Supreme Court Rejects “Endless Tolling” of §16(b)’s Two-Year Statute of Limitations

On March 26, 2012, the United States Supreme Court held, in Credit Suisse Securities (USA) LLC v. Simmonds, that an insider’s failure to file a disclosure statement under §16(a) of the Securities and Exchange Act of 1934 does not indefinitely toll the two-year statute of limitations for claims seeking recovery of “short-swing” profits under §16(b).

Laws Implicated

Under §16(b) of the Securities and Exchange Act of 1934, a corporation or a security holder of a corporation may sue directors, officers, or 10 percent shareholders of publicly traded companies who realize “short-swing” profits from the purchase and sale (or sale and purchase) of the corporation’s securities within a 6-month period. The statute also provides that “no such suit shall be brought more than two years after the date such profit was realized.” Under §16(a), insiders must disclose any changes in their ownership interests to the SEC.

Background

In 2007, Vanessa Simmonds sued numerous financial institutions that had underwritten IPOs in the late 1990s and early 2000, alleging manipulation of the aftermarket prices of the securities. She further alleged that these insiders owned more than 10 percent of the outstanding stock of the relevant companies, subjecting them to both disgorgement of profits under §16(b) and the reporting requirements of §16(a). She claimed that the insiders failed to comply with §16(a)’s reporting requirement, thereby tolling §16(b)’s two-year statute of limitations.

The district court dismissed the suit because the two-year statute of limitations under §16(b) had expired. The Ninth Circuit reversed, citing Whittaker v. Whittaker Corp., 639 F. 2d 516 (1981), in which it held that the two-year limitations period is “tolled until the insider discloses his transactions in a §16(a) filing, regardless of whether the plaintiff knew or should have known of the conduct at issue.”

The Supreme Court’s Holding

The Court unanimously rejected the Ninth Circuit’s decision, holding that even if the two year limitations period could be extended, the Ninth Circuit erred in determining that the limitations period is tolled until the filing of a §16 (a) disclosure statement. The Court criticized the Whittaker rule for creating the prospect of liability “in perpetuity” for potential defendants. The Court further admonished that it would be “inequitable” to allow “tolling to continue beyond the point at which a §16(b) plaintiff is aware, or should have been aware, of the facts underlying the claim.” The Court emphasized that the language of §16 itself clearly does not extend the limitations period in the manner the Whittaker rule indicates. Rather, “[t]he two-year clock starts from ‘the date such profit was realized.’”

The Court reiterated that under traditional equitable tolling principles, a litigant bears the burden of establishing: (1) that he has been pursuing his rights diligently, and (2) that some extraordinary measures stood in his way. Under these principles, the Court stated, tolling “ceases when fraudulently concealed facts are, or should have been, discovered by the plaintiff.”

The Court remanded the case to the lower court to determine how the usual rules of equitable tolling would apply.

The Court’s decision rejecting “endless tolling” and reinforcing the application of traditional equitable tolling principles was unanimous, with Chief Justice Roberts taking no part in the consideration or decision of the case. However, the Court was split four to four on the issue of whether “§16(b) establishes a period of repose that is not subject to tolling,” and thus affirmed without precedential effect the Ninth’s Circuit’s rejection of that contention. It is possible that the Court may consider this issue in the future and may hold that, like the statute of limitations that applies to rule 10(b)(5) claims, there is no tolling permitted under any circumstances.

Implications

The Supreme Court’s decision provides guidance for corporate insiders regarding potential liability under §16. Individuals and companies who face potential claims under §16 should note the Court’s elimination of exposure to “perpetual” liability under §16. Companies or individuals who might be subject to a §16(b) lawsuit should discuss the implications of the Court’s decision with legal counsel.

The case is Credit Suisse Securities (USA) LLC v. Simmonds.

For more information about the subject matter of this alert, please contact the authors or any Bingham securities and financial institutions litigation partner.

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