Jessica M. Karmasek Mar. 1, 2013, 5:00pm

WASHINGTON (Legal Newsline) -- The U.S. Supreme Court unanimously held this week that the statute of limitations for the Securities and Exchange Commission to bring civil suits seeking penalties for securities fraud runs from the time a fraud occurs.

In its 11-page opinion filed Wednesday, the Court ruled that the five-year clock begins to tick when the fraud occurs, not when it is discovered.

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

"Rather, a central 'mission' of the Commission is to 'investigat[e] potential violations of the federal securities laws,'" Chief Justice John Roberts wrote for the nation's high court. "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.

"It can demand that securities brokers and dealers submit detailed trading information. It can require investment advisers to turn over their comprehensive books and records at any time. And even without filing suit, it can subpoena any documents and witnesses it deems relevant or material to an investigation."

In the case at issue, the SEC in 2008 sought civil penalties from Bruce Alpert and Marc J. Gabelli.

The complaint alleged they aided and abetted investment adviser fraud from 1999 until 2002.

Alpert and Gabelli moved to dismiss, arguing in part that the civil penalty claim was untimely.

Invoking the five-year statute of limitations, they pointed out that the complaint alleged illegal activity up until August 2002 but was not filed until April 2008.

The Investment Advisers Act makes it illegal for investment advisers to defraud their clients and authorizes the SEC to bring enforcement actions against investment advisers who violate the act, or against individuals who aid and abet such violations.

If the SEC seeks civil penalties as part of those actions, it must file suit "within five years from the date when the claim first accrued," pursuant to a general statute of limitations that governs many penalty provisions throughout the U.S. Code, 28 U.S.C. Section 2462.

A district court agreed and dismissed the civil penalty claim as time barred.

The U.S. Court of Appeals for the Second Circuit reversed. It held that for all "claims that sound in fraud a discovery rule is read into the relevant statute of limitation," including Section 2462.

Prior to the Second Circuit's ruling, no appellate court had held that a discovery rule applies to Section 2462.

"The Second Circuit's ruling had far-reaching implications for defendants in penalty actions, as well as the justice system as a whole," said Mary Massaron Ross, president of DRI: The Voice of the Defense Bar.

"By permitting federal agencies to look years into the past to bring stale penalty claims, the ruling would undermine the core legislative objectives of statutes of limitations."

In November, DRI filed an amicus brief with the Court, in support of Alpert and Gabelli seeking to overturn the Second Circuit's ruling.

Asking the Court to reverse the ruling, the DRI brief said the Second Circuit's decision would mire defendants in costly litigation even when there is a claim that the government should have discovered the alleged misconduct earlier.

It also would leave defendants continuously vulnerable to suit even when there is no indication that they attempted to conceal their conduct, DRI argued.

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