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The U.S. Supreme Court agreed on September 25, 2012 to consider an appeal by former portfolio manager at Gabelli Funds LLC, Marc Gabelli, who accused the U.S. Securities and Exchange Commission (SEC) of waiting too long to sue him for securities fraud. The SEC accused Gabelli of letting a client engage in market timing to exploit market or pricing inefficiencies.
Gabelli was sued by the SEC in a civil case in 2008 for allegedly allowing a hedge fund, Britain’s Folkes Asset Management, now Headstart Advisers Ltd, rapidly trade shares of a mutual fund between 1999 and 2002. Market timing is not necessarily illegal, but a privilege not available to ordinary mutual fund investors. In September 2003, then-New York Attorney General Eliot Spitzer publicly unmasked the market timing practice.
The SEC’s statute of limitations is five years in cases where the SEC seeks a financial penalty, though the statute of limitations can be tolled if the parties consent. Gabelli said a five-year statute of limitations began no later than 2002, when he stopped the practice. The SEC did not sue Gabelli until April 2008, when Gabelli Funds agreed to pay $16 million to settle related charges. Since the statute of limitations was five years and the last market timing trade took place in August 2002, almost six years earlier, Gabelli argued the SEC waited too long to sue him.
The U.S. Supreme Court’s decision on the issue could have a strong effect on the SEC’s investigative process as well as financial industry defendants. If the U.S. Supreme court sides for the SEC, some experts say it such a decision create uncertainty and unfairly leave the financial industry wondering if the SEC will bring charges.
Some legal scholars comment that in complex cases, the SEC needs enough time to sort through detailed securities transactions, and other records. A decision in Gabelli’s favor might diminish the SEC’s enforcement power. Some note the SEC is understaffed so a short time frame to bring a case might lead to fewer cases being brought, and investors not vindicated.
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A U.S. Supreme court decision is expected in the court’s upcoming term, which ends in June. The case is Gabelli et al v. SEC, U.S. Supreme Court, No. 11-1274.
Gabelli has degrees from Massachusetts Institute of Technology Sloan School, Boston College, and Stanford University. Gabelli, son of prominent investor Mario Gabelli . Mario Gabelli is the founder, chairman, and CEO of Gabelli Asset Management Company Investors (GAMCO Investors), a $30 billion dollar global investment firm headquartered in Rye, New York.
