Supreme Court rules on securities fraud statute of limitations
Supreme Court rules on securities fraud statute of limitations
Supreme Court

[JURIST] The US Supreme Court [official website] ruled unanimously [opinion, PDF] in Gabelli v. Securities and Exchange Commission [JURIST report] that the statute of limitations under 28 USC § 2462 [text] begins tolling when the fraud occurs, not when it is discovered. Chief Justice John Roberts delivered the opinion of the court. The federal government and Securities and Exchange Commission (SEC) argued that the government should be able to avail itself to the fraud discovery rule as determined by Exploration Co. v. United States [opinion]. Roberts wrote to explain why the court would not be extending this rule to the government.

There are good reasons why the fraud discovery rule has not been extended to Government enforcement actions for civil penalties. The discovery rule exists in part to preserve the claims of victims who do not know they are injured and who reasonably do not inquire as to any injury. Usually when a private party is injured, he is immediately aware of that injury and put on notice that his time to sue is running. But when the injury is self-concealing, private parties may be unaware that they have been harmed. Most of us do not live in a state of constant investigation; absent any reason to think we have been injured, we do not typically spend our days looking for evidence that we were lied to or defrauded. And the law does not require that we do so. Instead, courts have developed the discovery rule, providing that the statute of limitations in fraud cases should typically begin to run only when the injury is or reasonably could have been discovered. The same conclusion does not follow for the Government in the context of enforcement actions for civil penalties.The SEC, for example, is not like an individual victim who relies on apparent injury to learn of a wrong. Rather, a central “mission” of the Commission is to “investigat[e] potential violations of the federal securities laws.” Unlike the private party who has no reason to suspect fraud, the SEC’s very purpose is to root it out, and it has many legal tools at hand to aid in that pursuit. It can demand that securities brokers and dealers submit detailed trading information. It can require investment advisers to turn over their comprehensive books and records at any time. And even without filing suit, it can subpoena any documents and witnesses it deems relevant or material to an investigation.

The court reversed the decision [opinion] of the US Court of Appeals for the Second Circuit.

Gabelli v. Securities Exchange Commission [SCOTUSblog backgrounder] was argued in January after being granted [JURIST report] in September. Gabelli Funds, LLC, is an investment adviser to a mutual fund formerly known as Gabelli Global Growth Fund (GGGF). At one point it allegedly gave advice to its client, Headstart Advisers, Ltd., on how to engage in “market timing” [backgrounder] in exchange for Headstart’s investment in a hedge fund. Although market timing is not technically illegal, it is discouraged due to impeding long-term investment strategies, and was the claim the SEC focused on in this case.