U.S. Supreme Court

SEC can't delay suit for late-discovered fraud; clock ticks when fraud is complete, SCOTUS says


The U.S. Supreme Court has ruled against the Securities and Exchange Commission in an appeal that contended the agency didn’t act quickly enough when it sought civil penalties against two former mutual fund advisers.

The five-year statute of limitations begins to run when the fraud is complete, rather than when the fraud is discovered, the U.S. Supreme Court ruled on Wednesday. Chief Justice John G. Roberts Jr. wrote the decision (PDF) for a unanimous court.

The Securities and Exchange Commission had sued two former mutual fund advisers under a law authorizing civil penalties against investment advisers who defraud their clients. A federal law sets the statute of limitations for government enforcement actions seeking civil penalties at “five years from the date when the claim first accrued.”

Roberts said that, under “the most natural reading of the statute,” the clock begins to tick when the fraud occurs. That standard rule—that a claim accrues “when the plaintiff has a complete and present cause of action”—has governed since the 1830s, he wrote. “And that definition appears in dictionaries from the 19th century up until today.”

The discovery rule—an exception to the standard rule—holds that the clock doesn’t begin to tick until a fraud is discovered. Courts applied the discovery rule as long ago as the 18th century when defendants’ deceptive conduct prevented plaintiffs from discovering the fraud. But lower courts didn’t begin applying the discovery rule in government enforcement actions until 2008, the chief justice said.

Roberts said there are reasons to set one rule for private parties and another for the Securities and Exchange Commission. “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,” he said. Most private parties, on the other hand “do not live in a state of constant investigation; absent any reason to think we have been injured, we do not typically spend our days looking for evidence that we were lied to or defrauded.”

Roberts also distinguished between compensation sought by private plaintiffs and the federal government. The SEC case involves penalties that “are intended to punish and label defendants wrongdoers,” he wrote.

The defendants are Bruce Alpert and Marc Gabelli, former managers at Gabelli Funds, a company that advised a mutual fund. They were accused of improperly allowing an investor to engage in market-timing trading in the mutual fund in exchange for a promise to invest in a Gabelli hedge fund. Both have denied wrongdoing.

According to prior coverage of the case, a decision rejecting the discovery rule could impact the government’s ability to bring cases stemming from the mortgage meltdown.

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