Federal securities fraud claims brought under § 10(b) of the Securities Exchange Act and S.E.C. Rule 10b-5 must be brought not later than the earlier of two years after the discovery of the facts constituting the violation, or five years "after such violation."1 The two-year period is typically referred to as a statute of limitations, and the five-year period as a statute of repose. Although the law in the Second Circuit regarding accrual of the two-year statute of limitations is fairly well-settled, recent decisions have highlighted the absence of any clear guidance as to when the five-year statute of repose is triggered.
A Primer on the Statute of Repose
The distinction between statutes of limitations and repose is important, and the two are often confused. Statutes of limitation impact the remedies available to plaintiffs, and they are subject to equitable considerations (such as tolling or discovery rules). But statutes of repose impact the underlying right, and the clock on them will start ticking without interruption once the necessary triggering event occurs – regardless of whether a plaintiff knows or should know that she has a claim. Statutes of repose are subject only to legislatively created exceptions, and not to equitable considerations, and act to extinguish a plaintiff's claim after the passage of a fixed period of time. They create a substantive right in those protected by them to be free from liability after a defined period of time, and thus allow potential defendants to rest assured that a particular claim cannot be asserted against them once that time has passed.
The five-year statute of repose applicable to claims under § 10(b) and Rule 10b-5 is set forth in 28 U.S.C. § 1658(b). 28 U.S.C. § 1658(b) was not, however, enacted specifically for § 10(b) and Rule 10b-5 claims. It applies generally to federal civil causes of action involving claims of "fraud, deceit, manipulation, or contrivance in contravention of a regulatory requirement concerning the securities laws." Nevertheless, it is settled law that the time limitations set forth in the statute apply to § 10(b) and Rule 10b-5 claims, and that the five-year statute of repose is triggered by a "violation" of § 10(b) and Rule 10b-5. The question is what "violation" means, as it is not defined in 28 U.S.C. § 1658(b) itself.
When Does The Five-Year Statute of Repose Begin To Run for § 10(b) Claims?
Generally stated, § 10(b) and Rule 10b-5 make it unlawful to employ any device, scheme, or artifice to defraud, to make any untrue statement of a material fact, or to engage in any act which would operate as a fraud on any person, in connection with the purchase or sale of any security.2 In 2009, the Second Circuit, in Arnold v. KPMG LLP, an unpublished decision, held that the statute of repose for these claims "starts to run on the date the parties have committed themselves to complete the purchase or sale transaction."3 This holding differs from those of the Third and Seventh Circuits, both of which have held that the five-year statute of repose begins to run on the date of the defendant's alleged misrepresentation, even if the misrepresentation was made before the parties completed (or committed themselves to complete) the purchase or sale of securities.4 Nevertheless, Arnold appeared to settle the law of the Second Circuit,and was even followed in that regard by Judge Marrero of the Southern District of New York in 2010, in a case entitled Anwar v. Fairfield Greenwich Ltd.5
However, three recent decisions cast doubt on Arnold's efficacy. The first was issued by the Second Circuit itself in 2011, in City of Pontiac Gen. Employees' Retirement Sys. v. MBIA, Inc., a case in which the Second Circuit did not address this issue (or Arnold) directly, but rather remanded to the district court the question of whether the statute of repose "commences at the time of the defendant's misrepresentation or at the time the relevant securities were purchased."6
Earlier this year, Judge Sweet of the Southern District of New York expressly declined to follow Arnold and held, in Intessa Sanpaolo S.p.A. v. Credit Agricole Corp. and Invest. Bank, that the statute of repose begins to run on the date of the last alleged misrepresentation (which in that case occurred more than a month prior to the actual transaction).7 In so holding, Judge Sweet noted that Arnold was an unpublished decision that did not constitute binding precedent, and also distinguished it on the facts, holding that Arnold "addresses a scenario where the alleged misrepresentation was made after the purchase."8
Judge Sweet then refined this analysis a few months later, in Arco Capital Corp. Ltd. v. Deutsche Bank AG, a case in which the plaintiff alleged that the defendant's allegedly fraudulent conduct continued after the securities purchase transaction at issue.9 This time, Judge Sweet relied upon Arnold and, consistent with his view that Arnold applies only "where the alleged misrepresentation was made after the purchase," specifically held that the "violation" that triggers the repose period can take place before and up to the time when the purchase or sale of securities takes place, but not after. In other words, where post-purchase or sale violations are alleged, the repose period for those violations is triggered as of the date of the transaction.
