The Clock Is Ticking

In the aftermath of the financial crisis, government regulatory agencies, such as the Securities and Exchange Commission (SEC), have aggressively pursued civil enforcement actions to combat financial fraud. Although these agencies already have many tools at their disposal, and clear advantages over private litigants, they have nevertheless pushed the envelope on their enforcement powers. However, their efforts to extend their ability to seek monetary penalties and fines outside of relevant limitations periods have been recently rebuffed by the courts. By doing so, courts have preserved an important safeguard against government overreach.

The Supreme Court of the United States, in Gabelli v. SEC, 133 S.Ct. 1216 (2013), and the District Court for the Southern District of New York, in SEC v. Straub (Straub II), No. 11 Civ. 9645 (RJS), 2016 WL 5793398 (S.D.N.Y. Sep. 30, 2016), rejected tolling arguments long used by government agencies to buy more time under the catch-all limitations period contained in 28 U.S.C. § 2462. Section 2462 provides that the government has five years to bring a civil enforcement action for violations that otherwise have no specific time limit. In Gabelli, the Supreme Court ruled that the equitable toll that prevents limitations periods for fraud-based claims from beginning to run until the plaintiff discovers the fraud — commonly known as the “discovery rule” — is unavailable in actions governed by § 2462, primarily because the equitable considerations underlying this tolling doctrine are inapplicable in the civil enforcement context. In Straub II, the district court ruled that § 2462's statutory text and legislative history foreclosed the SEC's argument that a defendant's presence outside bought the SEC more time to commence a civil enforcement action.

Gabelli and Straub II recognized that the government should be held to a higher standard than private plaintiffs when it comes to bringing a timely civil action. It remains to be seen if the courts will allow government agencies to use other tolling doctrines to extend the limitations period under § 2462 or if they will interpret such doctrines narrowly in civil enforcement actions in the wake of Gabelli and Straub II. Similarly, it remains to be seen if Congress will reexamine § 2462 in light of these recent decisions and other policy considerations that call into question the need for statutory tolling in civil enforcement actions.

The Gabelli Decision: No Discovery Rule Under § 2462

In Gabelli, the SEC brought an enforcement action against two investment advisers, alleging that they aided and abetted a securities fraud. The investment-adviser defendants successfully got these claims dismissed by arguing that the SEC's claims were time-barred by the five-year limitations period under § 2462, since the alleged fraudulent activity occurred in 2002 and the SEC commenced the action in 2008. But, the U.S. Court of Appeals for the Second Circuit reversed this dismissal because it accepted the SEC's argument that its claims were subject to the discovery rule and, hence, the limitations period under § 2462 began to run when the SEC discovered the fraud, not when the fraud occurred.

In a unanimous decision authored by Chief Justice John Roberts, the Supreme Court reversed the Second Circuit. In so doing, the Court noted that it is a legal principle that a claim accrues when it comes into existence, not when it is discovered. While the Supreme Court recognized that the discovery rule is a common exception to this principle, it held that the discovery rule cannot apply in the enforcement action context for four “good reasons.” Gabelli, 133 S.Ct. At 1222.

In next month's issue, we will look at the Supreme Court's analysis in Gabelli and Straub II, and discuss the implications of the holdings in those cases on the statute of limitations for civil enforcement actions.

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Jonathan B. New, a member of this newsletter's Board of Editors, is a former federal prosecutor and a partner in the New York office of BakerHostetler. Marco Molina is an associate in the firm.

In the aftermath of the financial crisis, government regulatory agencies, such as the Securities and Exchange Commission (SEC), have aggressively pursued civil enforcement actions to combat financial fraud. Although these agencies already have many tools at their disposal, and clear advantages over private litigants, they have nevertheless pushed the envelope on their enforcement powers. However, their efforts to extend their ability to seek monetary penalties and fines outside of relevant limitations periods have been recently rebuffed by the courts. By doing so, courts have preserved an important safeguard against government overreach.

The Supreme Court of the United States, in Gabelli v. SEC , 133 S.Ct. 1216 (2013), and the District Court for the Southern District of New York, in SEC v. Straub (Straub II), No. 11 Civ. 9645 (RJS), 2016 WL 5793398 (S.D.N.Y. Sep. 30, 2016), rejected tolling arguments long used by government agencies to buy more time under the catch-all limitations period contained in 28 U.S.C. § 2462. Section 2462 provides that the government has five years to bring a civil enforcement action for violations that otherwise have no specific time limit. In Gabelli, the Supreme Court ruled that the equitable toll that prevents limitations periods for fraud-based claims from beginning to run until the plaintiff discovers the fraud — commonly known as the “discovery rule” — is unavailable in actions governed by § 2462, primarily because the equitable considerations underlying this tolling doctrine are inapplicable in the civil enforcement context. In Straub II, the district court ruled that § 2462's statutory text and legislative history foreclosed the SEC's argument that a defendant's presence outside bought the SEC more time to commence a civil enforcement action.

Gabelli and Straub II recognized that the government should be held to a higher standard than private plaintiffs when it comes to bringing a timely civil action. It remains to be seen if the courts will allow government agencies to use other tolling doctrines to extend the limitations period under § 2462 or if they will interpret such doctrines narrowly in civil enforcement actions in the wake of Gabelli and Straub II. Similarly, it remains to be seen if Congress will reexamine § 2462 in light of these recent decisions and other policy considerations that call into question the need for statutory tolling in civil enforcement actions.

The Gabelli Decision: No Discovery Rule Under § 2462

In Gabelli, the SEC brought an enforcement action against two investment advisers, alleging that they aided and abetted a securities fraud. The investment-adviser defendants successfully got these claims dismissed by arguing that the SEC's claims were time-barred by the five-year limitations period under § 2462, since the alleged fraudulent activity occurred in 2002 and the SEC commenced the action in 2008. But, the U.S. Court of Appeals for the Second Circuit reversed this dismissal because it accepted the SEC's argument that its claims were subject to the discovery rule and, hence, the limitations period under § 2462 began to run when the SEC discovered the fraud, not when the fraud occurred.

In a unanimous decision authored by Chief Justice John Roberts, the Supreme Court reversed the Second Circuit. In so doing, the Court noted that it is a legal principle that a claim accrues when it comes into existence, not when it is discovered. While the Supreme Court recognized that the discovery rule is a common exception to this principle, it held that the discovery rule cannot apply in the enforcement action context for four “good reasons.” Gabelli, 133 S.Ct. At 1222.

In next month's issue, we will look at the Supreme Court's analysis in Gabelli and Straub II, and discuss the implications of the holdings in those cases on the statute of limitations for civil enforcement actions.

*****
Jonathan B. New, a member of this newsletter's Board of Editors, is a former federal prosecutor and a partner in the New York office of BakerHostetler. Marco Molina is an associate in the firm.