SEC v. Gabelli * The Honorable Jed S. Rakoff,

10-3581-cv (L)
SEC v. Gabelli
* The Honorable Jed S. Rakoff, United States District Judge
for the Southern District of New York, sitting by designation.
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UNITED STATES COURT OF APPEALS 1
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FOR THE SECOND CIRCUIT 3
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August Term 2010 7
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(Argued: June 2, 2011 Decided: August 1, 2011) 9
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Docket Nos. 10-3581-cv(L), 10-3628-cv(XAP), 10-3760-cv (XAP) 11
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SECURITIES AND EXCHANGE COMMISSION, 15
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Plaintiff-Appellant/Cross-Appellee, 17
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- against - 19
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MARC J. GABELLI and BRUCE ALPERT, 21
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Defendants-Appellees/Cross-Appellants. 23
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Before: LIVINGSTON and CHIN, Circuit Judges, and 27
RAKOFF, District Judge.*
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Appeal from a final order and judgment of the United States 30
District Court for the Southern District of New York granting in 31
part defendants’ motions to dismiss. REVERSED. 32
33
DOMINICK V. FREDA (Jacob H. Stillman, Hope 34
Hall Augustini, on the brief), Securities and 35
Exchange Commission, Washington, D.C., for 36
Plaintiff-Appellant. 37
38
LEWIS J. LIMAN (Kimberly C. Spiering, 39
Katherine L. Wilson-Milne, David R. Lurie, on 40
the brief), Cleary Gottlieb Steen & Hamilton 41
LLP, New York, New York, for 42
Defendant-Appellee Gabelli. 43

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1 Defendants Gabelli and Alpert have each filed
cross-appeals, but for the reasons stated herein we do not reach
the cross-appeals.
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KATHLEEN N. MASSEY (Edward A. McDonald, 1
Joshua I. Sherman, on the brief), Dechert 2
LLP, New York, New York, for Defendant- 3
Appellee Alpert. 4
RAKOFF, District Judge. 5
Plaintiff-appellant the Securities and Exchange Commission 6
(“SEC”) appeals from a judgment entered August 17, 2010, 7
dismissing the SEC’s complaint against Marc J. Gabelli, the 8
portfolio manager of the mutual fund Gabelli Global Growth Fund 9
(“GGGF” or the “Fund”), and Bruce Alpert, the chief operating 10
officer for the Fund’s adviser, Gabelli Funds, LLC (“Gabelli 11
Funds” or the “Adviser”). For the following reasons, we REVERSE 12
the District Court’s judgment and REMAND for further proceedings 13
consistent with this opinion. 1
14
BACKGROUND 15
Unless otherwise noted, the following facts are taken from 16
the complaint and are presumed to be true. In essence, the SEC’s 17
complaint charges defendants with failing to disclose favorable 18
treatment accorded one GGGF investor in preference to other 19
investors: specifically, the fact that Gabelli Funds, investor 20
adviser to GGGF, while prohibiting most GGGF investors from 21
engaging in a form of short-term trading called “market timing,” 22
secretly permitted one investor to market time the Fund in 23
exchange for an investment in a hedge fund managed by Gabelli. 24

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2 An illustration of time zone arbitrage is provided in the
SEC’s complaint:
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Compl. ¶¶ 1, 20-21, 17, 31, 35-38, 42, 44-45. 1
A. Market Timing 2
“Market timing” refers, inter alia, to buying and selling 3
mutual fund shares in a manner designed to exploit short-term 4
pricing inefficiencies. See Exemptive Rule Amendments of 2004: 5
The Independent Chair Condition (Apr. 2005) (“Staff Report”), 6
available at http://www.sec.gov/news/studies/indchair.pdf. A 7
mutual fund sells and redeems its shares based on the fund’s net 8
asset value (“NAV”) for that day, which is usually calculated at 9
the close of the U.S. markets at 4:00 P.M. Eastern Time. Prior 10
to 4:00 P.M., market timers either buy or redeem a fund’s shares 11
if they believe that the fund’s last NAV is “stale,” i.e., that 12
it lags behind the current value of a fund’s portfolio of 13
securities as priced earlier in the day. The market timers can 14
then reverse the transaction at the start of the next day and 15
make a quick profit with relatively little risk. 16
Mutual funds like GGGF that invest in overseas securities 17
are especially vulnerable to a kind of market timing known as 18
“time zone arbitrage,” whereby market timers take advantage of 19
the fact that the foreign markets on which such funds’ portfolios 20
of securities trade have already closed (thereby setting the 21
closing prices for the underlying securities) before the close of 22
U.S. markets. 2 Market timers profit from purchasing or redeeming 23

