UNITED STATES COURT
SOUTHERN DISTRICT OF NEW YORK
X
SECURITIES AND EXCHANGE COMMISSION,
ECF CASE
MARC J. GABELLI, and BRUCE ALPERT, Case No. 08-Civ-3 868
(DAB)
Defendants.
X
REPLY MEMORANDUM OF LAW IN SUPPORT OF MARC GABELLI'S
MOTION TO DISMISS
Lewis J. Liman
Breon S. Peace
Jason P. Gottlieb
CLEARY GOTTLIEB STEEN &
HAMILTON LLP
One Liberty Plaza
New York, NY 10006
Attorneys for Marc Ji Gabelli
Plaintiff,
V.
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Case 1:08-cv-03868-DAB Document 23 Filed 11/03/08 Page 1 of 17
TABLE OF CONTENTS
Pay..e
TABLE OF AUTHORITIES ........................................................................ ii
ARGUMENT ......................................................................................... 1
I. THE COMPLAINT FAILS TO STATE A CLAIM AGAINST MR. GABELLI
AND FAILS TO PLEAD FRAUD WITH PARTICULARITY...........................
A. The Allegations Do Not Establish Mr. Gabelli's Knowledge
Of A Violation.........................................................................
B. The Allegations Do Not State A Claim For Aiding A 206(1) Violation .... 6
II. THE SEC'S REQUESTS FOR RELIEF SHOULD BE DISMISSED .................. 7
A. The Complaint Is Barred By The Statute of Limitations......................... 7
B. Congress Chose Not To Create The Civil Penalties The SEC Seeks...........1I0
CONCLUSION....................................................................................... 10
i
Case 1:08-cv-03868-DAB Document 23 Filed 11/03/08 Page 2 of 17
TABLE OF AUTHORITIES
Page(s)
RULES AND STATUTES
15 U.S.C. § 80b-9(e)(1)............................................................................... 10
CASES
380544 Canada, Inc. v. Aspen Tech., Inc.,
544 F. Supp. 2d 199 (S.D.N.Y. 2008)............................................................... 3
3M Co. v. Browner,
17 F.3d 1453 (D.C. Cir. 1994) ....................................................................... 8
Armstrong v. McAlpin,
699 F.2d 79 (2d Cir. 1983) ........................................................................... 1, 7
Backman v. Polaroid Corp.,
910 F.2d 10 (1 st Cir. 1990) .......................................................................... 4
Bailey v. Glover,
88 U.S. 342 (1874).................................................................................... 8
Bell Atd. Corp. v. TwoMbly,
550 U.S._ 127S. Ct. 1955 (2007)............................................................... 2
Chiarella v. U.S.,
445 U.S. 222 (1980)................................................................................... 1
Chill v. Gen. Elec Co.,
101 F.3d 263 (2d Cir. 1996).......................................................................... 6-7
Corcoran v. N.Y. Power Auth.,
202 F.3d 530 (2d Cir. 1999).......................................................................... 8
Denn v. Barber,
576 F.2d 465 (2d Cir. 1978).......................................................................... 3
Dura Pharm., Inc. v. Broudo,
544 U.S. 336 (2005) .................................................................................. 9
FEC v. Williams,
104 F.3d 237 (9th Cir. 1996)......................................................................... 8
First Lincoln Holdings, Inc. v. Equitable Life Assurance Soc'y of the U.S.,
164 F. Supp. 2d 383 (S.D.N.Y. 2001)............................................................... 4
Glazer v. Formica Corp.
964 F.2d 149 (2d Cir. 1992).......................................................................... 4
ii
Case 1:08-cv-03868-DAB Document 23 Filed 11/03/08 Page 3 of 17
Holmberg v. Ambreclit,
327 U.S. 392 (1946) .................................................................................. 8
In re Advanta Corp. Sec. Litig.,
180 F.3d 525 (3d Cir. 1999).......................................................................... 3-4, 5
In re Aistom SA Sec. Lftig,.,
406 F. Supp. 2d 433 (S.D.N.Y. 2005)............................................................... 5
In re Atlas Air Worldwide Holdings. Inc. Sec. Litig.,
324 F. Supp. 2d 474 (S.D.N.Y. 2004)............................................................... 3
In re BISYS Sec. Litig.,
397 F. Supp. 2d 430 (S.D.N.Y. 2005)............................................................... 3
In re Bristol-Myers Sqiuibb Sec. Litig.,
312 F. Supp. 2d 549 (S.D.N.Y. 2004)............................................................... 3
In re Carter-Wallace, Inc. Sec. Litig.,
220 F.3d 36 (2d Cir. 2000) ........................................................................... 3, 6
In re Crude Oil Commodity Litig.,
No. 06 Civ. 6677 (NRB), 2007 WL 1946553 (S.D.N.Y. June 28, 2007) ........................ 6
In re DRDGOLD Ltd. Sec. Litig.,
472 F. Supp. 2d 562 (S.D.N.Y. 2007)............................................................... 3
In re Leslie Fay Co., Inc. Sec. Litig.,
918 F. Supp. 749 (S.D.N.Y. 1996)................................................................... 5
In re Union Carbide Corn. Consumer Products Bus. Sec. Litig.
