The U.S. Supreme Court has agreed to take up a case arising out of the credit crisis-era collapse of the Lehman Brothers investment bank, in order to decide whether or not, under principles known as the “American Pipe doctrine,” the filing of a securities class action lawsuit tolls the Securities Act’s statute of repose. In its 1974 American Pipe decision, the Court held that the filing of a class action suit tolls the applicable statute of limitations; in this latest case, the Court must resolve a split between the federal circuit courts and decide whether a class action lawsuit filing also tolls the applicable statute of repose. Though the case involves seemingly arcane issue, it could have very important practical implications, particularly with respect with respect to the timing of class members’ decisions whether or not to opt-out of the class. The U.S. Supreme Court’s January 13, 2017 order granting the petition of the plaintiff for a writ of certiorari in California Public Employees’ Retirement System v. ANZ Securitites Inc. can be found here.
Lehman Brothers issued over $31 billion of debt securities between July 2007 and January 2008. CalPERS purchased millions of dollars of these securities. On June 18, 2008, a plaintiff filed a securities class action lawsuit in the Southern District of New York against Lehman Brothers and certain of its directors and officers alleging, among other things, that the defendants had made material misrepresentations and omissions with respect to the debt offerings.
In February 2011, more than three years after the debt offerings, CalPERS filed its own separate complaint asserting that company officials and others had made misrepresentations and omissions in the offering documents. Later in 2011, the securities class action lawsuit settled. CalPERS opted out of the settlement in order to pursue its own claims. The district court subsequently dismissed the separate CalPERS lawsuit as untimely. CalPERS appealed the dismissal to the Second Circuit.
The relevant statute of limitations and statute of repose provisions are set out in Section 13 of the Securities Act of 1933, which provides that all claims under the Act must be brought within one year of the discovery of the violation or within three years after the security involved was first offered to the public. Under the tolling doctrine established in the U.S. Supreme Court’s 1974 decision in American Pipe & Construction Company v. Utah, the filing of a securities class action lawsuit tolls the running of a statute of limitations period. In its appeal to the Second Circuit, CalPERS argued that the American Pipe tolling doctrine also applied to the statute of repose.
Second Circuit Ruling
In a July 8, 2016 summary order for a unanimous three-judge panel (here), the Second Circuit affirmed the lower court’s dismissal of the case, holding that CalPERS had filed its lawsuit after the expiration of the three-year statute of repose in the Securities Act, and that the prior filing of the securities class action lawsuit had not tolled the statute of repose. An interesting analysis of the Second Circuit’s summary order can be found here.
In holding that the filing of the prior securities class action lawsuit did not toll the statue of repose, the Second Circuit relied on its own prior decision in the Indy Mac case, in which the appellate court had held that while statutes of limitations may be tolled, the period of a statute of repose is fixed and its expiration cannot be delayed by tolling.
In affirming the lower court ruling and affirming its own prior decision in the Indy Mac case, the Second Circuit also noted the split of the circuits on the question of whether or not the prior filing of a securities class action lawsuit tolls the statute of repose in the Securities Act. The appellate court said that in light of this circuit split, the tolling questions “may be ripe for resolution by the Supreme Court.” The court added that “unless and until the Supreme Court informs us that our decision was erroneous, Indy Mac continues to be the law of the Circuit and its reasoning controls the outcome of the case.”
The U.S. Supreme Court has, in fact, once before agreed to take up the tolling question, when it granted cert in the Indy Mac case itself (as discussed here). However, when the parties to the underlying securities Indy Mac securities case reached a settlement while the Supreme Court case was pending, the Court dismissed the writ as having been improvidently granted.
Cert Petition and Cert Grant
On September 22, 2016, CalPERS filed a petition to the Supreme Court for a writ of certiorari (here), seeking to have the Court review the Second Circuit’s decision, and to address the question the Court taken up but not had the opportunity to answer in the Indy Mac case. In seeking to have the Court take up the case, CalPERS cited the split between the circuits, in which the Tenth, Seventh and Federal Circuits holding that a prior class action lawsuit filing tolls the statute of repose in the Securities Act, while the Second, Sixth and Eleventh Circuits have refused to apply American Pipe tolling to the Securities Act’s statute of repose.
In their November 23, 2016 brief in opposition (here), the respondents argued that the Second Circuit had correctly decided the tolling questions, and that the purported circuit split on which CalPERS had relied was more apparent than real. The respondents also argued that the arguments CalPERS presented in favor of tolling the statute of repose were inconsistent both with the clear wording of the Securities Act and with the purpose of statutes of repose.
On January 13, the Supreme Court granted CalPERS petition for a writ of certiorari, but only as to the first of two questions CalPERS presented, the question of whether the American Pipe doctrine tolls the Securities Act’s statute of repose. The Court denied the writ on a second question CalPERS had presented, on whether the member of a class represented in a class action had been timely filed may file an individual suit, notwithstanding the expiration of relevant time limitations.
As I noted above, even though the question the court has agreed to take up may seem obscure, it potentially has important practical implications.
First, if the prior filing of a securities class action lawsuit does not toll the Securities Act’s three-year statute of repose, current securities class action opt-out practices could be affected. As things currently stand, many investors rely on class actions filed by other investors to prevent their claims from being time barred, while awaiting the resolution of the case through settlement before deciding whether or not to opt out.
Without the benefit of American Pipe tolling with regard to the statute of repose, many investors, including institutional investors, will have to monitor the many cases in which their interests are involved more closely and intervene or file individual actions earlier in order to preserve their interests. It its cert petition, CalPERS argued that in the circuits holding that the prior filing of a securities class action lawsuit,
potential securities plaintiffs are forced to guess whether they must file their own protective lawsuits to safeguard against the possibility that class certification in a pending action will be denied (or granted, then overruled on appeal) after the limitations period has run. If they guess wrong, genuine injuries and blatant frauds may go unaddressed. If they act conservatively, they will burden the courts with duplicative pleadings and redundant briefing that serve no real-world purpose.
Along the same lines, an amicus brief filed in support of CalPERS’ petition by the Retired Federal Judges raised similar concerns, stating that they “envision an increase in ‘protective filings’” and that “the Second Circuit’s decision could “prompt wasteful and unnecessary litigation that burdens all parties and the courts.”
In their opposition brief, however, the respondents argued that actual experience has shown that these dire warnings are unsupported by the facts. If, as CalPERS has argued, concerns about the statute of repose really were going to cause “protective filings,” this effect, the respondents argued, should already be evident in the number of opt-out filings. However, as discussed here, recent research was unable to discern an increase in opt-out actions over time.
In any event, because the outcome of this case likely will turn on the differences between statutes of limitations and statutes of repose, the outcome of the case likely will have an impact beyond just the context of class action litigation under the Securities Act of 1933. The outcome could affect the determination of whether or not other statutes of repose are absolute, including for example the statute of repose in the Securities Exchange Act of 1934, as well as other federal statutes unrelated to the securities laws. The Court’s determination of the impact of the filing of a class action complaint on questions of timeliness of later complaints would likely have an impact in class action litigation outside of the securities law context as well.