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For example, a U.S. mutual fund may hold shares of a
Japanese company traded on the Tokyo Stock Exchange
(“TSE”). Because of the time-zone difference, the TSE
may close at 2:00 a.m. EST. If the U.S. mutual fund
uses the TSE closing price for the Japanese company’s
stock to calculate the mutual fund’s NAV at 4:00 p.m.
EST, that fund’s NAV will be based, at least partially,
on market information that is fourteen hours old.
Positive market movements during the New York trading
day, which will later cause the Japanese market to rise
when it opens at 8 p.m. EST, will not be incorporated
into the fund’s NAV, thereby cause the NAV to be
artificially low. On such a day, a trader who buys the
U.S. fund at the artificially low or “stale” price can
realize a profit the next day by selling the U.S.
fund’s shares.
See Compl. ¶ 17.
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fund shares based on events occurring after foreign market 1
closing prices are established, but before the events have been 2
reflected in the fund’s NAV. In order to turn a quick profit, 3
market timers then reverse their positions by either redeeming or 4
purchasing the fund’s shares the next day when the events are 5
reflected in the NAV. 6
Although market timing is not itself illegal, market timing 7
can harm long-term investors in the fund by “rais[ing] 8
transaction costs for a fund, disrupt[ing] the fund’s stated 9
portfolio management strategy, requir[ing] a fund to maintain an 10
elevated cash position [to satisfy redemption requests], ... 11
result[ing] in lost opportunity costs and forced liquidations ... 12
unwanted taxable capital gains for fund shareholders and [a 13
reduction of] the fund’s long term performance.” Id. at 32-33. 14
See also Janus Capital Grp. Inc. v. First Derivative Traders, –- 15

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U.S. –-, 131 S. Ct. 2296, 2300 (2011) (“Although market timing is 1
legal, it harms other investors in the mutual fund.”). 2
B. The Parties 3
Gabelli Funds, an investment adviser within the meaning of 4
Section 2(a)(20) of the Investment Company Act of 1940 and 5
Section 202(a)(11) of the Investment Advisers Act of 1940 (the 6
“Advisers Act”), is the investment adviser to GGGF, an open end 7
investment company, or mutual fund, registered under the 8
Investment Company Act. Compl. ¶¶ 12-13. Marc Gabelli was the 9
portfolio manager for GGGF and its predecessor fund from 1997 to 10
2004 and also managed several Gabelli-affiliated hedge funds. 11
Id. ¶ 10. From 1988 to 2003, Bruce Alpert was Gabelli Funds’ 12
chief operating officer and the person who directed the Adviser’s 13
“market timing police,” a group of GGGF employees that monitored 14
trading in the Adviser’s mutual funds in order to restrict market 15
timing. Id. ¶¶ 1, 11, 31. Najy N. Nasser was the chief 16
investment adviser to Folkes Asset Management, now called 17
Headstart Advisers Ltd. (“Headstart”). Id. ¶¶ 1, 10. 18
C. The Alleged Misconduct 19
The complaint alleges that from 1999 until 2002, Gabelli and 20
Alpert permitted Headstart to engage in time zone arbitrage 21
(which defendants referred to as “scalping”) that took advantage 22
of stale pricing opportunities in GGGF. Id. ¶¶ 17, 36, 42. 23
Initially the amount of such scalping was limited, but on April 24
7, 2000, Gabelli allegedly agreed to permit Headstart to increase 25

