Update: Marc Gabelli and Bruce Alpert vs SEC

On February 27, 2013, Chief Justice Roberts delivered the opinion of a unanimous U.S. Supreme Court in Gabelli, et al vs. U.S. Securities and Exchange Commission (“SEC”), ruling against the SEC. The Supreme Court, petitioned by Marc Gabelli and Bruce Alpert (the “petitioners”), reversed a decision of the US Court of Appeals for the Second Circuit which had affirmed the SEC’s right to bring an enforcement action more than five years after the fraudulent conduct occurred.

The SEC argued that it should be able to avail itself of the “discovery rule” an exception to a traditional statute of limitations. That doctrine delays the start date of the five year period of the statute of limitations until a plaintiff has ‘discovered’ his or her cause of action. The Supreme Court rejected the application of the doctrine in SEC actions for civil penalties.

In deciding that the “discovery rule” is not applicable in an action for civil penalties brought by the SEC, Justice Robert’s wrote:

“Unlike the private party who has no reason to suspect fraud, the SEC’s very purpose is to root it out, and it has many legal tools at hand to aid in that pursuit.

It can demand that securities brokers and dealers submit detailed trading information… It can require investment advisers to turn over their comprehensive books and records at any time. ….And even without filing suit, it can subpoena any documents and witnesses it deems relevant or material to an investigation..

The SEC is also authorized to pay monetary awards to whistleblowers, who provide information relating to violations of the securities laws. …In addition, the SEC may offer “cooperation agreements” to violators to procure information about others in exchange for more lenient treatment. Charged with this mission and armed with these weapons, the SEC as enforcer is a far cry from the defrauded victim the discovery rule evolved to protect.”

The Court remanded the matter to the District Court where that Court held that the SEC’s claims for civil penalties were barred by the five year limitations period in 28 U.S.C. 2462. The Court reasoned that the SEC’s claims against petitioners had “first accrued” when petitioners committed the acts, not when the Commission discovered or reasonably could have discovered the fraud.

Pursuant to the ruling, the Division of Enforcement needs to bring enforcement cases within five years of the time that the fraud occurred.

Additional details on this case can be found in the released opinions PDF document (Case No. 11-1274) located on Supreme Court government website.