Fraud and the “Discovery Rule” — Two Takeaways from The Supreme Court’s Recent Decision in Gabelli v. Securities and Exchange Commission

Fraud likes to hide.  Which is why, since the 18th century, courts have held that a statute of limitations for fraud does not begin to run until the victim discovers the fraud.  In Gabelli v. Securities and Exchange Commission, No. 11-1274 (S. Ct. slip op. Feb. 27, 2013), the Securities and Exchange Commission (“SEC”) tried to extend that rationale a bridge too far, arguing that this same discovery rule should apply not only for victims seeking recompense, but also for enforcing agencies such as the SEC, seeking penalties.  In a unanimous opinion by Chief Justice Roberts, the Supreme Court rejected the SEC’s argument.  The decision has implications for the interpretation of many federal statutes, including the Federal Power Act, the Clean Water Act, and the Foreign Corrupt Practices Act (“FCPA”).

Organizations contracting with or regulated by the federal government should take away two things from the opinion:

1. The court’s holding, that the specific statute at issue, 28 U.S.C. § 2462, does not embrace an implied discovery rule for fraud.
2. The court’s rationale, that the discovery rule should not apply because an enforcement action is a different animal from a compensatory lawsuit.

First, the opinion is important because the statute at issue is important.  The statute in question, 28 U.S.C. § 2462, is the fallback statute of limitations for civil enforcement actions by federal agencies.  It applies whenever a civil enforcement statute lacks its own statute of limitations:

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....

Id. Many enforcement statutes are governed by this provision, including the Clean Water Act, the Federal Power Act, and the FCPA.  Organizations closely involved with government should see how Gabelli might affect the particular laws governing them.

Second, the opinion is important because of its skeptical attitude toward applying a fraud discovery rule in enforcement proceedings.  The Court reasoned, “[u]nlike the private party who has no reason to suspect fraud, the SEC’s very purpose is to root it out....”  Gabelli, slip op. at 8.  Further, stated the Court, “[t]he 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.”  Id.

Some enforcement statutes, like the False Claims Act, have their own statutorily outlined discovery rule.  See 31 U.S.C. § 3731(b).  But others do not, such as the FCPA.  Thus, Gabelli affects not only 28 U.S.C. § 2462, but potentially any federal enforcement statute lacking a discovery rule.