The Second Circuit Strictly Enforces Time Limits for Securities Claims

This week, the Second Circuit issued a very significant ruling regarding the time period during which securities cases must be brought.  In Police and Fire Retirement System of the City of Detroit v. IndyMac MBS, Inc. (, the Second Circuit held that so-called American Pipe tolling does not apply to the statute of repose for filing claims under the Securities Act of 1933.  Specifically, the Securities Act requires that civil claims brought thereunder must be filed within one year of plaintiff's discovery of the claim or within three years of the offering at issue, whichever occurs first.  The Second Circuit held that the three year period is a hard limit not subject to a well accepted form of tolling, so-called American Pipe tolling. In American Pipe, the Supreme Court held that statute of limitations for the claims by class members is tolled -- it does not run -- while a class action purporting to advance those claims is pending.  Otherwise, putative class members might be forced to file individual claims while waiting for class certification; otherwise, if class certification were denied, it might by then be too late for individual class members to file individual actions.  The Second Circuit held that the three year repose period under the Securities Act is so strict that this American Pipe tolling rule does not apply to it.

While technical and perhaps esoteric, the no tolling rule as significant implications.  In the IndyMac case itself, plaintiffs failed to include a named plaintiff for each and every one of the over 100 securities offerings at issue.  Accordingly, the claims with respect to offerings for which there was no named class representative were dismissed.  Absent the statute of repose, this problem would be easily remedied; plaintiffs would simply add class representatives for the additional offerings.  But, by the time of the ruling the three year statute of repose had run and the pendency of the class action the Second Circuit held did not extend the time period to file.

More common application of this rule may come in the form of opt outs.  Often, institutional and individual plaintiffs will remain part of a putative class action to see how the class action will proceed and how favorable a settlement might be.  If unsatisfied, the institutions or individuals can "opt out" of the class and file individual actions.  It is now clear that these would-be individual plaintiffs will have to opt out and file an individual action before the three-year statute of repose runs.  Accordingly, this new rule will impact opt out decisions and timing.

The rule will also almost certainly not be limited to Securities Act claims.  The more common securities claims under Section 10(b) of the Securities-Exchange Act and Rule 10b-5 are subject to a functionally identical five year statute of repose.  Therefore, this same rule will apply to Exchange Act claims.

Finally, the rule may also apply to other forms of tolling, possibly even contractual tolling agreements.  This ruling calls all forms of tolling into question with respect to the statutes of repose applicable under the Securities and Exchange Acts.  Plaintiffs will sometimes agree not to name certain defendants in exchange for a tolling agreement in the event that later discovered facts reveal a compelling reason to add that defendant.  Such agreements may be ineffective after the statute of repose date.

In sum, this decision will give defendants opportunities to argue that certain securities cases are time barred.  More importantly, perhaps, it will force plaintiffs to make more rapid decisions on class certification, opting out and other critical decisions in the life of securities actions.

California Supreme Court Limits Cases Against Dissolved Foreign Corporations

California allows plaintiffs to sue dissolved corporations for an indefinite period of time after their dissolution, subject only to the applicable statute of limitations.  See Cal. Corp. Code Section 2010.  Most other states, such as Delaware, place limits on how long after dissolution a corporation can be sued.  The question for dissolved foreign corporations sued in California is which rule applies?  In Greb v. Diamond Int'l Corp. (, the California Supreme Court has now resolved a dispute between Courts of Appeal and held that California will respect the rule in the state of incorporation of the dissolved corporation.  This is good news for corporations incorporated outside of California.  They can now wind up their affairs and achieve finality after a finite period of time. Perhaps even more importantly, the decision may presage a limitation of the attempts of Californa to apply its own (often more plaitiff-friendly) laws to foreign corporations.


The Supreme Court Imposes a Strict Five Year Statute of Limitations on SEC Penalty Cases

In Gabelli v. Securities and Exchange Commission (, the Supreme Court unanimously applied a hard five year statute of limitations to the SEC's ability to impose civil penalties on defendants.  The SEC tried to apply the so-called "discovery rule" to toll the limitations period until the wrongdoing was discovered.  The SEC contended that the discovery rule should be applied in cases of fraud.  The Supreme Court rejected that view, holding that the limitations runs from the date of the act constituting the wrongdoing without exception or extension.  This result is beneficial to defendants because it precludes the SEC from seeking to impose civil penalties to any conduct occurring more than five years before the SEC files suit.