On August 1, 2011, on appeal, the Second Circuit reversed accepting the SEC’s argument that because the underlying violations sounded in fraud, the Discovery Rule applied, meaning that the statute of limitations did not begin to run until the SEC discovered or reasonably could have discovered the fraud. On appeal, the United States Supreme Court noted that it had never applied the Discovery Rule in a matter where the plaintiff is the government bringing an enforcement action for civil penalties, in contradistinction to a defrauded victim seeking recompense. In declining to extend the Discovery Rule to government civil penalty enforcement actions, the Court cast the government as a unique plaintiff often tasked with rooting out fraud and armed with many arrows in its quiver just for such an undertaking. Viewing the Discovery Rule as something of an equalizer designed to assist wronged parties seeking recompense, the Court was not compelled to offer such assistance to regulators seeking not compensation but punishment aimed at wrongdoers. Further, the Court deemed that there were many motivating factors to avoid having courts attempt to parse through what the government knew or reasonably should have known about an alleged fraud. In setting forth its rationale, the Court noted, in part: Accordingly, the Court reversed and remanded SEC v. 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 immediately 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.
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