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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.; See October 2012, Page 6) (lexis.com
subscribers may access Supreme Court briefs for this case).
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
The defendants filed their petition for writ of certiorari
in the Supreme Court on April 20, and the Supreme Court granted review on Sept.
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
"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
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