Gabelli v. SEC: The Supreme Court Limits the Statute of Limitations for SEC Actions

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In a recent unanimous decision, the U.S. Supreme Court held that the Securities Exchange Commission (SEC) has five years from the date when an alleged fraud begins – not from the date when the SEC uncovers the fraud – to bring an action seeking penalties. It is likely this decision will have a large-scale impact, including an impact on D&O insurers, by spurring the SEC to complete its investigations and bring enforcement actions sooner rather than later.

The case, Gabelli, et al. v. Securities and Exchange Commission, No. 11-1274, which was argued on January 8, 2013 and decided on February 27, 2013, involved a portfolio manager and the chief operating officer at the investment firm Gabelli Funds, LLC (Gabelli). The government alleged that between 1999 and 2002, Gabelli gave preferential treatment to a single investor, allowing this client to engage in “time zone arbitrage” or “market timing,” which is an investment practice that capitalizes on the time difference between the financial markets in the United States and those abroad. Specifically, as a result of the difference between the markets’ closing times, investors can buy or sell securities based on events in a foreign market before those events affect prices in the U.S. market. While investors who engage in “time zone arbitrage” profit, this practice can greatly harm international investors.

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