The United States Supreme Court is set to decide later this term an important but technical decision concerning the time in which a plaintiff may bring a private securities claim under Section 11 of the Securities Act of 1933. On April 17, 2017, the Supreme Court held oral argument in California Public Employees' Retirement System v. ANZ Securities, Inc., et al. (No. 16-373) to resolve a question that has divided appellate courts: the circumstances under which a Section 11 claim can be tolled pending a class certification determination. As large institutional investors such as pension funds are increasingly pursuing standalone securities actions that parallel class action suits, the Court's decision could have significant implications for private securities litigation. A decision is expected to be issued early summer 2017.
Under Section 11 of the Securities Act, purchasers of securities may bring actions against certain persons involved in preparing and disseminating a registration statement that contains material misstatements or omissions; such actions are subject to a one-year statute of limitations and a three-year statute of repose found in Section 13 of the Securities Act:
No action shall be maintained to enforce any liability created under [Section 11] . . . unless brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence . . . In no event shall any such action be brought to enforce a liability created under [Section 11] . . . more than three years after the security was bona fide offered to the public . . . . 15 U.S.C. § 77m.
The Supreme Court previously held in American Pipe & Construction v. Utah, 414 U.S. 538 (1974), that the filing of a putative class action tolls the statute of limitations for the putative members of a proposed class pending a class certification decision. The applicability of American Pipe tolling in the context of the statute of repose has divided lower courts.
This question has significant practical implications. Over the last two decades, institutional investors such as pension funds have taken an increasingly significant role in securities litigation. Traditionally, these institutions have assumed that American Pipe tolling would cover their claims and they could take a "wait and see" position when a private class action was filed. Where institutional investors were satisfied with the resolution of the class action, they could choose to participate in the class; otherwise they could opt out of the class action and file a standalone claim. If the Supreme Court concludes that American Pipe tolling does not extend the three-year statute of repose, the "wait and see" approach will no longer be feasible.
Background on the CalPERS Case
The California Public Employees' Retirement System (CalPERS) is the nation's largest pension fund. Between July 2007 and January 2008, CalPERS purchased millions of dollars of debt securities issued by Lehman Brothers. On June 18, 2008, another retirement fund filed a putative class action in the Southern District of New York alleging that ANZ Securities and several dozen other financial institutions (ANZ defendants) involved in underwriting Lehman's debt securities were liable under Section 11 for making material misstatements and omissions in Lehman's registration statements. CalPERS filed its own complaint in February 2011 in the Northern District of California, which was subsequently transferred to the Southern District of New York and consolidated with the class action for pretrial purposes. Later that year, the proposed class reached a settlement and was certified for settlement purposes; CalPERS then opted out of the class settlement to pursue its own claim. The district court dismissed CalPERS's complaint, holding that its claims were barred by the three-year statute of repose.
The Second Circuit affirmed, holding that American Pipe tolling "does not affect the statute of repose embodied" in the Securities Act. See In re Lehman Brothers Securities and Erisa Litigation, 655 Fed. Appx. 13, 15 (2d Cir. 2016). In reaching this conclusion, the Second Circuit relied primarily on a prior decision, Police & Fire Ret. Sys. Of city of Detroit v. IndyMac MBS, Inc., 721 F. 3d 95 (2d Cir. 2013), which held that American Pipe tolling did not apply to Section 13's statute of repose.1 The Second Circuit reasoned alternatively that: (i) tolling is an inherently equitable principle, and to the extent American Pipe "is grounded in equity, its tolling rule cannot affect a legislatively enacted statute of repose"; and (ii) to the extent American Pipe establishes "a 'legal' tolling principle grounded in Rule 23, to apply it to a statute of repose would violate the Rules Enabling Act by permitting a procedural rule to abridge the substantive rights created by statutes of repose." Id. The Second Circuit also rejected CalPERS's arguments that its claims were essentially filed because it fell within the putative class before exercising its right to opt-out, and that time-barring its claims violates the due process considerations embodied in Rule 23's opt-out mechanism.
Other appellate courts have reached different conclusions on this issue.2 Most notably, the Tenth Circuit held that "American Pipe tolling applies to [Section 13's] statute of repose." Joseph v. Wiles, 223 F. 3d 1155, 166-68 (10th Cir. 2000). The Tenth Circuit concluded that: (i) American Pipe addressed legal—not equitable—tolling; (ii) tolling "the limitations period for class members while class certification is pending" serves FRCP Rule 23 by encouraging judicial economy; and (iii) that both limitations periods were satisfied when the class action was filed because "defendants were on notice of the substantive claim as well as the number and generic identifies of potential plaintiffs." Id. at 1166-68.
Oral Argument: Statutory Text vs. Practical Considerations
CalPERS began oral argument by urging the Court to find "that American Pipe tolling applies to both of the time limits set forth in Section 13 of the Securities Act."3 CalPERS argued that its action was always on file because the class action was brought within Section 13's one-year limitation and thus it was necessarily brought within its three-year limitation. CalPERS further argued that American Pipe was an interpretation of FRCP Rule 23, and that the congressional intent behind Section 13 was to limit its one-year "discovery" limitation with its three-year limitation. Throughout its argument, CalPERS referenced the increased opt-out litigation that would burden district courts if the Court ruled against it. In contrast, the ANZ defendants focused on the plain text of Section 13, arguing that it supports their position that the three-year limitation is a statute of repose that cannot be tolled for any reason. The financial institutions also characterized CalPERS's argument about increased opt-out litigation as a "parade of horribles," and noted that since IndyMac, the Second Circuit has not experienced a surge in opt-out litigation.
During oral argument, Justices Gorsuch (in his first day on the Supreme Court bench) and Alito were focused on the statutory text and plain meaning of the language, while Justice Kagan was focused on the policy argument and practical consequences noting that denying tolling is "kind of guaranteed to create make-work for district courts, to be essentially irrelevant for large investors, and for small investors to lose their claims."
Implications for Securities Class Actions
While the CalPERS case concerns a claim brought under the Securities Act of 1933, the decision will likely have implications for claims brought under the anti-fraud provisions of the Securities Exchange Act of 1934, which are subject to a five-year statute of repose.
A ruling that American Pipe does not apply to the three-year time limit, in the short run, would result in dismissal of a number of actions brought by institutional investors. In the long run, however, institutional investors might avoid this with increased "protective filings" at the outset of a case before class certification.
1. In 2014, the Supreme Court initially granted certiorari to review the IndyMac decision but subsequently dismissed the IndyMac writ as improvidently granted.
2. Since the Second Circuit decision in IndyMac, both the Sixth and Eleventh Circuits have found American Pipe tolling inapplicable to the Securities Act's statute of repose. See Stein v. Regions Morgan Keegan Select High Income Fund, Inc., 821 F.3d 780 (6th Cir. 2016); Dusek v. JPMorgan Chase & Co., 832 F.3d 1243 (11th Cir. 2016).
3. Notably, CalPERS does not concede that the three-year limitations period in Section 13 is a statute of repose.
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