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From Securities Regulation Daily, July 14, 2016

Action against Bear Stearns time barred as court finds statute of repose not tolled

By Kevin Kulling, J.D.

The class action tolling rule set forth in American Pipe does not apply to the five year statute of repose that limits the time in which claims under Section 10(b) of the Exchange Act can be brought, the Second Circuit Court of Appeals has held. The court affirmed the dismissal of claims against the defunct Bear Stearns Companies as time barred (SRM Global v. Bear Stearns Companies LLC, July 14, 2016).

Bear Stearns action. The action arose from the 2007 and 2008 purchase of Bear common stock by SRM Global Master Fund Limited Partnership. SRM alleged that it relied on misrepresentations in Bear’s 2006 Form 10-K as well as representations by Bear’s auditors, Deloitte, in Bear’s 2006 and 2007 Form 10-Ks.

According to SRM, prior to Bear’s collapse in 2008, its officers made material misstatements and omissions that overstated the value of Bear’s assets, the adequacy of its capital reserves and liquidity, and the quality of its risk management and valuation procedures. Deloitte allegedly falsely certified that the Form 10-Ks that Bear filed for 2006 and 2007 presented fairly, in all material respects, the information set forth.

Following Bear’s collapse, several class actions were consolidated and settled, while SRM requested and was granted an exclusion from the settlement class. SRM then filed a separate complaint in 2013, asserting Bear made material misrepresentations.

SRM time barred. Bear moved to dismiss SRM’s complaint as time barred. Although SRM argued that the statute of repose was tolled by the filing of the class action complaint in 2008, the district court disagreed, and dismissed the complaint, holding that tolling as set forth in American Pipe & Construction Co. v. Utahdid not apply.

Under American Pipe, the commencement of a class action suspends the applicable statute of limitations as to all asserted members of the class who would have been parties had the suit been permitted to continue as a class action. The court noted that 28 USC 1658(b)(2), the five year statute of repose that limits the time in which plaintiffs may bring claims under Section 10(b) of the Exchange Act, is not a statute of limitations. Instead, as a statute of repose, it defines the right involved in terms of the time allowed to bring suit.

Affirmed. The court reiterated its prior holdings that statutes of repose were not subject to equitable tolling. Such statutes create a substantive right in defendants to be free from liability after five years. The court said that American Pipe tolling cannot modify that right without running afoul of the Rules Enabling Act.

Because the complaint failed to allege that defendants made any misrepresentations within five years of the filing of SRM’s complaint, the court affirmed the holding that its claims were time barred under the five year statute of repose.

The case is No. 14-507-cv.

Attorneys: Richard Bruce Drubel (Boies, Schiller & Flexner LLP) and Karen Hanson Riebel (Lockridge Grindal Nauen PLLP) for SRM Global Master Fund Ltd. Partnership. Jessica S. Carey (Paul, Weiss, Rifkind, Wharton & Garrison LLP) for Bear Stearns Co. LLC, f/k/a Bear Stearns Co. Inc.

Companies: SRM Global Master Fund Ltd. Partnership; Bear Stearns Co. LLC, f/k/a Bear Stearns Co. Inc.

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