Two years ago, the United States Supreme Court stated in an opinion that the five-year statute of limitations for the SEC to seek civil monetary sanctions began from the date of the fraudulent act, as opposed to when the SEC discovered the fraudulent act. In doing so, the Court rejected the discovery rule.
The discovery rule extends the statute of limitations because it provides that the statute does not begin to run until the party brining the claim discovers the wrongdoing. For example, if the fraud happened 10 years ago, but was discovered yesterday, the SEC would have had five years from yesterday to bring a claim against the fraudster. Applying the Supreme Court’s rule noted above, the SEC would be out of luck to bring a claim for civil penalties.
This week, Senator Reed of Rhode Island introduced a bill that would extend the SEC’s statute of limitations from five to 10 years. Applying this new limitations period, the above-referenced scenario would fall within the time in which the SEC could act.
The logic behind extending the limitations can be seen as a way to insulate the impact of the Court’s decision and the absence of the discovery rule. In other words, it extends greater protection to investors who are the victim of a fraud.
Under the new proposed limitations period, the SEC would have twice as long to uncover a fraud to seek civil monetary penalties. The moral of the story; if you are committing securities fraud be prepared for the SEC to have more time to come after you. Better yet; don’t engage in fraud.