The high court on Tuesday heard arguments from Gabelli Funds LLC executive Bruce Alpert and former executive Marc J. Gabelli, who say the Securities and Exchange Commission missed its chance to sue them for allegedly committing securities fraud by allowing a hedge fund to rapidly trade shares of a mutual fund.
Gabelli and Albert say a five-year statute of limitations started no later than 2002 when the action occurred. The SEC argued the clock didn't start until it discovered the practice in late 2003, which put the 2008 lawsuit within the time limit.
The 2nd U.S. Circuit Court of Appeals agreed that the time limit starts with discovery of the practice.
But Gabelli and Albert's lawyers noted that government officials had never asserted the ability to stretch out the statute of limitations before this case. "The position that the SEC is taking now is a novel position that to our knowledge has not been taken by other regulators and hasn't been taken by the SEC until quite recently," Lewis J. Liman said.
Several justices agreed. "What's extraordinary is that the government has never asserted this, except in the 19th century, when it was rebuffed and repudiated its position. It isn't just that there are no cases against you. It's you've never—the government has never asserted it before," Justice Antonin Scalia said.
Justice Stephen Breyer noted any statute of limitation extension would affect more than just security cases. "It is a statute that applies to all government actions, which is a huge category across the board," said Breyer, who said extending the time limit could affect government enforcement actions involving Social Security, Veteran's Affairs and Medicare.
"It seems to me to have enormous consequences for the government suddenly to try to assert a quasi-criminal penalty and abolish the statute of limitations, I mean, in a vast set of cases," Breyer said.
And Justice Elena Kagan suggested that the only reason the government is trying to stretch back and go after Gabelli and Albert is because the New York attorney's general office got there first.
"The government had decided not to go after market timers," she said. "And it changed its decision when a state attorney general decided to do it, and it embarrassed them that they had made that enforcement priority decision, and then the government made a different enforcement priority decision."
Justice Department lawyer Jeffrey B. Wall said he didn't think that suggestion was fair. He also said he couldn't believe that lawmakers intended to create such an obvious loophole.
"I cannot imagine that the Congress, which allowed agencies to seek civil penalties ... would have thought that the only people who could get away without paying them are the ones who commit fraud or concealment and that remains hidden for five years," Wall said.
A decision is expected by summer.