In the Wake of Gabelli, SEC Voluntarily Dismisses Follow-on Cert. Petition

Today, the Solicitor General filed a motion asking the Supreme Court to dismiss the Securities and Exchange Commission’s petition for a writ of certiorari in SEC v. Bartek. As noted in a previous blog post, the Bartek petition focused on when the limitations period under 28 U.S.C. § 2462 begins to accrues, a question that was answered in Gabelli.

However, the petition also presented a second question: whether director and officer bars and injunctive relief constituted penalties. Although the Supreme Court was unlikely to take up that question at this juncture, the government’s decision to dismiss the petition perhaps signals a view that Gabelli will not have a significant adverse impact on the SEC’s civil enforcement activities. Certainly, Gabelli’s impact can be minimized if, as expected, Mary Jo White is confirmed as the next SEC Chair and follows through on her commitment to the Senate Banking Committee to “aggressive” pursuit of wrongdoers.

Supreme Court Unanimously Limits SEC’s Ability to Bring Civil Penalty Claims for Conduct Older Than Five Years

In Gabelli v. SEC, a unanimous Supreme Court held that the statute of limitations for “penalty” claims in governmental enforcement actions begins to run from the date of the underlying violation of the law, not when the government discovers or reasonably should have discovered the misconduct.  Gabelli has important implications for the Securities and Exchange Commission (“SEC”) and all governmental agencies because it limits the sanctions available to the agency for conduct that occurred more than five years before it commences a civil enforcement action. Opinion.

Gabelli involved the application of 28 U.S.C. § 2462, which provides that “an action, suit or proceeding for the enforcement of any civil fine, penalty or forfeiture … shall not be entertained unless commenced within five years from the date when the claim first accrued[.]”  In 2008, the SEC sought civil penalties from Mark Gabelli, a mutual fund portfolio manager, for alleged violations of the Investment Advisers Act in connection with alleged market timing issues.  Gabelli successfully moved to dismiss the penalty claims as time-barred under Section 2462 because the complaint was filed almost six years after the alleged misconduct.  On appeal, the Second Circuit reversed, reasoning that in cases of fraud the statute of limitations does not begin to run until the SEC discovered (or reasonably could have discovered) the wrongful acts.  The Supreme Court disagreed, holding that “a claim based on fraud accrues—and the five-year clock begins to tick—when a defendant’s allegedly fraudulent conduct occurs.”  Read More

Supreme Court to Resolve Split on Timing for SEC Penalty Actions

Today, the Supreme Court granted a petition for certiorari in Gabelli v. Securities and Exchange Commission (11-1274). In the appeal from a Second Circuit opinion, the Court will decide whether a governmental claim for penalties accrues on the date that the underlying violation occurs, or when the SEC discovers (or reasonably could have discovered) the violation, for purposes of the 5-year statute of limitations for governmental penalty actions embodied in 28 U.S.C. s. 2462. The precise question presented is:

“When Congress has not enacted a separate controlling provision, does the government’s claim first accrue for purposes of applying the five-year limitations period under 28 U.S.C. s. 2462 when the government can first bring the action for a penalty?”

The Second Circuit, in an opinion adopting the SEC’s position, held that the discovery rule applies to SEC enforcement actions rooted in fraud. Under that rubric, the SEC could bring an enforcement action within five years of learning about a fraud, which, in many cases, can be far more than five years after the underlying violation occurred. The Supreme Court’s decision to take the case follows closely on the heels of the Fifth Circuit’s August 7, 2012 decision in SEC v. Bartek, previously discussed here. In Bartek, the Fifth Circuit held that the statute of limitations for penalties in SEC enforcement actions began to run on the date of the underlying in violation, and that the discovery rule does not apply to 28 U.S.C. s. 2462. The Bartek decision therefore created a clear Circuit split that the Supreme Court is poised to resolve next term.

Fifth Circuit Tells the SEC “Time’s Up”

In SEC v. Bartek, filed August 7, 2012, the Fifth Circuit held that the discovery rule does not apply to 28 U.S.C. § 2462, the statute of limitations governing penalties in SEC civil enforcement actions, thus affirming a district court’s grant of summary judgment in favor of the defendants. Under the Fifth Circuit’s ruling, the SEC’s claims for penalties accrue on the date of the violation, not on the date that the SEC discovers the violation. This opinion creates a circuit split after the Second Circuit’s decision in SEC v. Gabelli, 653 F.3d 49 (2d Cir. 2011), which held that the discovery rule applied to Section 2462, and increases the likelihood that the Supreme Court will weigh in on the issue. Read More