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its market timing capacity from $7 million to $20 million, in 1
exchange for a $1 million investment by Headstart in a hedge fund 2
that Gabelli managed. Id. ¶ 21. Headstart’s $1 million 3
investment, which constituted approximately four percent of 4
Gabelli’s hedge fund’s assets, was made the day after Headstart’s 5
increase in market timing. Id. ¶ 23. 6
Between April 2000 and the Spring of 2002, Headstart’s 7
increased market timing in GGGF’s shares regularly involved 8
between four and fifteen percent of GGGF’s assets. Id. ¶ 24. 9
Eventually, however, following instructions from the Fund’s 10
parent company, Gabelli and Alpert caused Headstart to reduce its 11
ownership in GGGF and, in August 2002, to cease its market timing 12
activity, whereupon Headstart redeemed its remaining investment 13
in Gabelli’s hedge fund. Id. ¶¶ 25-28. 14
Prior to the cessation, however, and during the same period 15
that Gabelli and Alpert were approving Headstart’s market timing 16
in GGGF shares, Alpert and Gabelli banned at least 48 other GGGF 17
accounts from market timing and rejected market timing purchases 18
totaling at least $23 million. Id. ¶ 35. As early as December 19
2000, Alpert drafted an internal memorandum that explained that 20
since “Market Timers (scalpers) have been using the International 21
and Global Funds in a way that is disruptive to the Fund and the 22
management of the portfolio,” the Adviser was making efforts to 23
“identify each account and restrict them for purchasing the 24
funds.” Id. ¶ 31. For the next two years, “market timing 25

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police” -- employees instructed by Alpert to monitor market 1
timing activity within Gabelli Funds -- reviewed purchases in 2
global funds: if it appeared that the purchase was a market 3
timing trade, the purchase was rejected and sometimes the account 4
was banned from making future purchases. Id. Yet, during the 5
very same period, Alpert instructed the market timing police to 6
ignore Headstart’s market timing activity because “it was a Marc 7
Gabelli client relationship,” and assured Nasser that Headstart’s 8
accounts would not be blocked. Id. ¶¶ 33, 35. 9
According to the complaint, Headstart’s market timing 10
unfairly favored Headstart over all other GGGF investors. Thus, 11
while Headstart’s three accounts that market timed GGGF shares 12
during the relevant period earned rates of return of 185 percent, 13
160 percent, and 73 percent, respectively, the rate of return for 14
all other GGGF shareholders over the same period was, at best, 15
negative 24.1 percent. Id. ¶¶ 2, 39. Headstart’s market timing 16
also caused annual dilution ranging from one to four percent of 17
GGGF’s assets. Id. 18
While Headstart was market timing GGGF, the defendants 19
allegedly did not disclose to GGGF’s Board of Directors or to the 20
other GGGF shareholders that Headstart was market timing, that it 21
was being given an advantage accorded no other shareholder, and 22
that there was a conflict of interest created by the agreement 23
with Headstart. As a result, the Board was allegedly misled into 24
believing that the Adviser was taking all necessary steps to 25

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reduce or ban market timing activity in general. Id. ¶¶ 36-38. 1
For example, on February 21, 2001, Alpert and Gabelli attended a 2
GGGF Board meeting where they each addressed the Board. Alpert 3
told the Board about the dangers of market timing and the efforts 4
that Gabelli Funds was undertaking to eliminate this practice, 5
but failed to disclose that Headstart was being permitted to 6
market time GGGF. Immediately after Alpert’s report, Gabelli 7
reported on operations of GGGF, but also failed to disclose 8
Headstart’s market timing. After the meeting, Alpert and Gabelli 9
continued to allow Headstart to engage in market timing trades. 10
Id. 11
According to the complaint, even after the market timing 12
ceased, the defendants continued to mislead the Board and GGGF 13
investors. In particular, on September 3, 2003 -- the same day 14
that the New York Attorney General announced he was investigating 15
market timing in mutual funds -- Alpert, in an alleged effort to 16
reassure GGGF investors, posted a memorandum (the “Memorandum”) 17
on the website of Gabelli Funds’ parent company. Id. ¶¶ 43-44. 18
The Memorandum stated that: 19
[F]or more than two years, scalpers have been identified and 20
restricted or banned from making further trades. Purchases 21
from accounts with a history of frequent trades were 22
rejected. Since August 2002, large transactions in the 23
global, international and gold funds have been rejected 24
without regard to the past history. While these procedures 25
were in place they did not completely eliminate all timers. 26
Id. ¶ 44. In light of what Gabelli and Alpert knew and, indeed, 27
had authorized in market timing by Headstart, this Memorandum, 28

