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U.S. Supreme Court Rejects Argument That Claims Under § 16(b) Are Tolled Until a § 16(a) Disclosure Statement is Filed

Posted in Private Securities Litigation, Supreme Court

The U.S. Supreme Court ruled today that the two-year time limit for bringing an action under § 16(b) of the Securities Exchange Act of 1934 is not tolled until after the filing of a § 16(a) disclosure statement. The case involves the right of an issuer (or, in this case, a shareholder bringing a derivative suit) to recover short swing profits obtained by a beneficial owner, director, or officer by reason of his relationship to the issuer under Exchange Act 16(b). Under §16(b), a corporation (or shareholder) may bring an action against corporate insiders who realize profits from the purchase and sale of the corporation’s securities within any 6-month period. The Act provides that such suits must be brought within "two years after the date such profit was realized." The Supreme Court vacated a January 2011 decision by the Ninth Circuit that a § 16(b) claim is subject to tolling and remanded the case to the District Court for further proceedings (including consideration of other equitable tolling principles).

As discussed here, in 2007 the plaintiff filed over 50 derivative complaints under Section 16(b) in connection with IPOs in 1999 and 2000, alleging that underwriters had arranged for post-IPO stock purchases of the issuers’ securities at progressively higher prices (known as "laddering"). The plaintiff seeks disgorgement, claiming they were short-swing profits. The District Court, among other things, dismissed 24 of the cases on the basis of Section 16(b)’s two-year statute of limitations. The Ninth Circuit reversed as to the statute of limitations issue, ruling that the statute is tolled until there has been adequate disclosure of the trade (when the defendant files a Section 16(a) disclosure statement). Since defendants did not file a Section 16(a) statement, the Ninth Circuit held that the claims are not time-barred. Simmonds v. Credit Suisse Securities (USA) LLC, 638 F.3d 1072 (9th Cir. 2011). The Supreme Court granted Certiorari in June 2011 to consider whether tolling continues even after the receipt of actual notice of the facts giving rise to the claim.

In an 8-0 decision (Chief Justice Roberts took no part in consideration of the case), the Court determined that "even assuming that the 2-year [statute of limitations] can be extended, the Ninth Circuit erred in determining that it is tolled until the filing of a § 16(a) statement." The Ninth Circuit had expressed the concern that "the unscrupulous" could avoid the effect of Section16(b) "by failing to file … reports in violation of subdivision (a) and thereby concealing from prospective plaintiffs the information they would need" to bring a claim under §16(b). The Supreme Court rejected that analysis, stating that Congress could have easily addressed that concern by having the statute of limitations began running after the filing of a § 16(a) statement, but did not do so. The Supreme Court was also concerned tolling the statute of limitations until a § 16(a) statement was filed could result in "endless tolling in cases in which a reasonably diligent plaintiff would know of the facts underlying the action."

The Supreme Court concluded: "Having determined that §16(b)’s limitations period is not tolled until the filing of a §16(a) statement, we remand for the lower courts to consider how the usual rules of equitable tolling apply to the facts of this case."