Supreme Court Sharply Questions Hedge Fund Market-Timing Case

Jan 10 2013 | 1:26am ET

The U.S. Supreme Court seems inclined to throw out a Securities and Exchange Commission lawsuit over a hedge fund's mutual-fund market timing.

The hedge fund in question, the former Folkes Asset Management—now known as Headstart Advisors—is not involved in the case before the High Court. But two executives from the company that manages the mutual funds it market-timed, Gabelli Fund, have fought the fraud charges, arguing that the SEC sued it after the five-year statute of limitations expired.

Justices from all corners of the Supreme Court's ideological spectrum, questioning the government's lawyer, seemed likely to agree. Justice Antonin Scalia, mainstay of the Court's right, called the SEC's argument that the clock doesn't begin ticking until a fraud is discovered, or should have been, "a brand new assertion by the government."

"What's extraordinary is that the government has never asserted this, except in the 19th century, when it was rebuffed and repudiated its position."

Perhaps less extraordinary, Justices Ruth Bader Ginsburg and Elena Kagan, two of the more left-leaning members of the court, seemed to agree. Ginsburg called the five-year statute of limitations "generous" and Kagan wondered whether the federal government hadn't been "embarrassed" into pursuing mutual-fund market-timing by former New York Attorney General Eliot Spitzer, who led the charge against the practice prior to his short tenure as the Empire State's governor.

Another member of the court's left, Stephen Breyer, feared that the SEC's reasoning could apply to "all government actions."

"The reason I brought up Social Security, Veterans Affairs, Medicare is it seems to me to have enormous consequences for the government suddenly to try to asset a quasi-criminal penalty and abolish the statute of limitations, I mean, in a vast set of cases," he said.

Jeffrey Wall, the U.S. assistant solicitor general and the hapless defender of the government's position, could only muster that the court should not allow "feverish hypotheticals" to prevent the SEC from bringing cases in which it is difficult to determine when a fraud took place.

In the Gabelli case, the fraud allegedly occurred until August 2002, when the last allegedly improper trade took place. But the SEC did not sue until April 2008, when it accused Marc Gabelli and Gabelli Funds chief operating officer Bruce Alpert of approving Folkes' market-timing of one of their funds, without disclosing it to the fund's board or its investors, and while at the same time denying requests to market-time from other investors.

"This case concerns the statute dealing exclusively with penalty claims brought by government agencies to punish conduct made unlawful by statute," Lewis Liman, the lawyer for Gabelli and Alpert, told the court. "Congress provided a clear and easily administered statutory time limitation on the government's power to punish: five years."

Folkes and Gabelli Funds settled the SEC allegations, the former for $17 million and the latter for $16 million.


In Depth

Hedge Funds Take Interest In ‘Soft Deposits’

Nov 19 2014 | 11:56am ET

New York-based Winchester Equities, headed by Avi Benamu and Jack Hazan, funds soft...

Lifestyle

Cohen Buys $101 Million Sculpture

Nov 12 2014 | 9:17am ET

Steven Cohen was the sole bidder for a rare Alberto Giacometti sculpture at Sotheby...

Guest Contributor

Why The Big Money Is Going To Europe

Nov 14 2014 | 6:03am ET

Peer-to-peer lending was invented with the individual investor in mind. But despite...

 

Sponsored Content

    For Hedge Funds, Mastering Data Is Key To Success

    Nov 4 2014 | 9:45am ET

    Data management is important to every business, but for hedge funds, it is critical. FINalternatives recently asked Peter Sanchez, CEO of Northern Trust Hedge Fund Services, how fund managers can deal with the demands of managing data while at the same time remain transparent and abide by operational best practices. Read more…

Editor's Note

    Guidelines for Guest Articles

    Oct 22 2014 | 9:46am ET

    We are always looking for guest articles from hedge fund managers and buy-side firms.

    If you are interested in submitting a contributed piece for possible publication on FINalternatives, please take a look at the specs. Read more…

 

Futures Magazine

November 2014 Cover

Building a better market

Reg NMS created a huge bifurcation in equity markets and while much of what has followed has been positive, in terms of lower fees and greater liquidity, many traders would like to see the market come...

The Alpha Pages

TAP July/August 2014 Cover

The Alpha Pages Interview: Senator Rand Paul

Senator Paul sat down in the debut series of the Alpha Pages Interview to discuss the broken tax code, regulation surrounding Bitcoin, and his plans for the 2016 Presidential election.