[by Larry Goldfarb]

There is an old adage, “if you don’t want to do the time, don’t commit the crime.”  On Wednesday, the Supreme Court seem to qualify that saying by adding, “but you can run out the clock.”  The Justices limited the authority of the SEC to seek civil penalties over conduct that occurred more than five years before investigators took action.

Obviously, the decision impacts the SEC and other regulators, who may have been counting on more time to prosecute ill behavior from the financial meltdown.  The decision has implications beyond the SEC because the five-year statute of limitations applies to civil actions by numerous government agencies, from the Federal Trade Commission to the Social Security Administration.  The restriction applies to monetary penalties, not to the SEC's ability to recovery of ill-gotten gains and injunctions.

The Supreme Court verdict was not surprising.  Most observer did not think that the court would legislate from the bench on this issue while at the same time, overturning years of legal precedent.  The same perhaps will not be said for the Courts ruling on the Voting Rights Act which the court seems ready to overturn despite the fact that the legislation has been on the books for years.

The case stemmed from a market timing allegation hurled at Mario Gabelli and Bruce Alpert , whom the SEC claimed allowed a firm now known as Headstart Advisers Ltd to conduct hundreds of "market-timing" trades. Such trades involve rapid trading to exploit market or price inefficiencies.  Gabelli and Alpert, who deny any wrongdoing, said the clock for enforcement action starts to tick when the alleged act occurred. The SEC said it starts when the agency is reasonably able to detect fraud.  The case was not uncovered until 2008, more than 9 years after it was alleged to have occurred.

Judge Jed Rakoff wrote for the Appeals court that the regulator could not have reasonably uncovered the market timing until a high-profile investigation by then-New York Attorney General Eliot Spitzer brought it to prominence.

Chief Justice John Roberts, who wrote the opinion for the Supreme Court, shot down Rakoff's argument.  He said that extending the statute of limitations to seek civil penalties would "leave defendants exposed to government enforcement action not only for five years after their misdeeds, but for an additional uncertain period the future."  On Wednesday, Robert’s reminded us that the “run out the clock” provision applies to the government’s version of the old adage.

For more information, please read [Reuters, 12/27/13]