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.
If you, your family, friends, neighbors or associates have been subjected to Broker Misconduct, please contact The Resolution Law Group at (203) 542-7275 for a confidential, no obligation consultation.
Securities fraud robs investors of their money every year. The Resolution Law Group works with institutional and individual investors seeking to recoup those losses. Call us today. Working with an experienced securities firm increases one’s chances of recovery.
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