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the complaint alleges, was materially misleading. Id. ¶ 45. 1
Finally, the complaint alleges that because of the secret 2
nature of the defendants’ wrongdoing, as well as the defendants’ 3
affirmative misrepresentations to GGGF’s Board and shareholders, 4
the SEC did not discover the fraud until late 2003. Id. ¶¶ 46- 5
47. 6
On April 24, 2008, the SEC filed its complaint against the 7
defendants, alleging in its First Claim that Alpert had violated 8
the antifraud provisions of Section 10(b) of the Securities 9
Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 10
promulgated thereunder, 17 C.F.R. § 240.10b-5, in its Second 11
Claim that Alpert had violated the antifraud provisions of 12
Section 17(a) of the Securities Act of 1933, 15 U.S.C. § 77q(a), 13
and in its Third Claim that both Alpert and Gabelli had aided and 14
abetted violations by the Adviser of the antifraud provisions of 15
Sections 206(1) and 206(2) of the Advisers Act, 15 U.S.C. 80b- 16
6(1) & (2). As relief for these violations, the SEC sought 17
injunctions against future violations, disgorgement of ill-gotten 18
gains, and civil monetary penalties. 19
On July 25, 2008, each of the defendants moved to dismiss 20
the complaint under Federal Rule of Civil Procedure 12(b)(6) for 21
failure to state a claim upon which relief may be granted. On 22
March 17, 2010, the District Court granted the defendants’ 23
motions in substantial part. First, the District Court dismissed 24
the Securities Act and Securities Exchange Act claims against 25

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Alpert, finding that Alpert’s statement in the Memorandum that 1
“for more than two years, scalpers have been identified and 2
restricted or banned from making further trades” was “literally 3
true” and that because “this statement was not a 4
misrepresentation ... Alpert had no duty to disclose fully 5
Headstart’s market-timing.” SEC v. Gabelli, No. 08 Civ. 3868 6
(DAB), 2010 WL 1253603, at *8 (S.D.N.Y. Mar. 17, 2010). Second, 7
while the District Court denied defendants’ motion to dismiss the 8
Advisers Act claim, it ruled that the SEC could not seek civil 9
penalties for that claim because: (a) the SEC did not bring the 10
claim within the statute of limitations period applicable to such 11
penalties, and (b) the SEC is not authorized to seek monetary 12
penalties for aiding and abetting violations of the Advisers Act. 13
Id. at *4-5, 11-12. Third, the District Court dismissed the 14
SEC’s prayer for injunctive relief because the SEC “has not 15
plausibly alleged that Defendants are reasonable likely to engage 16
in future violations.” Id. at *11. Thus, the SEC’s Advisers Act 17
claim against the defendants survived the motions to dismiss, but 18
the District Court barred all relief other than disgorgement. 19
Believing that disgorgement would not provide significant 20
relief, the SEC moved to voluntarily dismiss the remaining claim 21
without prejudice to the SEC’s refiling this claim if, but only 22
if, the SEC were successful in this appeal. The District Court 23
granted the motion over the defendants’ objections and entered 24
judgment accordingly. 25

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The SEC now appeals the District Court’s dismissal of its 1
Securities Act and Securities Exchange Act claims against Alpert 2
and the District Court’s rejection of the SEC’s prayers for civil 3
penalties and injunctive relief for the defendants’ aiding and 4
abetting violations of the Advisers Act. In addition to opposing 5
the SEC’s appeal, both defendants have cross-appealed, contending 6
that the District Court erred in denying their motions to dismiss 7
the SEC’s prayer for disgorgement under the Advisers Act and, 8
more generally, in denying their motions to dismiss with 9
prejudice the SEC’s claim for aiding and abetting violations of 10
the Advisers Act. 11
DISCUSSION 12
A. Appellate Jurisdiction 13
We first address whether we have jurisdiction to hear the 14
instant appeals. We generally lack jurisdiction over an “appeal 15
from a dismissal of some of plaintiff’s claims when the balance 16
of the claims have been dismissed without prejudice pursuant to a 17
Rule 41(a) dismissal of the action,” because permitting such an 18
appeal would allow the parties to “effectively ... secure[] an 19
otherwise unavailable interlocutory appeal.” Chappelle v. Beacon 20
Commc’ns Corp., 84 F.3d 652, 654 (2d Cir. 1996). However, in 21
Purdy v. Zeldes, 337 F.3d 253, 258 (2d Cir. 2003), we recognized 22
an exception to this rule where “a plaintiff’s ability to 23
reassert a claim is made conditional on obtaining a reversal from 24

