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SUPREME COURT OF THE UNITED STATES
_________________
No. 11–1274
_________________
MARC J. GABELLI and BRUCE ALPERT, PETITIONERS
v. SECURITIES AND EXCHANGE COMMISSION
on writ of certiorari to the united states
court of appeals for the second circuit
[February 27, 2013]
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.” 54Stat. 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, 5Stat. 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 (2011) (slip
op., at 2, n. 1). 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 (slip op., at 2–3, 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. ___
(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 (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 (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 (1997);
Clark v.
Iowa City, 20 Wall.
583, 589 (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 (1838);
Evans v.
Gee, 11 Pet. 80, 84 (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 plain- tiff’s opportunity
for recovery and a defendant’s potential liabilities.”
Rotella v.
Wood,
528 U.S.
549, 555 (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 (1944). They provide “security and stability to
human affairs.”
Wood v.
Carpenter,
101 U.S.
135, 139 (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 forgot- ten,”
Wilson v.
Garcia,
471 U.S.
261, 271 (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. ___, ___ (2010) (slip op., at 8).
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 (1946) (quoting
Bailey v.
Glover, 21
Wall. 342, 348 (1875)). And we have explained that “fraud is deemed
to be discovered when, in the exercise of reasonable diligence, it
could have been discovered.”
Merck & Co.,
supra,
at ___ (slip op., at 9) (internal quotation marks and alterations
omitted).
But we have never applied the discovery rule in
this context, where the plaintiff is not a defrauded victim seeking
recompense, but is instead the Government bringing an enforcement
action for civil penalties. Despite the discovery rule’s
centuries-old roots, the Government cites no lower court case
before 2008 employing a fraud-based discovery rule in a Government
enforcement action for civil penalties. See Brief for Respondent 23
(citing
SEC v.
Tambone, 550 F.3d 106, 148–149 (CA1
2008);
SEC v.
Koenig, 557 F.3d 736, 739 (CA7 2009)).
When pressed at oral argument, the Government conceded that it was
aware of no such case. Tr. of Oral Arg. 25. The Government was also
unable to point to any example from the first 160 years after
enactment of this statute of limitations where it had even asserted
that the fraud discovery rule applied in such a context.
Id., at 26–27 (citing only
United States v.
Maillard, 26 F. Cas. 1140, 1142 (No. 15,709) (SDNY 1871), a
“fraudulent concealment” case, see n. 2,
supra).
Instead the Government relies heavily on
Exploration Co. v.
United States,
247 U.S.
435 (1918), in an attempt to show that the discovery rule
should benefit the Government to the same extent as private
parties. See,
e.g., Brief for Respondent 10–11, 16, 17,
33–34, 41–45. In that case, a company had fraudulently procured
land from the United States, and the United States sued to undo the
trans- action. The company raised the statute of limitations as a
defense, but this Court allowed the case to proceed, concluding
that the rule “that statutes of limitations upon suits to set aside
fraudulent transactions shall not begin to run until the discovery
of the fraud” applied “in favor of the Government as well as a
private individual.”
Exploration Co., supra, at 449. But in
Exploration Co., the Government was itself a victim; it had
been defrauded and was suing to recover its loss. The Government
was not bringing an enforcement action for penalties.
Exploration Co. cannot save the Government’s case here.
There are good reasons why the fraud discovery
rule has not been extended to Government enforcement actions for
civil penalties. The discovery rule exists in part to preserve the
claims of victims who do not know they are injured and who
reasonably do not inquire as to any injury. Usually when a private
party is injured, he is imme- diately aware of that injury and put
on notice that his time to sue is running. But when the injury is
self-concealing, private parties may be unaware that they have been
harmed. Most of us do not live in a state of constant
investigation; absent any reason to think we have been injured, we
do not typically spend our days looking for evidence that we were
lied to or defrauded. And the law does not require that we do so.
Instead, courts have developed the discovery rule, providing that
the statute of limitations in fraud cases should typically begin to
run only when the injury is or reasonably could have been
discovered.
The same conclusion does not follow for the
Government in the context of enforcement actions for civil
penalties. The SEC, for example, 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.” SEC, Enforcement Manual
1 (2012). 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.
Id., at 44. It can require investment advisers to turn over
their comprehensive books and records at any time. 15
U. S. C. §80b–4 (2006 ed. and Supp. V). And even without
fil- ing suit, it can subpoena any documents and witnesses it deems
relevant or material to an investigation. See §§77s(c), 78u(b),
80a–41(b), 80b–9(b) (2006 ed.).
The SEC is also authorized to pay monetary
awards to whistleblowers, who provide information relating to
violations of the securities laws. §78u–6 (2006 ed., Supp. V). In
addition, the SEC may offer “cooperation agreements” to violators
to procure information about others in exchange for more lenient
treatment. See Enforcement Manual, at 119–137. Charged with this
mission and armed with these weapons, the SEC as enforcer is a far
cry from the defrauded victim the discovery rule evolved to
protect.
