The U.S. Supreme Court on Tuesday appeared poised to curtail the power of the top federal securities regulator to seek civil penalties after exceeding the usual time limit for fraud investigations.
In oral argument, justices from across the ideological spectrum sharply questioned a government lawyer arguing for the U.S. Securities and Exchange Commission over how to interpret a law requiring the agency to seek such penalties within five years.
The case involved whether the SEC waited too long to sue mutual fund manager Marc Gabelli and his colleague Bruce Alpert, chief operating officer of Gabelli Funds LLC, and accused them of not disclosing a client’s questionable trades.
Gabelli and Alpert, who both denied wrongdoing, said the five-year clock starts to tick when the alleged wrongful act occurred, while the SEC said it starts only when it is reasonably able to detect fraud.
A victory for the SEC could help it pursue particularly complex investigations that require more time, including litigation stemming from the housing meltdown and the 2008 global financial crisis.
Jeffrey Wall, a U.S. Department of Justice lawyer arguing for the SEC, struggled at oral argument to cite cases supporting what he called the commission’s “fairly modern” position.
“Why is it that you don’t have any cases?” Justice Elena Kagan, one of the court’s more liberal members, said. “This is obviously an old statute…. The government, which has not asserted this power for 200 years, is now coming in and saying, ‘We want it.'”
Justice Antonin Scalia, from the court’s conservative wing, also criticized the SEC’s position.
“This is brand-new assertion by the government,” he told Wall. “Is there much difference between the rule you are arguing for and a rule that there is no statute of limitations?”
IMPACT ON OTHER AGENCIES
Because the five-year deadline also applies in other contexts, a defeat for the SEC could make it harder for agencies such as the Federal Trade Commission and the Social Security Administration to pursue a variety of civil litigation.
But Justice Stephen Breyer questioned why the government should be allowed to seek civil penalties, on top of the ill-gotten gains it can still pursue after five years lapse.
“It seems to me to have enormous consequences for the government suddenly to try to assert a quasi-criminal penalty and abolish the statute of limitations, I mean, in a vast set of cases,” he said.
Lewis Liman, a lawyer for Gabelli and Alpert, said the SEC’s position would effectively “override” the clear language that Congress provided in crafting the deadline.
“That five-year period in the securities laws puts a premium on the SEC acting promptly,” he said. “This statute has been on the books for quite a long time, and it is notable that agencies have not urged that interpretation.”
In Tuesday’s case, the SEC had contended that from 1999 to 2002, Gabelli and Alpert let a firm now known as Headstart Advisers Ltd conduct hundreds of “market-timing” trades, which involve rapid trading to exploit market or price inefficiencies.
The practice, while not illegal, is considered improper. It gained notoriety in September 2003 when then-New York Attorney General Eliot Spitzer began to challenge it.
But the SEC did not sue Gabelli and Alpert until April 2008, nearly five years later, and more than five years after it said the last market-timing trade occurred.
The SEC had prevailed before the 2nd U.S. Circuit Court of Appeals in August 2011, where U.S. District Judge Jed Rakoff wrote for the court that the regulator could not have reasonably uncovered the market timing until Spitzer’s probe became known.
Kagan on Tuesday questioned this logic.
“The government had decided not to go after market timers,” she said. “And it changed its decision when a state attorney general decided to do it, and it embarrassed them.”
Robert Anello, a litigation partner at Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer who is not involved in the case but attended Tuesday’s oral argument, said the questioning suggested that some justices believed the SEC was overreaching.
“The justices are very concerned that the expansion the SEC is asking for could have ramifications that are difficult to access,” he said. “If that kind of expansion is going to be done, it should be done by an act of Congress.”
A decision is expected by the end of June.
The case is Gabelli et al v. SEC, U.S. Supreme Court, No. 11-1274.
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