After Halliburton, SCOTUS has another securities litigation puzzler
In a matter of weeks, the securities class action industry — I’m talking here about both plaintiffs and defense lawyers — will find out whether the U.S. Supreme Court has ended business as they know it. As you know, the justices will decide by the end of this term, in Halliburton v. Erica P. John Fund, if investors may continue to take advantage of the fraud-on-the-market doctrine the Supreme Court established in the 1988 decision Basic v. Levinson, which codified shareholders’ right to sue as a class. At oral arguments in March, the justices seemed to be reluctant to conduct radical surgery on the existing regime for class actions brought under the fraud provisions of the Exchange Act of 1934, but that’s no guarantee of the outcome.
Halliburton has cast such an enormous shadow that the court’s next big securities case hasn’t gotten much attention. In March, the justices granted certiorari to Mississippi’s public employees’ pension fund in a case presenting the issue of whether the filing of a shareholder class action suspends the three-year time limit on claims under the Securities Act of 1933. The 2nd U.S. Circuit Court of Appeals held last June that it does not, finding that the Supreme Court’s landmark 1974 ruling on class actions and tolling of the statute of limitations, American Pipe v. Utah, doesn’t apply to the time limit known as the statute of repose. Last week, MissPERS and two other public pension funds filed their merits briefs arguing that the 2nd Circuit drew a misguided distinction between the statute of limitations and the statute of repose. According to the briefs, the principles that led the court in the American Pipe case to conclude that the filing of a class action puts defendants on notice of liability should apply regardless of whether the time limit at issue is the one-year statute of limitations in the Securities Act or the three-year statute of repose.
The 2nd Circuit had concluded in its IndyMac decision that defendants have a “substantive right” to be free of exposure to investors’ Securities Act suits once three years have elapsed from the offering date. According to the 2nd Circuit opinion, written by Judge Jose Cabranes, the Supreme Court’s American Pipe ruling — which addressed extending the one-year deadline for investors to bring claims after they’ve discovered evidence of issuer wrongdoing — was “equitable tolling” rooted in Rule 23 of the Federal Rules of Civil Procedure, which governs class actions. The 2nd Circuit said that under Supreme Court precedent in the 1991 decision Lampf, Pleva v. Gilbertson, equitable tolling doesn’t apply to the three-year statute of repose in the Securities Act. It also said that the Rules Enabling Act forbids using a federal rule to preclude substantive rights, so courts can’t curtail a defendant’s right to be free of liability via Rule 23.
The pension funds’ merits briefs argue that the 2nd Circuit wrongly applied both Lampf precedent and the Rules Enabling Act. The Lampf decision, according to MissPERS counsel of record David Frederick of Kellogg, Huber, Hansen, Todd, Evans & Figel, has no bearing on the case since it didn’t mention tolling for individual investors who would otherwise be members of class that already filed claims. And the Supreme Court, MissPERS said, has never recognized a “substantive right” under a statute of repose that’s distinct from ordinary statutes of limitations. The Securities Act provision establishing time limits, “like other statutes of limitations, refers only to the timeliness of actions and not to any underlying right,” the brief said. So the Rules Enabling Act does not preclude tolling of the time bar under American Pipe.
Besides, as the funds point out, if a defendant has been sued in a class action for Securities Act violations, it is already on notice of liability: Its repose has been disrupted by the class action. “Permitting putative class members to intervene or file a separate action simply provides them the opportunity to pursue claims the substance of which the defendant has already received notice within three years,” MissPERS argued. “Such a result does not offend the purposes of the three-year limitations provision, or any other limitations provision.”
The 2nd Circuit’s alternative interpretation, according to the funds, would swamp federal dockets with individual suits by investors worried about protecting potential Securities Act claims even if they’re already members of classes asserting the same causes of action. That’s the only way for investors to preserve their rights in the event the class isn’t certified or they decide to opt out. The Supreme Court specifically sought to avoid such duplicative and protective filings when it adopted the American Pipe rule, according to the pension funds. There’s no reason that the Supreme Court shouldn’t extend American Pipe tolling to the three-year time bar as well as the one-year discovery time limit, the brief said.
These are nuanced and technical arguments, but an amicus brief filed Wednesday by more than 40 pension funds pointed out the real-world consequences of the 2nd Circuit ruling: “Pension funds and other institutional investors would have to monitor and analyze a large number of pre-certification class actions in distant forums, to ensure that the limitations period does not run without a decision on class certification,” the brief said. “Even in cases in which class certification is granted within the limitations period, investors would still have to monitor, analyze, and perhaps intervene or file an action to protect themselves against the risk that a later decertification would make their claims time-barred.”
I reached out to Gibson, Dunn & Crutcher, which represents the IndyMac defendants, but didn’t hear back. Patrick Egan of Berman DeValerio is counsel of record for the Los Angeles and Detroit pension funds, which are nominally respondents in the case but are supporting MissPERS.
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