Supreme Court To Hear Appeal In Market Timing Case

Supreme Court To Hear Appeal In Market Timing Case

WASHINGTON, D.C. - (Mealey's) The U.S. Supreme Court on Sept. 25 agreed to hear 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 prior to the SEC bringing the lawsuit (Marc J. Gabelli, et al. v. Securities and Exchange Commission, No. 11-1274, U.S. Sup.). 

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)." 

"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 filed a complaint in the U.S. District Court for the Southern District of New York naming Gabelli Global Growth Fund portfolio manager Marc J. Gabelli and Chief Operating Officer of funds adviser Gabelli Funds LLC, Bruce Alpert as defendants. 

Favorable Treatment 

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 were also 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 with 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." 

Petition Filed 

The defendants filed their petition for writ of certiorari in the Supreme Court on April 20. 

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 Lewis J. Liman of Cleary Gottlieb Steen & Hamilton in New York.

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