February 12, 2017

Supreme Court Rules That Securities Act Time Bar Is Not Subject to American Pipe Tolling

Christopher F. Moriarty – October 3, 2017

In 1974, in American Pipe & Construction Co. v. Utah, the U.S. Supreme Court held that “the commencement of the original class suit tolls the running of the statute for all purported members of the class who make timely motions to intervene after the court has found the suit inappropriate for class action status.” 414 U.S. 538, 553 (1974). This ruling has for decades provided protection to absent class members who have been able to wait on developments in a class action before deciding whether or not to opt out and file an individual action. On June 26, 2017, the Supreme Court issued its opinion in California Public Employees’ Retirement System v. ANZ Securities, Inc., 137 S. Ct. 2042 (2017), which resolved a circuit split as to whether the three-year time bar in section 13 of the Securities Act of 1933 is subject to American Pipe tolling.

By way of background in ANZ Securities, between July 2007 and January 2008, Lehman Brothers raised over $31 billion through debt offerings. The California Public Employees’ Retirement System (CalPERS) purchased millions of dollars of those securities. 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.

Claims under section 11 of the Securities Act are subject to the limitations period set forth in section 13, which provides as follows:

No action shall be maintained to enforce any liability created under [section 11] . . . unless brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence. . . . In no event shall any such action be brought to enforce a liability created under [section 11] . . . more than three years after the security was bona fide offered to the public. . . .

15 U.S.C. § 77m.

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, CalPERS—which was a member of the putative class—filed an individual action. Later in 2011, the class action settled and the district court preliminarily certified a class for settlement. CalPERS elected to opt out of the settlement and to continue to pursue its claims individually. The district court then dismissed CalPERS’s individual action and the Second Circuit affirmed, with both courts holding that the three-year time bar was not tolled during the pendency of the class action. CalPERS filed a writ of certiorari, which the Supreme Court granted.

The Court concluded that section 13 is a statute of repose and noted that the “purpose of a statute of repose is to create ‘an absolute bar on a defendant’s temporal liability.’” ANZ Secs., 137 S. Ct. at 2050 (citation omitted). The Court also ruled that the statute “runs from the defendant’s last culpable act (the offering of the securities), not from the accrual of the claim (the plaintiff’s discovery of the defect in the registration).” Id. at 2049.

In dissent, Justice Ginsburg noted that the holding presents risks for absent class members, stating that “[b]ecause critical stages of securities class actions, including the class-certification decision, often occur years after the filing of a class complaint, the risk is high that class members failing to file a protective claim will be saddled with inadequate representation or an inadequate judgment.” Id. at 2057.

While the Court’s holding is limited to actions brought under the Securities Act, there can be little doubt that it will be applied in the broader context, including to actions arising under the Securities Exchange Act of 1934. Indeed, the Third Circuit has already made clear the five-year time bar under the Exchange Act is a statute of repose not subject to tolling. See N. Sound Capital LLC v. Merck & Co., No. 16-1364, 2017 WL 3278886 (3d Cir. Aug. 2, 2017).

Going forward, absent class members with significant losses in securities-related actions should be prepared to take a more active role in monitoring securities-related class actions. They will often have to decide earlier whether to file their own individual claims before the limitations periods run (regardless of whether there has been a ruling on class certification) or face the reality that they will lose their claims in the event of an adverse ruling (such as the denial of class certification) after the applicable time period has run.

Christopher F. Moriarty – October 3, 2017