Supreme Court Rules Against the SEC WIth Statute of Limitations Decision

In a recent ruling by the United States Supreme Court in Gabelli et al. v. SEC, the SEC now must file cases seeking civil penalties for securities fraud within five years of the alleged incident. This decision now puts a premium on quick action by the SEC’s Division of Enforcement, particularly since there likely are many cases yet to be filed against Wall Street resulting from the 2008 financial crisis.

In Gabelli et al. v. SEC, the Supreme Court unanimously ruled in favor of two officers of Gabelli Funds LLC who attempted to block SEC claims that they improperly let a client engage in market timing. Gabelli contended that the SEC missed the five-year deadline to file the lawsuit. Gabelli argued that by filing its case in 2008, six years after the last alleged fraud incident, the SEC’s claims were barred by the applicable statute of limitations. A district court ruled in favor of Gabelli, and eventually the Supreme Court did the same.

When investors bring claims under the Securities Exchange Act alleging securities fraud, they are held to a statute of limitations of two years after the fraud is discovered, or should have discovered, and no more than five years after the fraud occurred. The date of when an investor “discovers” the fraud is usually a question for the jury and investors are normally given the benefit of the doubt.

With this recent ruling the United States Supreme Court is holding SEC to a higher discovery standard which will result in a shorter statute of limitations time to file. Chief Justice John Roberts Jr. wrote for the majority that “the SEC…is not like an individual victim who relies on apparent injury to learn of a wrong…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.”

SEC spokesman John Nester noted that the ruling “does not prevent the SEC after five years from forcing companies to return illegal profits to investors or throwing a financial executive out of the industry.”

This ruling may be harmful to investors because defense attorneys will seek to impute the cases involves the SEC’s ability to discover fraud on investor claims. This could make it more difficult for investors to survive motions to dismiss based on statute of limitations grounds.