The U.S. Supreme Court will on Tuesday join the legal battle over how much leeway the government should have to conduct investigations and impose civil penalties.
Tuesday's case involves whether the U.S. Securities and Exchange Commission waited too long to bring a civil action accusing mutual fund manager Marc Gabelli and his colleague, Bruce Alpert, of letting a client engage in so-called "market timing" without disclosing it to investors.
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Gabelli and Alpert, chief operating officer of Gabelli Funds LLC, argued the five-year statute of limitations starts to tick down when the alleged wrongful act is committed. The SEC said the it begins only when the agency is reasonably able to detect fraud.
A victory for the SEC could give the regulator and others, including the U.S. Department of Justice and U.S. Commodity Futures Trading Commission, more firepower in civil cases.
This might be helpful in particularly complex investigations that require more time, including litigation stemming from the housing meltdown and the 2008 global financial crisis.
But many defense lawyers believe a ruling for the SEC would be unfair to the targets of investigations because such probes could drag on for years and make it harder to mount defenses.
"Evidence becomes stale. Memories fade. Evidence is lost," said Koji Fukumura, a partner at Cooley LLP who is not involved in the case. "It makes it increasingly difficult, if not impossible, for a defendant to defend himself or herself."
The SEC contended that from 1999 to 2002, Gabelli and Alpert let a firm now known as Headstart Advisers Ltd conduct hundreds of market-timing trades, a strategy that involves rapid trading to exploit market or pricing inefficiencies.
While market-timing is not illegal, it is a privilege not available to ordinary investors.
The SEC did not sue until April 2008, more than five years after the last market-timed trade occurred. But it was less than five years after market-timing first attracted public attention in September 2003, when then-New York Attorney General Eliot Spitzer began to challenge the practice.
The SEC prevailed before the 2nd U.S. Circuit Court of Appeals, where U.S. District Judge Jed Rakoff wrote for the court that the regulator could not have reasonably uncovered the market timing until Spitzer's probe became known.
Lawyers for Gabelli and Alpert said four other circuit courts ruled differently in similar cases.
Robert Anello, a litigation partner at Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer who is not involved in the case, expects the Supreme Court to rule against the SEC.
"It is a sign of the times," he said. "You can see both the liberals and conservatives here saying: 'SEC, get your act together.'"
The case is Gabelli et al v. SEC, U.S. Supreme Court, No. 11-1274.
(Reporting By Sarah N. Lynch and Jonathan Stempel.; Editing by Karey Wutkowski and Andre Grenon)