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Supreme Court Rules That SEC Can't Extend Fraud Deadline

In a unanimous decision, the Supreme Court rejected the SEC's efforts to extend the deadline for seeking civil penalties in fraud cases. Under the Investment Advisers Act, the SEC is authorized to bring enforcement actions, subject to a five-year statute of limitations for civil penalties. The SEC had alleged that the chief operating officer of Gabelli Funds, LLC (Gabelli) and the former portfolio manager of the Gabelli Global Growth Fund had aided and abetted investor fraud from 1999 to 2002 by allowing one investor to engage in market timing in the fund in exchange for an investment in a hedge fund run by Gabelli. This relationship was allegedly not disclosed by the fund, and other investors were not permitted to engage in market timing.

The SEC sought civil penalties in 2008. The Advisers Act requires that the SEC must file suit within five years from the date when the claim first accrued. The district court dismissed the suit for failure to file within five years. The Second Circuit reversed that decision, holding that the statute of limitations did not begin to run until the SEC discovered or reasonably could have discovered the fraud, also known as the "discovery rule." The Supreme Court reversed the Second Circuit decision and held that the "discovery rule" standard could not be used by government plaintiffs, though it may be permissible for individual victims. According to the Court, unlike individual plaintiffs who have no reason to suspect fraud, "the SEC's very purpose" is to root out fraud, and "it has many legal tools at hand to aid in that pursuit."

Sources: Joe Morris, Supreme Court: SEC Can't Extend Fraud Deadline, Ignites, February 23, 2013, Marc J. Gabelli and Bruce Alpert v. Securities and Exchange Commission, Supreme Court of the United States, Case No. 11-1274, February 27, 2013.

Copyright © 2020 Godfrey & Kahn S.C.National Law Review, Volume III, Number 103

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