[ by Howard Haykin ]

The Supreme Court of the United States agreed to hear arguments in a case involving Marc Gabelli and Bruce Alpert (Petitioners) and The Securities and Exchange Commission (Respondent), on the "Writ of Certiorari to the U.S. Court of Appeals for the Second Circuit."

In a Brief submitted to the court by Respondent, the SEC, it is said that the relevant question presented to the Supreme Court is, the following: 

Whether the court of appeals correctly held that the 5-year limitations period in 28 U.S.C. 2462 did not begin to run until the SEC discovered, or reasonably could have discovered, petitioners’ alleged fraudulent scheme.

Case Concerns a Type of "Market Timing" of Mutual Funds.   As per the Respondent's Brief,  the particular form of market timing in this case is known as "time-zone arbitrage."  This arises when a mutual fund portfolio is holding foreign securities that are traded on an overseas market.  While domestic securities generally are priced at 4 p.m. ET - when the NYSE closes - the foreign-traded securities are priced many hours earlier, when their respective markets closed.  This essentially incorporates stale prices or information into a given fund's price - i.e., its net asset value (NAV).  

Impact of Stale Information.   Imagine a mutual fund that has significant holdings in, say, Japanese companies that trade on the Tokyo Stock Exchange (TSE), which closes at 2 a.m. ET, 14 hours ahead of the NYSE closing time. The fund’s NAV for each day incorpo­rates the stock’s Japanese closing price from 14 hours earlier.  Positive market movements during the New York trading day, which will later cause the TSE price to rise when the TSE opens at 8 p.m. ET, will not be reflected in the fund’s late-afternoon NAV. 

“Market timers” attempt to exploit that type of pric­ing inefficiency by buying or selling a mutual fund’s shares based on events that they do not expect to be reflected in the fund’s NAV.  Market timers then re­verse their positions for a profit the next day. (“[A] market-timing in­vestor could buy shares of a mutual fund at the artifi­cially low NAV and sell the next day when the NAV cor­rects itself upward.”). That practice harms long-term mutual fund shareholders by capturing an arbitrage profit that comes dollar-for-dollar out of other shareholders’ pockets.

Gabelli Funds, LLC is an investment adviser, to ...  a mutual fund called Gabelli Global Growth Fund (GGGF).  During the relevant period, petitioner Bruce Alpert was the COO of Gabelli Funds and was responsible for, inter alia, monitoring trading in GGGF to eliminate market timing.  Petitioner Marc Gabelli was the portfolio manager for GGGF and also managed other affiliated funds.

In April 2008, the SEC brought a civil enforcement action against petitioners, alleging them with secretly permitting one of GGGF’s investors - Headstart Advisers, Ltd. - to market time the mutual fund, in return for Headstart’s investment in another fund managed by Gabelli.  The SEC further says that, at the same time that petitioners had allowed Headstart to market time the fund, they had prohibited other investors from doing the same.

As a result of its privileged position, Headstart had earned returns of between 73% and 185% on its investments - profits totaled nearly $10 million - while long-term investors had lost an average of 24% on their investments. The SEC further alleged that petitioners had failed to disclose Headstart’s market timing (or their quid pro quo agreement with the market timer) to GGGF’s board of directors and other investors, but instead had falsely represented that they were taking necessary steps to eliminate market timing.  As remedies for petitioners’ violations, the Commission sought injunctive relief, disgorgement of their gains, and civil monetary penalties. 

Yet, at the district court level, as is relevant for the current appeal, the court held that most of the SEC's claims for civil penalties were barred by the 5-year limitations period.  The court of appeals, however, reversed that decision, which brings us to this last appeal, brought on by Gabelli and Alpert.

For further detail, go to:   [ SEC Brief for the Respondent, December 2012 ].