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October Term, 2012

February 27, 2013

Today the Supreme Court issued one decision, described below, of interest to the business community.

Investment Advisers Act—Statute of Limitations for Enforcement Actions

Gabelli v. Securities and Exchange Commission, No. 11-1274 (described in the September 25, 2012, Docket Report)

The Investment Advisers Act of 1940 prohibits investment advisers from defrauding a client or prospective client. The Securities and Exchange Commission has authority to bring enforcement actions against advisers who violate the Act. Under 28 U.S.C. § 2462—the general limitations period applicable to civil-penalty actions—the SEC must initiate any such action “within five years from the date when the claim first accrued.” Today, in Gabelli v. Securities and Exchange Commission, No. 11-1274, the Supreme Court unanimously held that the statutory period begins to run when the fraud is complete, not when it is discovered.

In 2008, the SEC brought an enforcement action against petitioners, who were an investment adviser to a mutual fund, the adviser’s chief operating officer, and the adviser’s former portfolio manager. The SEC alleged that from 1999 to 2002, petitioners permitted an investor to engage in a fraudulent scheme that may have harmed other investors. Petitioners successfully moved to dismiss the complaint as untimely. On appeal, the Second Circuit held that the discovery rule, under which “‘the statute of limitations does not accrue until [a] claim is discovered, or could have been discovered with reasonable diligence, by the plaintiff’” applied to the SEC’s claim because that claim “‘sounded in fraud.’” Slip op. at 4.

In an opinion by Chief Justice Roberts, the Supreme Court reversed. Rejecting the views of the United States as amicus curiae, the Court reasoned that the “most natural reading of the statute” is that a claim accrues when the conduct occurs. Id. at 4. The Court emphasized that statutes of limitations “‘promote justice by preventing surprises through the revival of claims that have been allowed to slumber until the evidence has been lost, memories have faded, and witnesses have disappeared.’” Id. at 5. The discovery rule is an appropriate exception to the usual rule, when the plaintiff “is a defrauded victim seeking recompense,” in order “to preserve the claims of victims who do not know they are injured and who reasonably do not inquire as to any injury.” Id. at 6-7. But it has never been applied to a governmental enforcement action for civil penalties. The SEC is differently situated from private plaintiffs, the Court held, because it has many tools at its disposal to identify fraud that are not available to individual investors. Unlike private parties who have no reason to suspect fraud, “the SEC’s very purpose is to root it out.” Id. at 8. And the relief that the SEC seeks goes beyond compensation: The penalties sought are “intended to punish, and label defendants wrongdoers.” Ibid. Applying the discovery rule to governmental agencies thus presents difficulties that do not arise with private plaintiffs. Id. at 9.

The Court’s decision in Gabelli clarified that the statute of limitations applicable to “many penalty provisions throughout the U.S. Code” (id. at 2) begins at the time of the alleged conduct, thus narrowing the period of potential liability. The ruling is therefore of interest to businesses that may be subject to regulatory civil-enforcement actions.

Any questions about this case should be directed to Tim Bishop (+1 312 701 7829) in our Chicago office.

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