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WASHINGTON, D.C. - (Mealey's) The U.S. Supreme Court on Jan. 8 heard oral arguments in an appeal of a Second Circuit U.S. Court of Appeals ruling allowing the Securities and Exchange Commission to seek penalties against defendants for securities fraud for conduct that was not fraudulently concealed and that had ceased more than five years before the SEC brought the lawsuit (Marc J. Gabelli, et al. v. Securities and Exchange Commission, No. 11-1274, U.S. Sup.).
Arguing for petitioners Marc J. Gabelli and Bruce Alpert, attorney Lewis Liman told the Supreme Court that the SEC's position in the instant action is a "novel position that to our knowledge has not been taken by other regulators and hasn't been taken by the SEC until quite recently."
"This statute's [Section 2462 of Title 28 of the United States Code] been on the books for quite a long time, and it's notable that agencies have not urged that interpretation," Liman said.
Assistant to the Solicitor General Jeffrey B. Wall argued for the SEC and was asked by Justice Stephen G. Breyer whether there have been any cases brought before 2004 "in which the government ever tried to assert the discovery rule where what they were seeking was a civil penalty, not to try to make themselves whole where they are a victim" other than one that was brought in the 19th century.
"Is there any case at all until the year 2004, approximately, in which the government has either tried or certainly succeeded in taking this general statute and applying the discovery rule where they are not a victim, they are trying to enforce the law for the civil penalty," Justice Breyer asked.
"I'd say for 200 years there is no case. The only case, as far as I have been able to discover, which is why I am asking, is that what created the problem of recent vintage is that the Seventh Circuit, I guess, or a couple of other circuits decided that this discovery rule did not apply to an effort by the government to assert a civil penalty. That's what created the problem. Before that there was no problem; it was clear the government couldn't do it."
Justice Antonin Scalia seemed to agree with Justice Breyer's line of questioning, adding that "[w]hat's extraordinary is that the government has never asserted this, except in the 19th century, when it was rebuffed and repudiated its position."
"It isn't just that there are no cases against you. It's the government has never asserted it before," Justice Scalia said.
The SEC filed its complaint in the U.S. District Court for the Southern District of New York, naming Gabelli, who is Gabelli Global Growth Fund's portfolio manager, and Alpert, the chief operating officer of funds adviser Gabelli Funds LLC, as defendants.
The SEC alleged that the defendants violated Section 10(b) of the Securities Exchange Act of 1934, Section 17(a) of the Securities Act of 1933 and SEC Rule 10b-5 by failing to disclose certain favorable treatment provided to one of the fund's investors in preference to others.
Additional claims for violation of Sections 206(1) and 206(2) of the Investment Advisers Act also were made, and the SEC sought injunctive relief, disgorgement and civil monetary penalties.
In particular, the SEC contended that while the defendants prohibited other investors from engaging in a form of short-term trading called "market timing," it allowed one investor, Headstart Advisers Ltd., to market time the fund in exchange for an investment in a hedge fund managed by Gabelli.
Statute Of Limitations
The District Court dismissed the Section 10(b) and Section 17(a) claims; denied dismissal of the Advisers Act claims but ruled that the SEC may not seek civil penalties for the claims because it was not brought within the statute of limitations period for such claims and the SEC is not authorized to seek monetary penalties for claims for aiding and abetting violations of the Advisers Act; and dismissed the SEC's prayer for injunctive relief because the SEC "has not plausibly alleged that Defendants are reasonable likely to engage in future violations."
The SEC appealed the District Court's dismissal of the Exchange Act and Securities Act claims to the Second Circuit, and the defendants cross-appealed, arguing that the District Court erred in denying their motions to dismiss the SEC's prayer for disgorgement under the Advisers Act and, more generally, in denying their motions to dismiss with prejudice the SEC's claim for aiding and abetting violations of the Advisers Act.
The Second Circuit reversed and remanded, granting the SEC's appeal in all respects and dismissing the cross-appeals "for want of appellate jurisdiction."
The defendants filed their petition for writ of certiorari in the Supreme Court on April 20, and the Supreme Court granted review on Sept. 25.
The question presented is: "Section 2462 of Title 28 of the United States Code provides that 'except as otherwise provided by Act of Congress' any penalty action brought by the government must be 'commenced within five years from the date when the claims first accrued.' (emphasis added). This Court has explained that '[i]n common parlance a right accrues when it comes into existence.' United States v. Lindsay, 346 U.S. 568, 569 (1954) [enhanced version available to lexis.com subscribers]."
"Where Congress has not enacted a separate controlling provision, does the government's claim first accrue for purposes of applying the five-year limitations period under 28 U.S.C. [U.S. Code] § 2462 when the government can first bring an action for a penalty?"
The SEC is represented by Solicitor General Donald B. Verrilli Jr. of the U.S. Department of Justice in Washington.
The defendants are represented by Liman of Cleary Gottlieb Steen & Hamilton in New York.
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