Clearly, the issue of when the five-year statute of repose under § 10(b) and Rule 10b-5 is triggered remains unsettled in the Second Circuit, and is likely to remain so unless and until cases such as Intessa Sanpaolo and Arco Capital are appealed.10
1. 28 U.S.C. § 1658(b)
2. A private-plaintiff bringing a § 10(b) claim must show that she relied on the misrepresentation, and that the misrepresentation proximately caused her injuries, but these additional elements are not always deemed to be part of the "violation." See McCann v. Hy-Vee, Inc., 663 F.3d 926, 932 (7th Cir. 2011) ("there is no mention of reliance or injury in either section 10(b) of the 1934 Act or Rule 10b-5.") U.S. v. Vilar, -- F.3d --, 2013 WL 4608948 at * 19 (2d Cir. Aug. 30, 2013) ("the long-established law of our Circuit, and nearly every other circuit, is that, when the government (as opposed to a private plaintiff) brings a civil or criminal action under Section 10(b) and Rule 10b–5, it need only prove, in addition to scienter, materiality, . . . and not actual reliance.") (collecting cases)
3. Arnold v. KPMG LLP, 334 Fed.Appx. 349, 351 (2d Cir. 2009).
4. In re Exxon Mobil Corp. Sec. Lit., 500 F.3d 189, 200 (3d Cir. 2007); McCann v. Hy-Vee, Inc., 663 F.3d 926 at 932.
5. Anwar v. Fairfield Greenwich Ltd., 728 F. Supp. 2d 372, 387 (S.D.N.Y. 2010). In 2011 and 2012, federal district courts in California and Virginia also applied the Second Circuit's holding in Arnold. See Stichting Pensioenfonds ABP v. Countrywide Fin. Corp., 802 F. Supp. 2d 1125, 1134 (C.D. Cal. 2011);In re Countrywide Fin. Corp. Mtge.-Backed Sec. Litig., 2:11-ML-02265-MRP, 2012 WL 1097244 (C.D. Cal. Mar. 9, 2012); Carlucci v. Han, 886 F. Supp. 2d 497, 514 (E.D. Va. 2012).
6. City of Pontiac Gen. Employees' Retirement Sys. v MBIA, Inc., 637 F3d 169, 176 (2d Cir. 2011). A review of the docket in the case indicates that, following remand, the case settled and the district court never ruled on the statute of repose issue.
7. Intessa Sanpaolo S.p.A. v. Credit Agricole Corp. and Invest. Bank, 924 F. Supp. 2d 528, 537-38 (S.D.N.Y. 2013). Judge Kaplan of the Southern District of New York adopted a similar view in an unpublished 2012 decision, Boudinot v. Shrader, 09 Civ. 10163, 2012 WL 489215 at *4 (S.D.N.Y. Feb. 15, 2012), but did not address Arnold at all.
8. Id. at 536-37.
9. 12 Civ. 7270, 2013 WL 2467986, -- F. Supp. 2d --, at * 10 (S.D.N.Y. Jun. 6, 2013)
10. Judge Sweet recently dismissed the plaintiff's amended § 10(b) claim in Intessa Sanpaolo with prejudice, finding that the amended claim "failed to overcome the timeliness issues that proved fatal for the § 10(b) claims asserted in the first amended complaint." Intessa Sanpaolo S.p.A. v. Credit Agricole Corp. and Invest. Bank, 12 Civ. 2683, 2013 WL 4856199 at *6 (S.D.N.Y. Sept. 10, 2013). A motion to dismiss an amended complaint filed by the plaintiff in Arco Capital is currently pending.
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