666 F. Supp. 547 (S.D.N.Y. 1987)................................................................... 5
Johnson v. SEC
87 F.3d 44 (D.C. Cir 1996) ........................................................................... 10
Kalnit v. Eichler,
264 F.3d 131 (2d Cir. 2001).......................................................................... 6
Law v. Medco Research. Inc.,
113 F.3d 781 (7th Cir. 1997)......................................................................... 8
Lemer v. Fleet Bank, N.A.,
459 F.3d 273 (2d Cir. 2006)......................................................................... I.
Moviecolor Ltd. v. Eastman Kodak Co.,
288 F.2d 80(2d Cir. 1961) ........................................................................... 8
iii
Case 1:08-cv-03868-DAB Document 23 Filed 11/03/08 Page 4 of 17
N.Y. v. Hendrickson Bros.,
840 F.2d 1065 (2d Cir. 1988) ........................................................................ 9
N.Y. v. Niagara Mohawk Power Corp.,
263 F. Supp. 2d 650 (W.D.N.Y. 2003) .............................................................. 8
Nat'l Parks & Conservation Assoc., Inc. v. Tenn. Valley Auth.,
502 F.3d 1316 (11lth Cir. 2007) ...................................................................... 8
O'Brien v. Nat'l Prop. Analyst Partners,
719 F. Supp. 222 (S.D.N.Y. 1989) .................................................................. 9
Ross v. A.H. Robins Co.,
607 F.2d 545 (2d Cir. 1979).......................................................................... 6
Rothman v. Gregor,
220 F.3d 81 (2d Cir. 2000) ........................................................................... 3
SEC v. Am. Bd. of Trade, Inc.,
751 F.2d 529 (2d Cir. 1984).......................................................................... 9
SEC v. Bolla,
No. 02-1506 (CKK), 2008 WL 1959502 (D.D.C. May 6,2008) ................................. 10
SEC v. Buntrock,
No. 02 C 2180, 2004 U.S. Dist. LEXIS 9495 (N.D. Ill. May 25, 2004) ......................... 8
SEC v. Caserta,
75 F. Supp. 2d 79 (E.D.N.Y. 1999).................................................................. 4
SEC v. Druffner,
353 F. Supp. 2d 141 (D. Mass. 2005)................................................................ 1, 6
SEC v. Dunn,
No. 07 Civ. 2058(LAP), 2008 WL 4449379 (S.D.N.Y. Sept. 30, 2008)......................... 6
SEC v. Durgarian,
477 F. Supp. 2d 342 (D. Mass. 2007)................................................................ 1, 5, 6
SEC v. Espuelas,
No. 06 Civ. 2435(RJH), 2008 WL 4414516 (S.D.N.Y. Sept. 30, 2008) ......................... passim
SEC v. Fisher,
No. 07 C 4483, 2008 WL 2062699 (N.D. Ill. May 13, 2008)..................................... 8
SEC v. Jones,
476 F. Supp. 2d 374 (S.D.N.Y. 2007)............................................................... 8, 9,10
iv
Case 1:08-cv-03868-DAB Document 23 Filed 11/03/08 Page 5 of 17
SEC v. Koenig,
532 F. Supp. 2d 987 (N.D. Ill. 2007) ................................................................ 8
SEC v. Lucent Technologies Inc.,
No. Civ. 04-2315(WIHW), 2005 WL 1206841 (D.N.J. May 20, 2005)........................... 2, 6
SEC v. PIMCO Advisors Fund Mgmt. LLC,
341 F. Supp. 2d 454 (S.D.N.Y. 2004)............................................................... 2, 4
SEC v. Power,
525 F. Supp. 2d 415 (S.D.N.Y. 2007)............................................................... 9
SEC v. Scott,
565 F. Supp. 1513 (S.D.N.Y. 1983) ................................................................. 9
SEC v. Scnrushy,
No. CV-03-J-6155, 2005 WL 3279894 (N.D. Ala. Nov. 29, 2005) .............................. 8
SEC v. Tambone,
417 F. Supp. 2d 127 (D. Mass. 2006) ............................................................... passim
SEC v. Todd,
No. 03CV2230 BEN(WMC), 2006 WL 1564892 (S.D. Cal. May 30, 2006).................... 4
SEC v. Treadway,
430 F. Supp. 2d 293 (S.D.N.Y. 2006)............................................................... 1
Sheinbein v. Dudas,
465 F.3d 493 (Fed. Cir. 2006)........................................................................ 8
Shields v. Cityrust Bancorp. Inc.,
25 F.3d 1124 (2d Cir. 1994).......................................................................... 7
Shiliman v. U.S.,
No. CV-99-3215, 2000 WL 923761 (6th Cir. June 29, 2000)..................................... 8
Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc.,
531 F.3d 190 (2d Cir. 2008).......................................................................... 7
Tellabs Inc. v. Makor Issues & Rights, Ltd.,
__ U.S. __ 127 S. Ct. 2499 (2007)............................................................... 6
U.S. v. Core Labs. Inc.,
759 F.2d 480 (5th Cir. 1985)......................................................................... 8
U.S. v. Telluride,
146 F.3d 1241 (10thiCir. 1998) ...................................................................... 9
v
Case 1:08-cv-03868-DAB Document 23 Filed 11/03/08 Page 6 of 17
OTHER AUTHORITIES
Harvey E. Bines, The Law of Investment Management, ¶ 2.02[2] (1978) ..............
