Reviving Antifraud Lawsuit Over Alleged Market-Timing Practices From Over Five Years Ago is Not the Answer, Say Ex-SEC Officials

In their amicus curiae brief, a number of ex-SEC Commissioners and top officials told the U.S. Supreme Court that the decision by the U.S. Court of Appeals for the Second Circuit to revive the agency’s antifraud cases against investment advisory officials Bruce Alpert and Marc Gabelli was a mistake. The men, who are Gabelli Funds LLC’s COO and portfolio manager, respectively, are accused of taking part in allegedly questionable market-timing practices involving the selling and buying of mutual fund shares to take advantage of short-term price swings.

Per the SEC’S 2008 securities case, Alpert and Gabelli committed these alleged violations between September 1999 and August 2002. While the district court threw out most of the lawsuit, finding that the majority of allegations were either untimely or not legally sufficient, the appeals court disagreed and reversed that ruling. It said that the defendants failed to fulfill the burden of demonstrating that a reasonably diligent plaintiff would have identified the alleged fraud more than five years before the SEC submitting its action.

Amicus curiae brief: A brief is a statement of the law and the impact on the law or other persons if a case if decided a certain way. “Amicus curiae,” is Latin for “friend of the court.” This “friend” can be any non-party to the lawsuit that has an opinion about it. Feasibly, there could be 100 such briefs, but the court would only be interested in those from credible groups, persons or lawyers.

This amici in particular includes ex-SEC commissioners Joseph Grundfest, Paul Atkins, Richard Y. Roberts, Roberta Karmel, and Laura S. Unger, ex-SEC division directors David B.H. Martin and John Fedders, ex-general counsels Simon Lorne and Brian Cartwright, ex-regional officials Ira Lee Sorkin, Barry W. Rashkover, and Lawrence Iason, ex-assistant GC Richard M. Phillips, ex-enforcement officials Herbert F. Janick II and William R. Baker III, and Office of Internal Affairs inaugural director Michael D. Mann.
They are concerned that letting a plaintiff bring an antifraud penalty case more than five years after the alleged violation would have been committed might decrease rather than “promote efficient law enforcement.” They also expressed worry that the discovery rule that the Second Circuit articulated might subject the Commission and other agencies to judicial inquiry that could be damaging or not appropriate to the processes “leading to the institution of agency proceedings.”

The amici want the high court to reverse the appeals court’s decision. In September 2012, the US Supreme Court said it would look at this controversy.

“Interesting that some former SEC enforcement attorneys are now taking a stand against the SEC’s ability to enforce the law,” said Institutional Investment Fraud Attorney William Shepherd. Many attorneys go to work for the SEC at low wages to get experience to later defend those who are being investigated by the SEC for high wages. Submitting briefs seeking to reverse a prosecution by their former employer could be a good way to advertise their services. Meanwhile, how could limiting the SEC’s ability to catch criminals be a good thing for the SEC?”

Gabelli v. Securities and Exchange Commission, SCOTUS Blog


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