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U.S. Supreme Court Rules Section 16(b) Claim Tolling Not Proper Under Whittaker Rule

WASHINGTON, D.C. - (Mealey's) The Ninth Circuit U.S. Court of Appeals erred in ruling that the two-year statute of limitations claims brought pursuant to Section 16(b) of the Securities Exchange Act of 1934 are tolled until a Section 16(b) statement is filed, because the text of Section 16(b) "simply does not support" the Whittaker v. Whittaker Corp. rule, a unanimous U.S. Supreme Court ruled March 26 (Credit Suisse Securities [USA] LLC, et al. v. Vanessa Simmonds, No. 10-1261, U.S. Sup.). 

(Opinion. Document #57-120409-008Z.) 

Shareholder Vanessa Simmonds filed 55 nearly identical shareholder derivative complaints in 2007 in the U.S. District Court for the Western District of Washington.  She alleged on behalf of 54 companies (collectively, the issuer defendants) that numerous investment banks that acted as underwriters for initial public offerings (IPOs) of the companies' common stock violated Section 16(b) by engaging in an insider trading scheme during the 1990s and early 2000s where the underwriter defendants made "lock-up" agreements with a number of other insiders and certain investors to profit from underpriced IPOs. 

Thirty of the issuer defendants moved to dismiss under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6), arguing that Simmonds' claims were time-barred and that Simmonds lacked standing to bring the claims because she failed to properly submit adequate demand letters to the issuing companies before filing the suits.  The underwriters also moved to dismiss, arguing that Simmonds' claims were time-barred, that they failed to state a cause of action under Section 16(b) and that they are protected under certain provisions of Section 16(b). 

The District Court granted the moving issuer defendants' motion, ruling that the demand letters were inadequate, and granted the underwriters' motion, holding that the claims were barred under the two-year statute of limitations.  The District Court also dismissed the remaining 24 actions with prejudice in light of its statute of limitations ruling. 

Simmonds appealed to the Ninth Circuit, and the 30 moving issuer defendants cross-appealed, averring that the District Court should have dismissed their action with prejudice rather than without prejudice. 

The Ninth Circuit affirmed in part and reversed in part and denied rehearing and rehearing en banc, and Simmonds and 10 underwriters filed separate petitions for writ of certiorari with the U.S. Supreme Court.  The Supreme Court denied Simmonds' petition. 

On Oct. 28, the Supreme Court granted a motion for leave to participate in oral argument as amicus curiae and for divided argument filed by U.S. Solicitor General Donald B. Verrilli Jr. 

Oral argument was heard Nov. 29. 

The Supreme Court held that the Ninth Circuit erred in ruling that the two-year statute of limitations on Section 16(b) claims tolled until a Section 16(b) statement is filed because "[t]he text of §16(b) - which starts the clock from 'the date such profit was realized,' . . . - simply does not support the Whittaker [Whittaker v. Whittaker Corp. (639 F.2d 516 [1981])] [enhanced version available to subscribers] rule." 

"The rule is also not supported by the background rule of equitable tolling for fraudulent concealment.  Under long-settled equitable-tolling principles, a litigant must establish '(1) that he has been pursuing his rights directly, and (2) that some extraordinary circumstances stood in his way,'" the Supreme Court said, citing its precedent in Pace v. DiGuglielmo (544 U.S. 408, 418) [enhanced version]. 

"Tolling therefore ceases when fraudulently concealed facts are, or should have been, discovered by the plaintiff." 

The Supreme Court also found that, citing its precedent in John R. Sand & Gravel Co. v. United States (552 U.S. 130, 133) [enhanced version], "[a]llowing tolling to continue beyond that point would be inequitable and inconsistent with the general purpose of statutes of limitations:  'to protect defendants against stale or unduly delayed claims.'" 

"Under the Whittaker rule, alleged insiders who disclaim the necessity of filing are compelled either to file or to face the prospect of §6(b) litigation in perpetuity.  Had Congress intended the possibility of such endless tolling, it would have said so.  Simmonds' arguments to the contrary are unpersuasive.  The lower courts should consider in the first instance how usual equitable tolling rules apply in this case," the Supreme Court explained. 

Justice Antonin Scalia wrote the Supreme Court's opinion, and was joined by Justices Anthony M. Kennedy, Clarence Thomas, Ruth Bader Ginsburg, Stephen G. Breyer, Samuel A. Alito Jr., Sonia Sotomayor and Elena Kagan.  Chief Justice John G. Roberts Jr. took no part in the consideration or decision of the case. 

The underwriters are represented by Christopher Landau of Kirkland & Ellis in Washington. 

Simmonds is represented by Jeffrey I. Tilden of Gordon Tilden Thomas & Cordell in Seattle. 

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