The Clock Is Ticking for the SEC... (Or Is It?)

This post was written by Terence Healy.

The Supreme Court heard oral argument this morning in a case addressing the time within which the Securities and Exchange Commission (“SEC”) can initiate an action seeking civil penalties for violations of the federal securities laws. In Gabelli v. SEC, the Court considered whether the “catch all” five-year limitations period under 28 U.S.C. § 2462 runs from the date of the underlying violation or from when the government reasonably should have discovered the wrongful act. The statute – which traces its roots in the law back to 1799 – provides that the government must commence any “proceeding for the enforcement of any civil fine, penalty, or forfeiture” within five years from the time “when the claims first accrued.” 28 U.S.C. § 2462. The SEC argued – and the Second Circuit agreed below – that in cases of fraud, which involve deception by nature, a claim does not accrue until the government reasonably should have discovered the fraudulent conduct. The SEC maintained the law has long recognized the discovery rule as a "historical exception for suits based on fraud." See TRW Inc. v. Andrews, 534 U.S. 19, 37 (2001) (Scalia, J., concurring).

At the argument today, Assistant Solicitor General Jeffrey Wall encountered a hot bench in arguing  that a broad “discovery rule” should be read into a 200-year-old statute. The justices characterized penalties as “quasi-criminal” and distinguished cases finding that a “discovery rule” applied to actions seeking recovery of lost money or property. The government conceded in argument that, for criminal penalties, limitations periods run from the date of violation.

The Court challenged the government to cite any prior cases where a discovery rule was found to apply to an action seeking penalties. On two occasions, Mr. Wall responded that there were not really any cases “on either side of the ledger.” Given the age of the statute at issue, the justices were not satisfied. Justice Kagan asked, “Why is it that you don't have any cases? … This is an old statute.” Justice Breyer pressed the issue, at one point stating, “I will give you 30 seconds to cite me one case. Otherwise, I am going to assume there are none.” Justice Scalia added, “Fraud is nothing new. This has been around for 200 years for Pete’s sake.”

If the Court finds against the SEC and reverses the Second Circuit, the SEC will be under increased pressure to conclude its investigations in a timely manner (something for which the Enforcement Division has not always shown great skill). This is particularly true given that some federal courts have found “penalties” to include such non-monetary relief as professional bars and injunctions against future violations of the law. See SEC v. Johnson, 87 F.3d 484 (D.C. Cir. 1996).

The case is Gabelli v. SEC, Supreme Court Case No. 11-1274. A decision is expected in June.

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