February’s issue of the month is statute of limitations in SEC enforcement actions.
28 U.S.C. 2462 provides as follows.
“Except as otherwise provided by Act of Congress, an action, suit or proceeding for the enforcement of any civil fine, penalty or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued if, within the same period, the offender or the the property is found within the United States in order that proper services may be made thereon.”
28 U.S.C. 2462 was at the heart of Judge Sullivan’s recent order in an SEC FCPA enforcement action (SEC v. Straub) in which he denied the motion to dismiss brought by former Magyar Telekom executives. (See here for the prior post). As highlighted in this post yesterday regarding the same case, 28 U.S.C. 2462 is a ground on which the defendants are seeking an interlocutory appeal to the Second Circuit.
28 U.S.C. 2462 is also at the heart of Round 2 of the briefing in the SEC’s FCPA enforcement actions against Mark Jackson and David Ruehlen. (See here for the post earlier this week).
Yesterday, in a unanimous decision authored by Chief Justice Roberts, the Supreme Court, in Gabelli v. SEC, rejected the SEC’s expansive interpretation of 28 U.S.C. 2462 in cases involving civil penalties. I previously flagged (see here) the Gabelli case as one to watch given that the limitations period in most SEC FCPA enforcement actions would seemed to be stretched. Indeed, dig into the details of most FCPA enforcement actions and one quickly discovers that the conduct at issue is old – in some cases very old.
This post provides a summary of the Supreme Court’s decision and analyzes its relevance to SEC FCPA enforcement.
In 2008, the SEC brought a civil enforcement actions against Bruce Alpert and Marc Gabelli under the Investment Advisors Act which makes it illegal for investment advisors to defraud their clients, and authorizes the SEC to seek civil penalties. The SEC’s complaint alleged that from 1999 to 2002, Alpert and Gabelli allowed an investor to engage in “market timing” in an investment fund they operated. The defendants moved to dismiss, arguing in part, that the SEC’s claim was untimely under § 2462. The trial court agreed and dismissed the SEC’s civil penalty claim as time barred. The Second Circuit reversed and accepted the SEC’s argument that “because the underlying violations sounded in fraud, the ‘discovery rule’ applied to the statute of limitations. ” As explained by the Second Circuit, “under the discovery rule, the statute of limitations or a particular claim does not accrue until that claim is discovered, or could have been discovered with reasonably diligence, by the plaintiff.”
On appeal to the Supreme Court, the defendants argued that a “claim based on fraud accrues – and the five year clock begins to tick – when a defendants’ allegedly fraudulent conduct occurs.” The Supreme Court found that this position “is the most natural reading of the statute” and declined to read a discovery rule into § 2462.
In doing so, the Supreme Court rejected the SEC’s argument that a discovery rule should be read into § 2462 under which accrual is delayed until a plaintiff has ‘discovered’ the cause of action. The Supreme Court stated that a discovery rule has merit where the plaintiff is a defrauded victim seeking recompense, but that a discovery rule does not have merit when the plaintiff is the SEC in an enforcement action seeking civil penalties.
In pertinent part, the Supreme Court noted as follows (internal citations omitted).
“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.” SEC, Enforcement Manual 1 (2012). 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.
[...] Charged with this mission and armed with these weapons, the SEC as enforcer is a far cry from the defrauded victim the discovery rule evolved to protect.
In a civil penalty action, the Government is not only a different kind of plaintiff, it seeks a different kind of relief. The discovery rule helps to ensure that the injured receive recompense. But this case involves penalties, which go beyond compensation, are intended to punish, and label defendants wrongdoers.”
In two footnotes, the Supreme Court noted two issues that were not before it. First statute of limitations for SEC claims for injunctive relief and disgorgement were not before the court. Second, tolling doctrines such as when a defendants takes steps beyond the challenged conduct itself to conceal the conduct from the plaintiff were not before court.
It should also be mentioned that the specific clause in § 2462 in dispute in SEC v. Straub – found within the United States – was not addressed by the Supreme Court.
Subject to these potential limitations, the Supreme Court’s decision in Gabelli is significant from a Foreign Corrupt Practices Act enforcement perspective – at least in terms of individual enforcement actions as individuals are more likely than corporate defendants to put the SEC to its burden of proof and assert valid and legitimate defenses based on fundamental legal concepts.
From the perspective of SEC FCPA enforcement against corporations, the Gabelli case is, unfortunately unlikely to have much impact. Cooperation will continue to be the name of the game and corporations facing FCPA scrutiny will likely continue to waive statute of limitations arguments or otherwise toll statute of limitations as evidence of their cooperation.
I say unfortunate because there is a reason why the law has statute of limitations. As stated by the Supreme Court in Gabelli:
“Statute of limitations are intended to ‘promote justice by preventing surprises through the revival of claims that have been allowed to slumber until evidence has been lost, memories have faded, and witnesses have disappeared. They provide ‘security and stability to human affairs. [They] are ‘vital to the welfare of society [and] ‘even wrongdoers are entitled to assume that their sins may be forgotten.’”
Citing former Chief Justice John Marshall, the Court in Gabelli stated that it “would be utterly repugnant to the genius of our laws if actions for penalties could ‘be brought at any distance of time.”
Even though, for the reasons stated above, the Gabelli decision may not be directly on point to pending challenges in SEC FCPA enforcement actions, you can be sure that the above language will be cited in future briefs in those cases.
Commenting on the Gabelli case, this Wall Street Journal editorial stated, in pertinent part, as follows.
“It isn’t easy to lose 9-0 on the current ideologically divided Supreme Court. So ironic congratulations are in order for the Securities and Exchange Commission, which managed the feat in a unanimous ruling on Wednesday.”
As Justice Elena Kagan noted at January’s oral argument, “The government, which has not asserted this power for 200 years, is now coming in and saying, ‘We want this.’” Justice Antonin Scalia asked the government’s attorney, “Is there much difference between the rule you are arguing for and a rule that there is no statute of limitations?” Chief Justice John Roberts wrote for the Court that “we have never applied the discovery rule in this context.”
The abuse here is fundamental to the rule of law. If regulators can rewrite statutes on their own whim so they can put a pelt on the wall, then no citizen is safe from unjust prosecution. The people at the SEC who invented and pursued this legal humiliation deserve to be fired.”