Monday, March 26, 2012

Supreme Court Rejects Section 16(b) Tolling Based Solely on Failure to File Insider Disclosures

The U.S. Supreme Court held in a unanimous decision (Chief Justice Roberts did not participate in the case) that in a Section 16(b) case, equitable tolling ceases when fraudulently concealed facts are, or should have been, discovered by the plaintiff. The court rejected the claim by the plaintiff that the statute’s two-year limitations period was tolled by the failure to make Section 16(a) filings even if the the plaintiff was aware of the potential claim.

In an opinion authored by Justice Scalia, the court stated that “[u]nder long-settled equitable tolling principles, a litigant must establish “(1) that he has been pursuing his rights diligently, and (2) that some extraordinary circumstances stood in his way.” Allowing tolling to continue beyond that point would be inequitable and inconsistent with the general purpose of statutes of limitations, concluded the court.

This case presented a novel application of Section 16(b). Unlike most cases which involve management or large investors in public companies, this case involved underwriters in initial public offerings. As described by Justice Scalia, this theory of liability is “so novel that petitioners can plausibly claim that they were not aware they had to file a §16(a) statement,” and "would be compelled either to file or to face the prospect of §16(b) litigation in perpetuity."

The high court did not resolve the question of the application of tolling in general to Section 16 cases. The court remanded the case for consideration of how the usual rules of equitable tolling apply to the facts of this case. Justice Scalia noted that "we are divided 4 to 4 concerning, and thus affirm without precedential effect, the Court of Appeals’ rejection of petitioners’ contention that §16(b) establishes a period of repose that is not subject to tolling."

The decision reflects the view of the SEC, as expressed in a brief filed with the Solicitor General, that supported neither party. The Commission urged the court to recognize equitable tolling in Section 16 cases, but did not support the extension of such tolling in cases based on failure to file insider reports where the plaintiff had knowledge of the claim.

The amicus brief stated that like any federal statute of limitations, Section 16(b) is normally subject to a rebuttable presumption’ in favor of equitable tolling. That presumption is strengthened, said the SEC and the Solicitor General, in this context because Section 16(b) and related provisions of the securities laws expressly preserve room for the operation of traditional equitable doctrines.

The underwriters’ arguments for treating Section 16(b) as a statute of repose did not overcome the background presumption that equitable tolling applies. First, the text of Section 16(b), like a typical federal statute of limitations, establishes a time period for bringing suit but does not address the operation of traditional equitable doctrines. Second, the text and structure of Section 16(b) are different from other statutory time limits that the court has found not to be subject to equitable tolling.

In addition, noted the brief, the core purposes of Section 16(b) would be defeated if its limitations period could run while insiders fail to file Section 16(a) reports to conceal their short-swing transactions, and thereby insulate themselves from liability.

Accordingly, urged the brief, Section 16(b)’s limitations period should be tolled until a reasonably diligent security holder knows or should know the facts that would form the basis of a short-swing claim. Tolling was not appropriate, however, in this instance, argued the SEC and the Solicitor General. Although a Section 16(a) report will usually provide the first public notice that a short-swing transaction has occurred, that information may come to light in other ways as well. If other public disclosures adequately inform security holders that particular transactions have occurred, further tolling of the time for bringing suit to disgorge profits from those transactions is unwarranted, concluded the brief.

Credit Suisse Securities (USA) LLC v. Simmonds (No. 10-1261)


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