vi
Case 1:08-cv-03868-DAB Document 23 Filed 11/03/08 Page 7 of 17
Marc J. Gabelli respectfully submits this reply memorandum of law in further
support of his motion to dismiss. The SEC's brief sets up strawmen, relies on conclusions
(rather than facts), and does not respond to Mr. Gabelli's principal cases and arguments. When
the complaint itself is analyzed, it is clear it should be dismissed.
ARGUMENT
I. THE COMPLAINT FAILS TO STATE A CLAIM AGAINST MR. GABELLI AND
FAILS TO PLEAD FRAUD WITH PARTICULARITY
The SEC does not dispute that to state a claim for aiding and abetting against
Mr. Gabelli, it must plead facts showing that he had actual knowledge, or was at least reckless,'
with respect to the Adviser's alleged 206(1) and 206(2) violation. See Armstrong v. McAlpi,
699 F.2d 79, 9 1-92 (2d Cir. 1983), SEC v. Tambone, 417 F. Supp. 2d 127, 134-7 (D. Mass.
2006). Nor does it dispute that the knowledge it would need to allege is of the Adviser's intent
to defraud in connection with the 206(l) charge and its negligence with respect to the 206(2)
charge. See July 25, 2008 Mem. of Law in Supp. of Marc Gabelli's Mot. to Dismiss ("Gabelli
Br.") 6-7. Those facts must be pleaded with particularity. See Lerner v. Fleet Bank, N.A., 459
F.3d 273, 292-93 (2d Cir. 2006) (applying Rule 9(b) and its "strong inference" requirement to
claim for aiding and abetting fraud).2
A. The Allegations Do Not Establish Mr. Gabelli's Knowledge Of A Violation
Although the SEC spills much ink on the argument that GGGF violated Section
206, it does not allege anything other than conclusions to hold Mr. Gabelli liable for those
I Recklessness is not the right standard. Recklessness is sufficient scienter where the defendant owed a
fiduciary duty to speak. SEC Opp'n Br. ("Opp. Br.") 6 n.7 - circumstances the SEC does not allege here with
respect to Mr. Gabelli. See Chiarella v. U.S., 445 U.S. 222, 235 (1980); SEC v. Treadway, 430 F. Supp. 2d 293,
339 (S.D.N.Y. 2006) ("mere awareness and approval of the primary violation is insufficient to make out a claim for
substantial assistance."); see also Harvey E. Bines, The Law of Investment Management, ¶ 2.02[2] (1978) (absent
assignment of other duties, specific duties of investment managers are to "(i) invest promptly, (ii) invest prudently
and (iii) shift investments according to changes in the safety of existing investments.").
2 See also SEC v. Durgarian, 477 F. Supp. 2d 342, 354-55 (D. Mass. 2007) (dismissing SEC claims for
aiding and abetting securities fraud for failure to satisfy Rule 9(b)); SEC v. Druffher, 353 F. Supp. 2d 141,150-51
(D Mass. 2005) (same).
Case 1:08-cv-03868-DAB Document 23 Filed 11/03/08 Page 8 of 17
violations.3 The SEC argues that Mr. Gabelli was the "architect" of a market timing agreement
and authorized market timing. Opp. Br. 7-8. But the SEC does not claim that market timing, or
even an alleged quid pro quo agreement, violated Section 206: "market timing is not illegal per
se." Gabelli Br. 1 n. 1. And the SEC does not dispute that market timing agreements themselves
are legal. See SEC v. PIMCO Advisors Fund Mgmt. LLC, 341 F. Supp. 2d 454, 468 (S.D.N.Y.
2004); Tambone, 417 F. Supp. 2d at 136.
