WASHINGTON (CN) – The Supreme Court dove into a technical case Monday to examine what should determine how long investors that opt out of securities class actions can file separate lawsuits.
It was the third case newly confirmed Associate Justice Neil Gorsuch heard. Along with his conservative colleagues on the bench, he appeared to oppose extending the tolling precedent afforded to class actions for this type of case.
At issue is Section 13 of the Securities Act of 1933, which contains a special limitations provision that bars investors from litigating securities disputes separately from a class action over the same issue after three years.
Lower courts have held that the three-year time limit is absolute, but the California Public Employees’ Retirement System (CalPERS) argued Monday afternoon that the three-year period is subject to equitable tolling.
The Second Circuit Court of Appeals has ruled that Section 13 is a statute of repose, which means the three-year limitation is a strict deadline. A statute that is subject to equitable tolling, however, allows for an extension of time if the injured party did not learn about the injury until after the statute of limitations had already passed.
Typically in class actions, the class complaint counts as an individual claim for the purposes of calculating the statute of limitations.
Known as “American Pipe tolling,” the Supreme Court ruled in 1974 in American Pipe & Construction Co. v. Utah that a class complaint “tolled,” or paused, the statute of limitations, which enables later spin-off claims to be considered timely.
CalPERS, the nation’s largest pension fund at $316 billion, argued that rule should also apply to their investor fraud case against ANZ Securities Inc., an underwriter for Lehman Brothers that went bankrupt in 2008 in the wake of the subprime mortgage crisis.
Investors filed a class action that year, alleging that Lehman Brothers and ANZ had made false statements and omitted important information about some of Lehman’s security debt offerings. But the lawsuit went dormant until 2011, prompting CalPERS to file its own class action.
The issue with securities class actions that CalPERS ran up against, however, stems from a two-tiered system that governs time limitations on securities cases, which attorneys for CalPERS claimed during oral arguments are vague.
Section 13 of the Securities Act requires aggrieved investors to bring a claim within one year of discovering omissions or untrue statements by offerors, which was intended to protect investors.
But it also bars actions more than three years after securities are offered to the public, which protects offerors from never-ending litigation.
According to securities litigator Mark Foster with Morrison and Foerster, financial institutions that underwrite securities offerings rely on that certainty.
“Knowing when the time has run on potential claims allows them to more accurately estimate their risk exposure and any potential contingent liabilities,” he said in an email.
Thomas Goldstein with Goldstein & Russell argued on behalf of CalPERS that the strict deadline for filing securities actions separate from the class only serves to add additional litigation on the front end for district courts to deal with.
He also suggested that the issue turns on whether the new action constitutes “a separate and distinct action within the meaning of Section 13.”
“This is not a new action in any sense of the word,” Goldstein said. All CalPERS did was opt out of the first class action; it did not bring any new allegations, he added.
Gorsuch prodded Goldstein about the plain language of Section 13, which says that “in no event shall any action be brought to enforce a liability” more than three years after securities are offered to the public.
“Why shouldn’t we follow the plain language and the traditional understanding of the term ‘action’?” he said.
If Congress had meant claims, as Goldstein had suggested, why did they did they not use that term? Gorsuch pressed.
Goldstein suggested that the justices view this not within Section 13 alone, but through a prism of all securities-related legislation as a whole.
“What I’m saying is you have to interpret this word ‘action’ in the context of all of the law,” he said.
The liberal-leaning side of the bench remained relatively quiet while Goldstein presented his arguments. But they jumped in when Paul Clement, who argued on behalf of ANZ, presented his client’s case.
Clement faced a barrage of questions from the female justices in particular, who seemed sympathetic to CalPERS.
Justice Ruth Bader Ginsburg pressed Clement about his certainty that Section 13 constitutes a statute of repose.
“When one uses the language ‘forever barred,’ and the other uses ‘in no event,’ how do we know whether it’s a statute of repose?” she asked, referencing the stricter language – “forever barred” – attached to statutes of repose.
Clement pointed to the high court’s ruling in Lampf, Pleva, Lipkind, Prupis & Petigrow v. John Gilberston et al., which found that the two-tiered structure of Section 13 could only be explained if the second three-year tier was a statute of repose.
Speaking of Goldstein, Clement said, “He is seeking to recover millions of dollars from my client, based on an action that they filed in the Northern District of California in 2011, more than three years after these securities were issued to the public.”
According to Clement, that is the action the court must apply the text of Section 13 to.
“And, I’m sorry, 2011 is too late under the plain terms of the statute, and it is a statute of repose,” he said. “And the case really is that simple.”
According to Foster, the Supreme Court has been reluctant to expand securities law beyond court precedent and Congress’s previous definitions.
“The legislative history shows that Congress intended the passage of three years to serve as an absolute bar to claims brought under Section 11 of the Securities Act,” he said in a statement.
Section 11 outlines potential liabilities, while Section 13 governs when and how those claims can be addressed.
“No court-made tolling rule should extend that,” Foster added.
The high court will issue a ruling in the cases before the current session ends in June.