Marc J. Gabelli and Bruce Alpert
U.S. SECURITIES AND EXCHANGE COMMISSION
Litigation Release No. 20539 / April 24, 2008
Securities and Exchange Commission v. Marc J. Gabelli and Bruce Alpert, Civil Action No. 08 CV 3868
SEC Sues Gabelli Funds LLC Former Portfolio Manager Marc Gabelli and Chief Operating Officer Bruce Alpert for Securities Fraud in Connection With an Undisclosed Market Timing Arrangement; Gabelli Funds LLC Agrees to Pay $16 Million to Settle SEC Charges in Related Administrative Proceeding
On April 24, 2008, the Securities and Exchange Commission filed a civil fraud action in the United States District Court for the Southern District of New York against Marc J. Gabelli, the former portfolio manager of the Gabelli Global Growth Fund (GGGF), currently known as GAMCO Global Growth Fund, and Bruce Alpert, Chief Operating Officer of GGGF's adviser, Gabelli Funds LLC (Gabelli Funds), in connection with an undisclosed market timing arrangement with Folkes Asset Management, currently known as Headstart Advisers Ltd. (Headstart). "Market timing" refers to the practice of short term buying, selling, and exchanging of mutual fund shares in order to exploit inefficiencies in mutual fund pricing.
The Commission's Complaint, which seeks an injunction, civil penalties, disgorgement, and other relief, alleges as follows:
- From September 1999 until August 2002, Marc Gabelli authorized Headstart to place market timing trades in GGGF. Beginning in April 2000, Marc Gabelli authorized Headstart to triple its timing capacity in exchange for a "sticky asset" investment in a hedge fund that Marc Gabelli also managed. While Headstart was allowed to time GGGF, Marc Gabelli and Alpert knew that Gabelli Funds' was rejecting, at their direction, other market timers. Alpert allowed Headstart to continue timing GGGF as long as it maintained its investment in other affiliated funds.
- Neither Marc Gabelli nor Alpert disclosed to the GGGF Board of Directors that Headstart was allowed to market time GGGF while others were blocked from doing so. To the contrary, Alpert, in Marc Gabelli's presence, assured the Board that market timers were being excluded from GGGF. However, neither Alpert nor Marc Gabelli disclosed to the Board that Headstart was engaging in market-timing activity in GGGF. Indeed, neither Alpert nor Marc Gabelli disclosed to the Board, at that time or any other time during the relevant period, the market timing arrangement with Headstart, the fact that Headstart's investment in Marc Gabelli's hedge fund was made in exchange for increased market timing capacity, or the detrimental effects of Headstart's market timing on GGGF shareholders. By failing to make these disclosures, Marc Gabelli and Alpert aided and abetted Gabelli Funds' breach of fiduciary duty to GGGF.
- Over a two-year period, Headstart's internal rates of return on its three accounts were 185 percent, 160 percent, and 73 percent, respectively, while the rate of return for other GGGF shareholders was at most negative 24.1 percent. Gabelli Funds financially benefited from the market timing in that it earned advisory fees from both the market timing and Headstart's investment in the affiliated hedge fund.
- In September 2003, Alpert wrote a memorandum to the Board stating that Gabelli Funds had taken a number of steps to discourage market timing. The memorandum, which was posted on Gabelli Funds' parent company's website in the wake of the New York Attorney General's announcement concerning its prosecution of market timers, was designed to assure investors that Gabelli Funds did not have a market timing problem. However, Alpert failed to disclose any facts about Headstart, and the memorandum gave the misleading impression that any failure to exclude market timers resulted from procedural limitations, not intentional conduct by Marc Gabelli and Alpert.
The Complaint charges Marc Gabelli and Alpert with fraud for aiding and abetting violations of Sections 206(1) and 206(2) of the Investment Advisers Act of 1940. It charges Alpert with violations of Section 17(a) of the Securities Act of 1933, Section 10(b) of the Securities Exchange Act of 1934 and Exchange Act Rule 10b-5.
In a related administrative proceeding, the Commission simultaneously instituted and settled administrative and cease-and-desist proceedings against Gabelli Funds, a registered investment adviser. Without admitting or denying the Commission's findings, Gabelli Funds consented to the issuance of a Commission Order finding that Gabelli Funds willfully violated Section 206(2) of the Investment Advisers Act, Section 17(d) of the Investment Company Act and Investment Company Act Rule 17d-1, and willfully aided and abetted and caused violations by GGGF of Section 12(d)(1)(B)(i) of the Investment Company Act in connection with the undisclosed market timing by Headstart. Gabelli Funds was censured, ordered to cease and desist its securities law violations, and ordered to pay $9.7 million in disgorgement, $1.3 million in prejudgment interest, and a penalty of $5 million, for a total payment of $16 million. As described in the Order, Gabelli Funds' payment will be distributed to shareholders harmed by the market timing activity during the relevant period.
