The Supreme Court rejected the approaches of two Circuit Courts to tolling the limitation period for bringing an Exchange Act Section 16(b) claim while failing to decide if that period can be tolled. The High Court rejected the conclusion of the Ninth Circuit that the two year statute of limitations for filing a Section 16(b) claims for short swing profits does not begin to run until after the covered person filed the report required by Section 16(a). In a footnote the Court also rejected the actual knowledge rule of the Second Circuit. The eight Justices participating, however, were equally divided on the question of whether the two year period could be extended at all and thus affirmed that portion of the Ninth Circuitâ€™s ruling without precedential value. Chief Justice Roberts did not participate in the decision. Credit Suisse Securities (USA) LLC v. Simmons, No. 10-1261 (March 26, 2012).
The case is based on 55 nearly identical actions filed under Exchange Act Section 16(b) in 2007 against financial institutions that had underwritten various IPOs in the late 1990s and in 2000. Plaintiff claimed that the defendants inflated the price of the shares in the aftermarket. She also alleged that as a group the underwriters and insiders owned in excess of 10% of the outstanding shares. This brought them within the purview of Section 16(b) which applies to officers, directors and 10% shareholders, according to the complaint. That group is required to disclose changes in its ownership on Form 4 under Section 16(a). It also makes them subject to the short swing provisions of Section 16(b) which provides a derivative cause of action to recoup profits from the any purchase and sale which occurs within a six month period. The district court dismissed the complaints based in part on the statute of limitations.
The Ninth Circuit reversed. The Circuit Court concluded that Section 16(b)â€™s two year statute of limitation is tolled until the insider discloses his or her transactions in a 16(a) filing regardless of whether the plaintiff knew or should have known of the conduct in question.
The Supreme Court, in an opinion authored by Justice Scalia, began by noting that if Congress wanted to provide that the two year limitation period did not begin until the Section 16(a) report was filed it could have said so. The fact that it did not demonstrates that the premise of the Ninth Circuitâ€™s decision is wrong.
Even if its ruling is grounded in principles of equitable tolling, the Court noted, the Ninth Circuitâ€™s conclusion is contrary to the long standing principles of that doctrine. Under those principles the proponent of tolling must establish two points: 1) That he or she has pursued his or her rights diligently; and 2) that some extraordinary circumstances stood in his or her way. In this regard it is well established that when â€œa limitations period is tolled because of fraudulent concealment of facts, the tolling ceases when those facts are, or should have been, discovered by the plaintiff.â€ Under those principles the statute does not begin to run while the injured party remains ignorant of the fraud. To continue the tolling after that time as the rule adopted by the Ninth Circuit would do, would be inequitable. This is particularly true here where the defendants can, according to the Court, â€œplausibly claimâ€ as here that they are not subject to Section 16(a) and thus the statute would never commence.
The Court also rejected plaintiffâ€™s claim that an equitable tolling rule would be contrary to Section 16(b). This is because the principle is fact based while the statute has long been applied in a mechanical, bright line fashion, according to plaintiff. The Court rejected this claim, noting that it also argues for the two year limitation to be read as a statute of repose, that is, no tolling. In any event â€œassuming some form of tolling does apply, it is preferable to apply that form which Congress was certainly aware of, as opposed to the rule the Ninth Circuit has fashioned.â€ For this reason, in a footnote, the Court also rejected the approach of the Second Circuit under which the two year period is tolled until a plaintiff has actual notice that the person has short swing profits. The case was remanded to the Court of Appeals.