By John M. Jascob, J.D., LL.M.
The statute of limitations in the Illinois Securities Law barred common law fraud claims against the controlling stockholder of now-defunct electric car manufacturer Fisker Automotive Holdings, Inc. Sitting in diversity, a federal district court in Illinois ruled that the Illinois Securities Law’s three-year limitations period governed the action regardless of whether Illinois or Delaware common law applied in the case. As a private research report, congressional hearings, and the filing of a qui tam complaint put the plaintiffs on inquiry notice of their claims more than three years before the filing of their lawsuit, the action was dismissed (Orgone Capital III, LLC v. Daubenspeck, March 19, 2018, Pallmeyer, R.).
The plaintiffs were former Fisker investors who claimed that Fisker’s controlling shareholder, venture capital firm Kleiner Perkins Caufield & Byers, committed securities fraud by misleading prospective investors in order to save its investment—and its reputation—with infusions of outside cash. Specifically, the plaintiffs alleged that Kleiner Perkins and two of its principal officers raised over $800 million by issuing misleading information regarding Fisker’s financial health and production capabilities, and concealing the fact that the federal government froze Fisker’s access to a valuable loan from the Department of Energy. The court dismissed the initial complaint on statute of limitations grounds but granted the plaintiffs leave to amend.
The plaintiffs fared no better, however, with their second amended complaint. The plaintiffs continued to argue that that the parties were bound by the Delaware choice-of-law provisions in the stock purchase agreements and subscription agreements by which the plaintiffs purchased Fisker stock. For this reason, the plaintiffs contended that Illinois' residual five-year statute of limitations should apply, rather than the Illinois Securities Law's shorter statute of limitations.
The court observed, however, that under the plain language of the statute, the Illinois Securities Law's statute of limitations does not only apply to actions seeking relief under the Illinois Securities Law. Rather, the three-year statute of limitations also applies to any of the matters for which relief is granted under the Illinois Securities Law, and the Illinois Appellate Court has explicitly held that this includes common law claims arising from the purchase of securities.
The court also observed that finding the presence of Delaware substantive law dispositive as to which Illinois statute of limitations applied in the dispute would simply encourage forum shopping by any stockholder who failed to bring suit in the appropriate state in a timely manner. The court noted that the plaintiffs’ argument was, in effect, that while investors suing in Delaware under Delaware law are subject to a three-year statute of limitations, and investors suing in Illinois under Illinois law are subject to a three-year statute of limitations, investors suing in Illinois under Delaware law must be afforded a five-year statute of limitations. “There is no support in the case law, nor any principled basis for lengthening the limitations period for securities actions in Illinois in this way,” the court stated.
The case is No. 16 C 10849.