Published: March, 2012 - USA
Submission: April, 2012
Supreme Court Holds That a Failure to File Section 16(a) Disclosures Does Not Toll the Statute of Limitations on Recovery of Short Swing Profits
by Nicholas Even, Kit Addleman
Haynes and Boone, LLP Press
On Monday, March 26, 2012, the United States Supreme Court issued a decision in Credit Suisse Securities (USA) LLC v. Simmonds. The Court held that an alleged failure by a corporate insider to file a short-swing profit disclosure under Section 16(a) of the Securities Exchange Act of 1934 does not indefinitely toll the two-year statute of limitations on another party’s claim for recovery of such profits under Section 16(b). Rather, normal equitable tolling principles apply: the statute of limitations on a Section 16(b) suit is tolled only until a plaintiff is aware, or should have been aware, of the facts underlying the claim.
Section 16(a) requires directors, officers and 10 percent equity holders of publicly traded companies to report their transactions involving the corporation’s securities. If a corporate insider profits from the purchase and sale, or sale and purchase, of the securities within a six-month period, Section 16(b) provides that the corporation or its shareholders (if the company fails to take action following a demand) may sue for those profits. Section 16(b) provides that “no such suit shall be brought more than two years after the date such profit was realized.”
In Credit Suisse, plaintiff Vanessa Simmonds sued more than 50 underwriters in 2007, asserting Section 16(b) claims relating to alleged manipulation of aftermarket prices of stocks offered in the late 1990s and the year 2000. The underwriters successfully argued in the district court that the two-year period in Section 16(b) barred the claims because the underlying facts had been disclosed publicly years earlier, in offering registration statements and complaints in prior related lawsuits. The Ninth Circuit disagreed and held that the plaintiff’s claim was not time-barred because the statute of limitations was tolled until the defendants filed § 16(a) disclosures regarding the transactions on a Form 4. In addition to the Ninth Circuit, the Second Circuit and a number of federal district courts have held that the two-year period in Section 16(b) is a statute of limitations subject to equitable tolling where the defendant director, officer or substantial shareholder fails to disclose the trades at issue.
The Supreme Court Ruling
A unanimous Supreme Court reversed the Ninth Circuit’s decision and rejected the argument that the Section 16(b) statute of limitation is tolled until a Section 16(a) filing has been made. Justice Antonin Scalia, writing for the Court, held that even assuming underwriters had failed to make required disclosures, “it does not follow that the limitations period is tolled until the §16(a) statement is filed.” Justice Scalia noted that “Section 16 itself quite clearly does not extend the period in that manner. The 2-year clock starts from ‘the date such profit was realized.’ § 78p(b). Congress could have very easily provided that ‘no such suit shall be brought more than two years after the filing of a statement under subsection (a)(2)(C).’ But it did not.” (emphasis in original). The Court held that it would be “inequitable” to allow the statute of limitations to be tolled “beyond the point at which a § 16(b) plaintiff is aware, or should have been aware, of the facts underlying the claim.” Justice Scalia also noted that potentially “endless tolling” was “especially at odds with a provision that imposes strict liability on puta¬tive insiders.”
On a separate, but related, question – whether any tolling under Section 16(b) is permissible, or whether the two-year period is a “period of repose” not subject to extension – the Court was evenly divided (Chief Justice Roberts did not participate). The Court therefore, affirmed – “without precedential effect” – the Ninth Circuit’s rejection of that argument. The Court remanded the case to allow the lower courts to determine whether any tolling of the statute of limitations in this matter was called for under traditional equitable principles.
For a copy of the Court’s Opinion, click here.
For more information, please visit the Securities Class Action Defense and Shareholder Litigation page of the Haynes and Boone, LLP website, or contact one of the attorneys below. You may also view the alert in the PDF linked below.
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