Rather, the SEC argues that the Adviser violated Section 206 because its COO
Mr. Alpert stated to GGGF's Board in February 2001 that the Adviser was making efforts to stop
''market timers (scalpers) [that had been] disruptive to the Fund and the management'' without
disclosing "that a market timer was being allowed to time GGGF in extremely large amounts"
and was causing "harm [to] GGGF and its long-term investors." Opp. Br. 4-6. The SEC,
however, does not allege anything other than a conclusion to support its claim that Mr. Gabelli
"knew, or [was] reckless in not knowing, that GGGF was being harmed." Compl. ¶ 42. That
conclusion cannot satisfy even Rule 8, much less Rule 9(b). See Bell Atd. Corp. v. Twombly,
550 U.S. __,127 S. Ct. 1955 (2007); SEC v. Espuelas, No. 06 Civ. 2435(RJH), 2008 WL
4414516. at *10 (S.D.N.Y. Sept. 30, 2008) ("Conclusory allegations do not support a strong
inference of fraudulent intent."); SEC v. Lucent Technologies Inc., No. Civ. 04-231 5(WHW),
2005 WL 1206841, at *5..7 (D.N.J. May 20, 2005) (dismissal for failure to plead facts supporting
strong inference of scienter).
Unlike every other market timing case, there is no allegation here that the
prospectus prohibited market timing. Comnpare PIMCO, 341 F. Supp. 2d at 459. The SEC does
not identify any internal fund rules that the trading violated, nor allege that Mr. Gabelli
concealed the trading or had any indication that the market timing may have been harmful to
3 Mr. Gabelli joins Mr. Alpert's arguments that the SEC has not stated a claim for violation of 206(1) or (2).
2
Case 1:08-cv-03868-DAB Document 23 Filed 11/03/08 Page 9 of 17
GGGF or its long-term shareholders. The SEC can point to no employee who told him at the
time that the trading was harmful to GGGF's investors. Cf. EsPuelas at * 16.
The SEC's allegations regarding "the sheer magnitude of Headstart's trading" and
harm caused by that trading as of August 2002 cannot establish Mr. Gabelli's contemporaneous
knowledge of a violation. Opp. Br. 7; Compl. ¶¶ 40-41. See Denny v. Barber, 576 F.2d 465,
470 (2d Cir. 1978); In re Carter-Wallace, Inc. Sec. Litig., 220 F.3d 36, 42 (2d Cir. 2000).~ The
SEC does not plead (1) how many Headstart trades there were by February 2001 and whether
that number is "staggering"; (2) that Mr. Gabelli knew the frequency of Headstart' s trading (see
In re Bristol-Myers Sqjuibb Sec. Litig., 312 F. Supp. 2d 549, 567-68 (S.D.N.Y. 2004); Espuelas
at * 11); or (3) that Mr. Gabelli knew such trading was harmful. Cf. In re BISYS Sec. Litig., 397
F. Supp. 2d 430, 447-48 (S.D.N.Y. 2005) ("size of the fraud alone does not create an inference of
scienter.",). 5 After investigating five years, all the SEC alleges is that Mr. Gabelli "was
affirmatively made aware of Headstart' s market-timing on more than one occasion and referred
to the market timer in writing more than once." Opp. Br. 6; Compl. ¶ 42. See Tambone, 417 F.
Supp. 2d 127, 134-7 (dismissing §§ 206(1) and (2) charges where allegations failed to satisfy the
particularity requirement of Rule 9(b)); Espuelas at * 17.
Mr. Gabelli is not alleged to have been an expert on frequent trading; he was the
portfolio manager of GGGF. See Espuelas at * 11 (accounting knowledge "cannot be attributed
to defendants simply because of their positions at the company") (internal citation omitted); In re
Advanta Corp. Sec. Litig., 180 F.3d 525, 539 (3d Cir. 1999) ("[g]eneralized imputations of
4 The argument is reminiscent of the long and consistent line of cases in which plaintiffs unsuccessfully
argue that the size of an accounting restatement alone is sufficient to plead scienter. See Rothman v. Gregor, 220
F.3d 81, 90-92 (2d Cir. 2000); Espuelas at *10; 380544 Canada. Inc. v. Aspen Tech.. Inc., 544 F. Supp. 2d 199, 226
(S.D.N.Y. 2008); In re DRDGOLD Ltd. Sec. Litig., 472 F.Supp.2d 562, 575 (S.D.N.Y. 2007); In re Atlas Air
Worldwide Holdings. Inc. Sec. Litig., 324 F. Supp. 2d 474, 488-92, 496 (S.D.N.Y. 2004).
5 Further, if Marc Gabelli knew from magnitude alone, so did the general public, since the volume of the
fund turnover was publicly disclosed.
