Gabelli v. Sec. & Exch. Comm’n

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The Investment Advisers Act makes it illegal to defraud clients, 15 U.S.C. 10b–6(1),(2), and authorizes the Securities and Exchange Commission to bring enforcement actions against investment advisers and against individuals who aid and abet violations. If the SEC seeks civil penalties, it must file suit “within five years from the date when the claim first accrued,” 28 U. S. C. 2462. In 2008 the SEC sought civil penalties, alleging that individuals aided and abetted investment adviser fraud from 1999 until 2002. The district court dismissed the claim as time barred. The Second Circuit reversed, reasoning that the underlying violations sounded in fraud, so the “discovery rule” applied, and the limitations period did not begin to run until the SEC discovered or reasonably could have discovered the fraud. The Supreme Court reversed. The limitation period begins to run when the fraud occurs, not when it is discovered. In common parlance a right accrues when it comes into existence. The discovery rule is an exception to the standard rule and has never been applied where the plaintiff is not a defrauded victim seeking recompense, but is the government bringing an enforcement action for civil penalties. The government is a different kind of plaintiff. The SEC’s very purpose is to root out fraud. The discovery rule helps to ensure that the injured receive recompense, but civil penalties go beyond compensation and are intended to punish. Deciding when the government knew or reasonably should have known of a fraud would also present particular challenges for the courts. View "Gabelli v. Sec. & Exch. Comm'n" on Justia Law