The U.S. Supreme Court has added yet another lawsuit to its growing list of securities law cases by agreeing to take up the IndyMac MBS securities suit, to consider whether the filing of a class action lawsuit tolls the statute of repose under the Securities Act (by operation of so-called “American Pipe” tolling) or whether the statute of repose operates as an absolute bar that cannot be tolled. The U.S. Supreme Court’s March 10, 2014 order granting the petition of the plaintiff for a writ of certiorari in Public Employees’ Retirement System of Mississippi, v. IndyMac MBS can be found here.
As discussed below, this case could have a number of important practical implications, including whether or not putative securities class members can wait to decide whether or not to opt-out of the class action lawsuit, or must act earlier on in order to avoid the running of the statute of repose.
The statute of limitations for claims brought under the Securities Act of 1933, which is set out in Section 13 of the Act, provides that all claims under the Act must be brought within one year of the discovery of the violation or within the three years after the security involved was first offered to the public. Under the tolling doctrine established in the U.S. Supreme Court’s 1974 decision in American Pipe & Construction Co. v. Utah [an enhanced version of this opinion is available to lexis.com subscribers], the filing of a securities class action lawsuit tolls the running of the one-year statute of limitations. The question presented in the IndyMac MBS case is whether or not under American Pipe tolling the filing of a class action lawsuit tolls the three-year statute of repose.
As discussed in greater detail here, the underlying securities lawsuit involves allegations that the failed IndyMac Bank misled investors in connection with its issuance of securities in over 100 different offerings. The District dismissed for lack of standing all claims in which the plaintiffs had not themselves purchased securities. Five investors who did purchase the securities sought to intervene. The district court denied the motion to intervene, on the grounds that the three year statute of repose had lapsed and was not extended by the American Pipe tolling doctrine and could not be extended under Fed. R. Civ. Proc. 15 (c). The proposed intervenors appealed.
In a June 27, 2013 opinion (here) [enhanced version], the Second Circuit, in an opinion by Judge Jose A. Cabranes for a three-judge panel, held that the filing of a class action lawsuit does not toll Section 13’s statute of repose. The appellate court held that neither the equitable tolling principles under American Pipe nor the legal tolling principles could operate to extend the period of the statute of repose.
The proposed intervenors filed a petition with the U.S. Supreme Court seeking a writ of certiorari. The intervenors argued that the Second Circuit’s opinion conflicted with a prior holding of the Tenth Circuit that American Pipe tolling does apply to Section 13’s statute of repose. The intervenors also argued that the Second Circuit’s holding unsettled long-standing class action practices with regard to the principles of tolling. The intervenors the Second Circuit’s holding that the filing of a class action lawsuit does not toll the statute of repose is inconsistent with the idea of class action litigation in which the initiating class representative acts on behalf of all absent class members. Under these principles, the intervenors argued, the timely filing of a class action complaint should operate to satisfy all of Section 13’s timeliness requirements.
In opposing the cert petition, the defendants (the offering underwriters from the IndyMac securities offerings) not only argued that there was no need for the Supreme Court to take up the case, but also argued that the Second Circuit’s ruling was correct. The defendants argued under existing U.S. Supreme Court case law that statutes of repose are intended to operate as an absolute “cutoff” to all liability. They also argued that American Pipe tolling was not intended to apply broadly to all time limitation but rather to apply only to statutes of limitation. The statute of repose, they argued, provides litigants with substantive rights that cannot be overridden by equitable principles or even under procedural rules regarding class action litigation.
Even though this case involves technical issues involving statutes or repose and seemingly arcane legal doctrines, the case has potentially significant practical implications.
First and foremost, if the filing of a class action lawsuit does not toll the statute of repose, current practices regarding class action opt outs could be significantly affected. As reflected in an amicus brief filed on behalf of certain institutional investors and in support of the intervenors’s cert petition, institutional investors rely on class action claims filed by other claimants to prevent their claims from being time barred. They argue that the Second Circuit’s decision would require institutional investors to incur significantly higher litigation expenses as they would have to intervene earlier or otherwise act to protect their interests. They argue that they would have to become actively involved more frequently than they do now.
More to the point, the institutional investors also argue that it would impair their right to opt-out from the class litigation. Up until now, the institutional investors argue, they have been able to rely on American Pipe tolling await receipt of notice of claim and of the terms of prospective settlements before determining whether or not they believe the class representatives have adequately represented the class and protected their interests, or whether they feel that their interests are best served by opting out of the class. Without the benefit of American Pipe tolling with regard to the statute of repose, the institutional investors will have to monitor the many cases in which there interests are involved more closely and intervene or file individual actions in order to preserve their interests.
In other words, if the U.S. Supreme Court were to affirm the Second Circuit, current practices regarding class action opt-outs would change. Opt-outs have been an increasingly important part of securities class action litigation in recent years, but many of these practices would end or at least change if the institutional investors can’t simply wait until the class action has been settled to decide whether or not they want to opt out.
On the other hand, if the current practices where some investors can sit back and await the outcome of the class action before deciding whether or not to opt out were to be undercut, it could make it easier for defendants to secure a global settlement without worry that later opt outs will undermine the value of the class settlement or even trigger the “blow” provisions in the class action settlement agreement.
Because the outcome of this case may well depend on the differences between statutes of limitations and statutes of repose, the outcome of this case could well have an impact beyond just the context of class action litigation under the Securities Act of 1933. The outcome could affect the determination of whether or not other statutes of repose are or are not absolute – including the Securities Exchange Act of 1934 and other statutes unrelated to the securities laws. In addition, the Court’s determination of the impact of the filing of a class action complaint on questions of timeliness would likely have an impact on class litigation outside of the securities law context as well.
In any event, the Supreme Court has now taken on yet another case under the securities laws. As I noted just a few days ago when the Court agreed to take up the Omnicare case, the Court has for whatever reason seemed within recent years seemed very interested in securities cases. In the past, years would pass between Supreme Court securities cases. Now the Court not only has the potentially significant Halliburton case on this year’s docket, but already has two cases on the docket for next year, the Omnicare case and the IndyMac MBS case. In fact, both Omnicare and the IndyMac MBS case involve claims under Section 11 of the Securities Act of 1933.
The body of Supreme Court securities laws decisions is expanding rapidly, and as a result securities law jurisprudence has evolved significantly just in the last several years. It is clear that with these latest cases on the Supreme Court’s docket, the laws will continue to evolve quickly
Read other items of interest from the world of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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