Last week, in the case Gabelli v. SEC, the U.S. Supreme Court unanimously held that the Securities and Exchange Commission, when seeking a penalty or fine in connection with a civil enforcement action, must file the action within five years of the completion of the alleged fraud or wrongful conduct.
This decision has significant implications for how the SEC conducts its FCPA investigations, and stands to influence the Commission’s approach to enforcement going forward.
In 2008, the SEC charged two defendants, Marc Gabelli and Bruce Alpert, with violations of the Investment Advisors Act. The alleged misconduct, however, took place from 1999 to 2002, more than five years before the SEC filed its case. As a result, the defendants moved to dismiss the complaint, arguing in part that the civil penalty claim was untimely under 28 U.S.C. §2462, the five-year statute of limitations that also applies to civil FCPA enforcement actions. The SEC responded that because the underlying violations involved fraud, the “discovery rule” applied, meaning that the statute of limitations did not begin to run until the SEC discovered or reasonably could have discovered the fraud.
The trial court rejected the SEC’s argument and dismissed the civil penalty case as time-barred, a decision later reversed by the Second Circuit. This week, the Supreme Court sided with the trial court, holding that the five-year clock begins to tick when the fraud occurs, not when it is discovered.
The Court’s decision likely will affect the SEC’s current approach to its FCPA docket, as the average investigation lasts more than three years and many enforcement actions implicate conduct that took place more than five years prior to the investigation and disposition.
Also, this holding likely will cause the SEC to be more aggressive in asking companies and individuals involved in FCPA investigations to sign agreements tolling or altogether waiving the running of the statute of limitations as a sign of cooperation.
In several high profile FCPA cases that are currently pending, defendants have filed motions to dismiss their cases, in part, due to claims related to the statute of limitations. However, while Gabelli could prove to be useful for future defendants, it does not help with these cases, as described below:
- SEC v. Straub: The court held that the statute of limitations could not have expired by pointing out that the statute states that the offender or property must be found within the United States (which the ex-Magyar Telekom defendants were not) in order that proper service may be made thereon. Thus, Gabelli does not affect this decision because the SEC did not rely on the discovery rule, but rather on the requirement that defendants be on U.S. soil for the statute to run.
- SEC v. Jackson: The court decided that there were tolling agreements between the parties, and that the defendants concealed their wrongdoing (though the court granted the SEC leave to amend to supplement their complaint with regard to both of these findings). Gabelli does not affect this case because the SEC’s chief arguments against tolling here — fraudulent concealment, continuing violations and tolling agreements — were not before the Gabelli court. In fact, the Gabelli court, in a footnote, distinguished the discovery rule from doctrines that toll the running of an applicable limitations period when the defendant takes steps beyond the challenged conduct itself to conceal that conduct from the agency or other plaintiffs.
- SEC v. Sharef: The court dismissed the case on personal jurisdiction grounds, and thus did not reach the argument that the complaint was untimely.
Those cases are also discussed in our firm’s FCPA Winter Review 2013 here.
Leila Babaeva is an associate at the Washington, D.C. law firm of Miller & Chevalier. She’s a member of the firm’s international practice focusing on the FCPA, including internal investigations, and the design and implementation of compliance programs, white collar law defense, and a range of international trade regulatory areas.