The SEC has asked the US
Supreme Court to deny certiorari in a case involving applications of a
limitations period to an SEC enforcement action on the market timing of mutual
funds. The Commission essentially asks the Court to leave intact 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 Court is slated to review the cert. petition in
this action at its September 24 conference. 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.