With the New Year comes new beginnings. But, for Supreme Court nominee Merrick Garland, 2017 brought the end of his aspirations to be appointed to the highest court in the nation. In an unprecedented move, Republicans in the Senate refused for 293 days to hold a confirmation hearing for Judge Garland. He was nominated in March 2016 to fill the vacancy created by the death of Justice Antonin Scalia. After languishing for ten months, Judge Garland's nomination expired when the 114th Congress adjourned on January 3. President-elect Trump will now have an opportunity to nominate a justice of his choosing. But, given a lengthy and potentially combative nomination process, there is unlikely to be a ninth Justice seated until the Fall of 2017.
In the meantime, the Senate's conduct (or lack thereof) continues to impact the Supreme Court. With only eight Justices, important cases that would typically be decided by a 5-4 majority are now split 4-4, which are not really decisions at all. These single-sentence orders are problematic because they do not resolve the issue before the Court, do not contain opinions with guidance on the Justices' views on the matter, and have no precedential value. Last term, the Supreme Court's ability to issue meaningful decisions in several controversial cases was hindered without a ninth Justice.
The Court's 2016-2017 term has been light on securities cases, with the exception of Salman v. United States, an insider-trading case that was decided in December. But just last week, two cases important to investors were added to the Court's docket, and there is third significant matter currently seeking review. These cases, which will likely be heard in the fall of 2017, could dramatically affect the way institutional investors monitor litigation, as well as affect the scope of recoveries in government actions.
The Return of IndyMac
We have written extensively about our IndyMac litigation, which was previously before the Supreme Court until that appeal was dismissed a week before oral argument.1 The issue in Police & Fire Retirement System of Detroit v. IndyMac MBS, Inc., was, simply, whether the filing of a class action would toll the statute of repose—the date upon which an action can no longer be brought, whether it has accrued or not—for securities litigants. Now, the case is back before the Supreme Court in California Public Employees Retirement System ("CalPERS") v. ANZ Securities, Inc. The issue presented in CalPERS is the same as in IndyMac, namely, whether the time to file suit is suspended when a class action complaint is filed with respect to putative class members' claims under the Securities Act of 1933 ("'33 Act").
Since the Supreme Court's 1974 decision American Pipe & Construction Company v. Utah, the filing of a class action suit tolls the applicable statute of limitations.2 Investors have relied on the American Pipe rule in support of the concept that once a securities class action is filed, their individual claims are protected and preserved until the court decides whether the case should proceed as a class action. This sensible approach provided absentee class members the right to sit on the sidelines while the court-appointed lead plaintiffs pursued litigation, preserving their ability to opt out of any litigation or settlement if they were dissatisfied. This long-held practice was widely accepted in lower courts until IndyMac, when the Second Circuit ruled that the repose period in the '33 Act could never be tolled. The CalPERS action demonstrates the risks and burdens faced by institutional investors who wish to preserve their ability to opt out of an ongoing class action. CalPERS arose from $31 billion in debt securities issued from the now-defunct investment bank Lehman Brothers between July 2007 and January 2008. In June 2008, a timely securities class action lawsuit was filed against Lehman Brothers and certain officers and directors alleging that defendants made material misrepresentations and omissions in their debt offerings in violation of the '33 Act. CalPERS was a putative class member in that suit, having purchased millions of dollars of these securities. In February 2011, CalPERS elected to file its own separate lawsuit, while the class action was pending. Later in 2011, the securities class action settled, and CalPERS formally opted out of that settlement to continue to pursue its own claims. The district court dismissed CalPERS' case, however, as being time-barred because it was filed more than three-years after the sale/purchase of the Lehman securities at issue—the deadline under the statute of repose by which the case would have to be brought if the filing of the class action did not toll it. On appeal to the Second Circuit, CalPERS argued that its case was timely filed because the American Pipe rule applied to the '33 Act's three-year statute of repose, and its claims were tolled after the securities class action was filed in June 2008.