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this court.” Id. Under these circumstances, a judgment may be 1
deemed “final,” because the plaintiff “runs the risk that if his 2
appeal is unsuccessful, his ... case comes to an end.” Id. 3
Given Purdy, it is clear that we have jurisdiction to 4
consider the SEC’s appeal, since the only dismissal that was 5
without prejudice was expressly conditioned on the SEC’s promise 6
not to reassert this claim unless its appeal of this dismissal 7
was successful on appeal. However, given the strong policy 8
against interlocutory appeals, we see no reason to extend the 9
narrow exception announced in Purdy to the defendants’ cross- 10
appeals. Nor do we think we should exercise pendent appellate 11
jurisdiction over the cross-appeals. The doctrine of pendent 12
appellate jurisdiction -- which “allows us, where we have 13
jurisdiction over an interlocutory appeal of one ruling, to 14
exercise jurisdiction over other, otherwise unappealable 15
interlocutory decisions,” see Myers v. Hertz Corp., 624 F.3d 537, 16
552 (2d Cir. 2010) (internal quotation marks omitted) -- “should 17
be exercised sparingly, if ever,” Bolmer v. Oliveira, 594 F.3d 18
134, 141 (2d Cir. 2010) (internal quotation marks omitted). 19
Assuming the doctrine applies here at all, we see here none of 20
the “exceptional circumstances,” Papineau v. Parmley, 465 F.3d 21
46, 65 (2d Cir. 2006) (internal quotation marks omitted), that 22
would warrant its invocation at this juncture. We therefore 23
limit ourselves to the SEC’s appeal. 24
B. Standard of Review 25

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Turning to the merits of that appeal, we review the District 1
Court’s grant of the motions to dismiss de novo, “accept[ing] all 2
well-pleaded allegations in the complaint as true [and] drawing 3
all reasonable inferences in the plaintiff’s favor.” Operating 4
Local 649 Annual Trust Fund v. Smith Barney Fund Mgmt. LLC, 595 5
F.3d 86, 91 (2d Cir. 2010). To survive a motion to dismiss, 6
however, a complaint must “allege a plausible set of facts 7
sufficient ‘to raise a right to relief above the speculative 8
level.’” Id. (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 9
555 (2007)). 10
C. The Securities Act and Securities Exchange Act Claims against 11
Alpert 12
Applying these standards, we first consider whether the 13
District Court erred in dismissing the Securities Act and 14
Securities Exchange Act claims against Alpert that were premised 15
on the theory that his statements in the Memorandum of 2003 were 16
materially misleading. That Memorandum, as noted, stated that 17
“for more than two years, scalpers have been identified and 18
restricted or banned from making further trades” but that the 19
Adviser “did not completely eliminate all timers.” The District 20
Court was apparently of the view that because such statements 21
were “literally true,” they could not be misleading. See 22
Gabelli, 2010 WL 1253603, at *8. 23
The law is well settled, however, that so-called “half- 24
truths” -- literally true statements that create a materially 25

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misleading impression -- will support claims for securities 1
fraud. See List v. Fashion Park, Inc., 340 F.2d 457, 462 (2d 2
Cir. 1965); see also Rule 10b-5, 17 C.F.R. § 240.10b-5. Here, 3
the complaint plausibly alleges that a reasonable investor 4
reading the Memorandum would conclude that the Adviser had 5
attempted in good faith to reduce or eliminate GGGF market timing 6
across the board, whereas, as Alpert well knew but failed to 7
disclose, the Adviser had expressly agreed to let one major 8
investor, Headstart, engage in a very large amount of GGGF market 9
timing, in return for Headstart’s investment in a separate hedge 10
fund run by Gabelli. The District Court therefore erred in 11
dismissing the Securities Act and Securities Exchange Act claims. 12
Alpert further argues, however, that even if the statements 13
in the Memorandum were misleading, the District Court’s 14
determination can be affirmed on either of two alternate grounds: 15
a failure to adequately allege materiality or a failure to 16
adequately allege intent. 17
As to materiality, “a complaint may not properly be 18
dismissed ... on the ground that the alleged misstatements or 19
omissions are not material unless they are so obviously 20
unimportant to a reasonable investor that reasonable minds could 21
not differ on the question of their importance.” Ganino v. 22
Citizens Utils. Co., 228 F.3d 154, 162 (2d Cir. 2000) (internal 23
quotation marks omitted). Here, the complaint alleges that, 24
pursuant to an undisclosed agreement between the defendants and 25

