The North American Securities Administrators Association, Inc. has filed an amicus brief urging the Supreme Court to overturn the Second Circuit’s decision that the tolling rule set forth in American Pipe & Construction Co. v. Utah does not apply to the three-year statute of repose contained in Securities Act Section 13 and that the filing of a class action does not protect putative class member claims from the repose period. According to the group, requiring investors to quickly decide whether to proceed with a class or pursue an independent claim to avoid the statute of repose undermines the viability of class actions and the ability of the courts and state regulators to evaluate the superiority of class actions and the reasonableness of potential settlements (California Public Employees’ Retirement System v. Anz Securities, Inc., March 6, 2017).
In its brief, the NASAA noted that American Pipe “does not involve ‘tolling’ at all,” but instead defines what it means to “bring” an action by treating absent class members as parties to the original action. Once a class action has been filed, the purposes of the limitations period have been satisfied—the defendants know the subject matter and potential size of the litigation. Further, the group argued, by holding that a class action filing does not protect putative class member claims from the three-year repose period, the Second Circuit undermined the viability of class actions in securities litigation, placed significant burdens on institutional investors and the courts, and left retail investors with reduced protections.
Requiring investors to decide early on whether to proceed with a class or opt out for an independent claim in order to avoid the running of the statute of repose would deprive investors of justice, according to the NASAA. In addition, rejection of the American Pipe rule in these circumstances will result in duplicative, unnecessary litigation and substantial burdens on the judicial system, the NASAA explained. It is generally not practical for individual investors to opt out of a potential settlement, and they need to be able to pursue their interests together with institutional investors in order to leverage those companies’ often-greater financial interests and oversight capabilities. While rejection of the rule might incentivize sophisticated investors to file duplicative litigation, small investors will be left without recourse, the NASAA stated.
The NASAA opined that class action litigation provides critical remedies and compensation for harmed investors and promotes confidence in the markets by enforcing disclosure standards. Without litigation, a great deal of securities fraud would go unpunished because the number of violations is too large to be addressed by federal and state regulators, the NASAA stated. Resource constraints “prevent them from being able to fill an American Pipe sized hole in the securities enforcement structure,” according to the group.
Finally, Rule 23’s provisions become useless if individual class members’ claims are time-barred, the NASAA continued, as an individual would be very unlikely to exercise an opt-out right if the alternative is to try to litigate an untimely claim alone. In addition, if the statute of repose has run, the class action will always be “superior” to individual actions. These kinds of changes could negatively affect the integrity of the markets and the remediation of securities fraud, the NASAA concluded.
The case is No. 16-373.