Supreme Court Says that SEC Must Bring Actions within 5 Years of Fraud
The U.S. Supreme Court has ruled that the SEC must bring civil enforcement actions within 5 years of the alleged fraudulent conduct rather than within 5 years of the date the SEC discovers the fraud. In a case involving alleged market timing, the SEC argued that it brought its civil enforcement case within the 5-year statute of limitations because it commenced the action within 5 years of discovery, even though the alleged market timing occurred more than 5 years prior. The SEC argued a fraud exception, where a victim has 5 years from the date of discovery. The Court disagreed, opining that a government agency is not similar to a private plaintiff seeking redress for fraud losses. The Court asserted that the central mission of the SEC is to root out fraud and has the resources (e.g. investigative and subpoena power) to discover it. Moreover, the SEC seeks penalties, not recompense for losses. Also, the Court stated that it would be very difficult to determine when a large government agency had knowledge of a fraud.
OUR TAKE: We have no problem with a tight statute of limitations for SEC actions. However, we do not agree with the Court’s reasoning. Just because the SEC has the power to investigate doesn’t mean it suspects (or should suspect) fraud is occurring with respect to all registrants. The unintended consequence of this decision is to encourage the SEC to file more enforcement actions just to make sure that it doesn’t go past the 5 years.