3
Case 1:08-cv-03868-DAB Document 23 Filed 11/03/08 Page 10 of 17
knowledge do not suffice, regardless of the defendants' positions within the company."). The
SEC itself alleges that Mr. Alpert, Gabelli Funds' COO and alleged "head of the market timing
police," provided ground rules for Headstart's trading, allowed the trading, reviewed the trading,
knew Headstart was frequently trading, and allowed it to continue. Opp. Br. 8-9, 13-14. If true,
there was no reason for Mr. Gabelli to believe Mr. Alpert' s statements to be fraudulent. See SEC
v. Todd, No. 03CV2230 BEN(WMC), 2006 WL 1564892, at *7 (S.D. Cal. May 30, 2006) (no
scienter where corporate officer, without sufficient expertise to challenge accounting treatment,
relied on expert team, who did not voice concerns); SEC v. Caserta, 75 F. Supp. 2d 79, 94
(E.D.N.Y. 1999) (good faith reliance on advice is a defense to scienter in securities fraud cases).6
And, while today (after General Spitzer's 2003 investigation) market timing has taken on a bad
name, GGGF stopped it in August 2002, without any objection from Mr. Gabelli, when its
potential harm was far from obvious. Indeed, in the only cases regarding market timing before
2002, funds were sued for failure to permit it. See, e.g., First Lincoln Holdings, Inc. v. Equitable
Life Assurance Soc'y of the U.S., 164 F. Supp. 2d 383 (S.D.N.Y. 2001).
This case is thus comparable to Tambone, which the SEC understandably tries to
bury in a footnote (Opp. Br. 8 n. 1 0), rather than PIMCO, upon which it mistakenly relies. In
Tambone, the court dismissed claims that defendants who entered into market-timing agreements
aided and abetted § 206 violations because the SEC had not "pled with the requisite degree of
particularity that the defendants had 'actual knowledge' of the improper activity [or] possessed
the 'conscious intent' necessary for their inaction to qualify as knowing and substantial
assistance." 417 F. Supp. 2d at 137. Likewise here, it is not enough that Mr. Gabelli (unlike
6 Even if Gabelli Funds or Mr. Alpert had a duty to speak under the "make complete and accurate" rule in
Glazer v. Formica Corp., 964 F.2d 149, 152 (2d Cir. 1992) (quoting Backman v. Polaroid Corp., 9 10 F.2d 10, 12
(1 st Cir. 1990)) - and Mr. Gabelli adopts Mr. Alpert' s arguments on this point -that duty is not automatically
imputed to others.
4
Case 1:08-cv-03868-DAB Document 23 Filed 11/03/08 Page 11 of 17
Mr. Tambone) was "GGGF's portfolio manager." Opp. Br. 7-8. He, like Mr. Tambone, had "no
role in preparing, drafting or signing the allegedly misleading" communication, and there is no
allegation that he knew of a violation. 417 F. Supp. 2d at 133; see also Durgarian, 477 F. Supp.
2d at 350 (dismissing charge alleging duty to disclose based solely on defendants' positions).7
By contrast, in PIMCO, the SEC's sole authority on this point, the complaint
alleged - in great detail - that the defendant:
* was not just a portfolio manager on the relevant funds (as the SEC suggests), but
was also the Chief Executive Officer and Chief Investment Officer of the Adviser
to those funds (PJMCO Compl. ¶ lO0);8
* had personal authority over the fraudulent prospectus disclosures (Ld. ¶ 39);9 and
* was informned repeatedly in writing - and indeed recognized explicitly in his own
writing - that the trading in question was disruptive, harmful to investors, and
contrary to public disclosures (id. ¶¶ 21, 23, 30, 32, 39, 49-53).
Thus, the defendant bore personal responsibility for reporting such issues to the board and "owed
a fiduciary duty to those who were defrauded by the misleading disclosures." PIMCO, 341 F.
Supp. 2d at 468.10 Here, there is no allegation Mr. Gabelli knew of the alleged harmi, much less
that he did anything to further a violation.
7 See also Espuelas at *11; Advanta, 180 F.3d at 533-35; In re Alstom SA Sec. Litig., 406 F. Supp. 2d 433,
468 (S.D.N.Y. 2005).
8 The First Amended Complaint in SEC v. PIMCO Advisors Fund Mgmt. LLC, No. 04 Civ-3464 (VM)
(S.D.N.Y. Nov. 10, 2004) ("PIMCO Compl."), is attached hereto as Appendix A.
9 Compare In re Union Carbide Corp. Consumer Products Bus. Sec. Litig. 666 F. Supp. 547, 560 (S.D.N.Y.
1987) (motion to dismiss granted because no allegation was made of personal liability for misrepresentations beyond
mere titles) with In re Leslie Fay Co.. Inc. Sec. Litig., 918 F. Supp. 749, 761-62 (S.D.N.Y. 1996) (motion to dismiss
denied because of allegation that defendants made misleading statements that they knew would be used in disclosure
to investors).
