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SEC Enforcement Actions for Civil Penalties: The Road Ahead after Gabelli v. SEC

  • July 24th, 2014
  • Russell Weigel
  • Comments Off on SEC Enforcement Actions for Civil Penalties: The Road Ahead after Gabelli v. SEC

In Gabelli v. SEC, decided in February 2013, the Supreme Court unambiguously prohibited the Securities and Exchange Commission (the “SEC”) from bringing enforcement actions seeking civil penalties in cases of fraud after the applicable statute of limitations period has elapsed. Under the federal “catch all” statute of limitations, 28 U.S.C. § 2462, any government enforcement action that seeks to impose civil penalties or punish a defendant must be brought within “five years from the date when the claim first accrued.” Generally, a claim accrues when it comes into existence, however courts have long recognized a “discovery rule” exception in cases of fraud, whereby accrual is delayed and the statute of limitations does not begin to run until a plaintiff discovered or could have reasonably discovered the fraud.

Gabelli involved a 2008 SEC civil enforcement action that sought an injunction and civil penalties against defendants who the SEC alleged aided and abetted investment adviser fraud from 1999 to 2002. The defendants moved to dismiss the SEC’s civil penalties claim, arguing that the action was untimely because it was filed outside of section 2462’s five-year statute of limitations period. The SEC, in turn, asserted that the “discovery rule” applied to section 2462 in cases of fraud, and thus the statute of limitations did not begin to run until the SEC discovered the fraud. In a significant blow to the SEC, the Supreme Court rejected applying the “discovery rule” to enforcement actions seeking civil penalties in cases of fraud, holding that the five-year statute of limitations period begins to run when the fraudulent conduct occurs, not when the SEC discovers the fraud. The Court underscored the importance of time limits on penalty actions, without which defendants would be exposed to uncertain and indefinite future liability. Central to the Court’s decision was the punitive nature of SEC enforcement actions for civil penalties—the Court expressly distinguished between claims for relief that seek to compensate injured victims and restore the status quo and SEC enforcement actions for penalties, which go beyond compensation and are instead sanctions “intended to punish and label defendants wrongdoers.”

Yet, despite the Supreme Court’s unambiguous statement subjecting SEC actions for fraud to the five-year statutory time limit, the SEC moves forward unabated, taking the position that Gabelli merely bars civil penalty actions and does not preclude actions seeking only equitable relief, such as injunctions and disgorgement. Although Gabelli represents a significant decision that reins in the SEC’s power to seek penalties outside of the statute of limitations period, ambiguity lurks behind the Court’s decision, which may provide the SEC with an avenue to circumvent section 2462’s five-year statutory limit. Notably, Gabelli did not address its impact on allegedly “equitable” relief that is really punitive in nature, or the proper approach for determining whether relief is in fact equitable or punitive. Absent a mandate from Congress amending section 2462, the SEC can proceed with alleged “equitable” actions for relief that are not subject to the five-year limit. The Gabelli decision, however, provided some robust language ripe for challenging SEC enforcement actions. Significantly, the Court’s emphasis on punitive versus compensatory claims for relief may provide viable avenues for defendants to argue that certain SEC “equitable” claims are in fact disguised penalties, and thus must be filed within section 2462’s five-year statute of limitations. The subtle distinction between truly equitable claims for relief and penalties is certain to provide the backdrop for upcoming battles challenging SEC actions that fall outside the five-year statutory time limit.

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