Originally posted on March 1, 2013
On Wednesday the Supreme Court issued its opinion in Gabelli et al. v. Securities and Exchange Commission, unanimously rejecting the SEC's attempt to expand its enforcement powers by invoking a "discovery rule" for civil fraud cases. (full opinion at http://www.supremecourt.gov/opinions/12pdf/11-1274_aplc.pdf). In Gabelli the Supreme Court considered the application of 28 U.S.C. § 2462, which generally governs SEC civil actions and provides that "an action . . . for the enforcement of any civil fine, penalty, or forfeiture . . . shall not be entertained unless commenced within five years from the date when the claim first accrued."
The SEC argued that the limitations period in § 2462 should begin to run when the SEC could have reasonably discovered the alleged fraud rather than from the date of the alleged fraudulent conduct. In rejecting the SEC's argument, the Supreme Court noted that the Commission was making an unprecedented attempt to expand its enforcement powers:
"[W]e have never applied the discovery rule in this context, where the plaintiff is not a defrauded victim seeking recompense, but is instead the Government bringing an enforcement action for civil penalties. Despite the discovery rule's centuries-old roots, the Government cites no lower court case before 2008 employing a fraud-based discovery rule in a Government action for civil penalties. When pressed at oral argument, the Government conceded that it was aware of no such case."
The Supreme Court's ruling in Gabelli could further fuel the recent surge in SEC enforcement actions against financial services companies. In January we noted the recent uptick in government civil enforcement actions based on alleged manipulations of bank's allowances for loan and lease losses ("ALLL"). ( SEC Complaint Demonstrates Continuing Viability...). The frequency of these enforcement actions may increase in the wake of the Gabelli ruling as the five-year window from the peak of the financial crisis begins to close.
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