Illustrious fund manager Mario Gabelli has a new opponent in the civil suit against him: the U.S. government.

The Justice Department announced Wednesday that it would seek to take over the suit filed in 2001 by lawyer Russell C. Taylor III, under the qui tam provision of the Federal Civil False Claims Act.

In the late 1990s, recounts the New York Times, the F.C.C. began auctioning control of radio spectrum to telecommunications companies providing cellular phone services. To prevent small telecom outfits from being shut out, the government stipulated that a portion of spectrum be sold to small companies, as well as those owned by minorities or women, at a special low price.

Gabelli, who heads Gabelli Asset Management (Gamco) and owns companies worth an estimated combined total of over $20 billion, provided financial backing for several individuals to set up their own companies and capitalized on the discounted rates. These individuals included former Knicks player Trent Tucker, as well as an aerobics instructor, and a dentist who was also the father-in-law of Gabelli’s daughter.

While it was not illegal for Gabelli to loan these individuals their start-up funds, explains the Wall Street Journal's David Wessel in an interview with CNBC, the lawsuit brought by Taylor alleges Gabelli in fact controlled the companies he funded. It charges that these companies received licensing discounts worth $90 million and $70 million in low-interest loans, and were promptly sold off, after the granting of licenses, for profits of $206 million.

Taylor worked at one of the law firms involved with the auctioning process, and said he filed the suit after becoming suspicious about the profiles of companies funded by Gabelli. If the prosecution wins, Russell will receive a percentage of damages, which could exceed $300 million.

The Justice Department had initially chosen to stay out of the case, a fact which Gabelli previously pointed to as evidence the suit was unfounded. In an interview this week, reported in USA Today, Gabelli maintained he committed no fraud.

"I’m delighted to deal with an entity that knows the facts," he said of the government's decision to get involved. Lawyers for the plaintiff also welcomed the action.

Meanwhile, shares of Gamco dropped more than 8 percent yesterday upon news of the government’s decision, reported the New York Post.

F.C.C. commissioner Jonathan Adelstein said yesterday that his organization would bear the case in mind when reviewing bidders in this year's scheduled spectrem auction. "We want to make sure that large companies don't get credits intended for small businesses," he was quoted in USA Today. 

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