United States: Gabelli: The Supreme Court Rejects The SEC’s Reliance On The "Discovery Rule" In Civil Penalty Actions

Last Updated: March 14 2013
Article by David B. Hardison

In a unanimous decision issued last week, the Supreme Court declined to apply the "fraud discovery rule" to SEC enforcement actions seeking civil penalties under 28 U.S.C. § 2462. See Gabelli v. U.S. Securities & Exchange Commission. In Gabelli, the SEC had filed a complaint in April 2008 alleging that the defendants had improperly permitted an investor in a mutual fund to engage in "market timing" from 1999 to 2002, and that the Commission had not uncovered the scheme until 2003, due to its secret nature. Even though 28 U.S.C. § 2462 states that any government enforcement action to obtain a civil "fine, penalty, or forfeiture, pecuniary or otherwise" must be brought within five years from the day "when the claim first accrued," the SEC had argued that the statute of limitations did not begin to run until the Commission discovered the alleged fraud in 2003. Reversing the Court of Appeals for the Second Circuit, which had sided with the SEC, the Court held that a "discovery rule" should not be read into 28 U.S.C. § 2462 in SEC enforcement cases. Instead, the Court held that a "natural reading" of the statute supported the conclusion that a fraud-based claim "accrues" when the allegedly fraudulent conduct occurs, and not – as urged by the Commission - when it is either discovered by the government or should have been discovered by exercising reasonable diligence.

As discussed below, Gabelli is a significant litigation setback for the Commission, and can be expected to have a meaningful impact on the SEC's short-term enforcement and litigation agenda. At the same time, the decision leaves other important issues relating to SEC enforcement actions unresolved for now.

First, the Gabelli decision is notable for the Court's lack of sympathy to the SEC's argument that fraud, by its nature, is often difficult for the government to uncover and challenging to investigate. Contrasting the SEC with a private plaintiff seeking compensatory damages – as to whom the application of a "fraud discovery rule" might remain appropriate - the Court observed that the SEC's "very purpose" is to root out fraud and that the Commission "has many legal tools at hand to aid in that purpose." In light of the many weapons in the SEC's enforcement arsenal, the Court apparently saw no reason to adopt a strained interpretation of the statute that would create substantial uncertainty among potential respondents or defendants in SEC actions as to exactly how long they might be exposed to penalty claims. The Court's literal reading of 28 U.S.C. § 2642 is consistent with other Court opinions in recent years that have rejected the SEC's preferred interpretations and narrowly construed the reach of the federal securities laws.

Second, Gabelli was announced at a critical time for the SEC, which has been criticized for its response to the financial crisis and currently has a backlog of financial crisis-related investigations that may soon bump up against the five-year statute of limitations. While the SEC may seek to mitigate the decision's impact by asking individuals and entities currently under investigation to enter into voluntary "tolling agreements" that suspend the running of the statute, some may refuse to do so. Gabelli will thus place pressure on the SEC to make decisions soon in some pending enforcement matters, and increase the odds that defendants in cases that are brought will be able to assert successfully that the statute of limitations has run on the Commission's penalty claims.

Third, the Court took pains in Gabelli to make clear that it was not addressing whether the statute of limitations under 28 U.S.C. § 2462 could be tolled in cases involving "fraudulent concealment" – i.e., situations where a defendant allegedly takes steps beyond the underlying alleged misconduct to conceal such conduct from the government or other plaintiffs. Instead, the Court expressly noted that the SEC had abandoned any reliance in the Gabelli case on the fraudulent concealment doctrine or other equitable tolling principles. In the wake of Gabelli, however, the SEC may assert in future cases that defendants did, in fact, take steps to "fraudulently conceal" securities law violations from the Commission, while defendants are likely to respond that the SEC is seeking to circumvent the Court's decision.

Fourth, while Gabelli makes clear that a "discovery rule" does not apply to SEC actions to obtain civil penalties, the Court left undecided exactly what constitutes a "fine, penalty, or forfeiture" within the meaning of 28 U.S.C. § 2462. While the phrase clearly encompasses civil monetary penalties, the Court of Appeals for the Fifth Circuit held last year in SEC v. Bartek that, in some circumstances, SEC requests for injunctive relief and the imposition of officer-and-director bars on defendants also are "penalties" subject to the five-year statute of limitations. Read together, the Gabelli and Bartek decisions up the ante on the SEC to justify its requests for injunctive and other forms of relief, such as director-and-officer bars, as remedial, rather than punitive, in nature, since defendants will have every incentive to point out the draconian consequences that such sanctions can be expected to have on their professional livelihoods and future careers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions