The U.S. Supreme Court unanimously ruled in favor of an investment adviser against the SEC holding that the five-year statute of limitations that governs many penalty provisions throughout the U.S. Code begins when a fraud occurs, not when the SEC discovers the fraud. The Court held in Gabelli v. SEC that the SEC must seek civil penalties within five years after alleged conduct occurs, rather than within five years after the SEC discovered (or could have discovered) the conduct.
The case involved the allegations of market timing by Gabelli Funds and its Portfolio Manager, Marc Gabelli, and COO, Bruce Alpert. The SEC alleged that the individuals allowed an investor in a mutual fund managed by the advisor to engage in market timing, which is the practice of after-hours trading in the mutual fund's securities at the prior day's prices and which is harmful to other long-term investors in the fund. During the relevant period, the market timing investor earned 184% returns while long-term investors' returns were negative. The SEC alleged that the market timing ceased in August 2002 but that the SEC did not discover the fraud until late 2003 because of the secret nature of the defendants' wrongdoing. The SEC filed its complaint in April 2008, which was within five years of the time the SEC alleged that it discovered the fraud but more than five years after the time the SEC alleged the fraud ceased.
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