Supreme Court Ruling a Blow for Future Financial Crisis Cases

February 27, 2013
Watch The Untouchables, FRONTLINE’s look at why no Wall Street executives have been prosecuted for fraud in connection with the financial crisis.

In a setback for the government’s ability to prosecute crimes tied to the 2008 financial crisis, the Supreme Court ruled Wednesday that the Securities and Exchange Commission can’t extend the time limit for seeking penalties in civil fraud cases.

The unanimous decision largely ensures no new civil fraud charges will come out of the crisis, now that five-year statute of limitations for such cases has nearly expired.

The case, Gabelli v. SEC, involved Marc Gabelli, a portfolio manager, and Bruce Alpert, chief operating officer at the investment firm Gabelli Funds, LLC. According to the government, between 1999 and 2002, Gabelli and Alpert allowed a client to engage in an improper trading technique known as market timing. The strategy allows investors to make frequent short-term trades at the expense of other clients in a mutual fund. The SEC launched an investigation in 2003, but did not file a complaint until 2008.

At issue in the case was when should the clock start ticking for civil fraud cases: Should it begin when the alleged crime actually occurs, or when the crime is discovered? The defendants argued that the SEC waited too long to bring charges, but in August, a lower court decided in favor of the SEC, ruling that time runs out five years after the agency discovers — or could have reasonably been expected to discover — fraud.

Today’s 9-0 ruling by the justices reverses that decision. In his opinion for the court, Chief Justice John Roberts wrote that while some private plaintiffs can extend the statute of limitations through the so-called “discovery rule,” the SEC represents “a different kind of plaintiff”:

Most of us do not live in a state of constant investigation; absent any reason to think we have been injured, we do not typically spend our days looking for evidence that we were lied to or defrauded. And the law does not require that we do so. Instead, courts have developed the discovery rule, providing that the statute of limitations in fraud cases should typically begin to run only when the injury is or reasonably could have been discovered.

The same conclusion does not follow for the Government in the context of enforcement actions for civil penalties. The SEC, for example, is not like an individual victim who relies on apparent injury to learn of a wrong. Rather, a central “mission” of the Commission is to “investigat[e] potential violations of the federal securities laws.” SEC, Enforcement Manual 1 (2012). Unlike the private party who has no reason to suspect fraud, the SEC’s very purpose is to root it out, and it has many legal tools at hand to aid in that pursuit. It can demand that securities brokers and dealers submit detailed trading information. Id., at 44. It can require investment advisers to turn over their comprehensive books and records at any time. 15 U.S.C. §80b–4 (2006 ed. and Supp. V). And even without filing suit, it can subpoena any documents and witnesses it deems relevant or material to an investigation.

The Gabelli ruling applies strictly to civil fraud charges, the government’s main tool to date in responding to the subprime mortgage collapse. As FRONTLINE reported in The Untouchables, no Wall Street executives have been prosecuted for the meltdown, but regulators have secured several high-profile multi-million dollar settlements.

Despite the ruling’s implications for future financial crisis cases, some legal observers called the decision a victory for good public policy.

“Government works better as a consequence of the SEC having lost this case,” said Jonathan Macey, a professor of corporate and securities law at Yale Law School. The statute of limitations may be flawed, said Macey, but at the very least, the court’s decision will force regulators to pay closer attention to them.

“This is a good thing,” according to Macey. “It’s going to require the SEC to move a little bit faster and moving faster is in our interest.”

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