10 Indeed, the Complaint here only conchusorily alleges that Mr. Gabelli "created the market timing agreement
with Headstart" 'in the first place. Opp Br. 6, citin Compl. ¶¶ 20-27. There is no allegation of a written agreement,
nor of any statement that Mr. Gabelli affirmatively made acceding to, or even negotiating, any such "agreement."
After five years of investigation, the SEC still cannot allege the existence of this purported agreement with
particularity. Compare PIMCO Compl. ¶¶ 18-22, 24-29 (containing highly detailed allegations of the terms of the
agreement defendants negotiated).
5
Case 1:08-cv-03868-DAB Document 23 Filed 11/03/08 Page 12 of 17
B. The Allegations Do Not State A Claim For Aiding A 206(1) Violation
The SEC did not even charge the Adviser with a § 206(1) violation, and its
skimpy complaint cannot make out a claim for a § 206(1) violation, much less aiding and
abetting one. In arguing Mr. Gabelli had the requisite scienter, the SEC's brief attacks a
strawman. Mr. Gabelli never argued, as the SEC claims, that the PSLRA applies to this lawsuit.
Opp. Br. 14. He argued that the SEC must plead with particularity the facts establishing "a
strong inference of scienter" - as the SEC concedes is required. Opp. Br. 2; see also Ross v.
A.H. Robins Co., 607 F.2d 545, 558 (2d Cir. 1979); SEC v. Dunn, No. 07 Civ. 205 8(LAP), 2008
WL 4449379, at *28 (S.D.N.Y. Sept. 30, 2008).11 The SEC must show "an extreme departure
from the standards of ordinary care ... to the extent that the danger was either known to [Mr.
Gabelli] or so obvious that [he] must have been aware of it." Carter-Wallace, 220 F.3d at 3 9-40;
Dunn, 2008 WL 4449379, at *9 n.26.12
The very cases the SEC cites thus demonstrate why, as a matter of law, its
allegations do not satisfy the high bar established by Rule 9(b) on either of the allegations. Opp.
Br. 7 n.8. In Carter-Wallace, allegations that defendants promoted a drug as safe while in
possession of a "sheer number of adverse reports" demonstrating the drug was unsafe did not
give rise to a strong inference of scienter. 220 F.3d at 40, 42. And in Chill, detailed factual
11 The SEC is wrong that the Supreme Court's textual interpretation of "strong inference of scienter" in
Tellabs Inc. v. Makor Issues & Rights. Ltd., __U.S. __, 127 S. Ct. 2499, 2509 (2007) is irrelevant to the proper
construction of that very same language in the context of Rule 9(b). Opp. Br. 14; see Tellabs, 127 S. Ct. at 1250
("The strength of an inference cannot be decided in a vacuum. ... [tlo determine whether the plaintiff has alleged
facts that give rise to the requisite 'strong inference' of scienter, a court must consider plausible nonculpable
explanations for the defendant's conduct, as well as inferences favoring the plaintiff'); In re Crude Oil Commodity
Liti&., No. 06 Civ. 6677 (NRB), 2007 WL 1946553, at *7 n.5 (S.D.N.Y. June 28, 2007) (Tellabs relevant to
interpretation of 9(b) outside PSLRA context). However, even without applying Tellabs, courts have dismissed
numerous cases where -as here - the SEC has failed to meet the requirements of Rule 9(b). Se Espuelas at * 1 6-
17; Durgarian, 477 F. Supp. 2d at 354-55; Tambone, 417 F. Supp. 2d at 134-7; Drufftier, 353 F. Supp. 2d at 150-5 1;
Lucent at **5-7
12 The SEC does not argue that its allegations establish "motive and opportunity" to commit fraud and, in the
absence of such allegation, "the strength of the circumstantial allegations must be correspondingly greater." Kalnit
v. Eichler, 264 F. 3d 13 1, 142 (2d Cir. 200 1); see also Espuelas at *1I0.
6
Case 1:08-cv-03868-DAB Document 23 Filed 11/03/08 Page 13 of 17
allegations that senior executives were aware of a "huge increase" in trading and "multi-billion
dollar daily fluctuations" in the balance sheet did not give rise to a strong inference of scienter,
because plaintiffs did not "demonstrate how the increased level of activity at Kidder, as reflected
in GE's consolidated financial records, would necessarily have indicated to GE that there was
misconduct." Chill v. Gen. Elec Co., 101 F.3d 263, 270 (2d Cir. 1996) ("Fraud cannot be
inferred simply because GE might have been more curious or concerned about the activity at
Kidder"). See also Teamsters Local 445 Freight Div. Pension Fund v. Dynex Capital Inc., 531
F.3d 190, 197 (2d Cir. 2008) (no inference of scienter where competing inference that
misstatements "were the result of merely careless mistakes at the management level based on
false information fed it from below" was equally appealing); Shields v. Citytrust Bancorp. Inc.,
25 F.3d 1124, 1129 (2d Cir. 1994) (even if management "should have been more alert and more
skeptical, ... nothing alleged indicates that management was promoting a fraud").
