Issues
Should Section 16(b) of the Securities Exchange Act of 1934 be construed as a statute of repose, and, if so, is it permissible to toll a statute of repose until the disclosure requirements of Section 16(a) have been met?
Vanessa Simmonds brought suit under Section 16(b) of the Securities Exchange Act of 1934 in order to recoup profits realized by Credit Suisse and other investment banks in the course of engaging in short swing trading. The defendants engaged in such trading as underwriters during a series of lucrative initial public offerings in the early 2000s. Section 16(b) limits lawsuits to a two-year period following the date on which profits from trading were realized. In this case, Credit Suisse argues that the two-year time limit enunciated in Section 16(b) begins at the time the defendant realized profits, and constitutes a period of repose, which should not be extended under any circumstance. Simmonds argues that the Section 16(b) time limit should be interpreted in context with Section 16(a), which mandates disclosure in SEC filings of private transactions. Simmonds contends that, when read together, sections 16(a) and 16(b) suggest the time limit should toll until the plaintiff learns of the transaction. The Supreme Court's decision will affect the disclosure policies of investment banks and the time period during which directors can be held liable for short-swing purchases and sales.
Questions as Framed for the Court by the Parties
Whether the two-year time limit for bringing an action under Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), is subject to tolling, and, if so, whether tolling continues even after the receipt of actual notice of the facts giving rise to the claim.
Facts
In this case, respondent Vanessa Simmonds challenges the conduct of fifty-four underwriters in their activities related to a series of Initial Public Offerings (“IPOs”) of equity securities in the stock market boom of 1998 to 2000.
When the stock market bubble burst in 2001, thousands of investors filed suit alleging that fifty-five underwriters had violated federal securities laws by participating in a scheme that defrauded the investing public by artificially inflating the price of the issuers’ securities. The IPO investors claimed that the underwriters achieved this artificial price inflation in three ways. First, the underwriters engaged in laddering, in which they entered into agreements that induced customers to purchase additional shares at higher prices. Second, they required that customers compensate the underwriters in exchange for shares purchased through the IPO through high commissions, commissions paid for unrelated securities, and the purchase of other securities from the underwriters. Finally, they engaged in other improper practices with analysts, such as allowing analysts to own shares of stocks they were selling.
In 2002, investors challenged the underwriters’ conduct under antitrust laws, alleging that the investment banks had formed a cartel that harmed IPO customers through laddering and undisclosed compensation. The Supreme Court held that the underwriters’ conduct was not subject to antitrust liability.
Vanessa Simmonds, who owns stock in the fifty-five companies that were the subject of IPOs, brought a claim in 2007 in the U.S. District Court for the Western District of Washington under Section 16(b) of the Securities Exchange Act of 1934 (“1934 Securities Act”), alleging that Credit Suisse and other investment banks (collectively “Credit Suisse”) derived artificial profits from short-swing transactions in the IPOs of 1999 and 2000. Simmonds claims that Credit Suisse is subject to the requirements of Section 16 - which applies only to parties owning greater than ten percent of the relevant company’s outstanding stock - due to group participation of principal shareholders, directors, and officers of each company in facilitating a common scheme. Simmonds contends that Credit Suisse is liable under Section 16(b) for profiting from short-swing transactions in the IPOs, and under Section 16(a) for failing to report the profits resulting from those transactions.
The District Court dismissed all fifty-four complaints because they were brought outside the time limitation in Section 16(b), which states that suits under Section 16(b) cannot be brought more than two years after the date on which the profit in question was realized. The United States Court of Appeals for the Ninth Circuit reversed, holding under its previous decision in Whittaker v. Whittaker Corp. that the two-year period indicated in Section 16(b) was tolled because Credit Suisse had not disclosed the transactions through a Section 16(a) filing. The Ninth Circuit held that Simmonds could sue on events that transpired over five years previously, regardless of whether she knew or should have known of the underwriters' conduct.
The Supreme Court granted certiorari on June 27, 2011.
