Saturday, October 22, 2011

In Supreme Court Amicus Brief: Securities Industry and Chamber Contend that Section 16(b) Limitations Period Is a Period of Repose

The limitations period in Section 16(b) of the Exchange Act is a period of repose and runs from the time of the violation when profit was realized, said a US Supreme Court amicus brief filed by SIFMA and the Chamber of Commerce. When Congress wanted a limitations period to run from the discovery of a violation in the Exchange Act it know how to expressly say so, noted the brief, and in Section 16(b) it did not say so. Thus, amicus contends that a Ninth Circuit panel erred in ignoring that the plain statutory language establishes a period of repose. The panel held that the two-year limitations period in Section 16(b) is tolled until the insider discloses his or her transactions in a Section 16(a) filing, regardless of whether the plaintiff knew or should have known of the conduct at issue. The US Supreme Court has set November 29, 2011 for the date of oral argument. Credit Suisse Securities v. Simmonds, Dkt. No. 10-1261.

The Ninth Circuit’s misreading of the statute is particularly problematic, continued the brief, because virtually all of the litigation under Section 16(b) is driven by attorneys’ fees, not by harm to any plaintiff. Because any profits recovered in the litigation (minus attorneys’ fees) go to the corporation itself, the named plaintiffs have almost no personal stake in the litigation. In these circumstances, reasoned amicus, any form of tolling is particularly unwarranted. Moreover, in linking the limitations period of Section 16(b)
to compliance with Section 16(a), the Ninth Circuit has allowed Section 16(b)’s limitations period to be extended indefinitely, regardless of when the profit was realized or when a plaintiff should have known of the profit.

In the view of SIFMA and the Chamber, the Ninth Circuit adopted a tolling rule for the express limitations period in Section 16(b) that is inconsistent with the text and purpose of Section 16 and the Exchange Act as a whole. By its terms, the statute reflects that the two-year limitations period is an absolute outside limit on bringing suit, noted the brief, a conclusion confirmed by the legislative backdrop.

Section 16(b) provides for the recovery from company insiders of short-swing profits and also states that no suit for such recovery can be brought more than two years after the date such profit was realized. Congress could have adopted a different scheme, noted amicus. For example, it could have made the limitations period commence on the date that the transaction was reported under the disclosure requirements of Section 16(a) or Congress could have made the date run from when the company knew of or should have discovered the realized profit. But Congress did not. Instead, Congress clarfied that the limitations period runs from the time the violation was completed, i.e., “after the date such profit was realized.”

According to the brief, ting a limitations period to a wrongful act (as opposed to the plaintiff ’s injury) is typical when Congress intends the period to be one of repose, not subject to tolling. Moreover, Congress created the cause of action and the limitations period in the same sentence, noted amicus, suggesting that Congress intended to treat the limitations period as an integral part of the cause of action itself, and not simply a limit on the remedy. That close textual link also shows that Congress did not intend the limitations period to be subject to tolling.

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