Gabelli v. SEC

The Investment Advisers Act of 1940 (the act) made it unlawful for an investment adviser to defraud the adviser’s clients or prospective clients. The act authorized the Securities and Exchange Commission (SEC) (plaintiff) to bring enforcement actions and seek civil penalties against advisers who violated the act or aided and abetted violations of the act. Under 28 U.S.C. § 2462, a five-year statute of limitations applied to the SEC’s pursuit of civil penalties. In 2008, the SEC brought a civil enforcement action in federal district court against Bruce Alpert (defendant), chief operating officer of Gabelli Funds, LLC, and Marc Gabelli (defendant), portfolio manager of the Gabelli Global Growth Fund (GGGF). The SEC alleged that between 1999 and 2002, Alpert and Gabelli had allowed a GGGF investor to engage in market timing, which was a potentially harmful trading strategy. The SEC thus asserted that Alpert and Gabelli had aided and abetted violations of the act, and the SEC sought civil penalties. Alpert and Gabelli moved to dismiss, asserting that the claim for penalties was untimely because the SEC brought the action more than five years after the alleged market timing had ended in 2002. The district court agreed that the civil-penalty claim was time-barred and dismissed the claim. The Second Circuit reversed, holding that because the SEC’s claim was fraud-based, the discovery rule applied to the statute of limitations. Under that rule, the statute of limitations begins to run when the fraud is discovered or could reasonably have been discovered rather than when the fraud is complete. The United States Supreme Court granted certiorari.