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October Term, 2011

March 26, 2012

Today the Supreme Court issued one decision, described below, of interest to the business community.

Securities Law—Section 16(b)—Statute of Limitations

Credit Suisse Securities (USA) LLC v. Simmonds, No. 10-1261 (previously discussed in the June 27, 2011 Docket Report).

Section 16(b) of the Securities Exchange Act of 1934 allows shareholder derivative lawsuits against statutorily defined “insiders” who have profited from “short-swing” transactions. In addition to defining a short-swing transaction as a coupled purchase and sale, or sale and purchase, completed within six months, the statute provides that “no such suit shall be brought more than two years after the date such profit was realized.” 15 U.S.C. § 78p(b). To facilitate the identification of improper trades, Section 16(a) requires insiders to report to the SEC transactions involving relevant securities. Today, in Credit Suisse Securities (USA) LLC v. Simmonds, No. 10-1261, the Supreme Court unanimously rejected the Ninth Circuit’s rule that the two-year statute of limitations for a Section 16(b) suit is tolled until the filing of a Section 16(a) statement.

In 2007, Simmonds sued eleven underwriters under Section 16(b), alleging that they had inflated the prices of certain securities after an IPO and thereby allowed the underwriters to profit in aftermarket sales. The underwriters moved to dismiss the suits as untimely, because the challenged IPOs all occurred between 1998 and 2000 and thus the transactions fell outside the two-year statute of limitations. The Ninth Circuit held that the suits were timely, applying the “Whittaker rule,” see Whittaker v. Whittaker Corp., 639 F.2d 516 (9th Cir. 1981), according to which the statute of limitations is tolled until a Section 16(a) statement is filed.

While the Court was divided 4-4 on whether the two-year limitations period can ever be tolled (Chief Justice Roberts took no part in the consideration or decision of the case), it unanimously held that the Whittaker rule is incorrect. Instead, the Court held that, at most, traditional principles of equitable tolling apply. Under these principles, the Court explained, “when a limitations period is tolled because of fraudulent concealment of facts, the tolling ceases when those facts are, or should have been, discovered by the plaintiff,” slip op. 5, regardless of whether a Section 16(a) statement was filed. The Court criticized the Whittaker rule for creating liability “in perpetuity” for defendants who do not believe they are obligated to file a statement under Section 16(a). Id. at 6. The Court also rejected the Second Circuit’s rule that tolling continues until the plaintiff acquires actual notice of an improper transaction. Id. at 8 n.7. The Court remanded the case to allow the lower courts to apply traditional principles of equitable tolling to the underwriters’ motion to dismiss.

Today’s decision provides additional guidance for corporate insiders regarding potential liability under Section 16(b). In addition, individuals and companies that are closely associated with financial transactions but not governed by Section 16(a) should take note of the Court’s elimination of perpetual liability for those who do not file Section 16(a) statements. The question whether equitable tolling is appropriate for such suits, however, remains an open one.

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