One of the first cases that Justice Neil Gorsuch will hear on Monday at the U.S. Supreme Court involves a procedural issue in securities class actions, an area of law that the new justice once criticized as a “free ride to fast riches” for the plaintiffs bar.
To be sure, Gorsuch’s views on securities class actions were expressed more than a decade ago while he was a lawyer in private practice representing both the U.S. Chamber of Commerce and the Washington Legal Foundation. While on the U.S. Court of Appeals for the Tenth Circuit, his class action rulings have been largely textualist, not ideological.
Still, California Public Employees’ Retirement System v. ANZ Securities Inc. will give the securities bar its first glimpse of how Justice Gorsuch approaches issues that are esoteric on the surface but can greatly impact litigation strategy. CalPERS is hoping to reverse a July 8 ruling by the U.S. Court of Appeals for the Second Circuit that dismissed its securities fraud lawsuit against the underwriters of Lehman Bros.’ debt offerings.
The question before the court deals not with a fast ride, but instead how slow it can be—specifically, whether the time period in which an investor who opts out of a class action can pursue fraud claims is suspended by the filing of the initial class action.
The answer is important to institutional investors who, like CalPERS, frequently opt out of securities class actions to bring their own suits. In an indication that the stakes are high, each side has brought in an all-star Supreme Court advocate: Thomas Goldstein of Washington’s Goldstein & Russell for Calpers and Paul Clement, a former U.S. solicitor general and partner at Kirkland & Ellis, for the financial institution defendants.
Blair Nicholas, a partner at Bernstein Litowitz Berger & Grossman in San Diego, said a circuit split on the tolling issue has left institutional investors unclear about how to proceed with securities fraud claims.
“There’s no certainty,” said Nicholas, who filed an amicus brief on behalf of 75 institutional investors. “No one knows how a court is going to come out.”
That’s also a problem for business groups. In an amicus brief supporting the defendants, the U.S. Chamber of Commerce said how the Supreme Court answers the tolling question here could impact hundreds of other statutes, including those involving employee retirement plans and product liability claims. Chamber attorney William Jay, a partner in Goodwin Procter’s Washington office, also raised concerns that if given a way to stop the clock, the plaintiffs bar would abuse the practice to stretch the time limits “far beyond what Congress or the state legislature selected.”
CalPERS, which had purchased millions of dollars of subprime mortgage securities at the time Lehman filed for bankruptcy in 2008, brought its case over the Lehman Bros. securities individually after opting out of a related class action. But claims made under the Securities Act of 1933 must be “brought within one year after the discovery of the untrue statement or the omission” and within “three years after the security was bona fide offered to the public.” The Second Circuit found that its case was time-barred under the three-year time limit, called a statute of repose.
CalPERS, which brought on Goldstein to argue at the Supreme Court, is also represented by Robbins Geller Rudman & Dowd.
They contend that the Second Circuit’s holding, since adopted by the Sixth and Eleventh circuits, upends “an entrenched feature of federal civil procedure” that tolls the statute of repose. The so-called American Pipe rule—named for the U.S. Supreme Court’s 1974 decision in American Pipe & Construction Co. v. Utah—is critical for investors because many class actions don’t reach certification or other critical stages within three years. American Pipe also preserves the due process rights of class members to opt out of a case, Goldstein wrote.
Without the rule, he wrote, investors would be forced to intervene or bring separate cases—moves that would flood the courts.
But Clement, who represents the underwriter defendants along with lawyers from Cleary Gottlieb Steen & Hamilton, shrugged off the “sky-will-fall prediction.” No “parade of horribles” has resulted from the Second Circuit’s holding, which built on a 2013 decision in Police & Fire Ret. Sys. of City of Detroit v. IndyMac MBS Inc., Clement wrote.
And, he added, unlike statutes of limitations, which deal with how long plaintiffs have to file a suit, statutes of repose put an outer limit on civil liability. While the first can be tolled, he argued, the second cannot, even under the American Pipe rule.
The court, he wrote, should “merely to respect the policy judgments Congress had already made in enacting a statute of repose.”
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