For the past several years, professional investment funds in New York have faced a dilemma: if they wanted to see the results of a securities class action and settlement before filing their own case, they ran the risk that their claims would be time-barred by that point. That may now change as the Supreme Court has agreed to decide whether the filing of a securities class action tolls the statute of repose for investors who decide to "opt out" of the class. The Supreme Court will review a decision by a New York federal appeals court that held that the filing of a class action does not stop the clock on claims by investors who subsequently exclude themselves from the class and instead pursue direct claims.
In Police & Fire Retirement System of City of Detroit v. IndyMac MBS, Inc., 721 F.3d 95 (2d. Cir. 2013), the Second Circuit Court of Appeals (which covers federal courts in New York, Connecticut, and Vermont) held that the three-year statute of repose in Section 13 of the Securities Act of 1933 was not tolled by the filing of a class action asserting claims under the Securities Act. In 2014, the Supreme Court granted certiorari to review the IndyMac decision but then dismissed certiorari after the parties reached a settlement. In 2016, the Second Circuit applied its IndyMac holding to dismiss as time-barred the Securities Act claims of a significant purchaser of Lehman notes that did not file its individual action until more than three years after the issuance of those notes. In re Lehman Bros. Sec. & ERISA Litig., 655 Fed. Appx. 13 (2d Cir. 2016). The Supreme Court has now agreed to review that investor's appeal.
The Second Circuit's ruling in IndyMac conflicts with an earlier decision from the Tenth Circuit Court of Appeals. In Joseph v. Wiles, 223 F.3d 1155 (10th Cir. 2000), the Tenth Circuit held that the filing of a securities class action tolls the statute of repose for investors who later elect to pursue their own action. Since IndyMac, courts around the country have continued to decide the issue, resulting in a split of authority that the Supreme Court will now resolve. This issue is currently the subject of an appeal pending before the Third Circuit Court of Appeals (which covers federal courts in Delaware, New Jersey, Pennsylvania, and the Virgin Islands). Lowenstein Sandler LLP has been involved in most of these important cases, submitting amicus briefs to the Supreme Court and the Second Circuit Court of Appeals.
The Supreme Court's ruling will affect the rights of professional investors to bring direct actions in securities fraud cases. As it currently stands, investors are barred from bringing a direct securities fraud action in some states (such as New York) more than three or five years after the violations at issue (depending on the claim), notwithstanding the filing of a timely class action, while investors can rely on the filing of a timely class action in other states (such as Colorado) to preserve their claims. Because of the length and complexity of securities fraud class actions, the clock often runs out before a settlement is reached. This leaves some investors in the position of having to file their own actions simply to preserve their rights.
We anticipate that the Supreme Court will issue a decision in California Public Employees' Retirement System v. ANZ Securities, Inc. and create a uniform standard for class action tolling before the summer of 2018, and possibly even in 2017. In the meantime, professional investors should review all of their positions in existing class actions that could be affected by the Supreme Court's upcoming ruling and act immediately to protect their rights. If you would like to request a review of your portfolio, please contact the attorneys listed on this alert.
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