Second Circuit Addresses Statutes of Repose and Tolling in Securities Class Actions
The Second Circuit has clarified the applicable statutes of repose for securities-fraud and proxy-related claims under §§ 9(f), 14(a), and 18(a) of the Securities Exchange Act. The court’s March 17, 2016 decision in DeKalb County Pension Fund v. Transocean Ltd. holds that the five-year statute of repose enacted in the Sarbanes-Oxley Act of 2002 (“SOX”) applies to fraud and manipulation claims under §§ 9(f) and 18(a), but that a three-year statute of repose applies to proxy-related claims under § 14(a).
The court also ruled that the lead plaintiff, which had not filed its consolidated complaint until more than three years after the alleged violation had occurred, could not rely on an earlier complaint filed before the end of the three-year period of repose applicable to § 14(a) claims.
Factual Background. The litigation arose from a proxy statement issued in October 2007. In September 2010, less than three years later, a plaintiff filed a putative class action alleging that the proxy statement had violated § 14(a).
Pursuant to the Private Securities Litigation Reform Act of 1995 (the “PSLRA”), that initial lawsuit started a 60-day period during which any other shareholder could seek to be appointed as lead plaintiff. Plaintiff DeKalb sought appointment in December 2010, more than three years after the proxy statement had been issued, and was later appointed lead plaintiff. DeKalb filed its consolidated complaint in April 2011, asserting proxy-related violations under § 14(a).
The U.S. District Court for the Southern District of New York dismissed the case as untimely under the three-year statute of repose. The Second Circuit affirmed.
Statute of Repose. The Second Circuit agreed that a three-year statute of repose applies to § 14(a) claims. In reaching that decision, the court needed to reconcile SOX § 1658(b) – which established a five-year statute of repose for “private right[s] of action that involve a claim of fraud, deceit, manipulation, or contrivance” – with the court’s pre-SOX ruling that a three-year statute of repose applied to such claims.
The Second Circuit concluded that claims under §§ 9(f) and 18(a) depend on “fraud, deceit, manipulation, or contrivance” and are thus governed by SOX § 1658(b)’s five-year statute of repose. However, the court held that § 1658(b) does not apply to claims under § 14(a), because those claims do not require proof of fraud, deceit, manipulation, or contrivance. Accordingly, the court ruled that its pre-SOX decision applying a three-year statute of repose to § 14(a) claims remains in force.
Tolling Issues. The Second Circuit confirmed its view that classwide tolling under the so-called “American Pipe” rule does not apply to statutes of repose. Thus, DeKalb – as a member of the putative class covered by the first, timely filed complaint – could not rely on that pleading to toll the statute of repose.
But perhaps more interesting was the court’s rejection of the argument that the PSLRA tolled the applicable statute of repose during the 60-day statutory period in which any putative class member may move for appointment as lead plaintiff and then take over the case if appointed. The court observed that nothing in the PSLRA’s language “even remotely suggests that the PSLRA was intended to toll the applicable statutes of repose for the 60 days during which a member of the purported class may file a lead-plaintiff motion, and we have been unable to locate any authority that even arguably supports this notion.”
Accordingly, a lead-plaintiff applicant cannot assume that it will be able to use the first-filed complaint to satisfy a statute of repose if the applicant obtains appointment as lead plaintiff and then files a consolidated complaint. If the applicant wishes to avoid the statute of repose, it must file its own timely complaint even if the lead-plaintiff process has not yet concluded.