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Headstart, the latter was permitted to engage in market time 1
trading up to $20 million per transaction and completed 836 such 2
transactions over a three year period. In total, Headstart 3
allegedly traded $4.2 billion in GGGF, approximately 62 percent 4
of the total value of all trading in the Fund during that period, 5
and earned $9.7 million in profits while other GGGF investors, 6
who were not only themselves precluded from such trading but also 7
unaware of its being undertaken by Headstart, suffered annual 8
losses of at least 24.1%. Compl. ¶¶ 21, 40. 9
Although the negative economic impact of these massive 10
trades on GGGF’s assets was less severe, see Compl. ¶ 2, it was 11
still sufficient to create a jury issue as to its materiality. 12
And, in any event, the notion that a reasonable investor would 13
regard as immaterial the failure to disclose the secret 14
arrangement by which the Fund and its Adviser, in return for a 15
pay-off to another fund, allowed one GGGF investor to engage in 16
highly profitable market timing while denying this opportunity to 17
all other investors, borders on the frivolous. 18
As to intent, the complaint alleges that Alpert knew, or was 19
reckless in not knowing, that the statements in the Memorandum 20
were misleading, because, inter alia, Alpert -- the author of the 21
Memorandum that reasonably gave the impression that the Adviser 22
was making best efforts to eliminate scalping -- had himself 23
given the order to the market timing “police” to let Headstart 24
continue its massive market timing, and because, as he also knew, 25

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Headstart was being given the preference in return for a secret 1
pay-off in the form of an investment in Gabelli’s hedge fund. 2
Also, contrary to Alpert’s contention that the complaint fails to 3
allege that he knew market timing was harmful to the Fund, the 4
complaint alleges that Alpert redeemed his own holdings in GGGF 5
because, as he told a fellow Gabelli Funds officer, “Marc Gabelli 6
was allowing the GGGF to be scalped.” Compl. ¶ 42. Accordingly, 7
we find that the complaint adequately states claims against 8
Alpert for violations of Section 17(a) of the Securities Act and 9
Section 10(b) of the Securities Exchange Act. 10
D. Civil Penalties 11
We next turn to whether the District Court erred in 12
dismissing the prayer for civil penalties under the Advisers Act 13
on the alternative grounds that (a) the SEC is not permitted to 14
seek civil penalties in connection with a claim for aiding and 15
abetting violations of the Advisers Act, and (b) the claim for 16
civil penalties is time-barred. The first ground is plainly 17
wrong, for this Court has previously held that civil penalties 18
may be assessed in connection with such a claim. See SEC v. 19
DiBella, 587 F.3d 553, 571-72 (2d Cir. 2009) (holding that 20
because a “‘violation’ of the Advisers Act” includes the aiding 21
and abetting of principal violations of the Advisers Act, “the 22
civil penalty provision encompasses both primary and secondary 23
violators of the Advisers Act”). 24
As for the alternative ground, the relevant statute of 25

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3 Specifically, the Third Claim alleges violations of Section
206(1) of the Advisers Act, which prohibits “any device, scheme,
or artifice to defraud,” and Section 206(2), which prohibits any
practice that “operates as a fraud or deceit.”
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limitations is set forth in 28 U.S.C. § 2462, which provides that 1
a claim for civil penalties must be brought within five years 2
“from the date when the claim first accrued.” 28 U.S.C. § 2462 3
(emphasis supplied). Because the complaint charges violations of 4
the antifraud provisions of the Advisers Act, 3 the SEC argues 5
that the claim did not “accrue” until September 2003 when, as the 6
complaint alleges, the SEC first discovered the fraud. This, the 7
SEC argues, is because the determination of accrual under § 2462 8
is subject to the fraud-based discovery rule -- “a doctrine that 9
delays accrual of a cause of action until the plaintiff has 10
‘discovered’ it,” or in the exercise of due diligence, should 11
have discovered it, see Merck & Co. v. Reynolds, -- U.S. –-, 130 12
S. Ct. 1784, 1793-94 (2010). The defendants respond that since 13
no reference to the discovery rule appears in the plain language 14
of 28 U.S.C. § 2462, the SEC’s claim for civil penalties accrued 15
in August 2002, the last instance of Headstart’s market timing in 16
GGGF. In addition, defendant Gabelli argues that the discovery 17
rule cannot save the SEC’s claims against him because he did not 18
take affirmative steps to conceal his misconduct. 19
As an initial matter, we note that Gabelli’s latter argument 20
reflects the all-too-common mistake by which the discovery rule 21
is “sometimes confused with the concept of fraudulent concealment 22

