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. (http://www.ca2.uscourts.gov/decisions/isysquery/2d3ab723-2344-425c-9bf5-139f44ee9197/1/doc/11-2998_opn.pdf#xml=http://www.ca2.uscourts.gov/decisions/isysquery/2d3ab723-2344-425c-9bf5-139f44ee9197/1/hilite/), 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.