, any government action “for the enforcement of any civil fine, penalty, or forfeiture” must be “commenced within five years from the date when the claim first accrued.” 28 U.S.C. § 2462. On September 25, 2012, the Supreme Court granted certiorari to determine whether “the government’s claim first accrue[s] for purposes of” Section 2462 “when the government can first bring an action for a penalty.” Petition for Writ of Certiorari, Gabelli v. SEC, 2012 WL 1419938, at *i (U.S. Apr. 20, 2012) (11-1274).
On April 24, 2008, the SEC filed a complaint against Marc J. Gabelli (“Gabelli”), the portfolio manager of the Gabelli Global Growth Fund (“GGGF”) and Bruce Alpert, the chief operating officer for GGGF’s adviser, Gabelli Funds, LLC (the “Adviser”). Petition for Writ of Certiorari, Gabelli, at *6-7. “In essence, the SEC’s complaint charge[d] [the] defendants with failing to disclose favorable treatment accorded one GGGF investor in preference to other investors.” SEC v. Gabelli, 653 F.3d 49, 52 (2d Cir. 2011) (Rakoff, J.)1 (Gabelli II). While the Adviser “prohibit[ed] most GGGF investors from engaging in a form of short-term trading called ‘market timing,’” the Adviser allegedly “secretly permitted one investor to market time [GGGF] in exchange for an investment in a hedge fund managed by Gabelli.” Id. at 52-53. The SEC claimed, inter alia, that “both Alpert and Gabelli had aided and abetted violations by the Adviser of the antifraud provisions of Sections 206(1) and 206(2) of the Advisers Act.” Id. at 55.
The SEC’s complaint alleged that the market timing at issue ended in August 2002, more than five years prior to the date the SEC brought suit. Petition for Writ of Certiorari, Gabelli, at *7. However, the SEC contended that its claims were still timely because it did not discover the fraud until September 2003. Gabelli II, 653 F.3d at 58-59. The SEC argued that under the “discovery rule,” “a claim accrues and the statute of limitations begins to run for purposes of § 2462, when the fraud or misstatement is discovered … rather than when the violation occurs.” SEC v. Gabelli, 2010 WL 1253603, at *5 (S.D.N.Y. Mar. 17, 2010) (Batts, J.) (Gabelli I).
On March 17, 2010, the Southern District of New York determined that “the discovery rule does not apply to claims subject to the limitations of § 2462” and held that “the statute of limitations ha[d] run on [the SEC’s] claims for civil penalties under the Investment Adviser Act.” Gabelli I, 2010 WL 1253603, at *5-6.
The Second Circuit Holds That the Discovery Rule Applies to Section 2462’s Limitations Period for Claims That Sound in Fraud
On August 1, 2011, the Second Circuit reversed the district court’s ruling. The court stated that “it has been long established that the discovery rule applies [to statutes of limitations] where, as here, a claim sounds in fraud.” Gabelli II, 653 F.3d at 59. Although “Section 2462 does not expressly state a discovery rule,” the Second Circuit found that “it would [have] be[en] unnecessary for Congress to expressly mention the discovery rule … given the presumption that the discovery rule applies to [fraud] claims unless Congress directs otherwise.” Id. at 60 (citing Holmberg v. Armbrecht, 327 U.S. 392, 397 (1946) (Frankfurter, J.) (explaining that the discovery rule for claims of fraud “is read into every federal statute of limitation”) (emphasis added)).
The Second Circuit determined that “the discovery rule applies to fraud claims” even if there are “’no special circumstances or efforts on the part of the party committing the fraud to conceal it from the knowledge of the other party.’” Id. at 59 (quoting Bailey v. Glover, 88 U.S. 342, 348 (1874) (Miller, J.)). The court explained that “fraud claims by their very nature involve selfconcealing conduct.” Id.
“In this case, since the [SEC’s] Advisers Act claim is made under the antifraud provisions of that Act and alleges that the defendants aided and abetted Gabelli Funds’ fraudulent scheme,” the Second Circuit held that “the discovery rule defines when the claim accrues.” Id. at 60. The Second Circuit further held that “the SEC need not plead that the defendants took affirmative steps to conceal their fraud.” Id.
Citing a Circuit Split, the Defendants Petition the Supreme Court for Certiorari
The defendants petitioned the Supreme Court for certiorari, contending that “[t]he Second Circuit’s holding creates a circuit split with respect to the question of how to interpret the limitations period for government penalty actions set forth in Section 2462.” Petition for Writ of Certiorari, Gabelli, at *13. The petitioner-defendants argued that prior to the Second Circuit’s decision,
[F]our circuit courts ha[d] unambiguously read the term “accrual” as used in Section 2462 to refer to the date of the underlying violation, and, thus, [ ] required the government to bring a penalty claim within five years of the earliest date on which it could sue absent a statute expressly providing otherwise.2
Id. This circuit split was deepened by the Fifth Circuit’s decision in SEC v. Bartek, 2012 WL 3205446 (5th Cir. Aug. 7, 2012) (per curiam), issued after the Second Circuit’s decision but before the petitioner-defendants filed their reply. The Fifth Circuit “held that Section 2462’s ‘first accrued’ language refers to the date of the violation and that the discovery rule did not apply even when the Government alleged the defendant [had] violated an antifraud statute.” Reply Brief in Support of Petition for Writ of Certiorari, Gabelli v. SEC, 2012 WL 4428088, at *1-2 (U.S. Aug. 14, 2012) (No. 11-1274).