Discussion
The 1934 Securities Act was intended to protect the market and investors against insider trading. To that end, Section 16(a) mandates “insiders” (including directors and parties owning at least ten percent of any class of equity security) of the securities issuer to report purchases and sales of securities. Section 16(b) requires that those subject to disclosure under Section 16(a) must disgorge any profits gained from short-swing transactions, and that an issuer or holder of a security must bring suit for a violation of this requirement within two years after the alleged profit was realized. Simmonds argues that the two-year time limit should be tolled because Credit Suisse failed to comply with the Section 16(a) reporting requirements. Credit Suisse argues that the statute clearly indicates that the two-year statute of limitations begins to run on the date of the defendant’s challenged conduct, without regard to a plaintiff’s awareness of facts that could underlie a potential claim.
Protecting Against Insider Trading
The United States warns that, if the time limitation is not tolled, violators of Section 16(a) would profit from their wrongs: the very failure to report under Section 16(a) could allow violators to escape liability under Section 16(b) if the two years were to pass without discovery of the undisclosed profits. The United States explains that, since the disclosure of information under Section 16(a) is the primary means by which a plaintiff would acquire information that would serve as the basis of a claim under Section 16(b), starting the two-year time limit at the date on which the underwriter sees profits would facilitate precisely the wrongful evasion of suit that the 16(a) reporting requirement seeks to prevent.
On the other hand, the Chamber of Commerce insists that tolling is unwarranted because Congress intended to tie the limitations period to the date the profits were realized, not the date of the harm to the plaintiff. The Chamber of Commerce arguesthat attorneys' fees, not plaintiffs, drive almost all litigation arising under Section 16(b). The Chamber of Commerce explains that awards from the lawsuit go to the corporation, not the plaintiff, and concludes that plaintiffs do not have an interest in bringing suit. Citing the regularity with which attorneys ask friends or family to buy certain securities in order to gain standing with which to sue on Section 16 violations, the Chamber of Commerce insists that prospective plaintiffs have plenty of resources in place to detect violations of Section 16(b) without the extra support of tolling.
Fairness to Plaintiffs
The United States advocates that the availability of a cause of action should not begin to expire until the plaintiff has had an actual chance to discover a wrong. The U.S. emphasizes that, if a defendant has wrongfully concealed facts that would be essential to a plaintiff’s cause of action, the plaintiff may not even be aware that a violation has occurred. Therefore, the U.S. argues, in the event of misrepresentation or wrongful concealment (such as a failure to disclose under Section 16(a)), equitable tolling should occur until a reasonably diligent plaintiff discovers or should have discovered the relevant information.
On the other hand, Credit Suisse and the United States point out that a plaintiff should not be encouraged to delay filing suit, especially when facts underlying a claim are readily available. The Chamber of Commerce insists that, when enacting Section 16, Congress prioritized a policy of repose over protecting investors from undiscovered violations. The United States argues there should be a limit to the length of time a potential defendant must live in fear of being sued, especially given that there are other public sources of information from which plaintiffs can make themselves aware of a Section 16 violation.
Analysis
This case considers whether Section 16(b) of the 1934 Securities Act, which sets a two-year limit on bringing a lawsuit to recover profits from a short-swing purchase and sale, should be interpreted to begin at the time profits were realized, or at the time such profits were disclosed to the plaintiff. Petitioner Credit Suisse contends that the language, structure, and legislative history of Section 16(b) indicate that the two-year limitation on lawsuits should begin when the short-swing purchase and sale occur. Credit Suisse further argues that, even if this two-year time limit could be extended, this lawsuit would still be untimely because the respondent did not meet the standard of a reasonably diligent plaintiff. Respondent Simmonds argues that the two-year time limit should toll until the defendant trader satisfies the public disclosure requirements of Section 16(a).
Textual Evidence
Credit Suisse first argues that the language of Section 16(b) defines the two-year time limit as a period of repose because the date on which the time limitation starts to run refers only to the defendant’s conduct. A statute of repose bars a lawsuit brought after a certain period of time subsequent to a defendant’s action. The inability to extend a deadline set by a statute of repose distinguishes it from a statute of limitation. By contrast, statutes of limitations are subject to extension via tolling. Credit Suisse argues that, because Congress easily could have limited Section 16(b) lawsuits with a statute of limitations that began after the plaintiff's discovery of the defendant's conduct, the fact that it did not suggests that Congress meant for this two-year limit to begin at the time of the defendant’s action. Further, Credit Suisse argues that, when considering Section16(b) in the structural context of the larger statute, it is clear that no mechanism for extension exists. Credit Suisse points out that Congress included a statute of repose and a statute of limitations in other sections of the 1934 Securities Act to limit causes of action following the action of a defendant and the discovery of the action by the plaintiff. Credit Suisse argues that the language of Section 16(b) closely resembles the language of the part of the sections that create a period of repose. Credit Suisse contends that this indicates Congress could have allowed extensions to the Section 16(b) time limit, but chose not to do so.