For the same reasons, the SEC' s allegations that the Adviser knew Headstart' s
trading was harmful because the Adviser "was monitoring market timing" do not establish
scienter. Opp. Br. 3-6; Compl. IT 31, 34-3 5. And, even if they did, there is no allegation
Mr. Gabelli knew of this alleged violation. See Armstrong, 699 F.2d at 91-92 (aiding and
abetting requires knowledge of the underlying violation).
II. THE SEC'S REQUESTS FOR RELIEF SHOULD BE DISMISSED
A. The Complaint Is Barred By The Statute of Limitations
The SEC argues that the § 2462 limitations period (1) does not begin to run until a
violation is discovered, and (2) is tolled by fraudulent concealment. Opp. Br. 14-15. Every
Circuit Court that has considered the first issue has held that a claim first accrues under § 2462
7
Case 1:08-cv-03868-DAB Document 23 Filed 11/03/08 Page 14 of 17
when the cause of action first existed.'13 So has the leading (and only) decision from this District,
SEC v. Jones, 476 F. Supp. 2d 3 74, 3 81-85 (S.D.N.Y. 2007) ("JonesII"), a decision the SEC
does not even attempt to address. That holding follows naturally from the language of § 2462,
which applies to (and establishes the same rules for) all actions "for the enforcement of any civil
fine, penalty, or forfeiture." Indeed, the only authority the SEC cites in support of its argument
is a single case from the Northern District of Illinois that has never been followed by any court in
this Circuit, and has been sharply distinguished in its own. See Opp. Br. 15 n. 1 5.14
The SEC does not identify a single "affirmative step[]" by Marc Gabelli to
prevent discovery of the purported fraud. Corcoran v. N.Y. Power Auth., 202 F.3d 530, 543 (2d
Cir. 1999); Jones II, 476 F. Supp. 2d at 382; see Opp. Br. 17.15 And the omissions by Mr. Alpert
the SEC claims made the alleged fraud "self-concealing" are those omissions the SEC claims
constituted a fraud in the first place; they cannot satisfy the self-concealing doctrine. See Jones
HI 476 F. Supp. 2d at 382; see also Gabelli Br. 20-21.1
13 See. e.g., U S. v. Core Labs. Inc., 759 F.2d 480, 482-83 (5th Cir. 1985); Shiliman v. U.S., No. CV-99-3215,
2000 WL 923761, at **5..6 (6th Cir. June 29, 2000); FEC v. Williams, 104 F.3d 237, 240 (9th Cir. 1996); Nat'l
Parks & Conservation Assoc.. Inc. v. Tenn. Valley Auth., 502 F.3d 1316, 1322 (11Ith Cir. 2007); 3M Co. v.
Browner, 17 F.3d 1453, 1462 (D.C. Cir. 1994); Sheinbein v. Dudas, 465 F.3d 493, 496 (Fed. Cir. 2006). See also
SEC v. Scrushy, No. CV-03-J-6 155, 2005 WL 3279894, at *3 (N.D. Ala. Nov. 29, 2005) ("the appropriate start of
the statute of limitations is the date of the violations for which the civil penalties are sought, not the discovery of
such violations"); N.Y. v. Niagara Mohawk Power Corp., 263 F. Supp. 2d 650, 660 (W.D.N.Y. 2003).
14 The SEC cites SEC v. Buntrock, No. 02 C 2180, 2004 U.S. Dist. LEXIS 9495 (N.D. Ill. May 25, 2004),
and SEC v. Koenig, 532 F. Supp. 2d 987 (N.D. Ill. 2007), the latter of which was a denial of a motion to reconsider
the former. These decisions rely on Law v. Medco Research. Inc., 113 F.3d 781 (7th Cir. 1997), a case dealing with
a private right of action and not § 2462. See also SEC v. Fisher, No. 07 C 4483, 2008 WL 2062699, at *4 (N.D. Ill.
May 13, 2008) (stating that Law involved (1) a private plaintiff, not the SEC, whose "veritable army of trained
attorneys" with "subpoena power even before it files a lawsuit" provide "a distinct investigatory advantage," and
(2) a one-year limitations period, whereas § 2462 is five years, which "cuts against application of the discovery
rule."). Mr. Gabelli adopts Mr. Alpert's arguments with respect to Holinberg, v. Ambrecht, 327 U.S. 392 (1946),
Bailey v. Glover, 88 U.S. 342 (1874), and Moviecolor Ltd. v. Eastman Kodak Co., 288 F.2d 80, 83 (2d Cir. 1961).
15 The SEC also wholly fails to allege in its Complaint, or explain in its Opposition, what diligence it
exercised. Under Jones LI, the Complaint should be dismissed for that reason alone. See Alpert Reply pp. 5-6.
