Earlier this week the United States Court of Appeals for the Third Circuit decided two issues of first impression in the Circuit relating to the one-year statute of limitations in Section 13 of the Securities Act of 1933. The Court held that: (1) a plaintiff need not plead compliance with the statute of limitations in order to state a claim under the Securities Act; and (2) the discovery rule, not a more stringent "inquiry notice" standard, applies when analyzing whether a plaintiff timely filed an action under the Securities Act.
In Pension Trust Fund for Operating Engineers v. Mortgage Asset Securitization Transactions, Inc., the plaintiff pension fund purchased through UBS Securities certificates in a mortgage-backed security trust that entitled it to payments from the cash flow of the trust. Alleging that the offering documents for the certificates misrepresented the quality of the loans in the trust, the fund brought several claims against UBS under the Securities Act. The trial court dismissed the original complaint without prejudice because the fund had not pled that it complied with the statute of limitations in Section 13 of the Securities Act. After the fund amended the complaint to so plead, the trial court dismissed the amended complaint as untimely, holding that the fund was on inquiry notice of its claims more than a year before it filed them.
On appeal, the Third Circuit first held that "a Securities Act plaintiff is not required to plead compliance with Section 13" in order to state a claim under the Act. In so holding, the Court joined the Seventh, Ninth and Eleventh Circuits, but departed from contrary holdings by the First, Eighth and Tenth Circuits.
On the issue of whether compliance with the statute of limitations should be measured under the discovery rule or an inquiry notice standard, the Court acknowledged that it had adopted the inquiry notice standard in an earlier case. Under that standard, the statute of limitations begins to run when a reasonably diligent plaintiff would have begun investigating a possible violation, as opposed to when a reasonably diligent plaintiff would have discovered the violation itself (the accrual point under the discovery rule). Because the point at which a reasonably diligent plaintiff would have begun investigating is generally earlier in time than the point at which such a plaintiff would have discovered a violation, inquiry notice is typically a more stringent accrual standard. The Court reevaluated its prior holding that this more stringent standard should be applied in light of the Supreme Court's intervening decision in Merck & Co., Inc. v. Reynolds, and concluded that "pursuant to the Supreme Court's decision in Merck, we hold that the discovery standard governs whether Securities Act claims are timely under Section 13."
Although the Court disagreed with two of the trial court's legal conclusions, it nevertheless affirmed the dismissal of the action after concluding that the fund's complaint was untimely even under the more lenient discovery rule. The Court first held that a reasonably diligent plaintiff would have begun investigating its claim when, in September 2008, a class of plaintiffs filed a complaint alleging similar claims in California state court. The Court then concluded that, had the fund performed in September 2008 the same investigation it eventually performed to discover its claims – which investigation the fund alleged took two months to complete – it would have discovered its claims by November 2008. Since the fund did not file its complaint until February 2010, more than a year after it should have discovered its claims, its action was time barred even when applying the discovery rule.
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