Sunday, January 06, 2013

Banking Industry Urges US Supreme Court to Apply Bright Line Limitations Period to SEC Enforcement Action

In an amicus brief, the banking industry 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. The American Bankers Association urged the Court to reverse the judgment of a Second Circuit panel 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.

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 ABA brief argued that grafting a government discovery rule on to Section 2462 for violations that allegedly sound in fraud threatens a sea change in well-settled law about how to apply Section 2462’s check on the government’s power to punish individuals and entities through civil enforcement penalties. The brief contended that the bright line Congress drew in adopting a generally applicable deadline serves a vitally important role in the administration of justice and brings with it stability and certainty. The Second Circuit’s ruling undercuts the values and goals served by Section 2462.