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Supreme Court Applies Strict Time Limit to Securities Suits

The U.S. Supreme Court, in a 5-4 decision, held that a California pension fund (the “Fund”) untimely filed an individual suit alleging § 11 violations under the Securities Act of 1933 (the “Act”).  The Court ruled that the Fund untimely filed an individual complaint more than three years after the relevant securities offering, despite there being a timely-filed class action complaint.  The Fund would have been a member of the class but for opting out of it.

The decision, written by Justice Kennedy, upheld the dismissal of the Fund’s individual § 11 action based on the applicable three-year limitation found in §13 of the Act.  § 11 of the Act gives purchasers of securities a right of action against securities underwriters for material misstatements or omissions in a registration statement.  The controlling language of §13 requires that investors bring claims over a securities offering or a registration statement within one year after the discovery of the untrue statement or omission, or after such a discovery should have been made by reasonable diligence.  §13 further states that in no event will any action be brought for enforcement more than three years after a security is offered.

Justice Kennedy explained that the 3-year limitations period serves as a statute of repose, which is intended to provide defendants full protection from claims after a legislatively determined period of time.  Unlike statutes of limitations, statutes of repose are nonnegotiable and cannot be negated, evaded, or extended.

As background, this case began as a putative class action filed by another retirement fund in June of 2008.  The class action alleged that nearly thirty financial firms were liable under § 11 for false and misleading statements in the underwriting of billions of dollars in debt offerings made by a large investment bank before its collapse in 2008.  The Fund joined the class action, which reached a settlement in 2011, but the Fund chose to opt-out in order to pursue its claims individually.  The claims pursued by the Fund alleged violations that were identical to those in the class action.  When the Fund filed its complaint the trial court dismissed it as untimely under §13, and the Second Circuit affirmed the dismissal for the same reason.  The Fund then appealed to the Supreme Court.

The Fund argued that it should be allowed to pursue its claims because the three year time bar was tolled while the prior class action was pending.  The Fund primarily relied on American Pipe & Constr. Co. v. Utah, in which the Supreme Court held that the filing of a putative class action tolls the statute of limitations for all members of a proposed class who timely move to intervene after a court denies class certification.  The Court, however, distinguished the present case, explaining that (1) it would defy regular understanding to suggest that the Fund’s individual claim was the same “action” as the class action complaint and (2) that Congress changed the outside limit found in § 13 from 10 years to three years, which indicates its intent to have this section function as a statute of repose rather than a statute of limitations.  Because the three-year limit is a statute of repose rather than a statute of limitations, the majority determined that American Pipe was inapplicable.

The opinion went on to say that “permitting a class action to splinter into individual suits…would threaten to alter and expand a defendant’s accountability, contradicting the substance of a statute of repose.”  Justice Kennedy and the majority ultimately deemed the spirit of the statute of repose an important one to respect, and affirmed the dismissal of the fund’s individual claims.

Justice Ginsburg filed a dissent, which was joined by Justices Breyer, Sotomayor, and Kagan. In her dissent, Justice Ginsburg agreed with the Fund by pointing out that this precedent could have the effect of rendering the opt-out right illusory as well as incentivizing defendants to move slowly in discovery and other pre-certifications for settlement in order to run the clock on plaintiffs’ potential to opt-out.  She also argued that in light of this opinion there would be a greater importance for courts and class counsel going forward to take an active role in ensuring that class members understand the right to opt-out, and the timelines for expiration of the period of repose.

The opinion can be found here: https://www.supremecourt.gov/opinions/16pdf/16-373_pm02.pdf.