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SECURITIES FRAUD

Gabelli v. SEC

in
Oral argument: 
January 8, 2013
Court below: 
United States Court of Appeals for the Second Circuit

“Time zone arbitrage” is an investment practice that takes advantage of the time difference between markets in the United States and abroad but that may harm international institutional investors. In its initial action against defendants, Marc J. Gabelli and Bruce Alpert (collectively, “Gabelli”), the SEC alleged that Gabelli allowed a single investor in the mutual fund they managed to engage in a time zone arbitrage.  The SEC argued that Gabelli committed securities fraud by allowing such a practice while simultaneously representing to the directors and investors of the mutual fund that time zone arbitrage would not be tolerated. The SEC action was dismissed in the United States District Court for the Southern District of New York for having exceeded the statute of limitations. However, the Court of Appeals for the Second Circuit reversed, stating that the period did not begin running for statute of limitations purposes until the SEC discovered the alleged misconduct, rather than when the alleged misconduct first occurred. The defendants now appeal, arguing that potential targets of government enforcement actions should not have to live under the constant threat of penalty for conduct long since passed. The SEC counters that wrongdoers should not benefit by virtue of their conduct being more difficult to uncover. The Supreme Court’s resolution of this case will have long lasting implications on the government’s efforts to regulate the securities market.

Questions Presented: 

Section 2462 of Title 28 of the United States Code provides that “except as otherwise provided by Act of Congress” any penalty action brought by the government must be “commenced within five years from the date when the claims first accrued.” (emphasis added). This Court has explained that “[i]n common parlance a right accrues when it comes into existence.” United States v. Lindsay, 346 U.S. 568, 569 (1954).

Where Congress has not enacted a separate controlling provision, does the government's claim first accrue for purposes of applying the five-year limitations period under 28 U.S.C. § 2462 when the government can first bring an action for a penalty?

Issue

Whether the five-year limitation for government enforcement actions begins running when the government discovered an alleged violation or when the alleged violation took place.

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Written by: 
Zachary Glantz
Jonathan Goddard
Edited by: 
Judah Druck
Additional Resources: 

Janus Capital Group v. First Derivative Traders (09-525)

in

Oral argument: Dec. 7, 2010

Appealed from: United States Court of Appeals for the Fourth Circuit (May 7, 2009)

SECURITIES FRAUD, AIDING-AND-ABETTING LIABILITY, MARKET TIMING, INVESTMENT ADVISERS

A 2003 investigation by the New York State Attorney General revealed that Janus Capital Management, an investment adviser, had secretly allowed several hedge funds to engage in market-timing trades using the assets of the Janus Investment Fund, which were publicly marketed toward long-term investors. Subsequently, First Derivative Traders, a stockholder in Janus Capital Management’s parent company, brought a private securities fraud action against the Janus companies, alleging that Janus Capital Management was responsible for misleading statements in the Janus Funds’ prospectuses. Though Janus Capital Management argued that its status as a mere outside service provider precluded liability, the Fourth Circuit allowed First Derivative Traders to move forward with its claim. In a decision that will affect the scope of secondary liability in private securities-fraud actions, the Supreme Court is now asked to decide whether an investment adviser can be held responsible for misstatements that appear in its client’s offering documents.

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