On February 27, 2013 the Supreme Court handed down a unanimous decision holding that the Securities and Exchange Commission (“SEC”) may not invoke the “discovery rule” when bringing fraud charges under the Investment Advisors Act. 15 U.S.C. §§ 80b-6(1), (2). The “discovery rule,” so often extended to plaintiffs in private actions, triggers the statute of limitations at the time fraud is discovered by the plaintiff. The “standard rule,” on the other hand, triggers the statute of limitations when the alleged illegal acts occurred.
In the Supreme Court’s decision in Gabelli v. SEC, the Court chose not to extend the plaintiff-friendly discovery rule to the SEC. The reasoning was based on the asymmetries between the discovery powers of private plaintiffs and the nation’s securities regulation agency. The Court specified that the federal government had powerful discovery tools, such as the power to “subpoena data, use whistleblowers and force settlements” and that this should ensure “timely action.” Moreover, the Court noted, “[T]he SEC’s very purpose is to root [fraud] out.” The Court rested the distinction on the equitable nature of the discovery rule: the SEC’s mission of discovering and prosecuting fraud, coupled with its powerful enforcement tools, “[are] a far cry from the defrauded victim the discovery rule evolved to protect.” In the Court’s view, the SEC did not need the discovery rule.
The Supreme Court’s decision led to mixed reactions. The result in Gabelli came with the approval of the Cato institute, which filed an amicus brief for the defendants. In contrast, many investors were disappointed, concluding that those who contributed to the financial crisis will continue to go without sanction. Members of the “Occupy the SEC” movement (whose amicus brief can be found here) called the decision a “boon for fraudsters.”
The Network first covered this story the day after the Court handed down its decision. See the archived “Week in Review” post here.