Photo: New York Social Diary
Judge Rakoff has reversed a previous court decision and will proceed with a trial against Marc Gabelli for misleading investors in a Gabelli mutual fund while shareholders suffered.Gabelli ran a number of funds in his father’s company, GAMCO Investors. The one in question is the Gabelli Growth fund.
The hedge fund manager Gabelli favoured was Najy N. Nasser, the chief investment adviser to Folkes Asset Management, now called Headstart Advisers Ltd.
And here’s what he did: Gabelli arranged with Nasser’s fund an agreement where he could buy shares in Gabelli Growth low if their value was about to increase the next day, and vice versa. Nasser’s fund was the only fund known to benefit from an agreement with Gabelli in this way. Other investors were prohibited from doing so, because it harms other shareholders. In exchange, Gabelli got a $1 million investment – and collected fees on it.
The SEC’s lawsuit says:
The complaint alleges that from 1999 until 2002, Gabelli and Alpert permitted Headstart to engage in time zone arbitrage (which defendants referred to as “scalping”) that took advantage of stale pricing opportunities in (GGGF. Id. 17, 36, 42.) Initially the amount of such scalping was limited, but on April 7, 2000, Gabelli allegedly agreed to permit Headstart to increase its market timing capacity from $7 million to $20 million, in exchange for a $1 million investment by Headstart in a hedge fund that Gabelli managed. Headstart’s $1 million investment, which constituted approximately four per cent of Gabelli’s hedge fund’s assets, was made the day after Headstart’s increase in market timing.
After the investment –
For the next two years, “market timing police” — employees instructed by Alpert to monitor market timing activity within Gabelli Funds — reviewed purchases in global funds: if it appeared that the purchase was a market timing trade, the purchase was rejected and sometimes the account was banned from making future purchases. Yet, during the very same period, Alpert instructed the market timing police to ignore Headstart’s market timing activity because “it was a Marc Gabelli client relationship,” and assured Nasser that Headstart’s accounts would not be blocked.
“Market timing” is technically not illegal, however Gabelli funds did not disclose to other investors, who might have been adversely affected by the disadvantage (it can dilute shareholders’ returns), what was going on. AND meanwhile the funds had a misleading statement on their website saying:
[F]or more than two years, scalpers have been identified and restricted or banned from making further trades. Purchases from accounts with a history of frequent trades were rejected. Since August 2002, large transactions in the global, international and gold funds have been rejected without regard to the past history. While these procedures were in place they did not completely eliminate all timers.
Of course the opposite was going on.