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Editor's note: When the Securities and Exchange Commission (SEC) and other government regulatory agencies pursue civil enforcement actions against those accused of financial fraud, they often attempt to recover monetary penalties and fines for periods of time even outside the limitations period. This effort is being met with resistance by the courts, which are not necessarily buying the argument that statutes of limitations should be tolled by the discovery rule when the injured party is the government, or that it does not apply if the wrongdoers are not present in the United States and cannot be timely served. The authors, who note that 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), dealt with these issues, continue their discussion herein.
In Gabelli, the U.S. Supreme Court explained that the discovery rule exists, in part, to “preserve the claims of parties who have no reason to suspect fraud;” however, the government is not one of those parties. The Supreme Court noted that “[t]he SEC's very purpose, for example, is to root out fraud, and it has many legal tools at hand to aid in that pursuit.” Gabelli, 133 S.Ct. at 1222.Another reason cited by the Supreme Court is the type of relief sought by the government. The Court explained that the discovery rule “helps to ensure that the injured receive recompense” and, in enforcement actions, the government is not seeking recompense but, rather, intends to punish the defendants by way of civil penalties, forfeitures, and fines. Id. at 1223. Third, the Court noted that allowing the government to use the discovery rule would result in “speculation about what the Government knew, when it knew it, and when it should have known it.” Id. This query would be significantly harder than determining when an individual knew or reasonably should have known about an alleged fraud, especially because the government would likely assert various privileges that would make it impossible to make this determination. Finally, the Court declined to apply the discovery rule of 28 U.S.C. § 2462 partly because it had “no mandate from Congress” that such a toll was proper under § 2462, and in such cases the historical approach has been to assume no such toll exists. Id at 1224. (Section 2462 provides that the government has five years to bring a civil enforcement action for violations that otherwise have no specific time limit.)
The Straub II Decision: No Outside-the-Country Toll Under § 2462
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