Tuesday, November 29, 2011

Supreme Court Hears Oral Argument in Case Involving Tolling of Sec. 16(b) Limitations Period

The US Supreme Court has heard oral arguments in a case involving the construct of the two-year statute of limitations in Section 16(b) of the Exchange Act. 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. A Ninth Circuit 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. Credit Suisse Securities v. Simmonds, Dkt. No. 10-1261.

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, contended an amicus brief filed by SIFMA and the Chamber of Commerce. But in another amicus brief, the Solicitor General and the SEC said that Section 16(b)’s two-year limitations period should be equitably tolled until a reasonably diligent shareholder would have discovered the transaction that is alleged to trigger a disgorgement obligation. The filing of a Section 16(a) report that accurately discloses the transaction will preclude further tolling, whether or not a particular plaintiff had actual knowledge that the report was submitted. But even without a Section 16(a) disclosure, said the government, circumstances may arise in which a reasonably diligent security holder would be aware of the relevant transaction.

Christopher Landau, for the petitioner, said that in Section 16(b) Congress created a cause of action allowing securities issuers to recover short-swing profits from certain covered persons, but specified that a lawsuit must be brought 2 years after the date the short-swing profit was realized. The statute doesn't say two years after the date the defendants filed a Section 16(a) report, as the Ninth Circuit and Respondents would like to have it, he noted, nor does the statute say two years after the date the plaintiff discovers the short-swing transaction, as the government would like to rewrite it. Arguing for a period of repose, he said that a Congress that could give repose to intentional fraudsters would not want to deny repose to a defendant in a purely prophylactic section 16(b) action.

Justice Ginsburg noted that Section 16 of the 1934 Act is not simply prophylactic. There is an objective that 16(a) expresses, which is that Congress wanted these trades to be reported and to have a Form 4 filed. This is a disclosure-forcing provision, she observed, and so why would Congress mean for it to operate to immunize a defendant who has not made that filing, and who has concealed what is supposed to be reported under 16(a).

Mr. Landau said that if Congress had wanted the Section 16(a) disclosure to be the trigger under Section 16(b), it could have expressly said so. The Ninth Circuit adopted this absolute black letter rule that says, it is tolled, that it does not even start to run unless and until the Section 16(a) report is filed.

Jeffrey Wall, arguing for the government, said that where you have statutes that say there shall be no jurisdiction after a particular time, the Court has read them to cut off equitable tolling after that time. He added that Congress could have written the statute to say the time limit shall not be tolled. And there are statutes like that. In the government's view, the traditional equitable rule is that the statute is tolled until the plaintiff has actual or constructive notice of the facts underlying her claim.

Justice Breyer commented that, taking that view, a person who really thinks he doesn't have to file and so he doesn't file will be liable forever, there will be no statute of limitations because the plaintiff will never find out, or maybe find out 50 years later. But if you take the opposite position, then you will prevent plaintiffs in borderline cases from bringing suits because they aren't going to find out if somebody thinks it is a borderline case. Justice Breyer sees one harm one way, and one harm the other way.

Arguing for the respondent, Jeffrey Tilden said that Section 16(b) is unique in the securities law in that the plaintiff suffers no injury and recovers no damages. There is no triggering event, unlike a fraud case where their stock drops, to suggest that you have been harmed. Section 16(b) is 99% of the time irrelevant without a 16(a) filing, he emphasized, adding that as a matter of logic it makes no sense to provide the one who violates 16(b) an escape liability because they also violate 16a.

What about as a matter of language, asked Justice Alito, whether or not 16(b) is a statute of repose or a statute of limitations, it tells you exactly when the time is supposed to begin to run, and that is from the realization of the profit. And some want to say no, it doesn't begin to run from that point, it begins to run from the point when some other completely different external event occurs, if it ever does occur, which is the filing of the 16(a) report.

Mr. Tilden noted that the Court has several times recognized that 16(b) and 16(a) were interrelated. Section 16(b) is a statute of limitations for those who file the form demanded by Section 16(a), he posited, adding that there is no statute of limitations in 16(b) for those who do not. Noting that Section 16(a) is the discovery rule, he contended that Congress looked at this and commanded insiders to put the information in a particular location, so that shareholders who have the primary enforcement authority under Section 16(b) can go find it there

Justice Sotomayor observed that a very strong argument on the other side is that Congress, having created a statute of repose for intentional conduct like fraud, why would Congress not create a statute of repose for what is a strict liability statute.

Mr. Tilden noted that fraud cases involve someone who has reason to know that they have been defrauded. It may only be that they bought their stock at X, and now, it's selling for half of X, but they know something has happened. In the Section 16(b) context, the plaintiff has suffered no injury. It is critical to an understanding of what the Congress contemplated at the time.

Justice Scalia noted that, if the 16(b) plaintiff has really suffered no injury, it would be all the more likely that Congress would want a statute of repose.

Mr. Tilden said that legislative history reveals that Congress was extraordinarily concerned about a broad sweep of misconduct in the 1920s. They intended a rule that in this Court's language in the Reliance Electric opinion would be flat, sweeping, and arbitrary. They intended to squeeze every penny of profit out of these transactions, and they did so in 16(b).

In 1934, he noted, the purchase or sale of a stock required the actual knowledge of some other people, whereas today it is an impersonal electronic transaction, often at home in the middle of the night, invisible to everyone. Insider trading was hard enough to uncover then, he said, and it has gotten harder now. He does not believe that Congress envisioned that any additional burden would be placed on shareholders by forcing them to learn of this undetectable conduct within two years. The 16(b) plaintiff does not know insider trading has occurred and won't know unless he or she is told. And no other statute of limitations will serve as an analog here because of the unique nature of Section 16(b), he argued.

The plaintiff has no injury and recovers no damages. The Reliance Electric Court concluded that, if you have a choice, you should select that interpretation that best serves the goal of short-swing trading by insiders. He urged the Court to determine the case based on the wording of 16(b) itself, such that the limitations period in (b) applies to those who file the form in (a).

In rebuttal, Mr. Landau said that if there is any one theme that runs through the Court's 16(b) jurisprudence, it is that precisely because Section 16(b) is prophylactic it should be interpreted in a literal and mechanical way., which argues for repose, because you don't get into a lot of these questions about who knew what when. This certainly would be consistent with that tradition.