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.