The petitioner-defendants asserted that “[t]here is no room in Section 2462 or the federal securities laws to find a discovery rule for penalty actions under the [Advisers Act].” Petition for Writ of Certiorari, Gabelli, at *21. “This Court has held—in a decision the [Second Circuit] ignored—that ‘[i]n common parlance a right accrues when it comes into existence.’” Id. at *19-20 (alteration in original) (quoting United States v. Lindsay, 346 U.S. 568, 569 (1954) (Black, J.)). Moreover, “Congress explicitly legislated a discovery rule in the federal securities laws when it wanted the courts to apply such a rule, providing that the discovery rule would apply to ‘a private right of action’ and not to a governmental penalty action.” Id. at *20-21.
The petitioner-defendants also contended that the Second Circuit’s “decision cannot be reconciled with this Court’s intervening decision in” Credit Suisse Securities (USA) LLC v. Simmonds, 132 S. Ct. 1414 (2012) (Scalia, J.). Id. at *25. In Simmonds, “the Court rejected a court-created exception to clear statutory text directly analogous to the rule created by the [Second Circuit] below.”3 Id. at *26. “Simmonds also explained that the doctrine of fraudulent concealment was the only appropriate basis for avoiding a statutory limitations period where Congress had not specified otherwise … .” Id. at *27.
Finally, the petitioner-defendants claimed that “[u]nder the Second Circuit’s holding, a defendant whom the Government can allege violated an antifraud statute will forever be at the peril of a governmental penalty, so long as the Government claims it discovered the claim recently and did not know of it earlier.” Reply Brief in Support of Petition for Writ of Certiorari, Gabelli, at *1. “The potential for such endless tolling in cases in which a reasonably diligent plaintiff would know of the facts underlying the action is out of step with the purpose of limitations periods in general.” Petition for Writ of Certiorari, Gabelli, at *28 (quoting Simmonds, 132 S. Ct. at 1420).
The SEC Responds That the Discovery Rule Is Read Into Every Federal Statute of Limitations for Fraud Claims
In opposition to the defendants’ Petition for Writ of Certiorari, the SEC argued that the Supreme 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 the claim.” Brief for the Respondent in Opposition, Gabelli v. SEC, 2012 WL 3041165, at *7 (U.S. July 25, 2012) (No. 11-1274).
The SEC stated that:
This Court long ago adopted as its own the old chancery rule that where a plaintiff has been injured by fraud and “remains in ignorance of it without any fault or want of diligence or care on his part, the bar of the statute does not begin to run until the fraud is discovered, though there be no special circumstances or efforts on the part of the party committing the fraud to conceal it from the knowledge of the other party.”
Brief for the Respondent in Opposition, Gabelli, at *9 (quoting Holmberg, 327 U.S. at 397). The SEC contended that “the discovery rule has long been understood as a background principle that presumptively governs the application of federal limitations statutes unless Congress specifies otherwise.” Id. at *12. “Its applicability does not depend on express language incorporating the discovery rule into Section 2462.” Id.
As support for its position, the SEC pointed to the Seventh Circuit’s decision in SEC v. Koenig, 557 F.3d 736 (7th Cir. 2009) (Easterbrook, C.J.). The Koenig court “explained that it did not need to decide ‘when a “claim accrues” for purposes of [Section] 2462 generally, because the nineteenth century recognized a special rule for fraud, a concealed wrong.’” Id. at *10 (quoting Koenig, 557 F.3d at 739). The Seventh Circuit held that “a victim of fraud has the full time from the date that the wrong came to light, or would have done had diligence been employed.” Koenig, 557 F.3d at 739. The SEC noted that, “[i]n Koenig, as in this case, the [SEC] brought its enforcement action within five years after it was able to discover the fraud at issue.” Brief for the Respondent in Opposition, Gabelli, at *10. “The Seventh Circuit therefore concluded that the [SEC’s] enforcement action was timely.” Id.
The SEC contended that “[l]ike the Seventh Circuit in Koenig,” the Second Circuit had “correctly applied the discovery rule in this case.” Id. “[T]he [SEC] was required to bring its suit within five years after it discovered, or with reasonable diligence could have discovered, petitioners’ fraudulent scheme.” Id. at *12. “Applying that rule to the facts of this case, the [Second Circuit] correctly held that the [SEC’s] complaint was not subject to dismissal on limitations grounds.” Id.
Finally, the SEC explained that “the relevant statutory provisions create ample incentives for the [SEC] to pursue its claims diligently.” Id. at *17-18. “[T]o bring an enforcement action like this one, the [SEC] must satisfy … the pleading standards for fraud, which may become more difficult to meet as the defendants’ conduct becomes more remote in time.” Id. at *17. If “the [SEC] prevails on the merits, the district court has discretion to set the amount of any civil penalty, and it can consider the passage of time as well as other relevant factors.” Id.
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The Court will review the Gabelli case this term. A date for oral argument has not yet been set.