This post was written by Terence Healy.
The discovery rule is no more. The Supreme Court today issued its decision in Gabelli v. SEC, 568 U. S. ____ (2013), and held the five-year limitations period under 28 U.S.C. § 2462 runs from the date of the underlying violation, and not from when the government reasonably should have discovered the wrongful act. The Securities and Exchange Commission (“SEC”) had long maintained that, in civil enforcement proceedings, the time within which it could initiate actions seeking penalties did not begin to run until the fraud was discovered. After all, the Commission argued, fraud is deceptive by nature, and the law had long recognized a discovery rule as an exception for suits based on fraud.
Gabelli turned on the reading of 28 U.S.C. § 2462, a catch-all limitations statute tracing its roots in the law back to 1799. The statute provides the government must commence any “proceeding for the enforcement of any civil fine, penalty, or forfeiture” within five years from time “when the claims first accrued.” 28 U.S.C. § 2462. In rejecting a reading of a “discovery rule” into § 2462, the Court held that under “the most natural reading of the statute… the five-year clock begins to tick” when the fraud occurs. “In common parlance a right accrues when it comes into existence.” The Court found limiting the government’s ability to bring claims beyond the five-year window also advanced the basic policies of all limitations periods; namely, elimination of stale claims and certainty as to a party’s right to recovery or potential liability.
The Court distinguished cases where a “discovery rule” was used to protect victims of fraud, who often had no reason to know they had been defrauded. The Court noted that the SEC’s very purpose is to root out fraud, and it has been given significant tools to achieve that goal.
Now, with the limitations issue made clear, the SEC’s Division of Enforcement will be under increased pressure to conclude investigations and make charging decisions in a timely manner. If this leads the Commission to better allocate its limited resources – and better exercise its discretion with respect to the individuals and companies it charges – the decision from the Court today may not be such a bad thing…