Just because the government says a case is not a good cert candidate, does not mean the U.S. Supreme Court will agree. On Friday, in a somewhat surprising decision, the Court granted cert in three related cases that raise an issue about the scope of the Securities Litigation Uniform Standards Act ("SLUSA").
SLUSA precludes certain class actions based upon state law that allege a misrepresentation in connection with the purchase or sale of nationally traded securities. In the three related cases, the Fifth Circuit held that the "best articulation of the 'coincide' requirement" is that the fraud allegations must be "more than tangentially related to (real or purported) transactions in covered securities." The Fifth Circuit then concluded that the relationship between the alleged fraud, which centered around the sale of certificates of deposit, and any transactions in covered securities was too attenuated to trigger SLUSA preclusion. The defendants moved for certification on the grounds that the Fifth Circuit's "more than tangentially related" standard was in conflict with the standards articulated by other circuits.
The government, at the invitation of the Court, filed an amicus brief arguing that cert should not be granted because (a) the circuit standards are substantially similar and (b) the unusual fact pattern in the cases would render any holding that SLUSA applies (or does not apply) of little assistance to lower courts in future cases. But the Court evidently did not find the government's arguments persuasive.
The official question presented is: Whether SLUSA precludes a state-law class action alleging a scheme of fraud that involves misrepresentations about transactions In SLUSA-covered securities. Bloomberg and the Associated Press have coverage of the Court's decision.
The federal securities laws have statutes of repose (suit barred after a fixed number of years from the time the defendant acts in some way) and statutes of limitations (establishing a time limit for a suit based on the date when the claim accrued). There is a growing district court split, however, over whether the existence of a class action tolls the statute of repose for a federal securities claim.
Under what is known as American Pipe tolling, "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." American Pipe & Construction Co. v. Utah, 414 U.S. 538, 554 (1974). The Supreme Court found that its rule was “consistent both with the procedures of [Federal Rule of Civil Procedure] 23 and with the proper function of limitations statutes.” Id. at 555. In a later case, however, the Supreme Court also found that federal statutes of repose are not subject to equitable tolling. Lampf, Pleva, Lipkind, Prupis & Pettigrow v. Gilbertson, 501 U.S. 350, 364 (1991). In attempting to reconcile these two cases, the majority of lower courts have concluded that American Pipe tolling applies to the statute of repose for federal securities claims because it is based on FRCP 23 and, therefore, is a type of legal (as opposed to equitable) tolling. Other recent decisions, however, have concluded that because FRCP 23 does not expressly create a class action tolling rule, American Pipe tolling is best understood as a judicially-created rule based on equitable considerations and, as a result, cannot extend a statute of repose.
In New Jersey Carpenters Health Fund v. Residential Capital, LLC, 2013 WL 55854, (S.D.N.Y. Jan. 3, 2013), the court surveyed this case law and sided with the majority position. In particular, the court found that failing to toll the statute of repose would undermine the purpose of FRCP 23 and its endorsement of class actions. Indeed, the court noted that "in a securities case, the risk that potential class members would flood the courts is particularly serious, since class certification is a lengthy, uncertain process." Moreover, any former class members would have effectively been a party to an action against the defendant already. Tolling their individual claims therefore would not be "contrary to the purpose of the repose period that the right to initiate suit against a defendant be within a legislatively determined time period."
Holding: Denying motion to dismiss claims.
Addition: On the Case has a post on the decision and notes that the Second Circuit is considering the tolling issue in a pending appeal.
In a securities class action brought against Central European Distribution Corp., the court received applications for lead plaintiff from Harry Nelis (an individual investor) and the Prosperity Subsidiary Group (a grouping of four institutional investors). Nelis was represented by Pomerantz Haudek, while the Prosperity Subsidiary Group was represented by Robbins Geller. Apparently recognizing that the Prosperity Subsidiary Group's application was problematic, however, Robbins Geller also submitted a "response" to the court on behalf of another investor, a Puerto Rico public pension fund, in which the fund expressed an interest in being named lead plaintiff if the Prosperity Subsidiary Group was not selected.
In Grodko v. Central European Distribution Corp., 2012 WL 6595931 (D.N.J. Dec. 17, 2012), the court addressed this unusual lineup. The court found that the Prosperity Subsidiary Group had the largest alleged losses, but faced a unique defense based on loss causation. All of the investors in the group had sold their shares well before the disclosures that allegedly revealed the defendants' fraud. Accordingly, the court denied the Prosperity Subsidiary Group's application. While the Puerto Rico fund had the next largest alleged losses, Nelis argued that it should not be selected because (a) the Puerto Rico fund had failed to file a timely application for lead plaintiff, and (b) Robbins Geller was engaging in "unethical gamesmanship" based on its representation of multiple plaintiffs.
The court rejected Nelis' arguments. First, the Puerto Rico fund had filed a complaint in the action. Under the language of the PSLRA, the court held that the filing of an initial complaint is sufficient to entitle the party to consideration as lead plaintiff. Second, the court noted that "Nelis has not cited any legal authority supporting his contention that counsel in a securities class action are necessarily behaving unethically when they represent multiple plaintiffs." Indeed, Pomerantz Hudek also represented both Nelis and a different investor who had filed one of the initial complaints. Nor was there any apparent conflict of interest between Robbins Geller's various clients.
Holding: Appointing the Puerto Rico fund as lead plaintiff and Robbins Geller as lead counsel.