In a civil penalty action, the Government is not
only a different kind of plaintiff, it seeks a different kind of
relief. The discovery rule helps to ensure that the injured receive
recompense. But this case involves penalties, which go beyond
compensation, are intended to punish, and label defendants
wrongdoers. See
Meeker v.
Lehigh Valley R. Co.,
236 U.S.
412, 423 (1915) (a penalty covered by the predecessor to §2462
is “something imposed in a punitive way for an infraction of a
public law”); see also
Tull v.
United States,
481 U.S.
412, 422 (1987) (penalties are “intended to punish culpable
individuals,” not “to extract compensation or restore the status
quo”).
Chief Justice Marshall used particularly
forceful language in emphasizing the importance of time limits on
penalty actions, stating that it “would be utterly repugnant to the
genius of our laws” if actions for penalties could “be brought at
any distance of time.”
Adams v.
Woods, 2 Cranch 336,
342 (1805). Yet grafting the discovery rule onto §2462 would raise
similar concerns. It would leave defendants exposed to Government
enforcement action not only for five years after their misdeeds,
but for an additional uncertain period into the future. Repose
would hinge on speculation about what the Government knew, when it
knew it, and when it should have known it. See
Rotella, 528
U. S., at 554 (disapproving a rule that would have “extended
the limitations period to many decades” because such a rule was
“beyond any limit that Congress could have contemplated” and “would
have thwarted the basic objective of repose underlying the very
notion of a limitations period”).
Determining when the Government, as opposed to
an individual, knew or reasonably should have known of a fraud
presents 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? Different agencies often have
overlapping responsibilities; is the knowledge of one attributed to
all?
In determining what a plaintiff should have
known, we ask what facts “a reasonably diligent plaintiff would
have discovered.”
Merck & Co., 559 U. S., at ___
(slip op., at 8). It is unclear whether and how courts should
consider agency priorities and resource constraints in applying
that test to Government enforcement actions. See
3M Co. v.
Browner,
17 F.3d 1453, 1461 (CADC 1994) (“An agency may experience
problems in detecting statutory violations because its enforcement
effort is not sufficiently funded; or because the agency has not
devoted an adequate number of trained personnel to the task; or
because the agency’s enforcement program is ill-designed or
inefficient; or because the nature of the statute makes it
difficult to uncover violations; or because of some combination of
these factors and others”). And in the midst of any inquiry as to
what it knew when, the Government can be expected to assert various
privileges, such as law enforcement, attorney-client, work product,
or deliberative process, further complicating judicial attempts to
apply the discovery rule. See,
e.g., App. in No. 10–3581
(CA2), p. 147 (Government invoking such privileges in this case, in
response to a request for documents relating to the SEC’s
investigation of Headstart); see also
Rotella,
supra,
at 559 (rejecting a rule in part due to “the controversy inherent
in divining when a plaintiff should have discovered” a wrong).
To be sure, Congress has expressly required such
inquiries in some statutes. But in many of those instances, the
Government is itself an injured victim looking for recompense, not
a prosecutor seeking penalties. See,
e.g., 28
U. S. C. §§2415, 2416(c) (Government suits for money dam-
ages founded on contracts or torts). Moreover, statutes applying a
discovery rule in the context of Govern- ment suits often couple
that rule with an absolute provision for repose, which a judicially
imposed discovery rule would lack. See,
e.g., 21
U. S. C. §335b(b)(3) (limiting certain Government civil
penalty actions to “6 years after the date when facts material to
the act are known or reasonably should have been known by the
Secretary but in no event more than 10 years after the date the act
took place”). And several statutes applying a discovery rule to the
Government make some effort to identify the official whose
knowledge is relevant. See 31 U. S. C. §3731(b)(2)
(relevant knowledge is that of “the official of the United States
charged with responsibility to act in the circumstances”).
Applying a discovery rule to Government penalty
actions is far more challenging than applying the rule to suits by
defrauded victims, and we have no mandate from Congress to
undertake that challenge here.
* * *
As we held long ago, the cases in which “a
statute of limitation may be suspended by causes not mentioned in
the statute itself . . . are very limited in character,
and are to be admitted with great caution; otherwise the court
would make the law instead of administering it.”
Amy v.
Watertown (No. 2),
130 U.S.
320, 324 (1889) (internal quotation marks omitted). Given the
lack of textual, historical, or equitable reasons to graft a
discovery rule onto the statute of limitations of §2462, we decline
to do so.
The judgment of the United States Court of
Appeals for the Second Circuit is reversed, and the case is
remanded for further proceedings consistent with this opinion.
It is so ordered.