The Second Circuit held that CalPERS' case was untimely. The Second Circuit determined that the three-year statute of repose had expired before CalPERS filed suit and the securities class action did not toll the time period to file suit. In reaching that conclusion, the Second Circuit relied on its IndyMac ruling, which held that statutes of limitations may be tolled but statutes of repose are fixed.
Since IndyMac, the circuit splits have only intensified, with the Sixth and Eleventh Circuits joining the Second Circuit in finding that American Pipe tolling does not apply to the '33 Act's statute of repose, while the Tenth, Seventh, and Federal Circuits find tolling does apply.
The issue presented in CalPERS v. ANZ Securities, Inc. could have dramatic implications for investors. If tolling does not apply to statutes of repose, investors will need to be vigilant in monitoring the cases in which their interests are involved and intervene or file individual actions earlier in order to protect their rights. In addition, investors will no longer be able to wait until a settlement is reached to determine whether or not to opt out, because by that time it is likely the statute of repose will have run and filing an independent suit will no longer be a viable option. The decision could also open the door to finding that other statutes of repose are not subject to tolling, including, for example, under the Securities Exchange Act.
The CalPERS case is expected to be fully briefed and argued by the Fall of 2017.
SEC Disgorgement Actions
The second pending securities matter also involves a timeliness issue. Kokesh v. Securities and Exchange Commission ("SEC") asks whether the five-year statute of limitations that applies to civil penalties also applies to SEC claims for disgorgement. The SEC often seeks disgorgement well beyond the five-year limitations periods. In 2015 alone, disgorgement accounted for $3 billion having been collected by the SEC (nearly three times the amount collected in money penalties). In the case of New Mexico investment adviser Charles R. Kokesh, he was ordered to disgorge $35 million plus interest for ill-gotten gains covering a 14-year period (only $5 million had been collected by him within the limitations period). The Tenth Circuit upheld the order in August 2016, expressly disagreeing with an opinion by the Eleventh Circuit that limited disgorgement claims to five years. The Supreme Court recently decided to take up Kokesh to resolve this Circuit split.
The Rise of IPO Actions Filed In State Courts
The third matter that the Supreme Court may hear is Cyan, Inc. v. Beaver County Employees Retirement Fund. Cyan asks whether class actions that allege only federal '33 Act claims may be maintained in state court, or whether the Securities Litigation Uniform Standards Act ("SLUSA") completely eliminated state court jurisdiction. This petition is filed against a backdrop of an increasing number of '33 Act class actions being filed in California state courts.
Class actions alleging '33 Act claims typically arise from initial public offerings ("IPOs''), and Cyan is no exception. Following Cyan's IPO in May 2013, a securities class action was filed in California state court asserting '33 Act claims. Cyan unsuccessfully argued that the state court lacked authority under SLUSA to hear the matter. In denying Cyan's motion for dismissal, the trial court held that such claims may be brought in either state or federal court, and SLUSA did not change that analysis.
While California state court is a safe haven for these actions, that is not the case everywhere. Many courts outside of California hold that SLUSA stripped state courts of jurisdiction over '33 Act class actions. The Supreme Court appears interested. In October, it invited the Acting Solicitor General to provide the United States' view on the issue. If the Court decides to hear Cyan, the case will likely be added to the 2017 Fall docket. If the Supreme Court were to either affirm or let stand that lower court's ruling, that would provide investors further flexibility in deciding where to bring '33 Act claims based on misrepresentations in offering documents.
1 See, e.g., Court Approves $340 IndyMac MBS Settlement; Plaintiffs Reach $340 Million Agreement with Underwriters in IndyMac MBS Class Action; Supreme Court Decision in IndyMac MBS Case Could Have Big Impact on Investors; Institutional Investors At Risk In "Opt-Out" Lawsuits Post-IndyMac; Firm Files IndyMac Supreme Court Brief on Behalf of LACERA.
2 The difference between the statute of limitations and statute of repose is subtle—a statute of limitations is triggered by a plaintiff's injury or the discovery of an injury, while a statute of repose is triggered by a defendant committing its last culpable act or omission, which acts as the outer limit of the period within which the plaintiff may sue.