Kleptocracy in Action: Gabelli v. SEC

Some noteworthy Supreme Court decisions fly under the radar. One such is Gabelli v. SEC. Roberts delivered the decision in which the whole Court concurred on February 27, 2013.

The petitioners in the case were Marc Gabelli portfolio manager for Gabelli Global Growth Fund and Bruce Alpert COO of the fund's investment adviser Gabelli Funds, LLC. In 2008, the SEC filed civil suit against them for fraud under the Investment Advisers Act of 1940. The SEC complaint alleged that, from 1999 to 2002, the two had allowed one of their clients (the aptly named Headstart) to engage in market timing (arbitraging the fund's daily valuation against its valuation on other exchanges with later closing hours) in return for an investment in a hedge fund run by Gabelli. Gabelli and Alpert not only did not disclose this practice to other clients but told their other clients they would not tolerate it. As a result, Headstart made a large profit off its trading even as long term investors lost money in the fund. Gabelli and Alpert's defense was that the 5 year status of limitations had run out by the time the SEC filed suit. The Supreme Court agreed with Gabelli and Alpert reversing the Second Circuit's decision. Roberts ruled that, unlike for a private litigant where the statute of limitations began with the discovery of the fraud, the statute of limitations for the government began from the time when the actual fraud occurred. He reasoned that the SEC had the mission and the resources to ferret out fraud within the 5 year period from its inception and that it had not done so.

As is typical in these cases, Roberts did not stop when he was ahead but could not resist opining on the notion of the statute of limitation itself:

Chief Justice Marshall used particularly forceful language in emphasizing the importance of time limits on penalty actions, stating that it “would be utterly repugnant to the genius of our laws” if actions for penalties could “be brought at any distance of time.” Adams v. Woods, 2 Cranch 336, 342 (1805). Yet grafting the discovery rule onto §2462 would raise similar concerns. It 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. Repose would hinge on speculation about what the Government knew, when it knew it, and when it should have known it.

http://www.supremecourt.gov/opinions/12pdf/11-1274_aplc.pdf

Of course, as Roberts noted earlier in his opinion, fraud is not like other crimes because concealment is an essential component of it and a victim (or the government despite its resources) may not know that a fraud has occurred for sometime. This is very different from Marshall's more general statement and a misapplication of it. But what is truly striking is Roberts' concern for the fraudsters, especially when you consider that same "additional uncertain period into the future" would still hang over the fraudsters from a private action by an injured party. There the clock would not begin to run until the point of discovery or, at least, the point at which discovery might reasonably be assumed to have taken place. I have to wonder if Roberts would show or has ever shown similar concern for perpetrators of other kinds of criminal activities.

It hardly needs bears mentioning that Roberts' whole factual basis is wrong. The DOJ and government regulators do not use their vast powers and resources to find criminal activity in the financial sector but to not find it. Together they have managed to not investigate and not prosecute the greatest financial frauds in world history. The Gabelli case was a fluke, but this is not to say it isn't important. The financial meltdown began on September 15, 2008 when Lehman blew up. This means effectively that the statute of limitations on government action per Gabelli has already run out on most of the crimes associated with the meltdown and that the statute of limitations will run out on the rest in the next 6 1/2 months. This is the real meaning of Gabelli.