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Supreme Court Rules in Gabelli

Securities Alert | March 8, 2013
by: Jay Shapiro, Maurice Pesso and Reena Liebling

On February 27, 2013, the Supreme Court of the United States ruled that the five-year statute of limitations governing civil penalty claims by the Securities and Exchange Commission (the SEC) and other federal agencies begins to run when the fraud occurs and not, as the Government argued, when the fraud is discovered. Because the statute at issue in this case applies to both court and agency enforcement actions, the ruling in Gabelli, et al. v. Securities and Exchange Commission, No. 11-1274 will have significant implications. 

The statute underlying the decision, 28 U.S.C. § 2462, provides:

Except as otherwise provided by Act of Congress, an action, suit, or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued.

In the underlying case, the SEC brought a civil enforcement action in 2008 against Bruce Alpert and Marc Gabelli of Gabelli Funds, LLC, the investment advisor to the mutual fund Gabelli Global Growth Fund, for violations of the Investment Bankers Act of 1940. The SEC alleged that between 1999 and 2002, Alpert and Gabelli allowed an investor, Headstart Advisors, Ltd., to engage in market timing, a practice that allows short-term traders to exploit inefficiencies in the pricing of a mutual fund’s shares. Alpert and Gabelli successfully moved to dismiss the case, invoking the five-year statute of limitations under 28 U.S.C. § 2462. 

The Second Circuit reversed, holding that because the underlying violations sounded in fraud, the “discovery rule” applied. Under the discovery rule, the statute of limitations does not accrue until the claim is discovered or reasonably could have been discovered.  653 F. 3d 49, 59 (2011).

The Supreme Court overturned the Second Circuit’s ruling, reasoning 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.” In an unanimous decision, the Court held that the discovery rule does not apply to government penalty actions. Therefore, the SEC and other government agencies seeking civil penalties now have five years from when fraudulent conduct is completed to bring an action. 

As a consequence of the ruling, the SEC may not be able to detect, within the requisite time, fraud violations in the finance industry, especially where the fraud is more difficult to detect and would require lengthier investigations. The new time constraints imposed by the decision could result in the SEC bringer fewer fraud actions because of its inability to discover the fraud within the five-year period. On the other hand, because the five-year statute of limitations may be expiring in connection with purported frauds that occurred during the subprime and ensuing credit crisis of 2007-2009 (some of which may have already expired), there may be an uptick in SEC enforcement actions in the near term.

While the decision does put serious pressure on the SEC and other federal agencies to expedite their investigations into fraud for civil penalties, the Court acknowledged the limits of its ruling in two footnotes. In the first, the Court clarified that the injunctive relief and disgorgement sought by the SEC were not subject to the statute of limitations in § 2462. In the second, the Court explained that its decision did not address doctrines that toll the statute of limitations when a defendant takes steps to conceal its conduct. 

Additionally, the ruling certainly raises the prospect that the Government will actively seek to obtain tolling agreements in order to preserve its enforcement rights. That, in turn, presents interesting strategic questions for counsel representing subjects of these inquiries as to what concessions they may seek in exchange for entering into tolling agreements.

For more information regarding this alert, please contact Jay Shapiro (212.714.3063 /, Maurice Pesso (212.631.4405 / or Reena Liebling (212.714.3060 / of our New York office. 

This correspondence should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions.
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