Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Thursday, April 24, 2008

SEC Institutes Market Timing Suit Against Former Portfolio Manager of A Gabelli Fund

The SEC 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). The complaint alleges that from September 1999 until August 2002, Marc Gabelli authorized Headstart to place market timing trades in GGGF while Gabelli Funds was rejecting other market timers. In return, Headstart maintained its investment in other affiliated funds.
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 a related administrative proceeding, the SEC settled administrative proceedings against Gabelli Funds, a registered investment adviser, 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.

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