* Case involved debate over statute of limitations
* SEC argued clock starts ticking from when fraud discovered
* Supreme Court says clock starts from when fraud committed
* SEC: Decision will not have immediate impact
By Sarah N. Lynch and Lawrence Hurley
WASHINGTON, Feb 27 The U.S. Supreme Court on
Wednesday limited the authority of the Securities and Exchange
Commission to seek civil penalties over conduct that occurred
more than five years before investigators took action.
The nine-member court ruled by a unanimous vote that the
five-year clock for the government to act on fraud begins to
tick when the fraud occurs, not when it is discovered.
Wednesday's decision is a defeat for securities regulators,
who would have benefited from a favorable ruling because it
could have bought them more time to bring complex cases,
including cases springing from the 2007-2009 financial crisis.
The decision has implications beyond the SEC because the
five-year statute of limitations applies to civil actions by
numerous government agencies, from the Federal Trade Commission
to the Social Security Administration.
At the same time, though, the SEC and other agencies can
still ask defendants for voluntary suspensions of the statute of
limitations, which defendants often grant in hopes of leniency.
Also, the restriction applies to monetary penalties, not to
the SEC's ability to recovery of ill-gotten gains and
The case marks a victory for mutual fund manager Marc
Gabelli and colleague Bruce Alpert, whom the SEC claimed allowed
a firm now known as Headstart Advisers Ltd to conduct hundreds
of "market-timing" trades. Such trades involve rapid trading to
exploit market or price inefficiencies.
The practice, while not illegal, is considered improper. The
SEC alleged they engaged in market-timing trades without
properly disclosing it to board directors and other investors.
Gabelli and Alpert, who deny any wrongdoing, said the clock
for enforcement action starts to tick when the alleged act
occurred. The SEC said it starts when the agency is reasonably
able to detect fraud.
In an e-mailed statement, Gabelli and Alpert's lead counsel,
Lewis Liman of Cleary Gottlieb Steen & Hamilton, praised the
high court's decision. "We are gratified that the court has
upheld the plain language of the statute and affirmed a
bright-line standard for the time the government has to bring a
civil penalty action," he said.
SEC spokesman John Nester said the agency is reviewing the
decision, but does not expect it to have an immediate impact on
its ability to hold violators accountable.
"This ruling pertains only to penalties and does not
restrict our ability to strip violators of their unlawful
financial gains or bar them from the securities industry when
necessary to protect investors," Nester said in a statement.
He added that the court also "left open" whether the agency
can pursue penalties after five years in cases where
law-breakers conceal their conduct, such as through false
filings with the commission.
PUTS PRESSURE ON SEC
Outside observers who closely followed the case were not
surprised by the Supreme Court's decision.
During oral arguments in January, justices from across the
ideological spectrum appeared frightened by the prospect of
extending the statute of limitations across the government.
They also raised concerns about the lack of a legal
precedent and were frustrated when the Justice Department lawyer
arguing for the SEC could not cite a case supporting what he
called the agency's "fairly modern" position.
Stephen Crimmins, a former SEC deputy chief litigation
counsel who is now a partner with K&L Gates, said he does not
think the time limit for seeking civil penalties will have a
huge impact on the agency.
"They will still be able to bring, even as to old cases,
litigation where they seek disgorgement of profits... and I
think where it's necessary to bring older cases, those remedies
will be sufficient for them to make their law enforcement
statement and to rein in any bad actors," he said.
In this case, the SEC had accused Gabelli and Alpert of
violating the law from 1999 to 2002. But the agency did not sue
Gabelli and Alpert until April 2008, more than five years after
it said the last market-timing trade occurred.
After Gabelli and Alpert alleged the SEC had exceeded the
statute of limitations to seek penalties, the 2nd U.S. Circuit
Court of Appeals sided with the agency in August 2011.
Judge Jed Rakoff wrote for the Appeals court that the
regulator could not have reasonably uncovered the market timing
until a high-profile investigation by then-New York Attorney
General Eliot Spitzer brought it to prominence.
Chief Justice John Roberts, who wrote the opinion for the
Supreme Court, shot down Rakoff's argument.
"The government is a different kind of plaintiff," he wrote.
"The SEC's very purpose, for example, is to root out fraud,
and it has many legal tools at hand to aid in that pursuit. The
government in these types of cases also seeks a different type
He added that extending the statute of limitations to seek
civil penalties would "leave defendants exposed to government
enforcement action not only for five years after their misdeeds,
but for an additional uncertain period the future."
Robert Anello, an attorney at Morvillo Abramowitz who has
been closely tracking the Gabelli case, said the court's
decision is an embarrassment for the SEC, but that it will hold
regulators' feet to the fire.
"You don't want to give the SEC the opportunity to put
things on the back burner," he said. "I think what it does... is
basically tells them they have a job to do and they have to do
The government's ability to seek penalties in civil or
criminal financial cases is usually limited to five years.
Authorities can extend the statute of limitations through
what are known as "tolling agreements," or voluntary agreements
between the government and the targets of the investigation.
The SEC is believed to have tolling agreements in place for
many of the cases it has pending from the financial crisis.
"While we always prioritize our investigative workload to
meet the five-year deadline, where circumstances warrant we also
obtain agreements from individuals and entities under
investigation to waive the deadline in financial crisis cases
and other investigations," the SEC's Nester said.
There are some exceptions, however, to the five-year limit.
One example is The Financial Institutions Reform, Recovery,
and Enforcement Act, or FIRREA, a federal civil fraud statute
that gives the Department of Justice a 10-year window to seek
FIRREA has rarely been used since it was enacted in 1989
after the savings-and-loan scandal, but the DOJ has started to
use it over the past year.
Earlier this month, the DOJ used it to file a $5 billion
civil lawsuit against McGraw Hill's Standard & Poor's in
connection with mortgage product ratings issued in the years
leading up to the financial crisis.
The SEC, which also has an investigation pending against S&P
in connection with crisis-related ratings, cannot bring a FIRREA
case. An S&P spokesman declined to comment on whether the
company has a tolling agreement in the SEC case.
The case is Gabelli v. SEC, U.S. Supreme Court, No. 11-1274.