The Justice Department said it will pursue civil fraud claims against Mario Gabelli, alleging that the famed money manager was at the center of a scheme to deceive the Federal Communications Commission in auctions of cell-phone spectrum.

In a surprise appearance in U.S. District Court here yesterday, a Justice Department lawyer said the government would move to take over a five-year-old private lawsuit that seeks hundreds of millions of dollars in damages from Mr. Gabelli and others who participated in FCC auctions between 1995 to 2000. The suit alleges that Mr. Gabelli created “sham” companies that bid for FCC cell-phone licenses at a discount under rules favoring minority and small businesses, and then sold the licenses at a profit.

The move by the government is a significant legal setback for Mr. Gabelli, who has cited its absence from the case as support for his stance that the suit is without merit. And with the Justice Department in the case, his potential liability could rise sharply with added government claims.

“After looking at the evidence.. we believe they do have a compelling case,” Assistant U.S. Attorney David Kennedy told the court. He cited a November 4 ruling by Judge Paul A. Crotty “as a call to re-examine the case.” The ruling narrowed the damages that the private plaintiffs could seek, but also invited the government to recover the added damages – as much as $205 million more if Mr. Gabelli loses at trial.

Judge Crotty did not immediately rule on the government’s request to join the case, however. He sternly rebuked the FCC for failing to provide all of the documents that Mr. Gabelli’s legal team has said it needs to complete its defense and made the government’s entry into the case “contingent on full, open-book discovery on all matters.” He said that as a result, it’s unlikely the case can go to trial June 1 as scheduled.

The case has drawn attention to problems with the FCC’s spectrum auctions as it prepares for a new $15 billion auction this summer. Under a congressional mandate to encourage broad participation, the FCC offers small businesses bidding discounts of as much as 25%. These bidders are permitted to have backing from big companies, but must be independent and not simply serve as “fronts,” as alleged in the Gabelli case. As a result of alleged abuses of these rules, the FCC is considering tightening them.

Mr. Gabelli wasn’t present at the hearing. He has denied the claims in the lawsuit and mounted a fierce defense. The lead defense counsel, Lanny Breuer, was sharply critical of the U.S. decision to take over the case.

“The government’s conduct in this case has been outrageous,” he said. Mr. Breuer also told the court that the FCC has stonewalled in producing needed evidence and that some of it may have been lost.

“I am convinced, though I can’t say for sure, that the FCC has permitted document after document to be destroyed,” he said. Plaintiff’s lawyers responded that Mr. Breuer had no evidence for this charge, and have said the document dispute is being used to delay a trial in the case.