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 significant 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 Police and Fire Retirement System of City of Detroit v. IndyMac MBS, Inc., 2013 WL 3214588 (2d Cir. June 27, 2013), the Second Circuit has resolved the split by holding that the statue of repose cannot be tolled even if the American Pipe tolling rule is "legal." The court noted that statutes of repose "create a substantive right in those protected to be free from liability after a legislatively-determined period of time." Meanwhile, FRCP 23 is a product of the Rules Enabling Act, which specifically states that the rules it authorizes "shall not abridge, enlarge or modify any substantive right." Accordingly, the court held, "[p]ermitting a plaintiff to file a complaint or intervene after the repose period . . . has run would therefore necessarily enlarge or modify a substantive right and violate the Rules Enabling Act."
Holding: Affirming denial of motions to intervene.
Quote of note: "We are cautioned by some of the proposed intervenors that a failure to extend American Pipe tolling to the statute of repose in Section 13 could burden the courts and disrupt the functioning of class action litigation. We are not persuaded. Given the sophisticated, well-counseled litigants involved in securities fraud class actions, it is not apparent that such adverse consequences will inevitably follow our holding. But even if the decision causes some such problem, it is a problem that only Congress can address; judges may not deploy equity to avert the negative effects of statutes of repose."
A couple of interesting items from around the web.
(1) The New York Law Journal (June 10) has a column on the potential impact of the recent GAMCO v. Vivendi decision (a discussion of a related, earlier decision in that case can be found here). In GAMCO, the court found that the plaintiff was not entitled to a fraud-on-the-market presumption of reliance because its trading strategy did not rely on the market price of Vivendi's stock as an accurate measure of its value. The column's authors suggest that in light of this decision, "defendants going forward should delve deeply into a plaintiff-investor's decision-making process in an attempt to sever the link with market price."
(2) The D&O Diary has a guest post from two Stanford professors who have studied the outcomes of securities class actions. Their findings, for the period from 2000 to 2010, include: (a) during that period there was no statistically significant change in the overall dismissal rate, (b) half of all settlements occured before a final ruling on a motion to dismiss and half occured after the motion to dismiss had been denied and the case had moved to discovery, and (c) the insurer contribution to settlements was higher among cases filed in the second half of the past decade than in the first half.
The class certification decision in In Diamond Foods, Inc. Sec. Litig., 2013 WL 1891382 (N.D. Cal. May 6, 2013) contains a number of interesting holdings.
(1) Market efficiency is an issue for the finder of fact - A rebuttable presumption of reliance based on the fraud-on-the-market theory is only available to plaintiffs if the company's stock traded on an efficient market. Market efficiency means that the company's stock price reflected all publicly available information, which is typically tested by examining a number of empirical factors. In Diamond Foods, the court noted that the Supreme Court and the Ninth Circuit have never addressed "whether market efficiency is an issue for the jury to determine in trial (or, where appropriate, summary judgment), or is a matter reserved for the judge." The court concluded, however, that the majority of courts correctly "treat efficiency as an issue for the finder of fact."
(2) Comcast decision inapplicable to securities class actions - In the Supreme Court's recent Comcast decision, it held that class certification should be denied if damages are incapable of measurement on a classwide basis. The Diamond Foods court found that the Comcast holding was inapplicable to securities class actions, where it is widely accepted that an event study can be "used to identify the economic loss caused by alleged fraud." Indeed, the defendant failed "to identify any specific complications that would make such a calculation impossible or ill-advised in this case."
(3) Pay-to-play allegations insufficient to find proposed class representative inadequate - The lead counsel had made political contributions to Mississippi Attorney General Jim Hood, who controlled the lead plaintiff's selection of counsel. The court found that none of the contributions, however, were made "after counsel were approved by the Court in June 2012." While lead counsel also had made contributions to the Democratic Attorneys General Assocation in 2012, there did not appear be any "communication between the law firms and Attorney General Hood, or his office, regarding any expectation that the law firms contribute to DAGA or that such contributions would eventually make their way to Attorney General Hood." Accordingly, the court held that "[d]efendant has not advanced a record adequate to torpedo this action based on a pay-to-play theory."
Holding: Motion for class certification granted.