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Just when companies were starting to get used to the Sarbanes-Oxley Act, a key part of the two-year-old law has come up for debate. The sweeping corporate governance legislation extended the statute of limitations for fraud claims. But does the extension apply retroactively to claims that are off-limits under the old statute of limitations? To the delight of several corporate defendants, the majority of courts ruling on the issue so far have said no. But in September, in a case on appeal, the Securities and Exchange Commission filed an amicus brief in which it argued for retroactively applying the longer time frame. “Practically speaking, this is a huge issue,” says John Sturc, a partner in the Washington, D.C., office of Gibson, Dunn & Crutcher. “If the courts decide in favor [of retroactivity], the potential liability for corporate America goes way up.” Prior to the passage of Sarbanes-Oxley in July 2002, plaintiffs who alleged a violation of federal securities laws had to file suit within one year of discovering the suspected fraud, and within three years of the violation taking place. But under Sarbanes-Oxley, plaintiffs can now file suit within two years of learning about an alleged fraud, and within five years of its occurrence. The question is whether plaintiffs can file claims on incidents that fall outside the old statute of limitations, but within the new one. Only a finite number of cases can be considered for retroactivity � those that target alleged fraud between July 1997 and July 1999 (i.e., between five years and three years prior to SOX’s enactment). But, notably, those suits are asking for hundreds of millions of dollars in potential damages. The Washington State Investment Board says that it has $53 million worth of potential claims against Enron Corp. for alleged wrongdoing that took place at the company in 1997 and 1998. Paul Silver, the Washington State senior assistant attorney general in charge of the board’s litigation, says that “until Enron collapsed [in late 2001], we had absolutely no reason to suspect that any [fraud] was going on. And by the time we had discovered it, the old statute of limitations had run.” But last February, Houston federal judge Melinda Harmon dismissed the Washington board’s claims pertaining to the 1997 � 98 time period (several claims that fell within the earlier statute of limitations are still pending). That was the wrong call, in Silver’s view: “I can’t believe Congress wasn’t thinking about [enabling recoveries against] Enron and WorldCom when it passed [the longer statute of limitations].” Of 12 lower courts that have ruled on the issue, eight have held that Congress did not intend for Sarbanes-Oxley’s statute of limitations to apply retroactively. But plaintiffs picked up a powerful ally when the SEC filed its amicus brief in a case currently on appeal to the U.S. Court of Appeals for the Second Circuit. The suit involves a $40 million claim by AIG Asian Infrastructure Fund, L.P., against divisions of J.P. Morgan Chase & Co. for allegedly fraudulent statements made in January 1998. In its brief, the SEC says that the pre�SOX statute of limitations was “too short” and left many investors “without recourse” in the frauds being uncovered at the time of the law’s passage. According to a lawyer close to the AIG case, the SEC could have filed an amicus over a year ago in a Florida case currently on appeal to the Eleventh Circuit. But this lawyer, who has talked with SEC officials, says the agency chose to save its arguments for one of the most influential circuits. “[The commission] is taking this issue very seriously,” says the lawyer. “It wants to preserve claims against huge defendants like the Enrons and WorldComs.” SEC officials declined to comment on this lawyer’s assessment. Will the SEC brief carry the day? On that question, even agency veterans give a collective shrug. According to Covington & Burling’s David Martin, Jr., a former director of the SEC’s corporate finance division, “On general issues of statutory construction — like statutes of limitations — the commission wields only a moderate amount of influence.” Martin and others think the real goal of the SEC brief may be to get Congress to clarify Sarbanes-Oxley’s ambiguous language on the statute of limitations. Congress has yet to give a sign that it plans to do that, however. “It’s typically hard to get legislative pronouncements [clarifying statutes],” Martin says. “But this might be one of those rare occasions where Congress decides to step in. The interests are pretty big.”

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