U.S. top court to hear Marc Gabelli appeal in SEC case
(Reuters) - The U.S. Supreme Court agreed on Tuesday to consider an appeal by fund manager Marc Gabelli, who accused the U.S. Securities and Exchange Commission of waiting too long to bring a civil case accusing him of letting a client engage in so-called market timing.
The case hinges on the question of when the statute of limitations clock begins to tick. The SEC's statute of limitations is five years in cases where the agency is seeking a financial penalty, though it can be suspended if both parties consent under what's known as a "tolling agreement."
Experts say the high court's decision could have a big effect both on the SEC's investigative process as well as defendants in the financial industry.
The SEC had accused Gabelli, a former portfolio manager at Gabelli Funds LLC, and Bruce Alpert, a chief operating officer for the firm, of letting Britain's Folkes Asset Management, now known as Headstart Advisers Ltd, conduct hundreds of improper market-timing trades in the Gabelli Global Growth Fund between 1999 and 2002.
The SEC, however, did not sue until April 2008, when Gabelli Funds agreed to pay $16 million to settle related charges.
Market timing involves rapid trading to exploit market or pricing inefficiencies. It is not necessarily illegal, but is a privilege not available to ordinary mutual fund investors.
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.
But in an opinion by U.S. District Judge Jed Rakoff, the 2nd U.S. Circuit Court of Appeals said Gabelli and Alpert did not show that a reasonably diligent plaintiff would have uncovered the fraud before September 2003, when then-New York Attorney General Eliot Spitzer publicly unmasked the practice. Thus, the appeals court let the SEC lawsuit seeking civil penalties go forward.
In their Supreme Court appeal, Gabelli and Alpert said the 2nd Circuit decision conflicted with decisions of at least four other circuit courts that said the five-year clock begins ticking when a claim "accrues" - in this case, they said, in 2002.
If the high court decides to uphold Rakoff's decision, then some experts say it could create uncertainty and unfairly leave the financial industry in the lurch for years wondering if the SEC will bring charges.
"Virtually every type of case has a statute of limitations. The only types of cases that don't are murder cases, and other unique types of cases," said Robert Anello, an attorney at Morvillo Abramowitz who wrote an article about the case in the New York Law Journal last year.
"Capital offenses don't have a statute of limitations, and to put this on par with that is quite a significant expansion."
At the same time, however, some legal scholars note that in complex cases like this one, the SEC needs enough time to sort through detailed records, such as securities transactions.
Elizabeth Nowicki, a professor at Tulane University Law School who previously worked in the SEC's general counsel office, said she is concerned that the Supreme Court could effectively diminish the agency's enforcement power.
"I am a little nervous ... about what it signals. I'm a little afraid it signals they are concerned about the SEC overreaching," she said.
"The SEC remains I think woefully understaffed, so the shorter the time frame they have in terms of the statute of limitations for discovering fraud, the fewer cases they will be able to vindicate for investors."
Marc Gabelli is a son of prominent investor Mario Gabelli. Both the SEC and GAMCO Investors, which manages the Gabelli Funds family, declined to comment about the Supreme Court's decision to hear the case.
A decision is expected in the court's upcoming term, which ends in June.
The case is Gabelli et al v. SEC, U.S. Supreme Court, No. 11-1274.