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of a cause of action,” see Pearl v. City of Long Beach, 296 F.3d 1
76, 80 (2d Cir. 2002), and we take this opportunity to once again 2
clarify that these two doctrines are distinct. Under the 3
discovery rule, the statute of limitations for a particular claim 4
does not accrue until that claim is discovered, or could have 5
been discovered with reasonable diligence, by the plaintiff. As 6
a general matter, this rule does not govern the accrual of most 7
claims because most claims do not involve conduct that is 8
inherently self-concealing. However, since fraud claims by their 9
very nature involve self-concealing conduct, it has been long 10
established that the discovery rule applies where, as here, a 11
claim sounds in fraud. As the Supreme Court recently stated in 12
Merck, “[t]his Court long ago recognized that something different 13
was needed in the case of fraud, where a defendant’s deceptive 14
conduct may prevent a plaintiff from even knowing that he or she 15
has been defrauded.” 130 S. Ct. at 1793 (emphasis in original). 16
See also TRW Inc. v. Andrews, 534 U.S. 19, 37 (2001) (Scalia, J., 17
concurring) (the discovery rule is a “historical exception for 18
suits based on fraud”). Thus, contrary to Gabelli’s contention, 19
the discovery rule applies to fraud claims “though there be no 20
special circumstances or efforts on the part of the party 21
committing the fraud to conceal it from the knowledge of the 22
other party.” Bailey v. Glover, 88 U.S. (21 Wall.) 342, 348 23
(1874). See also John P. Dawson, Fraudulent Concealment and 24

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Statues of Limitation, 31 M ICH . L. REV . 875, 880 (May 1933) 1
(“Where undiscovered ‘fraud’ was the basis of liability, it was 2
universally agreed that no new concealment was necessary.”). 3
The fraudulent concealment doctrine, by contrast, is an 4
equitable tolling doctrine, not an accrual doctrine. Under the 5
fraudulent concealment doctrine, even when a claim has already 6
accrued, a plaintiff may benefit from equitable tolling in the 7
event that the defendant took specific steps to conceal her 8
activities from the plaintiff. Thus, whereas the discovery rule 9
does not ordinarily apply to non-fraud claims (as it is generally 10
expected that a plaintiff will be able to discover the conduct 11
underlying non-fraud claims), the fraudulent concealment doctrine 12
may be used to toll the limitations period for non-fraud claims 13
where the plaintiff is able to establish that the defendant took 14
affirmative steps beyond the allegedly wrongful activity itself 15
to conceal her activity from the plaintiff. 16
In this case, since the Advisers Act claim is made under the 17
antifraud provisions of that Act and alleges that the defendants 18
aided and abetted Gabelli Funds’ fraudulent scheme, we hold that 19
the discovery rule defines when the claim accrues and, 20
correlatively, that the SEC need not plead that the defendants 21
took affirmative steps to conceal their fraud. Although the 22
defendants make much of the fact that Section 2462 does not 23
expressly state a discovery rule, this Court has previously held 24

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4 The defendants’ reliance on 3M Co. v. Browner, 17 F.3d
1453 (D.C. Cir. 1994), is misplaced, since it did not involve
fraud claims but concerned violations of the Toxic Substances
Control Act. Id. at 1460-63. As the Seventh Circuit recently
observed in SEC v. Koenig, 557 F.3d 736, 739 (7th Cir. 2009),
“[w]e need not decide when a ‘claim accrues’ for the purpose of §
2462 generally, because the nineteenth century recognized a
special rule for fraud, a concealed wrong.”
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that for claims that sound in fraud a discovery rule is read into 1
the relevant statute of limitation. See Dabney v. Levy, 191 F.2d 2
201, 205 (2d Cir. 1951) (Hand, J.) (“[I]n cases of ‘fraud’ ... 3
when Congress does not choose expressly to say the contrary, the 4
period of limitation set by it only begins to run after the 5
injured party has discovered, or has failed in reasonable 6
diligence to discover, the wrong.”) (internal quotations 7
omitted). Indeed, the Supreme Court has recently affirmed that a 8
fraud claim “accrues” only when the plaintiff discovers the 9
fraud. Merck, 130 S. Ct. at 1793-94. Thus, while Congress might 10
have to affirmatively include language about a discovery rule in 11
the event that it wanted a discovery rule to govern the accrual 12
of non-fraud claims or wanted to impose a limit on using a 13
discovery rule for certain fraud claims, it would be unnecessary 14
for Congress to expressly mention the discovery rule in the 15
context of fraud claims, given the presumption that the discovery 16
rule applies to these claims unless Congress directs otherwise. 4
17
See Holmberg v. Armbrecht, 327 U.S. 392, 397 (1946) (the 18
discovery rule for claims of fraud “is read into every federal 19
statute of limitation.”) (emphasis added). 20

