United States: Eastern District Of Michigan Holds That Exchange Act Statute Of Repose Starts To Run From Date Of Last Fraudulent Misrepresentation

On August 3, 2018, Judge George C. Steeh of the United States District Court for the Eastern District of Michigan dismissed with leave to amend an individual action asserting, among other things, Section 10(b) of the Securities Exchange Act and Rule 10b-5 claims.  Equity Trust Co., et al., v. Kopacka, et al., No. 17-12275 (E.D. Mich. Aug. 3, 2018).  Defendant argued that plaintiffs’ Exchange Act claims were barred by the applicable five-year statute of repose, which he argued was triggered no later than plaintiffs’ final purchase of securities.  Noting that the Sixth Circuit had not ruled on when the Exchange Act repose period begins to run, the Court sided with plaintiffs, the Third Circuit, and district courts in the First and Second Circuits in ruling that the period begins to run with the last alleged misrepresentation, even if it is made after the last alleged security purchase.

Plaintiffs worked with defendant to purchase interests in various funds between 2000 and 2009.  In 2016, the FBI investigated two of the funds following allegations that they were operating a Ponzi scheme.  This investigation, the Court noted, appeared to have prompted plaintiffs’ complaint.  Plaintiffs generally alleged that defendant made three types of misrepresentations:  (i) misrepresenting the risk, liquidity, and other features of the investments; (ii) concealing defendant’s status as a direct or indirect owner, manager, and/or advisor of the funds; and (iii) failing to disclose that defendant was barred from the stock brokerage industry.  

Defendant argued that plaintiffs’ Exchange Act claims were barred by the applicable five-year statute of repose, which provides that a claim “that involves a claim of fraud, deceit, manipulation, or contrivance in contravention of a regulatory requirement…may be brought not later than…5 years after such violation.”  28 U.S.C. § 1658(b)(2).  Relying on dicta in a Sixth Circuit decision and another Eastern District of Michigan case, defendant argued that the “violation” referenced in the Exchange Act statute of repose must refer to misrepresentations that precede the purchase or sale of securities.  According to defendant, Section 10(b) applies to claims of misrepresentation or omission “in connection with the purchase or sale of a security,” and a “violation” is therefore “triggered by the purchase of stock.”  In other words, the alleged wrong to be remedied by Section 10(b), if at all, was done at the time plaintiffs made their investments.  

Rejecting this argument, the Court relied on the Third Circuit’s decision in In re Exxon Mobil Corp. Securities Litig., 500 F.3d 189 (3d Cir. 2007), to hold that “the specific acts targeted by a § 10(b) cause of action are fraudulent statements themselves.”  According to the Court, even though a Section 10(b) claim accrues when there is a purchase or sale of the securities, it is “more consonant with the traditional understanding of how a statue of repose functions for the repose periods…to begin from the date of [the] alleged misrepresentation” rather than the date of the purchase or sale of the security.  Though not discussed in the Court’s opinion, the Third Circuit, in Exxon, further explained that a statute of repose runs from the time a defendant allegedly acted, here making a misrepresentation, and that the reference to “violation” rather than “accrual” in the Exchange Act statute of repose was instructive as to where the focus of the analysis needs to be.  (While analytically the decision in Exxon was consistent with the Court’s holding, Exxon notably did not involve an alleged misrepresentation after the alleged purchase of a security, as was the case here.) 

Because plaintiffs failed to allege defendants made a misrepresentation within the five years of the complaint, the Court dismissed the complaint with leave to amend.

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