Simmonds responds by arguing that the relevant difference between a statute of limitations and a statute of repose is not the person whose action starts the clock (defendant’s act or plaintiff’s discovery of the act), but rather the action that each statute limits. Simmonds argues that statutes of repose limit the duration of a given right, whereas statutes of limitations specifically limit the ability to bring a lawsuit. Simmonds argues that the language of Section 16(b), which says that “no such suit shall be brought” after a period of two years, mirrors the language of typical statutes of limitations. Simmonds further argues that Credit Suisse fails to consider Section 16(b) within the larger context of the statute. Noting that Section 16(a) includes a disclosure requirement in SEC filings for ownership and trading activities, Simmonds contends that the time limit in Section 16(b) can only be properly interpreted within the context of disclosure. Simmonds argues that the word "such" in the time limitation language of Section 16(b) refers to profits made by the owners, directors, and officers who are required to disclose under Section 16(a).
Evidence of Congressional Intent
Credit Suisse argues that Congress intended the disclosure requirement in Section 16(a) to have no bearing on the time limit set forth in Section 16(b). Credit Suisse contends that Congress considered making the Section 16(b) time limit contingent upon Section 16(a) disclosure in a draft of the bill, but decided instead to link the two-year limit to the date profits were realized. Credit Suisse also points to the historical context in which Congress passed the statute. Credit Suisse argues that the 1934 Securities Act, taken as a whole, significantly increased the exposure of directors to liability. Credit Suisse asserts that this suggests that Congress intended Section 16(b) to be a statute of repose because individuals would not be willing to serve as directors if a period of repose did not delay their liability. Credit Suisse further argues that Congress intended for Section 16(b) to be a statute of repose because of the concern that extending liability would harm business and encourage false claims.
Simmonds counters that, even if the Court accepted Credit Suisse’s interpretation of Section 16(b), the court should still interpret the statute in the way that best serves Congress’s underlying intent to curtail short-swing transactions. Simmonds argues that, because Congress intended Section 16(b) to be enforceable through lawsuits by private shareholders, it follows that such shareholders can only bring suits on private transactions if information about those transactions is disclosed pursuant to Section 16(a). Simmonds further argues that, because shareholders can only learn of private transactions through Section 16(a) disclosures, it would defeat the purpose of the statute if the Section 16(b) time limit were not tied to such disclosures. Simmonds also points out that Congress has reconsidered Section 16(b) several times and, each time, has declined to revise it. Simmonds contends that Congress’s silence in the face of a widespread acceptance of tolling indicates that Congress intended for the two-year time limit to toll until the disclosure requirements of Section 16(a) have been met.
Timeliness of Simmonds' Suit
Credit Suisse argues that, even if the Court finds that Section 16(b) can be tolled, Simmonds's action is still untimely. Credit Suisse contends that Section 16(b) clearly provides that the time limit begins to run on the date the profits from the short-swing transaction are realized. Credit Suisse argues that a plaintiff cannot benefit from tolling if the plaintiff knew or should have known the facts underlying the complaint, and points out that Simmonds knew about the facts giving rise to her lawsuit five years before she filed the lawsuit. Credit Suisse concludes that Simmonds cannot assert that she did not have enough information to file a lawsuit, due to a lack of disclosure under Section 16(a), because she did in fact file her claim without receiving Section 16(a) disclosure.
Simmonds counters by arguing that her lawsuit was timely. Simmonds distinguishes between equitable and legal tolling, arguing that legal tolling extends a time limitation based upon a statute, whereas equitable tolling keeps a statute of limitations running to prevent unfairness or mistake. Simmonds argues that if legal tolling applies, her lawsuit is timely because Section 16(b) is tolled until Section 16(a) disclosure is provided and that Credit Suisse never complied with this requirement. Simmonds further asserts that, if equitable tolling applies, her lawsuit is still timely, because, under the equitable tolling doctrine, the tolling period ends when a plaintiff discovers or should have discovered the facts underlying a claim. Simmonds contends that she could not have known of the facts giving rise to her claim because Credit Suisse did not file a Section 16(a) disclosure report and the information was only known to insiders.
