UPDATE 2-U.S. high court limits SEC authority to seek penalties
* Case involved debate over statute of limitations
* SEC argued clock starts ticking from when fraud discovered
* Supreme Court says clock starts from when fraud committed
(Adds comments from lead counsel, legal experts, background)
WASHINGTON, Feb 27 (Reuters) - The U.S. Supreme Court on Wednesday limited the authority of the Securities and Exchange Commission to seek civil penalties over conduct that occurred more than five years before investigators took action.
The nine-member court ruled by a unanimous vote that the five-year clock for the government to act on fraud begins to tick when the fraud occurs, not when it is discovered.
Wednesday's decision is a blow to securities regulators, who would have benefited from a favorable ruling because it could have bought them more time to bring complex cases, including cases springing from the 2007-2009 financial crisis.
However, the decision also has wide-reaching implications 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.
Specifically, the case was a victory for mutual fund manager Marc Gabelli and colleague 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.
The practice, while not illegal, is considered improper.
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.
In an e-mailed statement, Gabelli and Alpert's' lead counsel, Lewis Liman of Cleary Gottlieb Steen & Hamilton, praised the high court's decision.
"We are gratified that the court has upheld the plain language of the statute and affirmed a bright-line standard for the time the government has to bring a civil penalty action," he said.
SEC spokesman John Nester said the agency was reviewing the decision.
"The Supreme Court's unanimous decision in Gabelli confirms the importance of limitations and repose periods in enforcement actions brought by federal agencies," said Mark Perry, a partner at Gibson Dunn & Crutcher, who was not involved in the case.
By rejecting the SEC's argument, he added, the court has "provided needed certainty and stability that will benefit all participants in our financial markets."
PUTS PRESSURE ON SEC
Outside observers who closely followed the case were not surprised by the Supreme Court's decision.
During oral arguments in January, justices from across the ideological spectrum appeared frightened by the prospect of extending the statute of limitations across the government.
They also raised concerns about the lack of a legal precedent and were frustrated when the Justice Department lawyer arguing for the SEC could not cite a case supporting what he called the agency's "fairly modern" position.
The Supreme Court's ruling will not affect the SEC's ability to seek recovery of ill-gotten gains, which are not subject to the five-year time limit.
However, it may pressure the SEC to hurry up and file charges sooner rather than later.
In this case, the SEC had accused Gabelli and Alpert of violating the law from 1999 to 2002. But the agency did not sue Gabelli and Alpert until April 2008, more than five years after it said the last market-timing trade occurred.
After Gabelli and Alpert alleged the SEC had exceeded the statute of limitations to seek penalties, the 2nd U.S. Circuit Court of Appeals sided with the agency in August 2011.
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.
"The government is a different kind of plaintiff," he wrote.
"The SEC's very purpose, for example, is to root out fraud, and it has many legal tools at hand to aid in that pursuit. The government in these types of cases also seeks a different type of relief."
He added 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."
Robert Anello, an attorney at Morvillo Abramowitz who has been closely tracking the case, said the court's decision is an embarrassment for the SEC, but that it will hold regulators' feet to the fire.
"You don't want to give the SEC the opportunity to put things on the back burner," he said. "I think what it does... is basically tells them they have a job to do and they have to do it quickly."
The case is Gabelli v. SEC, U.S. Supreme Court, No. 11-1274.
(Reporting by Lawrence Hurley and Sarah N. Lynch; Additional reporting by David Ingram; Editing by Howard Goller, Gerald E. McCormick and Dan Grebler)