UPDATE 1-US Supreme Court skeptical of SEC power in Gabelli case

* Fund executives accused of allowing market-timing

* Court weighs when statute of limitations starts to run

WASHINGTON, Jan 8 (Reuters) - The U.S. Supreme Court on Tuesday appeared poised to curtail the power of the top federal securities regulator to seek civil penalties when it takes a long time to conduct fraud investigations.

In oral argument, justices from across the ideological spectrum sharply questioned a government lawyer arguing for the U.S. Securities and Exchange Commission over how to interpret a law requiring the agency to seek such penalties within five years.

The case involved whether the SEC waited too long to sue mutual fund manager Marc Gabelli and his colleague Bruce Alpert, chief operating officer of Gabelli Funds LLC, over a client's questionable trades.

Gabelli and Alpert, who both denied wrongdoing, said the five-year clock starts to tick when the alleged wrongful act occurred, but the SEC said it starts only when it is reasonably able to detect fraud.

But Jeffrey Wall, a U.S. Department of Justice lawyer arguing for the SEC, struggled at oral argument to cite cases supporting what he called the commission's "fairly modern" position.

"Why is it that you don't have any cases?" Justice Elena Kagan, one of the court's more liberal members, said. "This is an old statute ... The government (has) not asserted this power for 200 years and is now coming in and saying, 'We want it."'

Justice Antonin Scalia, from the court's conservative wing, also criticized the SEC's position. "This is a brand new assertion by the government," he told Wall.

Because the five-year deadline also applies in other contexts, a defeat for the SEC could make it harder for other federal agencies to pursue a variety of civil litigation.

In Tuesday's case, the SEC had contended that from 1999 to 2002, Gabelli and Alpert let a firm now known as Headstart Advisers Ltd conduct hundreds of "market-timing" trades, which involve rapid trading to exploit market or price inefficiencies.

The practice, while not illegal, is considered improper. It gained notoriety in September 2003 when then-New York Attorney General Eliot Spitzer began to challenge it. But the SEC did not sue Gabelli and Alpert until April 2008, nearly five years later, and more than five years after it said the last market-timing trade occurred.

A decision is expected by the end of June.

The case is Gabelli et al v. SEC, U.S. Supreme Court, No. 11-1274.