US Supreme Court to decide when government penalty action accrues

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The U.S. Supreme Court will decide when the limitations period applicable to a penalty action brought by the federal government commences to run in the absence of a separate controlling provision enacted by Congress.

The Court will review a 2nd Circuit decision holding that the discovery rule tolled the five-year limitations period applicable to an investment fraud complaint filed by the Securities and Exchange Commission.

Under 28 U.S.C. §2462, “except as otherwise provided by Act of Congress” any penalty action brought by the government must be “commenced within five years from the date when the claims first accrued.”

In this case, the SEC filed an investment fraud complaint against the managers of a mutual fund in 2008. The defendants argued that the SEC’s penalty action was untimely under §2462’s five-year limitations period because the complaint pertained to alleged improprieties that occurred between 1999 and 2002.

But the 2nd Circuit, rejecting a rule that §2462 required the government to bring a penalty claim within five years of the date the cause of action arose, held that accrual under the statute is subject to a fraud-based discovery rule.

“Although the defendants make much of the fact that §2462 does not expressly state a discovery rule, this court has previously held that for claims that sound in fraud a discovery rule is read into the relevant statute of limitation,” the court said.

Accordingly, the court held that the SEC’s complaint was timely because the alleged fraud did not come to the agency’s attention until 2003.

The Supreme Court is expected to decide the case this term.