Legal Alerts

Securities Practice Group Legal Update :: March 2013


Supreme Court Tells SEC “Time Is Up”

Christopher A. Grgurich

The Supreme Court recently issued its decision in Gabelli et. al. v. Securities Exchange Commission, 133 S.Ct. 1216 (February 27, 2013) holding that the general five year statute of limitations applicable to the Investment Advisors Act begins to tick when the fraud occurs, not when it is discovered—a holding that presents a major setback for the SEC when pursuing civil penalties against investment advisors. In Gabelli, the SEC brought a civil enforcement action in 2008 alleging that from 1999 until 2002, investment advisors Alpert and Gabelli allowed one investor to engage in market timing in the fund. “Market timing is a trading strategy that exploits time delay in mutual funds’ daily valuation system.” Gabelli at 1219. Writing for the Court, Chief Justice John Roberts took the SEC to task noting that in civil penalty actions, the “the Government is not only a different kind of plaintiff, it seeks a different kind of relief. The discovery rules helps to ensure that the injured receive recompense. But this case involved penalties, which go beyond compensation, are intended to punish, and label defendants wrongdoers … [G]rafting the discovery rule onto § 2462 would … leave defendants exposed to Government enforcement action not only for five years after their misdeeds, but for an additional uncertain period into the future. Determining when the Government, as opposed to an individual, knew or reasonably should have known of a fraud presents particular challenges for the courts. Agencies often have hundreds of employees, dozens or offices, and several levels of leadership. In such a case, when does “the Government” know of a violation? Who is the relevant actor? Different agencies often have overlapping responsibilities; is knowledge of one attributed to all.” Gabelli at 1223. 

In light of these concerns about allowing the Government to utilize the discovery rule to toll claims beyond the five year statute of limitations, the Supreme Court reversed the lower Court ordering the lower court to issue an opinion consistent with the Supreme Court’s ruling, meaning that the SEC’s claims would be time-barred. What this means from a practical perspective has yet to be determined. On the one hand, the SEC will now be hard-pressed to legitimately pursue claims under the 1940 Act for fraud that began more than five years ago. On the other hand, will this cause the SEC to initiate enforcement proceedings prematurely as a prophylactic measure to preserve claims from dismissal? We will be monitoring developments in this area and providing an update as trends begin to take shape.

Recent SEC Enforcement Trends

Mark S. Enslin

The Supreme Court’s decision in Gabelli holding that civil penalty actions under the Investment Advisors Act must be brought within five years of when the alleged fraud occurs no doubt constitutes one of the most important recent developments relating to SEC enforcement actions. Other recent trends relating to SEC enforcement actions include the following:

  • Enforcement Actions Against Individuals. The SEC continues to pursue enforcement actions against individuals regarding wrongdoing related to the financial crisis. In 2012 alone, the SEC commenced 29 separate actions against 38 individuals, including 24 CEOs, CFOs, and other corporate executives. The cases included enforcement actions involving former senior officers at Fannie Mae and Freddie Mac for misleading statements regarding the extent of each company’s holdings of higher-risk mortgage loans, former investment bankers at Credit Suisse for fraudulently overstating the prices of $3 billion in subprime bonds, and several bank and mortgage executives for misleading investors about mounting loan losses and the deteriorating financial condition of their institutions. The trend of pursuing enforcement actions against individuals is likely to continue into 2013 and beyond, no doubt spurred on by overwhelming public support for such personal accountability.
  • Insider Trading Cases. From the what’s old continues to be new category, the SEC continues to pursue insider trading cases. In fact, the 168 total insider trading actions filed since October 2009 have been the most in SEC history for any three-year period.  In these actions, the SEC has charged approximately 400 individuals and entities for illegal trading totaling approximately $600 million in illicit profits. These cases range from contained one-time transactions to large, complicated trading schemes. Among the SEC’s ongoing and more prominent cases, the SEC continues to pursue an insider trading case against Dallas Maverick’s owner Mark Cuban, over his alleged illegal trading in, a small internet search company. Cuban allegedly received a call from’s CEO asking if he was interested in participating in a new share offering. According to the SEC, Cuban declined and sold all of his shares the following day, avoiding a $750,000 loss. Cuban’s motion to dismiss the civil charges against him was recently denied, paving the way for a 2013 trial which is likely bring more public attention to insider trading cases.
  • Investment Advisors. The SEC filed numerous actions resulting from its investment adviser compliance initiative, which targets registered investment advisers lacking effective compliance programs. In total, the SEC filed 147 enforcement actions in 2012 against investment advisers and investment companies, another record number. Among the highlights, the SEC filed actions against three advisory firms as part of the Aberrational Performance Inquiry into abnormal performance returns by hedge funds. This too is a trend that is likely to continue, as RIAs become more of a target for both federal and state regulators. 

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