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5 Indeed, the Seventh Circuit has observed that requiring
the SEC to plead why it did not discover a fraud sooner would be
“nonsensical” as it would require a plaintiff to “prove a
negative” in the complaint. Marks v. CDW Computer Ctrs., Inc.,
-21-
The defendants then argue that even if the discovery rule 1
applies, the SEC’s prayer for civil penalties must still fail 2
because the SEC has not pled reasonable diligence. Cf. SEC v. 3
Koenig, 557 F.3d 736, 739 (7th Cir. 2009) (pursuant to discovery 4
rule, “a victim of fraud has the full time from the date that the 5
wrong came to light, or would have done had diligence been 6
employed”). They claim that all of the evidence that GGGF was 7
being harmed by market timing was publicly disclosed in periodic 8
reports with the SEC and that, with reasonable diligence, the 9
SEC’s claims could have been discovered within Section 2462’s 10
five year limitations period. But the entire argument is, at 11
best, premature. The “lapse of a limitations period is an 12
affirmative defense that a defendant must plead and prove,” 13
Staehr v. Hartford Fin. Servs. Grp., Inc., 547 F.3d 406, 426 (2d 14
Cir. 2008), and dismissing claims on statute of limitations 15
grounds at the complaint stage “is appropriate only if a 16
complaint clearly shows the claim is out of time.” Harris v. 17
City of New York, 186 F.3d 243, 250 (2d Cir. 1999). Here, since 18
the complaint expressly alleges that the SEC first discovered the 19
facts of defendants’ fraudulent scheme in late 2003, therefore, 20
applying the discovery rule, the claim for civil penalties claims 21
is not clearly time-barred. 5 Finding that at this stage in the 22

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122 F.3d 363, 368 n.2 (7th Cir. 1997) (internal quotation marks
omitted).
6 For present purposes, we simply assume without deciding
that a complaint must include sufficient factual allegations to
plausibly allege not only a “claim to relief,” Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 570 (2007) (construing Fed. R. Civ. P.
8(a)(2)), but also a “demand for the relief sought,” Fed. R. Civ.
P. 8(a)(3)).
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litigation defendants have not met their burden of demonstrating 1
that a reasonably diligent plaintiff would have discovered this 2
fraud prior to September 2003, we conclude that the SEC’s prayer 3
for civil penalties survives defendants’ motions to dismiss and 4
must be reinstated. 5
E. Injunctive Relief 6
Finally, we turn to whether the District Court erred in 7
dismissing the SEC’s prayer for injunctive relief. In 8
determining whether injunctive relief is appropriate, “[t]he 9
critical question ... is whether there is a reasonable likelihood 10
that the wrong will be repeated.” SEC v. Manor Nursing Ctrs., 11
Inc., 458 F.2d 1082, 1100 (2d Cir. 1972). We first observe that 12
where, as here, the complaint plausibly alleges that defendants 13
intentionally violated the federal securities laws, it is most 14
unusual to dismiss a prayer for injunctive relief at this 15
preliminary stage of the litigation, since determining the 16
likelihood of future violations is almost always a fact-specific 17
inquiry. 6 Indeed, the defendants are unable to point to a single 18
case where the SEC’s prayer for injunctions against further 19

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-23-
violations was dismissed at the motion to dismiss stage based 1
upon a finding of non-likelihood of further violations. In any 2
event, since the complaint alleges that for almost three years 3
Gabelli and Alpert intentionally aided and abetted Advisers Act 4
violations and since “fraudulent past conduct gives rise to an 5
inference of a reasonable expectation of continued violations,” 6
see id., we conclude that the complaint sufficiently pleads a 7
reasonable likelihood of future violations and thus reverse the 8
District Court’s dismissal of the SEC’s prayer for injunctive 9
relief. 10
CONCLUSION 11
For the foregoing reasons, we grant the SEC’s appeal in all 12
respects, dismiss the cross-appeals for want of appellate 13
jurisdiction, and remand to the District Court for proceedings 14
consistent with this opinion. 15

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