16 Compare Opp. Br. 18 (essence of the case is that Mr. Gabelli and Mr. Alpert maintained an agreement to
permit Headstart to engage in market-timing in exchange for a long-term investment in a Gabelli-managed hedge
fund and that the agreement was hidden from the board) to Opp. Br. 3 (arguing Mr. Gabelli violated § 206 because
the agreement was "hid ... from GGGF's Board").
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Case 1:08-cv-03868-DAB Document 23 Filed 11/03/08 Page 15 of 17
Likewise, Mr. Alpert has not engaged in "affirmative acts of concealment" -
without the allegation that information was withheld from the Board, there would be no claim of
a § 206 violation at all. Jones 1I, 476 F. Supp. 2d at 382. And, as to Mr. Gabelli, the SEC does
not even attempt to address the long line of cases that hold a plaintiff may not "use fraudulent
concealment by one defendant as a basis for tolling the statute of limitations against another
defendant who did not engage in affirmative fraudulent acts to conceal." O'Brien v. Nat'l Prop.
Analyst Partners, 719 F. Supp. 222, 232 (S.D.N.Y. 1989); see also Gabelli Br. 20-21.'
The SEC claims that the statute of limitations does not apply to equitable relief.
Opp. Br. 14. But the SEC must still plead facts that would entitle it to an injunction or
disgorgement and make those remedies other than punitive. Cf. Dura Pharm., Inc. v. Broudo,
544 U.S. 336, 347 (2005) (plaintiff must plead loss and causation). Although the SEC has
clarified that it is not seeking sums representing the alleged harm to investors, it does not allege
that Mr. Gabelli was unjustly enriched at all. And, the only facts that the SEC has pleaded here -
Mr. Gabelli's current position as director of a public company and the fact that he is challenging
the legal merits of the SEC's claim - are irrelevant to establishing that an injunction would be
equitable and not punitive. See SEC v. Am. Bd. of Trade. Inc., 751 F.2d 529, 543 (2d Cir.
1984); SEC v. Scott, 565 F. Supp. 1513, 1538 (S.D.N.Y. 1983). 18 See also U.S. v. Telluride, 146
F.3d 1241, 1245-46 (10th Cir. 1998) (for purposes of § 2462, a "penalty," is "a sanction or
17 The SEC cites two cases for the proposition that "Alpert's concealing actions can be attributed to Marc
Gabelli" (Opp. Br. 17), but neither relieves the SEC of its pleading burden to establish fraudulent concealment by
Mr. Gabelli. In N.Y. v. Hendrickson Bros., 840 F.2d 1065, 1083-84 (2d Cir. 1988), the alleged fraud was a "bid-
rigging conspiracy," which "is the kind of enterprise that requires a number of participants" and the court held "the
record adequately established fraudulent concealment by all defendants" (emphasis added). And the SEC does not
address the argument made in Mr. Gabelli's Opening Brief regarding SEC v. Power, 525 F. Supp. 2d 415, 426
(S.D.N.Y. 2007), where the defendant was alleged to have deliberately created an accounting scheme expressly
designed to avoid detection.
18 Although there is an allegation in the settlement of In the Matter of RS Inv. Mgmt.. Inc. (and it is a
settlement, not a litigated decision) that a RS representative entered into a market-timing agreement for a $1 million
investment, the SEC neglects to mention that it did charge that representative.
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punishment imposed for violating a public law which goes beyond compensation for the injury
caused by the defendant"); Jones 1I, 476 F. Supp. 2d at 382 (rejecting injunctive relief); Johnson
v. SEC, 87 F.3d 484, 488 (D.C. Cir. 1996) (same).
B. Congress Chose Not To Create The Civil Penalties The SEC Seeks
The SEC admits that under the plain language of the IAA § 209(e) and the ruling
of the only court to have considered the question, the court may impose civil penalties oLnly
against the person who violated the Advisers Act, and not an alleged aider and abettor. See 15
U.S.C. § 80b-9(e)(1); SEC v. Bolla, No. 02-1506 (CKK), 2008 WL 1959502, at *8 (D.D.C. May
6, 2008). The SEC has not identified any flaw in Bolla's legal analysis nor any argument it
overlooked, and each argument the SEC now makes was made and rejected in Bolla after that
court's "searching consideration." Id. at *8.
CONCLUSION
For the reasons above and in our Opening Brief, the complaint should be
dismissed or, in the alternative, the § 206(1) claim should be dismissed, or the claims for civil
penalties and injunctive relief should be dismissed in their entirety with prejudice.
DATED: November 3, 2008
New York, NY
Jason P. Gottlieb
One Liberty Plaza
New York, New York 10006
(212) 225-2000
Attorneys for Marc J. Gabelli
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Case 1:08-cv-03868-DAB Document 23 Filed 11/03/08 Page 17 of 17