Discussion
The 1934 Securities Act was intended to protect the market and investors against insider trading. To that end, Section 16(a) mandates “insiders” (including directors and parties owning at least ten percent of any class of equity security) of the securities issuer to report purchases and sales of securities. Section 16(b) requires that those subject to disclosure under Section 16(a) must disgorge any profits gained from short-swing transactions, and that an issuer or holder of a security must bring suit for a violation of this requirement within two years after the alleged profit was realized. Simmonds argues that the two-year time limit should be tolled because Credit Suisse failed to comply with the Section 16(a) reporting requirements. Credit Suisse argues that the statute clearly indicates that the two-year statute of limitations begins to run on the date of the defendant’s challenged conduct, without regard to a plaintiff’s awareness of facts that could underlie a potential claim.
Protecting Against Insider Trading
The United States warns that, if the time limitation is not tolled, violators of Section 16(a) would profit from their wrongs: the very failure to report under Section 16(a) could allow violators to escape liability under Section 16(b) if the two years were to pass without discovery of the undisclosed profits. The United States explains that, since the disclosure of information under Section 16(a) is the primary means by which a plaintiff would acquire information that would serve as the basis of a claim under Section 16(b), starting the two-year time limit at the date on which the underwriter sees profits would facilitate precisely the wrongful evasion of suit that the 16(a) reporting requirement seeks to prevent.
On the other hand, the Chamber of Commerce insists that tolling is unwarranted because Congress intended to tie the limitations period to the date the profits were realized, not the date of the harm to the plaintiff. The Chamber of Commerce arguesthat attorneys' fees, not plaintiffs, drive almost all litigation arising under Section 16(b). The Chamber of Commerce explains that awards from the lawsuit go to the corporation, not the plaintiff, and concludes that plaintiffs do not have an interest in bringing suit. Citing the regularity with which attorneys ask friends or family to buy certain securities in order to gain standing with which to sue on Section 16 violations, the Chamber of Commerce insists that prospective plaintiffs have plenty of resources in place to detect violations of Section 16(b) without the extra support of tolling.
Fairness to Plaintiffs
The United States advocates that the availability of a cause of action should not begin to expire until the plaintiff has had an actual chance to discover a wrong. The U.S. emphasizes that, if a defendant has wrongfully concealed facts that would be essential to a plaintiff’s cause of action, the plaintiff may not even be aware that a violation has occurred. Therefore, the U.S. argues, in the event of misrepresentation or wrongful concealment (such as a failure to disclose under Section 16(a)), equitable tolling should occur until a reasonably diligent plaintiff discovers or should have discovered the relevant information.
On the other hand, Credit Suisse and the United States point out that a plaintiff should not be encouraged to delay filing suit, especially when facts underlying a claim are readily available. The Chamber of Commerce insists that, when enacting Section 16, Congress prioritized a policy of repose over protecting investors from undiscovered violations. The United States argues there should be a limit to the length of time a potential defendant must live in fear of being sued, especially given that there are other public sources of information from which plaintiffs can make themselves aware of a Section 16 violation.
Conclusion
In this case, the Supreme Court will decide whether Section 16(b) of the Securities Exchange Act of 1934 can be tolled in order to extend the period of time in which a plaintiff can bring suit to recoup profits made by defendants in the course of short-swing trading. Credit Suisse argues that the time limit set forth in Section 16(b) is a period of repose and, as such, cannot be tolled. Credit Suisse points to the language, structure, and legislative history of the statute to suggest that Section 16(b) should be read as a stand-alone section that refers only to the defendant's conduct when setting its time limit. Simmonds argues that Section 16(b) must be interpreted in conjunction with Section 16(a), which requires disclosure in SEC filings of private transactions. Taken together, Simmonds argues, Section 16(b) tolls the period of time in which a plaintiff can bring suit until the disclosure requirement in Section 16(a) is met. The Supreme Court's decision will affect the disclosure policies of investment banks and the time period during which directors can be held liable for short-swing purchases and sales.
Written by
Edited by
Acknowledgments
Additional Resources
Wex: Statute of Repose
Securities and Exchange Commission: Securities Exchange Act of 1934