Gabelli v. Sec. & Exch. Comm'n

• Citation: 133 S.Ct. 1216,568 U.S. 442,185 L.Ed.2d 297
• Decision Date: 27 February 2013
• Docket Number: No. 11–1274.,11–1274.
• Parties: Marc J. GABELLI and Bruce Alpert, Petitioners v. SECURITIES AND EXCHANGE COMMISSION.
• Court: United States Supreme Court

568 U.S. 442

133 S.Ct. 1216

185 L.Ed.2d 297

Marc J. GABELLI and Bruce Alpert, Petitioners

v.SECURITIES AND EXCHANGE COMMISSION.

No. 11–1274.

Supreme Court of the United States

Argued Jan. 8, 2013.

Decided Feb. 27, 2013.

Lewis Liman, New York, NY, for Petitioners.

Jeffrey B. Wall, Washington, DC, for Respondent.

Lewis J. Liman, Counsel of Record, Michael R. Lazerwitz, Alida Y. Lasker, Katherine L. Wilson–Milne, Jared M. Gerber, Cleary Gottlieb Steen & Hamilton LLP, New York, NY, Edward A. McDonald, Kathleen N. Massey, Joshua I. Sherman, Dechert LLP, New York, NY, Counsel for Petitioners.

Mark D. Cahn, General Counsel, Michael A. Conley, Deputy General Counsel, Jacob H. Stillman, Solicitor, Hope Hall Augustini, Dominick V. Freda, Senior Litigation Counsels, David Lisitza, Senior Counsel Securities and Exchange Commission, Washington, DC, Donald B. Verrilli, Jr., Solicitor General, Malcolm L. Stewart, Deputy Solicitor General, Jeffrey B. Wall, Assistant to the Solicitor General, Counsel of Record, Department of Justice, Washington, DC, for Respondent.

Chief Justice ROBERTS delivered the opinion of the Court.

The Investment Advisers Act makes it illegal for investment advisers to defraud their clients, and authorizes the Securities and Exchange Commission to seek civil penalties from advisers who do so. Under the general statute of limitations for civil penalty actions, the SEC has five years to seek such penalties. The question is whether the five-year clock begins to tick when the fraud is complete or when the fraud is discovered.

I

A

Under the Investment Advisers Act of 1940, it is unlawful for an investment adviser "to employ any device, scheme, or artifice to defraud any client or prospective client" or "to engage in any transaction, practice, or course of business which operates as a fraud or deceit upon any client or prospective client." 54 Stat. 852, as amended, 15 U.S.C. § 80b–6(1), (2). The Securities and Exchange Commission is authorized to bring enforcement actions against investment advisers who violate the Act, or individuals who aid and abet such violations. § 80b–9(d).

As part of such enforcement actions, the SEC may seek civil penalties, § 80b–9(e), (f) (2006 ed. and Supp. V), in which case a five-year statute of limitations applies:

"Except as otherwise provided by Act of Congress, an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued if, within the same period, the offender or the property is found within the United States in order that proper service may be made thereon." 28 U.S.C. § 2462.

This statute of limitations is not specific to the Investment Advisers Act, or even to securities law; it governs many penalty provisions throughout the U.S. Code. Its origins date back to at least 1839, and it took on its current form in 1948. See Act of Feb. 28, 1839, ch. 36, § 4, 5 Stat. 322.

B

Gabelli Funds, LLC, is an investment adviser to a mutual fund formerly known as Gabelli Global Growth Fund (GGGF). Petitioner Bruce Alpert is Gabelli Funds' chief operating officer, and petitioner Marc Gabelli used to be GGGF's portfolio manager.

In 2008, the SEC brought a civil enforcement action against Alpert and Gabelli. According to the complaint, from 1999 until 2002 Alpert and Gabelli allowed one GGGF investor—Headstart Advisers, Ltd.—to engage in "market timing" in the fund.

As this Court has explained, "[m]arket timing is a trading strategy that exploits time delay in mutual funds' daily valuation system." Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. ––––, ––––, n. 1, 131 S.Ct. 2296, 2300, n. 1, 180 L.Ed.2d 166 (2011). Mutual funds are typically valued once a day, at the close of the New York Stock Exchange. Because funds often hold securities traded on different exchanges around the world, their reported valuation may be based on stale information. If a mutual fund's reported valuation is artificially low compared to its real value, market timers will buy that day and sell the next to realize quick profits. Market timing is not illegal but can harm long-term investors in a fund. See id., at –––– – ––––, and n. 1, 131 S.Ct., at 2299–2300, and n. 1.

The SEC's complaint alleged that Alpert and Gabelli permitted Headstart to engage in market timing in exchange for Headstart's investment in a hedge fund run by Gabelli. According to the SEC, petitioners did not disclose Headstart's market timing or the quid pro quo agreement, and instead banned others from engaging in market timing and made statements indicating that the practice would not be tolerated. The complaint stated that during the relevant period, Headstart earned rates of return of up to 185%, while "the rate of return for long-term investors in GGGF was no more than negative 24.1 percent." App. 73.

