United States: Supreme Court Rejects Ninth Circuit Rule On Tolling For Short-Swing Trading Claims

In Credit Suisse Securities (USA) LLC v. Simmonds, No. 10-1261, ___ U.S. ___, 2012 WL 986812 (Mar. 26, 2012), the U.S. Supreme Court unanimously rejected the Ninth Circuit's 30-year-old rule that tolls the statute of limitations for short-swing profit claims under Section 16(b) of the Securities Exchange Act of 1934 until the insider discloses his transactions, typically in an SEC Form 4. Instead, the Court held that, to the extent that Section 16(b)'s statute of limitations is subject to tolling, courts must follow standard equitable tolling principles, which look to when the claimant discovers or should have discovered facts that support a claim. The Court left open the possibility that the statute of limitations for Section 16(b) claims may not be subject to tolling at all.

Short-Swing Profits Prohibited by Section 16(b)

Section 16(b) imposes a form of strict liability on executive officers, directors and 10% shareholders of public companies who both purchase and sell, or sell and purchase, their corporation's equity securities within a period of less than six months. The statute applies regardless of whether these corporate insiders actually had inside information. Under Section 16(b), a public company (or a security holder in the event that the company fails to pursue the claim) may sue these corporate insiders to compel disgorgement of all profits from such trades. Section 16(b) expressly states that "no such suit shall be brought more than two years after the date such profit was realized."

In 2007, Vanessa Simmonds filed 55 actions against the underwriters of various initial public offerings and insiders of the companies that were taken public, alleging that the defendants, as a group, were subject to, and had violated, both Section 16(b)'s prohibition on short-swing insider trading and Section 16(a)'s requirement to disclose changes to their beneficial ownership on Form 4.

The district court dismissed 24 of Simmonds' complaints on the ground that Section 16(b)'s two-year statute of limitation had expired years before she filed her suits. In re Section 16(b) Litig., 602 F. Supp. 2d 1202 (W.D. Wash. 2009). Relying on its decision in Whittaker v. Whittaker Corp., 639 F.2d 516 (9th Cir. 1981), the Ninth Circuit reversed, holding that the limitations period was tolled until the insiders disclosed the trades on a Form 4—and that tolling continued until such a disclosure occurred even if the plaintiff shareholder knew or should have known of the conduct that formed the basis for the claims. Simmonds v. Credit Suisse Sec. (USA) LLC, 638 F.3d 1072 (9th Cir. 2011). The Supreme Court reversed in an 8–0 decision.

The Supreme Court Rejects the Ninth Circuit's Whittaker Standard in Favor of Standard Equitable Tolling Principles

The Court rejected the Ninth Circuit's Whittaker standard, noting first that tolling the statute of limitations until a Form 4 discloses the purchase and sale transactions is inconsistent with Section 16(b)'s plain language, which states that the statute of limitations starts running as of "the date [the short-swing] profit was realized." The Court observed that Congress could have easily stated that suit can be brought no more than two years after the filing of the statement required by Section 16(a), but did not do so.

Equally important, the Court considered the Ninth Circuit rule to be "completely divorced from long-settled equitable-tolling principles," which require plaintiffs to establish both that they pursued their rights diligently and that extraordinary circumstances prevented them from filing their claims earlier. The Court also cited the well-established rule that when limitations periods are tolled due to fraudulent concealment of facts, tolling ceases when the plaintiff discovers, or should have discovered, the previously concealed facts.

The Court was concerned by the inequity of allowing plaintiffs to sit indefinitely on Section 16(b) claims, even after they discover a factual basis to assert those claims, simply because the defendant insider did not file a Form 4. The Court added that, in this case, where the defendants never filed Form 4s, the statute of limitations still would not have begun to run under the Ninth Circuit rule, even though Simmonds knew enough facts to file her claim years earlier.

The Court remanded the matter to the lower courts to consider whether Simmonds' claims were time-barred under the usual rules of equitable tolling.

Court Leaves Open the Possibility that a Future Decision May Entirely Reject Equitable Tolling for Section 16(b) Claims

The Court did not rule on the defendants' argument that the two-year limitations period in Section 16(b) is a "period of repose that is not subject to tolling" and may not be extended until a plaintiff discovers facts that underlie the claim. With Chief Justice Roberts not participating, the Court was evenly divided on this issue, but given his positions in other cases, it seems more likely than not that the Chief Justice would have joined the four justices who believe that the plain language of Section 16(b)'s limitations clause precludes the application of any kind of tolling. It remains to be seen whether tolling principles of any sort will continue to have vitality in the Section 16(b) statute of limitations analysis.

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