Gabelli v. Securities and Exchange Commission

PETITIONER:Marc J. Gabelli, et al.
RESPONDENT:Securities Exchange Commission
LOCATION: Gabelli Global Growth Fund

DOCKET NO.: 11-1274
DECIDED BY: Roberts Court (2010-2016)
LOWER COURT: United States Court of Appeals for the Second Circuit

CITATION: 568 US (2013)
GRANTED: Sep 25, 2012
ARGUED: Jan 08, 2013
DECIDED: Feb 27, 2013

Jeffrey B. Wall – Assistant to the Solicitor General, Department of Justice, for the respondent
Lewis J. Liman – for the petitioners

Facts of the case

Defendant Mark Gabelli was the portfolio manager for the Gabelli Global Growth Fund (GGGF), as well as several affiliated funds, from 1997 until 2004. Defendant Bruce Alpert had been the Chief Operating Officer of Gabelli Funds, a company that advises GGGF, since 1988. Beginning in 1999, Gabelli permitted another company, Headstart, to engage in “market-time” trading with GGGF. “Market-time” trading is premised on the fact that price movements during the New York trading day can cause corresponding movements in the international markets that will not be incorporated into new stock prices until the following day. Traders can then buy and sell at artificially low and high prices, respectively. By early 2002, Alpert became concerned about the effects of market-timing and instructed Headstart to reduce the number of those transactions. On August 7, 2002, Gabelli announced that all market-timing must stop, and Headstart pulled its money from GGGF.

On September 3, 2003, the New York Attorney General announced an inquiry into market-timing. On April 24, 2008, the SEC sued the defendants and alleged that Gabelli and Alpert knew of Headstart’s market-timing but deliberately mislead GGGF’s Board and shareholders in violation of the Securities and Exchange Act of 1934. The district court dismissed the SEC’s claims for failure to bring the suit within the five-year statute of limitations, and the SEC appealed. The United States Court of Appeals for the Second Circuit reversed.


Does the five-year statute of limitations begin when the SEC can first bring an action, or when the alleged violation is committed?

Media for Gabelli v. Securities and Exchange Commission

Audio Transcription for Oral Argument – January 08, 2013 in Gabelli v. Securities and Exchange Commission

Audio Transcription for Opinion Announcement – February 27, 2013 in Gabelli v. Securities and Exchange Commission

John G. Roberts, Jr.:

I have our opinion this morning in case 11-1274, Gabelli versus the Securities and Exchange Commission.

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 investment advisers who do so.

When the government brings such a civil penalty case, there is a five-year statute of limitations.

It provides that “An action for the enforcement of any civil penalty shall not be entertained unless commenced within five years from the date when the claim first accrued.”

The question here is when a fraud claim accrues.

In other words, when the five-year clock of the statute of limitations begins to tick, is it when the fraud occurs or when the fraud is discovered?

In this case, the relevant fraud occurred between 1999 and 2002.

It was discovered in 2003 and the SEC sued the petitioners in 2008.

If the clock begins to tick when the fraud occurred, the SEC waited too long and it cannot recover civil penalties.

If the clock begins to tick when the fraud was discovered, the claim can go forward.

Now, as noted, the statute says, “The limitation period begins to run when the claim first accrued.”

We think the most natural reading of that is when the fraud occurs.

Our cases have long said that a claim generally accrues when the events giving rise to it take place.

Such a reading advances, the policies behind statutes of limitations, those statutes are meant to provide repose.

As years go by, memories fade, witnesses disappear and evidence is lost.

It is a basic feature of our legal system that at some point, bygones must be bygones.

The rule that a statute of limitations begins to run when the alleged events take place, provides relative certainty about when we have reached the point of repose.

Now, at the same time, our cases have explained that a different approach is necessary in cases of fraud where a defendant’s deceptive conduct prevents a plaintiff from even knowing that he has been defrauded.

There, we have applied the discovery rule.

That will preserve the claims of victims who do not know they have been injured and who reasonably do not ask about any injury.

Now, that makes sense.

Usually, when a person is injured, he knows it and is put on notice, that his time to sue is running.

But when an injury is self-concealing, as in the case of fraud, a person might not know of it, and most of us do not live in a state of constant investigation.

We do not typically spend our days looking for evidence that we were lied to or defrauded.

Fortunately, the law does not require us to do so.

Instead, until we discover or reasonably should have discovered a fraud, the statute of limitations on our claims does not begin to run.

But that logic does not work for the Government.

The SEC, for example, is not like the individual victim who relies on apparent injury to learn of a wrong.

Rather the SEC’s very mission is to investigate violations of the security’s laws.

Its purpose is to root out fraud, and the SEC has many legal weapons on hand to do so.

John G. Roberts, Jr.:

The Government also seeks a different kind of relief in these cases.

The discovery rule helps to ensure that the injured are compensated, but this case involves penalties which go beyond compensation are intended to punish and label defendants as wrong doers.

Chief Justice Marshall said over 200 years ago that it “Would be utterly repugnant to the genius of our laws if actions for penalties could be brought at any distance of time.”

Now, with language like that, you get the sense that he meant it.

Applying the discovery rule here would raise similar concerns.

Defendants would be exposed to Government enforcement actions not only for five years after their misdeeds, but for an uncertain period into the future.

In determining when the Government knew or reasonably should have known of a fraud would present particular challenges for the courts.

Agencies often have hundreds of employees, dozens of offices, and several levels of leadership.

In such a case, when does the Government know of a violation?

Who is the relevant actor?

Agencies also have resource constraints and enforcement priorities.

Do we consider those in determining when the Government should have known of a violation, and if so, how?

These questions make applying a discovery rule to Government penalty actions, far more challenging than applying it to suits by defrauded victims.

Now, perhaps the most important consideration is history.

When you look back over the past two centuries, you see we have applied the discovery rule to preserve the fraud claims of private injured parties many times, but we have never applied it in a penalty case such as this in favor of the Government and we are not going to start today.

The decision below to the contrary is reversed.

Our opinion is unanimous.