• Gabelli: The Supreme Court Rejects the SEC's Reliance on the "Discovery Rule" in Civil Penalty Actions
  • March 12, 2013
  • Law Firm: Fried Frank Harris Shriver Jacobson LLP - New York Office
  • In a unanimous decision issued last week, the Supreme Court declined to apply the “fraud discovery rule” to SEC enforcement actions seeking civil penalties under 28 U.S.C. § 2462. See Gabelli v. U.S. Securities & Exchange Commission. In Gabelli, the SEC had filed a complaint in April 2008 alleging that the defendants had improperly permitted an investor in a mutual fund to engage in “market timing” from 1999 to 2002, and that the Commission had not uncovered the scheme until 2003, due to its secret nature. Even though 28 U.S.C. § 2462 states that any government enforcement action to obtain a civil “fine, penalty, or forfeiture, pecuniary or otherwise” must be brought within five years from the day “when the claim first accrued,” the SEC had argued that the statute of limitations did not begin to run until the Commission discovered the alleged fraud in 2003. Reversing the Court of Appeals for the Second Circuit, which had sided with the SEC, the Court held that a “discovery rule” should not be read into 28 U.S.C. § 2462 in SEC enforcement cases. Instead, the Court held that a “natural reading” of the statute supported the conclusion that a fraud-based claim “accrues” when the allegedly fraudulent conduct occurs, and not - as urged by the Commission - when it is either discovered by the government or should have been discovered by exercising reasonable diligence.