U.S. Sen. Jack Reed, D-R.I. has introduced a bill that would give the Securities and Exchange Commission a longer period of time to uncover and impose penalties for financial fraud. Under his proposal the statute of limitations for pursuing civil penalties would be extended from five years to ten years.
The bill comes in the wake of the Supreme Court’s decision in Gabelli v. SEC, in which the Court held that the current five-year statute to take action against wrongdoers begins when the fraud happened and not upon discovery. According to an announcement about the new legislation, which was published on the Senator’s website, the ruling in Gabelli has made it even harder for the Commission to take action against offenders by shortening how much time the regulator has to investigate and pursue violations of securities laws.
The Gabelli case involved allegations of fraud by Marc J. Gabelli, an investment adviser who managed the Gabelli Global Growth Fund, which is a mutual fund. The SEC said that the alleged fraud took place from 1999 and 2002.
According to the regulator, Albert and Gabelli allowed one fund investor, Headstart Advisers, Ltd., to engage in market timing. Not only that but they failed to disclose the market timing by Headstart while barring others from also taking part in market timing. The complaint contends that as a result, Headstart’s return rates were up to 185% while other long-term investors in the mutual fund experienced negative return rates.
However, the Commission did not file its civil case against Gabelli until 2008. The defendants contended that the SEC took too long to file its securities case, exceeding the statute of limitations. The Supreme Court agreed with them, overturning a ruling by a lower court.
Senator Reed’s website noted that because multiple parties and complex financial instruments may be involved in certain instances of fraud, sometimes more time is needed to gather the relevant evidence to prove that wrongdoing happened and a case can be pursued. His bill would give the SEC the “breathing room” to “better police” financial markets and protect investors by doubling the statute of limitations for how much time the agency would have to pursue financial fraud cases and impose penalties.If passed, the SEC’s new statute of limitations of ten years would be the same length of time as what the Department of Justice has been granted to seek civil penalties against persons who have committed fraud against financial institutions.
Last month, Senator Reed, who is on the Senate Banking Committee, along with Sen. Charles Grassley, R-IA, authored another bill that would increase the penalties for violating securities laws by nearly tenfold. Our securities law firm published a blog post about that measure, Stronger Enforcement of Civil Penalties Act of 2015, here.
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Reed Seeks to Double Statute of Limitations for Securities Law Violations, Reed.Senate.Gov, August 7, 2015
Bipartisan U.S. Senate Bill Wants to Up SEC Fines For Securities Law Violations By Almost Ten Times, Institutional Investor Securities Blog, July 9, 2015