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Since the implosion of Enron, an astounding string of accounting scandals have stunned the securities markets. WorldCom, Adelphia and a host of other companies have seen share prices plummet, and SEC and criminal investigations. The reaction of lawmakers has been equally stunning and surprisingly swift. Congress has passed with near unanimity the Sarbanes-Oxley Act of 2002 (SOA), and President George Bush quickly signed it into law. Most press attention has focused on the SOA’s tougher criminal penalties and the creation of a new Public Company Accounting Oversight Board. But one provision that has garnered relatively little attention is � 804, which provides a longer statute of limitations for certain claims under the federal securities laws. While the plaintiffs’ bar has lobbied for more than 10 years for this provision, there is little evidence it is necessary. Moreover, the provision is poorly drafted. It is inconsistent with express statutes of limitation already contained in the federal securities laws and is likely to create significant interpretational difficulties for courts. SOA’S LIMITATIONS PERIOD Section 313(a) of Judicial Improvements Act of 1990 (codified at 28 U.S.C. � 1658) provides a four-year limitations period for any acts of Congress that do not have an explicit limitations period. The SOA amends � 1658 by adding a new subsection (b) that provides: (b) Notwithstanding subsection (a), a private right of action that involves a claim of fraud, deceit, manipulation, or contrivance in contravention of a regulatory requirement concerning the securities laws … may be brought not later than the earlier of (1) Two years after the discovery of the facts constituting the violation; or (2) Five years after such violation. The SOA’s use of the phrase “a claim of fraud, deceit, manipulation, or contrivance” suggests it was intended to apply primarily to actions brought under � 10(b) of the Securities Exchange Act and Rule 10b-5. Because Rule 10b-5 is an implied private right of action, there is currently no statutory limitations period. In 1991, however, the U.S. Supreme Court, in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, [FOOTNOTE 1] determined that the statute of limitations for Rule 10b-5 actions is one year after the discovery of the facts constituting the violation and within three years after such violation, the same limitation period that applies to several express causes of action in the Exchange Act and the Securities Act of 1933. [FOOTNOTE 2] Prior to Lampf, most courts borrowed limitations periods from state law, creating a patchwork of inconsistent limitation periods ranging from one to 10 years. Lampf adopted a uniform period to eliminate these inconsistencies, to reduce forum shopping, and to avoid “complex and expensive litigation over what should be a straightforward matter.” [FOOTNOTE 3] The Lampf Court adopted the one-three year rule because it could “imagine no clearer indication of how Congress would have balanced the policy considerations implicit in any limitations provision than the balance struck by the same Congress in limiting similar and related provisions.” [FOOTNOTE 4] Congress is, of course, free to reassess that balance. But any such reassessment should be based on an empirical analysis of whether the current limitations period is inadequate. Any changes should also be structured to minimize damage to the basic structure of the federal securities laws. Unfortunately, the SOA does neither. CONGRESS’ RATIONALE The rationale Congress offered for extending the statute of limitations is that a longer period will permit defrauded investors a greater opportunity to recoup losses in cases where those perpetrating the fraud have concealed it. [FOOTNOTE 5] Congress cited no empirical study demonstrating the need for such a change, but instead relied on sketchy anecdotal evidence. Had Congress investigated the matter more fully, it would have discovered such a change is unnecessary. Only seven years ago, Congress passed the Private Securities Litigation Reform Act (PSLRA) [FOOTNOTE 6] to address perceived abuses in private securities litigation. At that time, Congress expressed exactly the opposite concern — it found that actions were often brought too quickly with little apparent prefiling investigation. The PSLRA has not significantly slowed this race to the courthouse. Indeed, there is no evidence that the one-year discovery rule placed significant constraints on attorney’s ability to file meritorious securities claims. In connection with a recently completed study of the effectiveness of the PSLRA, I have examined in detail a sample of 160 securities-fraud class actions filed from July 1998 through June 2001. Of those cases, 146 involved the kind of Rule 10b-5 actions that appear to be the primary focus of the SOA. On average, these cases were brought within 55 days of the end of the class period, i.e., the time when the alleged misrepresentation or omission was disclosed. Median filing time in the cases was even shorter — just 11 days. Eighty-nine percent of the class actions were filed within six months of disclosure of the alleged misconduct. Only 5 percent of the cases studied were brought within three days of the one-year limit. WEIGHING THE EVIDENCE This evidence demonstrates that the plaintiffs’ lawyers — who are the driving force behind this litigation — are more than capable of bringing actions within a year of discovery. Indeed, in Enron, WorldCom and other recent cases, class actions were brought within days of the companies’ accounting restatements. This incentive to file quickly is not from fear that a limitations period will run; rather, it is because earlier filings appear to give attorneys an advantage in securing the lucrative lead counsel position. Finally, the one-year discovery rule already addresses the problem of fraudulent concealment — the time period does not begin to run until the plaintiff discovered or should have discovered through reasonable diligence the facts necessary to assert a claim. [FOOTNOTE 7] Thus, there appears to be no empirical or legal basis for altering the one-year discovery rule. There is also little support for lengthening