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 fraud at issue regardless of the time at which the SEC discovered or reasonably could have discovered the scheme.
A discovery applies to Section 2462 when the government seeks civil penalties based on fraud, said the SEC, citing opinions by the Fifth and Seventh Circuits that the five-year limitations period in Section 2462 does not begin to run until the SEC knew or should have known the relevant facts. The application of a discovery rule in cases of fraud or concealment dates to the earliest days of the Republic, added the Commission.
Application of the discovery rule does not depend on its express incorporation in a federal limitations period, said the SEC. Rather, the crucial question is whether Congress has clearly displaced the usual rule that limitations periods in fraud cases are triggered by actual or constructive discovery. It has not, emphasized the SEC, since nothing in Section 2462 clearly displaced the fraud discovery rule.
The SEC noted 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 Court’s approach, said the SEC, follows naturally from equity’s primary justification for the fraud discovery rule, which is to prevent defendants from unfairly relying on a statute of limitations when their own acts have kept potential plaintiffs in the dark.