SEC Fraud Suit Deadlines Draw Review From U.S. High Court

The U.S. Supreme Court agreed to hear an appeal that seeks to force the Securities and Exchange Commission to move more quickly in pressing fraud lawsuits.

The justices today said they will hear arguments from two Gabelli Funds LLC officials seeking to block SEC claims that they improperly let a client engage in market timing, a practice of making frequent, short-term trades at the expense of other investors.

Marc J. Gabelli and Bruce Alpert contend that the SEC sued after the five-year window for seeking penalties had expired. A federal appeals court in New York said the suit could go forward because the window doesn’t open in fraud cases until the SEC has reason to know a violation has occurred.

The case raises issues similar to those addressed by the Supreme Court in 2010, when it ruled that the two-year period for shareholder fraud suits doesn’t begin until investors have indications of intentional company wrongdoing. The new case concerns SEC enforcement actions, rather than private suits.

Gabelli and Alpert contend that, under the appeals court ruling, “the SEC would be able to bring an ancient claim on the mere allegation that it did not discover and could not have discovered the violation earlier.”

At the time of the alleged wrongdoing -- from 1999 to 2002 -- Gabelli was the portfolio manager for the Gabelli Global Growth Fund and Alpert was chief operating officer of Gabelli Funds. The SEC filed its complaint in 2008.

The SEC and the Obama administration urged the high court not to take up the case. They said the court has “repeatedly recognized” the so-called discovery rule in fraud cases.

“Courts long ago recognized that, despite concerns about stale evidence and the passage of time, the discovery rule was necessary to ensure that a defendant could not benefit from his own fraud or concealment,” U.S. Solicitor General Donald Verrilli argued.

The court will hear arguments early next year and rule by June. The case is Gabelli v. SEC, 11-1274.

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