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.