In Gabelli v. SEC, the US Supreme Court has decided that in some securities fraud cases, the SEC needs to move faster when it comes to filing its case. The ruling could affect agencies nationwide.
In a unanimous decision, the justices sided with two officials of Gabelli Funds LLC, who sought to stop the regulator’s claim contending that they acted improperly by allowing a client to take part in market timing. The Commission sought civil penalties from them for illegal activities that allegedly took place leading up to August 2002.
Per the Investment Advisers Act, it is against the law for investment advisers to defraud clients and the regulator is allowed to seek penalties for such actions. However, the Commission only has five years from when the window opens to file. The regulator had argued that Gabelli and Alpert had let Headstart Advisers Ltd. take part in “market timing” in the fund while failing to disclose this and banning others from engaging in the same practice even as statements were issued noting that this was not allowed.
Alpert and Gabelli had argued that the SEC filed its securities complaint about these allegations after the statute of limitations for filing for penalties had passed. They said that under the appeals court decision, which said that the securities fraud lawsuit could go ahead because the statute of limitations doesn’t start with litigation involving fraud until the Commission has grounds to know that there was a violation, the SEC could then make an ancient claim just on the allegation that prior to that it hadn’t and couldn’t have found out about the violation sooner.
The Second Circuit’s ruling, reverses a District Court’s decision to throw out the SEC’s lawsuit against the two men because it said the civil penalty claim was time barred. The Second Circuit, however, disagreed, and accepted the Commissions contention that the discovery rule could be applied, which means that the five-year window to file didn’t start until the regulator found out (or could have reasonably discovered) the fraud.
Now, the US Supreme Court is saying that it never applies the Discovery Rule in a case where the government is the plaintiff bringing an enforcement action that seeks civil penalties in contradistinction to a victim that has been defrauded and wants compensation.
Shepherd Smith Edwards and Kantas, LTD, LLP represents securities fraud victims throughout the US. Your first case evaluation with one of our stockbroker fraud attorneys is free.
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Related Web Resources:
Gabelli v. SEC
Investment Advisers Act of 1940 (PDF)
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Plaintiff Must Arbitrate Faulty Investment Advice Claim With TD Ameritrade But Can Proceed With Litigation Against Oakwood Capital Management, Stockbroker Fraud Blog, October 29, 2012
Examples of securities fraud:
• Failure to supervise
• Misrepresentations
• Breach of fiduciary duty
• Omissions
• Overconcentration
• Registration violations
• Breach of Contract
• Churning
• Unauthorized trading
• Margin account abuse
• Insider trading
• Breach of promise
• Negligence
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