SEC on the clock after high court ruling on case backlog

Upholds five-year limit: agency may need to get act in gear on '08 financial crisis cases

Feb 27, 2013 @ 4:13 pm

By Mark Schoeff Jr.

SEC, SCOTUS, Gabelli, legal
+ Zoom

The SEC must file cases seeking civil penalties for securities fraud within five years of the alleged incident, the Supreme Court ruled today.

That's potentially bad news for an agency already strapped for cash facing further belt-tightening if automatic government spending cuts take effect in the event that President Barack Obama and Congress fail to reach a budget reduction plan by the end of this week.

The decision will put a premium on quick action by the SEC's Division of Enforcement, particularly if it's considering cases related to the 2008 financial crisis.

“It could put stress on the enforcement process,” said Jay Baris, a partner at Morrison & Foerster LLP. “It's certainly going to set the SEC scrambling to beat the clock in enforcement cases.”

The high court unanimously held that the statute of limitations “five-year clock begins to tick when the fraud occurs, not when it is discovered.”

In the case, the SEC brought an action against Gabelli Funds LLC, which is an investment adviser to the Gabelli Global Growth Fund. The agency alleged that from 1999 through 2002, the fund company allowed Headstart Advisers Ltd. to use market-timing techniques in exchange for Headstart investing in a hedge fund run by Gabelli Funds.

No other participant in the Gabelli fund was allowed to use market timing. Headstart achieved returns of up to 185%, while the return for other long-term investors was less than -24%.

Gabelli argued that by filing its case in 2008, six years after the last alleged fraud incident, the SEC had violated the statute of limitations. A district court ruled in favor of Gabelli. The 2nd U.S. Circuit Court of Appeals reversed that decision.

But the Supreme Court reversed the appeals court's decision, holding the SEC to a higher “discovery” standard when seeking civil penalties for fraud than that to which it holds an individual fraud victim seeking compensation.

“The SEC, for example, is not like an individual victim who relies on apparent injury to learn of a wrong,” Chief Justice John Roberts Jr. wrote for the majority. “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.”

The ruling means that potential defendants in SEC cases will not have to look over their shoulders indefinitely.

“I'm pleased that, as the court noted, there will now be finality,” said Eugene Goldman, a partner at McDermott Will & Emery LLP and a former SEC prosecutor. “We will not have clients hounded eight, nine, 10 years after the alleged fraud took place.”

Although the enforcement clock is ticking particularly quickly this year on potential cases involving fraud related to the 2008 financial crisis, the SEC maintains that the ruling will not limit its ability go after securities law violators.

SEC spokesman John Nester noted that it does not prevent the SEC after five years from forcing companies to return illegal profits to investors or throwing a financial executive out of the industry.

“We are reviewing the decision, but we do not expect an immediate impact on our ability to successfully hold violators accountable for their misconduct,” Mr. Nester said in a statement. “The court also left open whether the SEC can pursue financial penalties after five years when violators have taken steps to conceal their illegal conduct, such as submitting false information in a commission filing.”

Nonetheless, if the SEC is considering financial crisis cases, deadlines are creeping closer.

“Now is the time to do it,” Mr. Baris said.

In another securities case, the Supreme Court ruled 6-3 that plaintiffs do not have to prove that an alleged securities fraud affected the value of an investment before the complaint is certified as a class action.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

Apr 30

Conference

Retirement Income Summit

Join InvestmentNews at the 12th annual Retirement Income Summit - the industry's premier retirement planning conference.Much has changed - and much remains to be learned. Attend and discuss how the future is full of opportunity for ... Learn more

Featured video

INTV

How T. Rowe Price is courting advisers

Managing editor Christina Nelson and senior columnist John Waggoner discuss the storied fund family and the ways it is aggressively moving into the financial adviser space.

Video Spotlight

The Search for Income

Sponsored by PGIM Investments

Recommended Video

Path to growth

Latest news & opinion

T. Rowe Price steps up its game to serve financial advisers

The Baltimore-based mutual fund giant is more aggressively targeting financial advisers with a beefed-up wholesale crew and placement on custodial platforms.

The most important tax changes for 2018

The Internal Revenue Service issued inflation adjustments to more than 50 tax provisions for 2018.

Shift to Roth 401(k)s 'highly likely' part of tax reform: former Treasury official Mark Iwry

Mandated contributions to Roth accounts would likely only be partial, as opposed to having a full repeal of pre-tax accounts.

E*Trade acquiring custodian Trust Company of America

Discount broker buying second-tier custodian for $275 million.

Another thousand Dow points higher, and investors yawn

Market milestones keep falling like dominoes, with 51 records broken so far this year.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print