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Time Limits on SEC Enforcement Actions: The Supreme Court Ruling in Gabelli v. SEC


The Supreme Court rejected the efforts of the Securities and Exchange Commission ("SEC") effort to extend the five-year statute of limitations for imposing a civil penalty by engrafting a discovery exception onto the statute. Chief Justice Roberts, writing for a unanimous Court, held that under Section 2462 of Title 28, the statute of limitations begins when there is a cause of action. The decision is a straight forward reading of the statutory language. Gabelli v. SEC, No. 11-1274 (S. Ct., Decided February 27, 2013) [an enhanced version of this opinion is available to subscribers].

I. Background: The Case

The Commission's case centered on alleged false statements by Marc Gabelli, the portfolio manager of Gabelli Global Growth Fund ("Fund"), and Bruce Alpert, the COO of the Fund's adviser, Gabelli Funds, LLC. From 1999 until 2002, the defendants permitted trader Headstart Advisers, Ltd. ("Headstart") to engage in "time zone arbitrage" according to the SEC, a form of market timing. At the same time, defendants banned others from utilizing the practice. The arrangement with Headstart was not disclosed to the Fund's board of directors who were thus deceived. Even after Headstart halted the practice, the defendants continued to mislead the board and investors, according to the SEC.

The Commission filed its complaint in April 2008. The underlying investigation began in the Fall of 2003 following the publicized inquiry of the New York Attorney General into market timing. At one point the SEC sought tolling agreements. The complaint alleged violations of Securities Act Section 17(a), Exchange Act Section 10(b) and Advisers Act Sections 206(1) and (2).

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