Securities — The Investment Advisers Act — statute of limitations — discovery rule

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U.S. Supreme Court

Civil

Securities — The Investment Advisers Act — statute of limitations — discovery rule

The five-year clock in 28 U.S.C. 2462 begins to tick when the fraud occurs, not when it is discovered.

There are good reasons why the fraud discovery rule has not been extended to Government civil penalty enforcement actions. The discovery rule exists in part to preserve the claims of parties who have no reason to suspect fraud. The Government is a different kind of plaintiff. The SEC’s very purpose, for example, is to root out fraud, and it has many legal tools at hand to aid in that pursuit. The Government in these types of cases also seeks a different type of relief. The discovery rule helps to ensure that the injured receive recompense, but civil penalties go beyond compensation, are intended to punish, and label defendants wrongdoers. Emphasizing the importance of time limits on penalty actions, Chief Justice Marshall admonished that it “would be utterly repugnant to the genius of our laws” if actions for penalties could “be brought at any distance of time.” Adams v. Woods, 2 Cranch 336, 342. Yet grafting the discovery rule onto §2462 would raise similar concerns. It would leave defendants exposed to Government enforcement action not only for five years after their misdeeds, but for an additional uncertain period into the future. And repose would hinge on speculation about what the Government knew, when it knew it, and when it should have known it. Deciding when the Government knew or reasonably should have known of a fraud would also present particular challenges for the courts, such as determining who the relevant actor is in assessing Government knowledge, whether and how to consider agency priorities and resource constraints in deciding when the Government reasonably should have known of a fraud, and so on. Applying a discovery rule to Government penalty actions is far more challenging than applying the rule to suits by defrauded victims, and the Court declines to do so.

653 F. 3d 49, reversed and remanded.

11-1274 Gabelli v. SEC

Roberts, C.J.