February 28, 2013

Supreme Court Case to Impair Future Regulatory Enforcement Actions

Underscores Securities and Exchange Commission’s Continued Lapses During Financial Crisis

Demonstrating the legal adage “hard cases make bad law,” the Supreme Court issued its unanimous decision in Gabelli v. U.S. Securities and Exchange Commissionon February 27, 2013. In its decision, the Supreme Court has greatly narrowed a powerful tool used by civil regulatory agencies throughout the government – especially federal financial regulators such as the SECOffice of the Comptroller of the CurrencyFederal Deposit Insurance Corporation, and the Board of Governors of the Federal Reserve.  This tool, the so-called “discovery rule,” is used to reach back well beyond the normal statute of limitations, and bring enforcement actions where fraudulent conduct has been hidden or reasonably could not be discovered by regulators through ordinary examination or regulatory inquiry.  Consequently, the discovery rule generally can resurrect or lengthen a statute of limitations for plaintiffs until discovery of the wrongful act of the defendant, or at least until the plaintiff could have reasonably have been expected to discover the misconduct of the defendant.  Therein lies the rub of hard cases making bad law.

Based on popular news articles too numerous to cite extensively (and for which I cite just three selected samples), there can be little debate that, in our current financial crisis, the Securities and Exchange Commission has been largely asleep at the switch, except for pursing little people.  This has been noted as recently as today, in numerous articles commenting on Gabelli. 1 2 3

The fact that the SEC was asleep at the switch – and that not a single large scale prosecution has gone to trial, or resulted in a single prison sentence, makes for very bad facts indeed.  These bad facts now lead the Supreme Court – for the first time – separating the SEC and potentially other civil enforcement agencies from “regular” plaintiffs, and proscribing the SEC’s use of the discovery rule.

Chief Justice John Roberts wrote, quite simply, that the SEC is “a different kind of plaintiff.”


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 filing suit, it can subpoena any documents and witnesses it deems relevant or material to an investigation. 4

The Supreme Court is, therefore, of the view that the SEC, and potentially other civil enforcement authorities, may not rely on the discovery rule.  This will potentially limit regulatory agencies seeking civil penalties to the ordinary five-year statute of limitations for penalty actions found in federal law, 28 U.S.C. § 2642.   (More in a future blog post that I do not believe the five year limitations period applies to cease and desist, restitution or other equitable remedies that may be imposed other than fines).  This means that the enforcement action begins to accrue on the date of the misconduct, not when the misconduct is detected.

While the decision is specific as to the SEC, the oral argument before the Supreme Court, coupled with the unanimity of the decision, makes clear that the Justices plainly viewed the case as applying to other regulatory agencies in a wide variety of fields, including Social Security, Veterans Affairs, Medicaid and Medicare.  Transcript of Oral Argument at 24, Gabelli v. SEC, No. 11-1274 (Jan. 8, 2013) (Justice Breyer questioning).  With such far flung agencies mentioned, there can be little doubt that the restriction in the discovery rule applied in Gabelli will at least impact the SEC’s more-competent sister financial regulatory agencies such as the OCC, FRB and FDIC.  (Even still, the agencies will have the ability left open to argue that the regulatory examination process in banking is less adversarial, and does not include access, in ordinary exams, to investigations, subpoenas, and compelled testimony.  This may leave the door open to future arguments by the banking agencies that the discovery rule should be preserved).  For the SEC, however, that door has now closed.

Because it is such an appropriate reference, (as noted first by the St. Louis Post-Dispatch), Bruce Springsteen’s last stanza of “Death to my Hometown” goes:

Send the robber barons straight to hell.

The greedy thieves who came around

And ate the flesh of everything they found.

Whose crimes have gone unpunished now,

Who walk the streets as free men now.

Sadly for the government, the Supreme Court has now ruled that robber barrons must be charged within five years, at least in the civil enforcement context.  As it is now 2013, that time frame is coming to an end, and thus it appears we may never see a substantial enforcement action brought for misdeeds of the financial crisis.  Instead, as in Gabelli, the SEC prefers to chase small game.  Even while chasing small game, the SEC just can’t seem to pull it together.

For the rest of the agencies – a Congressional fix may be needed, such as that withStanford Stoddard,

Please note that this blog is not intended as specific legal advice, and no attorney-client relationship is established until a signed retention agreement is entered into with Goodwin Weber PLLC.  In addition, the views expressed above are those of the author alone, and do not constitute the views of the University of Maryland University College.

About the author:  David P. Weber is an attorney and certified fraud examiner.  He is the former Assistant Inspector General for Investigations at the Securities and Exchange Commission, where he was the official in charge of investigating misconduct at the SEC.  Previous to the SEC, he served as Supervisory Counsel and Chief of Enforcement Unit I at the FDIC, and Special Counsel in the Enforcement and Compliance Division of the OCC.  Presently, David is an attorney at Goodwin Weber PLLC, Washington, DC, where he practices regulatory defense, litigation, fraud and forensic examination, and federal employment law, among other fields.  He is also an adjunct associate professor at University of Maryland University College.  He is a member of the bar of the Supreme Court of the United States, the state of New York, and the District of Columbia.  You can learn more about David and Goodwin Weber PLLC at the firm’s website, www.goodwinweberlaw.com.


  1. Supreme Court Ruling a Blow for Future Financial Crisis Cases []
  2. STL Today: Should too big to jail firms fear new SEC  []
  3. New York Times: Our Crisis of Regulation []
  4. U.S. Supreme Court No. 11-1274 []