Late in 2007, fifty-four coordinated cases were filed by the same plaintiff in the Western District of Washington in Seattle. The plaintiff had recently purchased stock in 54 issuers in public offerings that took place back during the 1999-2001 time period. Plaintiff named the issuers nominally and asserted that their directors and officers had acted as a group with the dozen underwriters named as defendants to acquire more than ten percent ownership of the issuers and engage in transactions leading to short swing profits that should be disgorged under Securities Exchange Act Section 16(b). The alleged misconduct tracked the allegations in MDL securities fraud class actions filed years earlier in the Southern District of New York. We represented all of the underwriter defendants, each of which was represented by separate national counsel and retained us as liaison counsel. We participated equally with all others in the briefing, except that Kirkland & Ellis (for Morgan Stanley) was appointed lead counsel for all in our underwriter group. In half of the cases, the issuers had asserted that plaintiff had made a defective Section 16(b) demand that the issuer seek to disgorge short swing profits, and those cases were dismissed without prejudice on that ground. The federal district court dismissed the other half of the cases with prejudice on statute of limitations grounds, where the issuers did not assert a defective demand. Plaintiff appealed to the Ninth Circuit, where the dismissals were upheld based on defective demands, but were changed to dismissals with prejudice rather than without. The appellate opinion severely criticized an earlier Ninth Circuit opinion holding that the two-year limitations period could not begin to run until a 16(a) group ten percent ownership report had been filed. Both sides petitioned the U.S. Supreme Court, which granted certiorari on our underwriter group’s petition. In an opinion issued on March 26, 2012, the U.S. Supreme Court upheld the dismissal on the primary ground asserted by our underwriter group. The two-year statute of limitations had started to run on the dates of the alleged short swing profit transactions – between 1999 and 2002. Plaintiff had relied on the Ninth Circuit opinion holding that the statute of limitations was not triggered until a ten percent beneficial ownership report had been filed under Section 16(a). The Supreme Court reversed, adhering to the district court’s view that the limitations period could be equitably tolled, but observing that extensive publicity surrounding multi-district class actions starting around 2002 would preclude equitable tolling. The Supreme Court almost confirmed a far-reaching argument we made at that level. We contended that the two-year limitations period in 16(b) was a statute of repose, to which the doctrine of equitable tolling would not apply. This was based on similar Supreme Court authority interpreting limitation periods for implied and express statutory remedies under the Securities Exchange Act of 1934 – e.g., Sections 10(b), 9(e) and 18(c). The Supreme Court was split 4-4 on this issue, with Justice Roberts not participating in the decision. The Supreme Court opinion overturned a longstanding Ninth Circuit precedent and altered a Second Circuit precedent as well. The ruling will help prevent suits contrived to convert fraud allegations into strict liability cases under Section 16 that reach back many years.
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