Gabelli v. SEC

In a securities action brought by the SEC, the statute of limitations begins to run on the date the allegedly fraudulent action occurred not the date it was discovered.

The Investment Advisers Act of 1940 (IAA) prohibits investment advisers from “employ[ing] any scheme, or artifice to defraud any client….” The IAA allows the Securities and Exchange Commission (SEC) to seek civil penalties against violators. 28 U.S.C. § 2462 applies a five-year statute of limitations to civil penalties the government seeks to impose “from the date when the claim first accrued….” The alleged violations occurred in 2002. In 2008, the SEC brought a civil enforcement action against Petitioners for violating the IAA.

The District Court held that the SEC’s claim was time barred. The Court of Appeals for the Second Circuit reversed, explaining that “for claims that sound in fraud a discovery rule is read into the relevant statute of limitation.” Thus, the Second Circuit held the claim was not time barred because under the discovery rule the statute of limitations does not toll until the claim is “discovered, or could have been discovered, with reasonable diligence.”

The Supreme Court reversed the Second Circuit, holding that there was no “textual, historical or equitable reason” to read a discovery rule into the statute of limitations set out in 28 U.S.C. § 2462.

The Court explained that the purpose of the discovery rule is to protect victims of fraud “who do not know they have been injured and have no reason to inquire as to any injury.” In the present case the SEC is neither the defrauded victim, nor is the SEC unaware of the need to investigate as it is “the central mission” of the SEC to investigate federal securities law violations. As such, it is inappropriate to read into 28 U.S.C. § 2462 the protection of the discovery rule.