The Securities and Exchange Commission must move more quickly in pressing some fraud lawsuits, the U.S. Supreme Court ruled in a decision that may affect agencies across the government.
The justices today unanimously ruled in favor of 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. They contend the SEC missed the five-year deadline to file the lawsuit.
The case raised 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 concerned SEC enforcement actions, rather than private suits.
“Unlike the private party who has no reason to suspect fraud, the SEC’s very purpose is to root it out, and it has many legal tools at hand to aid in that pursuit,” Chief Justice John Roberts wrote for the court.
The ruling might affect the SEC’s investigation of alleged insider trading at Steven Cohen’s SAC Capital Advisors LLC. This July will be the five-year anniversary of its 2008 sale of a $700 million-plus position in two drug companies, just days before the public release of negative information drove those companies’ share prices down.
In November, the SEC notified the hedge fund’s management that it planned to bring a civil case against SAC Capital claiming it failed to supervise its employees. The SEC in November sued former SAC portfolio manager Mathew Martoma, accusing him of using non-public information to persuade Cohen to make the sale. Prosecutors also filed criminal charges against Martoma.
In the Supreme Court case, Marc J. Gabelli and Bruce Alpert contended that the SEC sued after the five-year window for seeking penalties had expired. A federal appeals court in New York had 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.
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 argued that the Supreme Court has repeatedly endorsed the so-called discovery rule in fraud cases.
The case is Gabelli v. SEC, 11-1274.