Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Thursday, September 27, 2012

Supreme Court Grants Cert to Decide SEC Statute of Limitations Issue

The U.S. Supreme Court granted certiorari in Gabelli v. SEC (11-1274) to address the following question:

Section 2462 of Title 28 of the United States Code provides that "except as
otherwise provided by Act of Congress" any penalty action brought by the
government must be "commenced within five years from the date when the
claims first accrued." (emphasis added). This Court has explained that "[i]n
common parlance a right accrues when it comes into existence." United States v.
Lindsay, 346 U.S. 568, 569 (1954).

Where Congress has not enacted a separate controlling provision, does the
government's claim first accrue for purposes of applying the five-year limitations
period under 28 U.S.C. ยง 2462 when the government can first bring an action for a

The case comes from the Second Circuit, SEC v. Gabelli, No. 10-3581-cv(L) (decided Aug. 1, 2011).(Download Gabelli.080111[1])  In that case the SEC alleged that Gabelli, the portfolio manager of a mutual fund, and Alpert, the chief operating officer for the fund's adviser, failed to disclose that the adviser, while prohibiting most fund investors from engaging in market-timing, secretly permitted one investor to market time in exchange for an investment in a hedge fund managed by Gabelli.  The alleged conduct took place from 1999 until 2002.  The SEC alleged that after the market timing stopped, the defendants continued to mislead the fund's board of directors and fund investors about these activities and that, because of this deception, the SEC did not discover the activity until late 2003. 

The SEC filed its complaint in April 2008.  The district court dismissed the claims in substantial part, some on the merits, others on statute of limitations grounds.  The Second Circuit, however, applied the discovery rule to hold that the statute of limitations did not accrue until the claim was discovered or could have been discovered with reasonable diligence, by the plaintiff:  "since fraud claims by their very nature involve self-concealing conduct, it has been long established that the discovery rule applies where, as here, a claim sounds in fraud" (citing the Supreme Court's opinion in Merck & Co. v. Reynolds).  The court contrasted the discovery rule with the equitable tolling doctrine of fraudulent concealment, where a plaintiff may benefit from equitable tolling, even when a claim has already accrued, if the defendant took specific steps to conceal the activities from plaintiff, and is available for non-fraud claims. 

Accordingly, the Court held that since the SEC alleged fraud claims under the Advisers Act, the discovery rule defines when the claim accrues and that the SEC need not plead that the defendants took affirmative steps to conceal their fraud.  The court dismissed the defendants' argument that Section 2462 did not expressly state a discovery rule, citing previous decisions that for claims in fraud a discovery rule is read into the statute. Finally, the court ruled as premature the defendants' assertion that the SEC's claims could have been discovered, with reasonable diligence, within the five-year limitations period, because the lapse of a limitations period is an affirmative defense that defendants must plead and prove.

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