the three-year statute of repose to five years. There is little or no evidence of completed frauds that only came to light after the three-year period had run. Nonetheless, even if plaintiffs can commence actions quickly after discovery, it is possible that a three-year limit might cut off some potential recovery if the fraud existed for a significant amount of time. From a policy perspective then, the relevant question Congress should have addressed is the frequency of long-term frauds. One way to analyze that question is to look at the class periods alleged in securities-fraud complaints because the class period typically starts when the fraud allegedly commences. If long-term frauds are prevalent, we should expect to see a significant number of class periods approaching three years in length. The data reveal no such pattern. The average class period in the actions studied is about 243 days, or a little over eight months. Median class periods are an even shorter 199 days, just over six months. Less than 3 percent of the actions studied involved class periods longer than two and a half years. That long-term frauds are relatively rare comports with common sense. In our efficient securities markets, it is likely difficult to conceal most frauds for an extended time period. Even if long-term frauds are rare, one might ask what the harm is in extending the statute of repose to five years? While such an extension might assist a few investors, it likely imposes significant costs on our capital markets as well. When Congress passed the PSLRA it was concerned with non-meritorious class actions brought for their settlement value. While the PSLRA gave defendants significant tools to fight non-meritorious cases, these cases have not been completely eliminated. Corporations still may have incentives to settle such cases, in part because of the large damages generated in securities fraud cases and the reluctance of defendants to risk an adverse jury verdict. Extending the statute of limitations increases this settlement pressure because it creates even larger potential damages. INTERPRETATIONAL PROBLEMS Although the drafters’ primary aim appears to be to extend the statute of limitations for Rule 10b-5 actions, the SOA has a much broader effect because it applies to all causes of action under the Securities Act and the Exchange Act. There are a number of express private rights of action in those statutes, each of which is already governed by an explicit statute of limitations. Previously, 28 U.S.C. � 1658 was consistent with these provisions because it contains an exception for acts of Congress with their own limitations periods. [FOOTNOTE 8] That exception, however, is not contained in the SOA. Thus, if one of the express causes of action under the federal securities laws involves a claim of fraud, deceit, manipulation, or contrivance, two statutes of limitations will apply to it — the express provision of the federal securities laws and 28 U.S.C. � 1658(b). This appears to be the case for at least two provisions of the Exchange Act: manipulation claims under � 9(e) [FOOTNOTE 9] and certain insider trading claims under � 20A. [FOOTNOTE 10] The SOA may also present significant problems for causes of action that do not require proof of scienter. For example, claims under �� 11 and 12(a)(2) of the Securities Act do not require that the plaintiff prove fraud, but a number of courts have found that such claims may still “sound in fraud.” [FOOTNOTE 11] Courts applying the SOA may have to determine whether these claims sound in fraud before determining the appropriate limitations period to apply. Thus, different claims under the same express liability provisions may be governed by different statutes of limitations. Different courts are likely to reach different conclusions on this issue, thereby creating uncertainty for potential plaintiffs and defendants as to the viability of a particular claim. Such inconsistencies may encourage forum shopping and increase the costs of securities fraud actions as litigants clash over whether the limitations period has run. CONCLUSION There is no evidence that a longer statute of limitations was necessary to protect defrauded investors. Even if a longer statute of limitations under Rule 10b-5 were warranted, Congress could have easily avoided the inconsistencies and interpretational problems that the SOA creates by simply amending � 10 of the Exchange Act to include an express statute of limitations. Unfortunately, in the rush to establish that it was doing something to combat corporate fraud, Congress did not step back to examine all the ramifications of this provision. The result of this haste may well be that the SOA recreates the kinds of problems the Supreme Court sought to eliminate when it decided Lampf. Michael A. Perino is an associate professor at St. John’s University School of Law and the author of “Securities Litigation After the Reform Act.” ::::FOOTNOTES:::: FN 1 501 U.S. 350 (1991). FN 2 Although Lampf was a 5-4 decision, seven justices agreed that one year from discovery was the appropriate rule to apply to Rule 10b-5 cases. See Lampf, 501 U.S. at 374 (opinion of Justices Kennedy & O’Connor, dissenting). FN 3 Lampf, 501 U.S. at 357 (quoting Agency Holding Corp. v. Malley-Duff & Associates, Inc., 483 U.S. 143, 154 (1987)). FN 4 Lampf, 501 U.S. at 359. FN 5 148 CONG. REC. S6437 (daily ed. July 9, 2002) (statement of Sen. Tom Daschle). FN 6 Pub. L. No. 104-67, 109 Stat. 737 (1995) (codified in scattered sections of 15 U.S.C.). FN 7 See Lampf, 501 U.S. at 363; Law v. Medco Research, Inc., 113 F.3d 781, 785-86 (7th Cir. 1997). FN 8 See Lampf, 501 U.S. at 364 n.10. FN 9 See 15 U.S.C. � 78i(e) (manipulation claims must be brought within one year after the discovery and within three years after violation). FN 10 See 15 U.S.C. � 78t-1(b)(4) (contemporaneous insider trading claims may not be brought more than five years after the date of the last transaction that is the subject of the violation). FN 11 See, e.g., In re Stac Electronics Sec. Litig., 89 F.3d 1399, 1405 (9th Cir. 1996), cert. denied, 520 U.S. 1103 (1997); Shaw v. Digital Equipment Corp., 82 F.3d 1194, 1223 (1st Cir. 1996).

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