The U.S. Supreme Court recently decided to take up the case of SEC vs. Marc Gabelli and Bruce Alpert. At issue, in this case, is whether the SEC’s five-year statute of limitations to bring civil enforcement actions (cases where the agency is seeking a financial penalty) begins when the fraud is first discovered, or the last time the violation occurred. The outcome of their decision could have broad ramifications for the investment adviser industry.
In this case, the SEC has accused Gabelli, a former portfolio manager at Gabelli Funds LLC, and Bruce Alpert, a former chief operating officer for the firm, of several acts of fraud spanning from 1999 to 2002. The SEC, however, did not sue until April 2008. Gabelli and Alpert said this was too late, given that the statute of limitations was five years and the last market-timing trade had taken place in August 2002, nearly six years earlier. While the district court agreed with Gabelli and Alpert, Judge Jed Rakoff of the 2nd Circuit Court of Appeals disagreed, and ruled in favor of the SEC.
The SEC is arguing that “starting the clock” on the statute of limitations should occur when the fraud is first discovered. Their position is that discovery of such violations is often delayed due to concealment on the part of the violator, and a negative ruling could effectively diminish the agency’s enforcement power, resulting in fewer cases being prosecuted on behalf of harmed investors.
Gabelli and Alpert are arguing Jed Rakoff overreached his authority by ruling that the SEC’s clock should start when it first discovers the fraud. Their argument is such that, under the appeals court ruling, the SEC would be able to bring an ancient claim on the mere allegation that it did not discover and could not have discovered the violation earlier. Furthermore, having no time limit disadvantages the defendants because records may have been discarded and witnesses’ memories faded in the time it would take the SEC to bring a claim.
The case raises issues similar to those addressed by the Supreme Court in Merck & Co., Inc., et al. v. Reynolds et al. (2010), when it ruled that the two-year period for shareholder fraud suits doesn’t begin until investors have indications of intentional company wrongdoing. The new case, however, concerns SEC enforcement actions rather than private suits.
A decision is expected in the court’s upcoming term, which ends in June. The case is now termed: Gabelli et al v. SEC, U.S. Supreme Court, No. 11-1274.
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