The Supreme Court started a new term this week, making now a good time to review how the Court’s recent actions have affected investors. For decades, “absent” class members (i.e., those individuals and entities included in a case who are not actively litigating the action) have been able to take advantage of an equitable rule known as American Pipe tolling. That legal doctrine delays the running of the statute of limitations, or time period in which an eligible party may bring legal action, once a class action is filed and allows class members to wait on developments in the case (such as the size of any settlement) before deciding whether to remain as a part of the class action or “opt out” and file an individual lawsuit.
On June 26, 2017, the Supreme Court decided California Public Employees’ Retirement System v. ANZ Securities, Inc., 137 S. Ct. 2042 (2017), in which it held that the three-year time bar in the Securities Act of 1933 is not subject to American Pipe tolling. The ruling could have significant implications for investors with big losses in securities fraud class actions. There may also be some ways to mitigate those implications.
Between July 2007 and January 2008, Lehman Brothers raised more than $31 billion through debt offerings. An institutional investor purchased millions of dollars of those securities and suffered significant losses when seemingly fraudulent conduct was revealed.
On June 18, 2008, another investor filed a putative class action alleging that the underwriters of the debt offerings were liable under Section 11 of the Securities Act for issuing false and misleading statements in the registration statements that accompanied the offerings.
In February 2011, more than three years after the securities were offered to the public, but before the district court had decided whether to certify the class, the institutional investor elected to “opt out” of the class action and pursue its individual lawsuit. Even after the class action settled in 2011, the institutional investor elected not to rejoin the class action (and thus participate in the settlement), but rather to continue to pursue its claims individually.
The district court then dismissed the individual action and the Second Circuit affirmed, with both courts holding that the Securities Act’s three-year time bar was not tolled while the class action was pending.
The Supreme Court then granted the institutional investor’s request to review the Second Circuit’s decision.
Supreme Court’s Ruling
The Supreme Court concluded that the claims were not subject to American Pipe tolling (and thus time-barred) and also held that start of the repose period commences with the defendant’s last culpable act (the offering of the securities in this case), not from the accrual of the claim (the plaintiff’s discovery of the defect in the registration). The ruling will be applied to actions brought under other statutes regulating the securities markets, including the Securities Exchange Act of 1934.
Potential Implications for Investors
The ruling may have potential, significant implications for investors with large losses in securities-related actions. For example, investors may now want to take a more active role monitoring the progress of class actions to ensure they are not left without recourse following a negative procedural ruling or an inadequate settlement.
In many cases, investors will no longer be able to wait to see whether the court grants motions for class certification or sit back and decide at the end of the case whether they approve of a settlement before determining whether it is in their interest to file an individual action. Instead, they will have to decide whether to file their own individual claims before the limitations periods run.
Such “protective” filings might be warranted in cases where the court has not yet ruled on the class certification motion and the limitations period is in sight. For example, the denial of class certification on grounds unrelated to the merits of the action (such as a finding that the lead plaintiff is an inadequate representative of the class members) after the expiration of the limitations period would prevent all class members from recovering anything no matter how strong the merits of the claims. Accordingly, it would not be surprising to see defense counsel use the ruling to attempt to prolong litigation past the expiration of the relevant limitations periods in the hope of securing a procedural verdict that would eliminate all class members’ claims.
Unfortunately, many investors will likely be negatively affected by the ruling, but through increased awareness and monitoring of their portfolios and class actions, investors with significant losses should be able to reduce the likelihood of being caught by surprise and possibly losing their claims entirely.