The U.S. Supreme Court signaled it may tighten the time limits that apply when the Securities and Exchange Commission and other government agencies seek to impose fines on people and companies accused of fraud.
Hearing arguments today in Washington, justices across the court’s ideological divide voiced doubt about the Obama administration’s position in a case involving market timing, the practice of making frequent, short-term trades at the expense of other investors.
The issue is whether the five-year window for suits had expired by the time the SEC sued two Gabelli Funds LLC officials, saying they secretly allowed market timing by a client. The Obama administration says the window opens only after the government has reason to know about a fraud -- an approach several justices said would reverse hundreds of years of practice and give federal enforcers too much power.
“This is a brand new assertion by the government,” Justice Antonin Scalia said. “What’s extraordinary is that the government has never asserted this except in the 19th century, when it was rebuffed” and the government dropped its position, he said.
A federal appeals court in New York said the suit against Marc J. Gabelli and Bruce Alpert could go forward, agreeing with the Obama administration’s approach.
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.
It affects only the power of agencies to seek fines, not their ability to seek “disgorgement” -- that is, to force those who engage in fraud to give back the money.
Today’s hour-long session suggested the court’s ruling also will apply to what Justice Stephen Breyer called a “huge category” of other government enforcement actions, including cases pressed by the Defense Department and Federal Trade Commission and allegations of Medicare and Medicaid fraud.
Breyer questioned whether the government should be able to extend its time to sue -- and impose “what look like criminal penalties” -- by saying that it didn’t learn about a fraud until recently.
Justice Ruth Bader Ginsburg called the five-year window “generous” and asked the government lawyer, Jeffrey Wall, why the SEC took so long to sue Gabelli and Alpert.
The SEC complaint, filed in 2008, centers on conduct that took place from 1999 to 2002. At the time of the alleged wrongdoing, Gabelli was the portfolio manager for the Gabelli Global Growth Fund and Alpert was chief operating officer of Gabelli Funds.
Both men deny any wrongdoing.
Wall told Ginsburg that the SEC was seeking documents and engaging in settlement discussions during that period.
Justice Elena Kagan broke in with a different explanation, saying the SEC had decided not to pursue market timing cases until it was “embarrassed” by suits pressed by Eliot Spitzer, then New York’s attorney general.
Wall contended that it would be anomalous for the so-called discovery rule to apply to private lawsuits and not the federal government.
He drew few allies on that point. Chief Justice John Roberts said the distinction made sense to him, given the vast resources of the federal government.
“The one plaintiff we should be particularly concerned about is the government,” Roberts said.
Gabelli and Alpert’s lawyer, Lewis Liman, told the justices that the issue might be different had the SEC accused his clients of taking steps to conceal their activities.
“There’s no allegation whatsoever that anything was hidden from the government,” Liman said.
The case, which the court will decide by June, is Gabelli v. SEC, 11-1274.
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