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From Securities Regulation Daily, June 26, 2017

Section 13 is repose law, American Pipe can’t save suit by investor who opted out of class settlement

By Mark S. Nelson, J.D.

The Supreme Court in a 5-4 opinion held that American Pipe’s equitable tolling rule is unavailable to save an individual suit filed outside the three-year repose period contained in Securities Act Section 13. In reaching this conclusion, the justices sought to resolve long-simmering questions about the nature and scope of Section 13 and the equitable tolling doctrine previously established by the court in American Pipe. The court’s pending decision on whether to hear two other cases raising a similar American Pipe question, but with respect to slightly different statutory language, could further help to indicate the reach of today’s opinion (California Public Employees' Retirement System v. ANZ Securities, Inc., June 26, 2017, Kennedy, A.).

The case arose from Lehman Brothers’ issuance of securities during the financial crisis. Class plaintiffs initially sued in the federal court in Manhattan, but California Public Employees' Retirement System (CalPERS) eventually filed a separate suit in a California federal court and chose to opt-out of a class settlement. The CalPERS case was transferred to the Manhattan federal court, consolidated, and then dismissed as untimely. The Second Circuit affirmed that result, holding that Section 13 is a repose statute such that equitable tolling cannot apply, and that legal tolling could not apply because the Rules Enabling Act would bar expansion of the defendants’ substantive right to be free from additional suits after the three-year limit passed.

Section 13 is a statute of repose. According to the court, Securities Act Section 13 has two parts: an opening sentence that contains a statute of limitations, and a second sentence that contains a statute of repose. One way to know this is to examine the nature of limitations and repose periods. In the court’s Waldburger decision, the justices explained that a statute of limitations requires a plaintiff to diligently pursue known claims, while a statute of repose constitutes a legislative finding that a potential defendant should be free from liability after some fixed period of time.

Section 13 is a repose period, said the court, because of its structure and language, something the court previously suggested in its 1991 Lampf decision. For one, the second sentence’s "in no event" language does not contain any exceptions. The court also found support for the sentence being a repose period from its legislative history, which revealed a quick amendment a year after its original enactment to shorten both the limitations period and to dramatically shorten the outside time limit from 10 years to three years.

Moreover, American Pipe emphasized equitable principles, further suggesting that its application is limited to a court’s equitable powers to toll a statute of limitations. While equitable tolling functions to help a diligent plaintiff who encounters difficulties arising from extraordinary circumstances, a repose statute’s purpose supplants a court’s equitable powers. As a result, a statute of repose generally is not subject to equitable tolling. Having enumerated the differences between statutes of limitation and statutes of repose, the court concluded that American Pipe did not apply to the repose language contained in Section 13.

CalPERS arguments rejected. The majority rejected CalPERS’s four arguments in favor of applying American Pipe tolling. First, Section 13 functioned as a repose period, while American Pipe involved a statute of limitations. Second, while general interests in notice of potential claims and in the generic identities of plaintiffs may be important for limitations periods, the interests backing limitations periods differ from those for repose periods. For example, the tolling of a repose period could raise a defendant’s practical burdens and financial risk (i.e., an opt-out plaintiff has leverage to get "outsized recoveries"). The court also rebuffed arguments about limits on opt-out rights (still cannot disregard time limits) and about judicial inefficiencies if tolling is disallowed (worries about courts being flooded by filings may be overstated).

The majority suggested what class action practice going forward may look like. According to the court, a potential class member could file a motion to intervene or request to be included as a named plaintiff.

Lastly, the court rejected CalPERS’s argument that tolling was not truly at issue in the case because the timely class action "brought" CalPERS’s "action" in a timely manner. The court said "action" means judicial proceeding and that CalPERS’s action was not the same one as the earlier, timely class action. The justices said CalPERS’s suggested rule would stretch the logical limits of what it means to give repose.

Dissent notes "slow walk" strategy. Justice Ginsburg, joined by Justices Breyer, Sotomayor, and Kagan, pushed back against the majority’s explanation of repose. For the dissenters, the notice to defendants of claims and potential plaintiffs within the repose period is key:

But whether CalPERS stayed in the class or eventually filed separately, respondents would have known, within the repose period, of their potential liability to all putative class members.

Justice Ginsburg further argued that not only does the majority opinion "disserve[]" investors, it invites securities class action defendants to "slow walk" pre-class certification proceedings, such as discovery. Moreover, Justice Ginsburg suggested that class counsel and courts will need to do more to inform class members of the importance of taking protective actions to ensure they may pursue their claims, a point she had made during oral argument.

Pending cert petitions; strength of statutory language. The Supreme Court spoke of the lack of exceptions inherent in the language of Section 13’s repose clause (elsewhere, the court spoke of legislative intent to permit tolling, such as where a statute of repose has its own built-in exceptions). The court also noted that Section 13 is keyed not to the accrual of a cause of action but instead to a defendant’s last culpable act. Here the court was emphatic about that feature of the statute: "[u]nder CTS, this point is close to a dispositive indication that the statute is one of repose." Yet the court’s conclusion that the American Pipe tolling rule is grounded in equity overshadows its various explanations.

Still, the court has two more pending certiorari petitions that deal with American Pipe tolling issues, but in the context of another statute that applies to securities suits and with different language from Section 13. The statute is 28 U.S.C. §1658, which provides that fraud claims may be brought no later than the earlier of two years after the discovery of the facts constituting the violation or five years after the violation. The provision was part of a package of amendments made by the Sarbanes-Oxley Act.

One petition raises the question of applying American Pipe to a repose period in the context of suits over the Madoff Ponzi scheme (Dusek petition) and the other case raises the same question regarding Bear Stearns’s collapse during the financial crisis (SRM Globalpetition). The court distributed both petitions (DusekSRM Global ) for today’s conference and will eventually issue orders indicating whether the court will hear the American Pipe issue again.

The case is No. 16-373.

Attorneys: Thomas C. Goldstein (Goldstein & Russell, PC) for California Public Employees’ Retirement System. Paul D. Clement (Kirkland & Ellis LLP) for ANZ Securities, Inc.

Companies: California Public Employees' Retirement System; ANZ Securities, Inc.; IndyMac MBS, Inc.; Lehman Brothers

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