The US Supreme Court has agreed to review a case involving the application of a limitations period to an SEC enforcement action on the market timing of mutual funds. The Court will review a Second Circuit ruling that the five-year limitations period in 28 USC 2462 did not begin to run until the SEC discovered, or reasonably could have discovered, the alleged fraudulent scheme. The SEC has urged rthe Court to uphold the Second Circuit. Gabelli v. SEC, Dkt. No. 11-1274.
Section 2462 provides that an action for the enforcement of any civil penalty must not be entertained unless begun within five years from the date when the claim first accrued. The appeals court rejected the petitioners’ argument that the SEC claims against them for civil penalties first accrued when they engaged in the fraud at issue regardless of the time at which the SEC discovered or reasonably could have discovered the scheme.
The SEC’s brief notes that the Supreme Court has repeatedly recognized that, unless Congress specifies a different rule, the limitations period in an action for fraud does not begin to run until the plaintiff discovers, or in the exercise of reasonable diligence could have discovered, the facts underlying the claim. That rule, said the SEC, derives from the equitable maxim that a party should not be permitted to benefit from its own misconduct. The Court has long held as a matter of equity that defendants cannot use their own conduct as a defense, including by unfairly relying on a statute of limitations.
The Second Circuit correctly applied the discovery rule in this case, argued the SEC, noting that the agency’s claims under the Investment Advisers Act were based on fraud. Thus, the discovery rule should define when the claim accrues. The appeals court correctly reasoned that for claims sounding in fraud a discovery rule is read into the relevant statute of limitation.
It does matter that the SEC is the plaintiff in the action, said the brief. The Court has previously stated that there is no good reason why the rule that statutes of limitations upon suits to set aside fraudulent transactions must not begin to run until the discovery of the fraud should not apply in favor of the Government as well as a private individual.
Finally, the SEC said that the petitioners’ reliance on the Court’s recent decision on Credit Suisse Securities v. Simmonds was misplaced. In Simmonds, the Court considered the limitations period for filing suits against a corporate insider to recover short-swing profits under Exchange Act Section 16(b). The Court divided 4-4 on whether that two-year period could be tolled at all. The Court held that, assuming some form of tolling did apply, it was preferential that form which Congress was aware of rather than a more expansive tolling rule. The Court concluded that allowing tolling to continue beyond the point at which a 16(b) plaintiff is aware or should have been aware of the facts underlying the claim would be inequitable and inconsistent with the general purposes of limitations periods.
The plaintiff’s claim for recovery of short-swing profits did not sound in fraud, noted the SEC, and thus the Court had no occasion to address the application of the discovery rule to cases where the underlying violation is based on fraud. Also, in the SEC’s view, the Court’s reason for rejecting the expansive tolling rule was inapposite here. In Simmonds, the plaintiff’s proposed approach was novel because it divorced equitable tolling principles from the reason equity would delay the limitations period, which would be the plaintiff’s reasonable lack of awareness of the facts underlying the claim. By contrast, in the instant action, the appeals court applied the discovery rule in its traditional form and held that the limitations period would begin to run when the SEC knew or with reasonable diligence could have known of the fraudulent scheme.