U.S. Supreme Court Ruling Defines Statute of Limitations "Start Time"

The U.S. Supreme Court (the “Court”) last week unanimously reverseda 2nd U.S. Circuit Court of Appeals decision, effectively mandating the Securities and Exchange Commission (“SEC”) to file complaints seeking civil penalties for securities fraud within five years of the alleged incident, not five years after the alleged incident is discovered.

This ruling stemmed from the case of SEC vs. Marc Gabelli and Bruce Alpert.  In this case, the SEC accused Gabelli, a former portfolio manager at Gabelli Funds LLC, and Bruce Alpert, a former chief operating officer for the firm, of several acts of fraud spanning from 1999 to 2002.  The SEC, however, did not sue until April 2008.  Gabelli and Alpert said this was too late, given that the statute of limitations was five years and the last market-timing trade had taken place in August 2002, nearly six years earlier.  While the district court agreed with Gabelli and Alpert, the Appellate Court disagreed, and ruled in favor of the SEC on the grounds that the statute of limitations begins to run once the SEC discovers the alleged fraud.  The Supreme Court then decided to take up the case to give a ruling on the issue. 

The Court was not persuaded by the SEC’s argument that discovery of such violations is often delayed due to concealment on the part of the violator, and a negative ruling could effectively diminish the agency's enforcement power, resulting in fewer cases being prosecuted on behalf of harmed investors.  Instead, the Court agreed with attorneys for Gabelli and Alpert, who argued that under the appeals court ruling, the SEC would be able to bring an ancient claim on the mere allegation that it did not discover and could not have discovered the violation earlier.  Furthermore, having no time limit disadvantages the defendants because records may have been discarded and witnesses’ memories faded in the time it would take the SEC to bring a claim.

The Court’s decision subsequently holds the SEC to a higher “discovery” standard when seeking civil penalties for fraud than it does individual fraud victims seeking compensation.  In justifying the decision, Chief Justice John Roberts Jr. wrote “the SEC…is not like an individual victim who relies on apparent injury to learn of a wrong…unlike the private party who has no reason to suspect fraud, the SEC's very purpose is to root it out, and it has many legal tools at hand to aid in that pursuit.”

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