The SEC alleged that Alpert and Gabelli aided and abetted violations of § 80b–6(1) and (2), and it sought civil penalties under § 80b–9. Petitioners moved to dismiss, arguing in part that the claim for civil penalties was untimely. They invoked the five-year statute of limitations in § 2462, pointing out that the complaint alleged market timing up until August 2002 but was not filed until April 2008. The District Court agreed and dismissed the SEC's civil penalty claim as time barred.¹

The Second Circuit reversed. It acknowledged that § 2462 required an action for civil penalties to be brought within five years "from the date when the claim first accrued," but accepted the SEC's argument that because the underlying violations sounded in fraud, the "discovery rule" applied to the statute of limitations. As explained by the Second Circuit, "[u]nder the discovery rule, the statute of limitations for a particular claim does not accrue until that claim is discovered, or could have been discovered with reasonable diligence, by the plaintiff." 653 F.3d 49, 59 (2011). The court concluded that while "this rule does not govern the accrual of most claims," it does govern the claims at issue here. Ibid. As the court explained, "for claims that sound in fraud a discovery rule is read into the relevant statute of limitation." Id., at 60.²

We granted certiorari. 567 U.S. ––––, 133 S.Ct. 97, 183 L.Ed.2d 737 (2012).

II

A

This case centers around the meaning of 28 U.S.C. § 2462 : "an action ... for the enforcement of any civil fine, penalty, or forfeiture ... shall not be entertained unless commenced within five years from the date when the claim first accrued." Petitioners argue that a claim based on fraud accrues—and the five-year clock begins to tick—when a defendant's allegedly fraudulent conduct occurs.

That is the most natural reading of the statute. "In common parlance a right accrues when it comes into existence...." United States v. Lindsay, 346 U.S. 568, 569, 74 S.Ct. 287, 98 L.Ed. 300 (1954). Thus the "standard rule" is that a claim accrues "when the plaintiff has a complete and present cause of action." Wallace v. Kato, 549 U.S. 384, 388, 127 S.Ct. 1091, 166 L.Ed.2d 973 (2007) (internal quotation marks omitted); see also, e.g., Bay Area Laundry and Dry Cleaning Pension Trust Fund v. Ferbar Corp. of Cal., 522 U.S. 192, 201, 118 S.Ct. 542, 139 L.Ed.2d 553 (1997) ; Clark v. Iowa City, 20 Wall. 583, 589, 22 L.Ed. 427 (1875). That rule has governed since the 1830s when the predecessor to § 2462 was enacted. See, e.g., Bank of United States v. Daniel, 12 Pet. 32, 56, 9 L.Ed. 989 (1838) ; Evans v. Gee, 11 Pet. 80, 84, 9 L.Ed. 639 (1837). And that definition appears in dictionaries from the 19th century up until today. See, e.g., 1 A. Burrill, A Law Dictionary and Glossary 17 (1850) ("an action accrues when the plaintiff has a right to commence it"); Black's Law Dictionary 23 (9th ed. 2009) (defining "accrue" as "[t]o come into existence as an enforceable claim or right").

This reading sets a fixed date when exposure to the specified Government enforcement efforts ends, advancing "the basic policies of all limitations provisions: repose, elimination of stale claims, and certainty about a plaintiff's opportunity for recovery and a defendant's potential liabilities." Rotella v. Wood, 528 U.S. 549, 555, 120 S.Ct. 1075, 145 L.Ed.2d 1047 (2000). Statutes of limitations are intended to "promote justice by preventing surprises through the revival of claims that have been allowed to slumber until evidence has been lost, memories have faded, and witnesses have disappeared." Railroad Telegraphers v. Railway Express Agency, Inc., 321 U.S. 342, 348–349, 64 S.Ct. 582, 88 L.Ed. 788 (1944). They provide "security and stability to human affairs."

Wood v. Carpenter, 101 U.S. 135, 139, 25 L.Ed. 807 (1879). We have deemed them "vital to the welfare of society," ibid., and concluded that "even wrongdoers are entitled to assume that their sins may be forgotten," Wilson v. Garcia, 471 U.S. 261, 271, 105 S.Ct. 1938, 85 L.Ed.2d 254 (1985).

B

Notwithstanding these considerations, the Government argues that the discovery rule should apply instead. Under this rule, accrual is delayed "until the plaintiff has ‘discovered’ " his cause of action. Merck & Co. v. Reynolds, 559 U.S. 633, ––––, 130 S.Ct. 1784, 1793, 176 L.Ed.2d 582 (2010). The doctrine arose in 18th-century fraud cases as an "exception" to the standard rule, based on the recognition that "something different was needed in the case of fraud, where a defendant's deceptive conduct may prevent a plaintiff from even knowing that he or she has been defrauded." Ibid. This Court has held that "where a plaintiff has been injured by fraud and ‘remains in ignorance of it without any fault or want of diligence or care on his part, the bar of the statute does not begin to run until the fraud is discovered.’ " Holmberg v. Armbrecht, 327 U.S. 392, 397, 66 S.Ct. 582, 90 L.Ed. 743 (1946) (quoting Bailey v. Glover, 21 Wall. 342, 348, 22 L.Ed. 636 (1875) ). And we have explained that "fraud is...