Wednesday, December 12, 2012

Former SEC Commissioners Urge US Supreme Court to Apply Bright Line Limitations Period to SEC Enforcement Action


Five former SEC Commissioners have asked the US Supreme Court to disallow the institution of an SEC enforcement action more than five years after the alleged market timing violation occurred since allowing the penalty action would undermine efficient law enforcement. In an amicus brief, the former SEC officials expressed concern that the discovery rule enunciated by the Second Circuit Court of Appeals could subject the Commission and other federal agencies to inappropriate and damaging judicial inquiry intro the process of bringing enforcement actions. The former SEC officials urged the Court to reverse the judgment of the Second Circuit 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 Court has set January 8, 2013 for oral argument in the case. Gabelli v. SEC, Dkt. No. 11-1274.

The former SEC Commissioners are Laura Unger, Roberta Karmel, Joseph Grundfest, Richard Roberts and Paul Atkins. Also on the brief were former SEC General Counsels Simon Lorne and Brian Cartwright.

In the enforcement action, the SEC alleged that the market timing violated the Investment Advisers Act and sought monetary penalties for those violations. The Advisers Act, like many federal statutes, does not set forth a specific time period within which the government must institute an enforcement action. In such instances, the five-year limitations period in 28 USC 2462 is applied.

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 alleged fraud at issue regardless of the time at which the SEC discovered or reasonably could have discovered the scheme.

The former SEC officials said that statutes of limitation in penalty cases are crucial to the public’s confidence in the fairness of the system and provide salutary limits on the ability of the government to punish old behavior, in turn promoting the timely investigation of potential violations. In addition, amici argued that the discovery rule endorsed by the Second Circuit could undermine the purpose of repose and certainty underlying Section 2462 and damage the public perception that the federal securities laws are being fairly and timely enforced. Any need of the SEC for more time to bring such enforcement actions should be addressed through tolling agreements in individual cases, said the former officials, and more broadly through requests to Congress for additional resources or an extension of the limitations period.

A discovery rule would involve the federal courts in intrusive discovery of the SEC’s investigative and decision making process, said amici, including particular information received by SEC investigators, including information from confidential sources. This type of inquiry would harm sound principles and encroach on separation of powers. It would also needlessly focus the courts on the actions of federal agencies rather than on defendants in securities fraud cases.

Amici noted that the doctrine of equitable tolling based on fraudulent concealment by a defendant is not at issue here, The Second Circuit properly distinguished the concept of a defendant’s fraudulent concealment, they said, which focuses on the defendant’s conduct from a discovery rule that focuses on the knowledge and diligence of federal agencies, and grounded its ruling in the discovery rule.

In an earlier amicus brief, the securities industry and the US Chamber of Commerce said that the Supreme Court has repeatedly emphasized that the financial markets need predictability and that the Second Circuit opinion violated that principle by engrafting a discovery rule on to the five-year limitations in Section 2462, thereby transforming it from a bright line to a shifting and uncertain inquiry. 


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