Last week's unanimous Supreme Court opinion in Gabelli v. Securities and Exchange Commission marks the agency's latest judicial reprimand. Many of the agency's most notable recent court losses have come in the context of rulemaking, but this case was an enforcement matter. It dealt with mutual fund market timing, a widespread practice in the fund industry. Sophisticated mutual fund shareholders had figured out how--sometimes with the help or purposeful blindness of fund managers--to make mutual funds' once-a-day-pricing work in their favor at the expense of other shareholders. The practice came to light a decade ago and resulted in a string of cases by the SEC and state attorneys general.
The SEC waited until April 2008 to bring its action against Gabelli. The SEC entered into a settlement with Gabelli Funds, which agreed to pay $16 million, and sued two individuals, Marc Gabelli and Bruce Alpert. In district court, these individuals successfully moved to dismiss the civil penalties portion of their case on statute of limitations grounds, but the Second Circuit reversed. The SEC argued that "the limitations period in a suit for fraud does not begin to run until the plaintiff discovers, or in the exercise of reasonable diligence could have discovered, the facts underlying his claim." The Supreme Court distinguished the SEC--with its mission of "root[ing] out" fraud and its "many legal tools at hand to aid in that pursuit"--from everyday people who "do not typically spend our days looking for evidence that we were lied to or defrauded." The fraud discovery rule applies to the latter category, not to civil penalty actions brought by government agencies like the SEC.
The Supreme Court's decision was an important reminder to the SEC of the importance of carrying out its enforcement mission within the confines of established and predictable rules of law. Only by doing so will the agency be able to build a reputation as a regulator that holds the industry--and itself--to high standards.