03.12.2013 Supreme Court Tightens Statute of Limitations for SEC Enforcement Actions
BY: CHARLES W. KEMP
At the end of February, a unanimous Supreme Court found in Gabelli v. SEC that the statute of limitations period for federal enforcement actions seeking civil penalties begins to run "when the fraud is complete," not when it is discovered by the government. The statute of limitations period ordinarily begins to run when a party is injured; however, courts have developed the discovery rule in cases of fraud, where the injury itself could be concealed, to protect victims who are not required to be in a constant state of investigation. The SEC in Gabelli argued that it should receive the benefit of the discovery rule in an enforcement action it filed against two mutual fund managers for allegedly committing fraud.
Chief Justice Roberts explained for the Court that the government does not and should not get the benefit of the discovery rule in civil penalty enforcement actions. He reasoned, in part, that the SEC’s very purpose is to root out fraud and that the relief sought is not that of an injured party seeking recompense. Therefore, the Court concluded that, while the government can receive the benefit of the discovery rule when it has been injured, it may not in civil penalty enforcement actions.