Supreme Court Update: Gabelli v. SEC (11-1274); Evans v. Michigan (11-1327) and Johnson v. Williams (11-465)

March 3, 2013 Supreme Court Update

Greetings, Court fans!

This Update will tackle Gabelli v. SEC (11-1274), holding that the SEC has 5 years (and no more) to bring a claim for civil penalties under the Investment Advisers Act; Evans v. Michigan (11-1327), finding that double jeopardy barred retrial of a criminal defendant even where the trial court had based its acquittal decision on an incorrect understanding of the elements of the crime; and Johnson v. Williams (11-465), addressing when a state court can be presumed to have considered and rejected a federal claim for AEDPA purposes.

The Investment Advisers Act ("IAA") makes it illegal for investment advisers to defraud their clients or aid and abet such violations. Under 28 U.S.C. 2462, which provides a general limitations period applicable to many actions for civil penalties, SEC actions for civil enforcement penalties under the IAA must be brought "within five years from the date when the claim first accrued." Gabelli v. SEC (11-1274) required the Court to determine whether this 5-year limitation period begins to run when the fraud occurs, or later, when the SEC discovers the fraud (the so-called "discovery rule"). The SEC alleged that defendants had aided and abetted violations of the IAA by permitting market timing by one investor in a mutual fund, while refusing to allow other investors to do so and making statements suggesting that such timing would not be tolerated. (The market timer had a 185% rate of return, while the other investors did not fair quite so well, with a negative 24.1% return rate.) But the claimed market timing occurred just a bit more than 5 years before the SEC filed suit. The district court dismissed the SEC's civil penalties claim as time-barred, but the Second Circuit reversed, concluding that because the underlying violation sounded in fraud, the statute of limitations did not begin to run until the fraud was discovered, or could have been discovered with reasonable diligence by the SEC.

The Court reversed in a unanimous decision by the Chief. Section 2462 provides that the limitation period runs from the time the action "accrued." Because "accrued" normally means the moment a cause of action comes into existence, the most natural reading of Section 2462 is that the limitations period begins to run when the fraud occurs, as a cause of action exists at that time. This reading is consistent with the general purpose of statutes of limitations, which are intended to aid justice by setting an outer time limit on the period in which claims may be brought such that evidence is still available and fresh. Time limits provide "‘security and stability to human affairs.'" The discovery rule is an exception that has been applied to help defrauded victims seek recompense. But civil penalties are not recompense and the SEC is not a private victim. Ordinary persons "do not typically spend [their] days looking for evidence that [they] were lied to or defrauded." But that is the entire mission and purpose of the SEC and it has substantial weapons to do so, including sweeping investigative powers. "Given the lack of textual, historical or equitable reasons to graft a discovery rule onto the statute of limitations of 2464," the Court declined to do so.

The next case brings us another procedurally fortunate defendant. With the Court's decision in Evans v. Michigan (11-1327), Lamar Evans – who was caught running from a burning building with a gas can and admitted to starting the fire – had his second lucky day. At the end of the state's evidence in Mr. Evans's arson trial, the trial court entered a directed verdict of acquittal based on the state's failure to prove that the burned building "was not a dwelling house," a factor that Michigan's Criminal Jury Instructions identified as "an essential element" of the crime of "Burning other real property." But as it turns out, according to governing caselaw, the non-dwelling factor was not an element at all – a conviction for burning a dwelling carries a stiffer sentence, and "Burning other real property" is simply a lesser included offense that does not require proof that the burnt building was a dwelling. Based on the error, the Michigan Court of Appeals reversed the trial court and rejected Evans's argument that the Double Jeopardy Clause barred his retrial. The Michigan Supreme Court affirmed.

Resolving disagreement among various state and federal courts, the Court reversed in an 8-1 decision holding that retrial is barred even when a trial court grants acquittal based on a failure to prove an "element" that the state did not have to prove at all. Justice Sotomayor penned the opinion, which she grounded in the 50-year-old decision in Fong Foo v. U.S. (1962), which held that the bar against double jeopardy applies even if the acquittal is "based upon an egregiously erroneous foundation." The Court has applied Fong Foo broadly to prohibit retrial based on a variety of different errors leading to erroneous acquittals, including any ruling that the prosecution's proof was insufficient. Such substantive rulings are distinct from procedural ones, which don't bear the same double jeopardy consequences. "The law attaches particular significance to an acquittal . . . [because] [t]o permit a second trial after an acquittal, however mistaken the acquittal may have been, would present an unacceptably high risk that the Government, with its vastly superior resources, might wear down the defendant so that ‘even though innocent he may be found guilty.'" Retrial would also expose a defendant to additional "embarrassment, expense and ordeal" while "compelling him to live in a continuing state of anxiety and insecurity" – upending his expectation for repose. To the majority, the critical question is whether an acquittal resolves the question of the defendant's guilt or innocence as a matter of the sufficiency of the evidence, or whether a case is merely dismissed or a mistrial declared mid-trial on procedural grounds. If the former is true, reprosecution is prohibited.

