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The United States Supreme Court Holds That The SEC Must File Enforcement Cases For Securities Fraud Within 5 Years

On February 27, 2013, the United States Supreme Court issued a decision in the matter, Gabelli vs. Securities and Exchange Commission, Index No. 11-1274, in which the Supreme Court unanimously ruled that the Securities and Exchange Commission (“SEC”) must bring securities fraud cases seeking civil damages within 5 years of the actual fraud, not within 5 years of discovery of the fraud. In April 2008, the SEC brought a civil enforcement action against Gabelli Funds LLC (“Gabelli”), the investment adviser to the Gabelli Global Growth Fund, which alleged that from 1999 to 2002 Gabelli allowed Headstart Advisers, Ltd. (“Headstart”) to use market-timing techniques in exchange for Headstart to be able to invest in a hedge fund run by Gabelli, which achieved returns of up to 185%, while other investors’ returns were less than 24%. In its defense, Gabelli argued that by filing the case in 2008, the SEC violated the statute of limitations as the case was commenced more than 6 years after the last alleged fraudulent incident. The District Court for the Southern District of New York ruled in favor of Gabelli. Thereafter, the SEC appealed the District Court decision to the Second Circuit Court of Appeals, which reversed the District Court Decision.

On April 26, 2012, Gabelli filed a writ of certiorari to the Supreme Court, which was granted on September 28, 2012. In the Supreme Court’s recent ruling, Chief Justice Roberts stated, “[t]he question is whether the five-year clock begins to tick when the fraud is complete or when the fraud is discovered.” Usually, in civil actions brought by a private litigant, courts rule that the statute of limitations for fraud beings to run when the plaintiff discovers the fraud, or should have discovered the wrongdoing. Chief Justice Roberts also wrote, “[w]hen the injury is self-concealing, private parties may be unaware that they have been harmed. Most of us do not live in a state of constant investigation; absent any reason to think we have been injured, we do not typically spend our days looking for evidence that we were lied to or defrauded.” The high court, however, drew a distinction between private litigations and the SEC, as a government agency, and determined that since investigation is the central mission of the SEC’s Enforcement Department, it has the resources to detect fraud and wrongdoing when it is occurring. This recent Supreme Court decision places increased pressure on the SEC’s Enforcement Department when investigating fraud cases, particularly in fraud cases relating to the 2008 financial crisis.

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