Justice Alito dissented, rejecting the substance versus procedure distinction. In his view, the majority's opinion was inconsistent with the meaning and purpose of the Double Jeopardy Clause because the termination of Evans' trial was not truly an "acquittal" under caselaw that has defined that term as a decision that "actually represents a resolution, correct or not, of some of all of the factual elements of the offense charged." In Alito's view, whether the burned building was a dwelling house or not was not an "element of the offense charged," and thus an erroneous termination of the trial based on the prosecution's failure to prove that non-element should not be considered an acquittal for double jeopardy purposes. The prohibition against double jeopardy, he argued, barred repeated attempts by the state to attempt to convict a defendant of a particular offense. Here, allowing a retrial would not give the prosecution a second chance to convince a jury that its evidence satisfied all of the elements of the offense; instead, "because the trial judge's ruling in the first trial was not based on an actual element of the charged offense, retrial would simply give the prosecution one fair opportunity to prove its case." According to Justice Alito, Evans's counsel "fooled the judge into committing an error that provided his client with an undeserved benefit[.]" Evans, in his view, did not now deserve the "even greater benefit" of the protection an actual acquittal provides against retrial.

Finally, in Johnson v. Williams (11-465), the Court considered whether a federal claim has been "adjudicated on the merits" in state court, where the state court's opinion addresses some of the claims raised by the defendant, but does not expressly address the federal claim. This issue is critical because, under the Antiterrorism and Effective Death Penalty Act of 1996 ("AEDPA"), a federal court is required to give substantial deference to a state court's resolution of a federal issue so long as the state court's decision adjudicates the federal claim on the merits. (While this case will have significant impact for habeas practitioners, the rest of you can probably stop here, as AEDPA procedure is about as mind-numbing as it gets.)

The twisting procedural road of this case started with a drive through Southern California in 1993, when Tara Williams and two of her friends hit the highway with an eye to commit a robbery. After her friends robbed a store (committing murder in the process), Williams drove the getaway vehicle. After avoiding capture for 5 years, she was caught and charged with first-degree murder. At trial, Williams claimed she did not know that her friends intended to rob that specific liquor store at that time, claiming that she only agreed to case the liquor store with the possibility of returning later than evening to rob it. The jury deliberated for hours, until the foreperson began sending the judge questions suggesting that one juror – Juror No. 6 – might not be willing to apply the law. Over Williams' objection, the judge questioned Juror No. 6 and ultimately dismissed her for bias. With an alternate juror in place, the jury convicted Williams.

On appeal, Williams argued that the discharge of Juror No. 6 violated both the Sixth Amendment and the California Penal Code, though her brief "did not clearly distinguish between these two lines of authority." In affirming Williams's conviction, the California Court of Appeal addressed the issue regarding Juror No. 6 at length and cited to relevant federal caselaw regarding "impartiality," but did not expressly acknowledge that it was deciding a Sixth Amendment claim. William's case then went up to the California Supreme Court, only to be remanded back to the Court of Appeal for consideration of an interim decision, which resulted in the Court of Appeal issuing a revised opinion, which still rejected Williams' claim, still cited relevant federal authority, but still did not specifically refer to the Sixth Amendment. Williams did not seek rehearing or argue to the court that it had overlooked her federal claim. Instead, she again sought review with the California Supreme Court, which denied relief without a reasoned decision.

After failing once again to obtain relief, this time through state habeas proceedings, Williams filed a federal habeas petition. Under Section 2254 of AEDPA, if a federal claim has already been "adjudicated on the merits" by a state court, a federal habeas court may not grant relief unless adjudication of the claim resulted in: (1) a decision contrary to, or which involved an unreasonable application of, clearly established federal law as determined by the Supreme Court; or (2) a decision based on an unreasonable determination of the facts in light of the evidence in the state court proceeding. The district court applied this deferential standard of review to Williams' Sixth Amendment claim and denied relief. The Ninth Circuit reversed, declining to apply the deferential standard because it thought it "obvious" that the state appellate court had "overlooked or disregarded" Williams's Sixth Amendment claim. The Ninth Circuit held that the dismissal of Juror No. 6 violated the Sixth Amendment.

The Court reversed, with Justice Alito writing for the majority. In Harrington v. Richter (2011), the Court held that federal courts must presume that a state court has adjudicated a federal claim on the merits when the state court issues a decision summarily rejecting both state and federal legal claims without setting forth its reasoning. The Court found no sound basis to distinguish between cases where the state court addressed none of the claims and those where it addressed some of the claims. When a state court rejects a federal claim without expressly addressing it, a federal habeas court "must presume that the federal claim was adjudicated on the merits. . . ." While this presumption can be rebutted in limited circumstances, such as when the federal claim is rejected due to "sheer inadvertence," the Court did not find such circumstances in this case, particularly given the state court's citation to relevant federal authority and state cases discussing the relevant constitutional issues.

Justice Scalia concurred in the Court's judgment, but disagreed that "inadvertently" overlooking a federal claim could provide grounds for rebutting the presumption that a federal claim was adjudicated on the merits. This standard, Scalia argued, required the Court to do "its own detective work" to probe "the judicial mind" and determine if a judge "thought about the merits of an unaddressed claim." According to Scalia, if a federal claim is denied, it is necessarily "adjudicated," "whatever the individual judge might have been pondering (or not pondering)."

We have more decisions from this week to bring you, so you'll be hearing from us again soon.

Kim, Jenny & Julie

From the Appellate and Complex Legal Issues Practice Group at Wiggin and Dana. For more information, contact Kim Rinehart or any other member of the Practice Group at 203-498-4400