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Although the Sarbanes-Oxley Act of 2002 established more generous time limits for filing securities claims, a federal judge has ruled that the law cannot be used to revive claims for which the previous, shorter time limits had already expired. In her 14-page opinion in L-3 Communications Corp. v. Clevenger, U.S. District Judge Anita B. Brody found that none of the federal appellate courts has yet tackled the question, but that numerous district court judges have shown a strong trend — with just one exception — against allowing Sarbanes-Oxley to revive previously expired claims. Plaintiff’s lawyers urged Brody to rely on the legislative history of the law which, they said, showed that Congress intended the new time limits to apply to any case filed after the statute was passed. Brody refused, saying “such an inquiry would be inappropriate” since the U.S. Supreme Court has held that there is a strong presumption against retroactive application of any new limitations period, and that if Congress wants to override that presumption and set new time limits that effectively revive dead claims, it must do so “unambiguously.” Since the text of Sarbanes-Oxley is ambiguous, Brody found that she was forced to apply the presumption, announced by the Supreme Court in its 1994 decision in Landgraf v. USI Film Products, that the new time limits cannot be applied retroactively. In the suit, plaintiff L-3 Communications, a defense contractor whose clients include the Department of Homeland Security, claims it was the victim of a fraud scheme perpetrated by the top executives of a group of companies it acquired in 1998. According to the suit, executives at SPD Technologies Inc. set out to make their company and four of its subsidiaries attractive for acquisition and induced L-3 to pay an “artificially inflated” price. The suit also alleges that SPD executives engaged in a cover-up scheme during the merger talks and even after the merger took place. L-3 claims it did not learn of the fraud scheme until January 2002 when it received information from the U.S. Navy that exposed the truth. In the suit, L-3′s lawyers — Matthew J. Siembieda, Carl M. Buchholz, Timothy D. Katsiff, Frank A. Dante and Evan H. Lechtman of Blank Rome — alleged several claims under federal securities laws, as well as Pennsylvania state law claims of common law fraud, civil conspiracy, negligent misrepresentation, gross negligence and breach of fiduciary duty. But defense lawyers moved to dismiss all of the federal claims as time-barred. Brody found that, prior to Sarbanes-Oxley, the federal securities laws included no specific statutes of limitations. Instead, Brody said, the statute of limitations for such claims was governed by the U.S. Supreme Court’s 1991 decision in Lampf Pleva Lipkind Prupis & Petigrow v. Gilbertson in which the justices held that the statute of limitations period governing such a claim is one year from the date of discovery of facts constituting the violation or three years after the violation, whichever is earlier. Sarbanes-Oxley expanded those time limits, Brody found, by allowing plaintiffs to file within the earlier of two years after discovery or five years after the fraud. Defense lawyers argued that the Lampf limitations periods should apply to L-3′s claims. Brody found that if the old time limits applied, the claims would be barred because the alleged fraud occurred in August 1998 when the merger took place, and was allegedly discovered in January 2002, but L-3 did not file its suit until July 2003. Under Lampf, the defense lawyers said, L-3 was required to file by the earlier of one year after discovery or three years after the fraud. One year after discovery was January 2003, they said, and three years after the violation was August 2001. But the plaintiff’s lawyers insisted that the new Sarbanes-Oxley time limits should apply, which would set a deadline of August 2003. In their brief, the plaintiff’s team quoted remarks by Sen. Patrick Leahy, D-Vt., one of the authors of the statute, who said: “The section, by its plain terms, applies to any and all cases filed after the effective date of the act, regardless of when the underlying conduct occurred.” At the time the suit was filed, the plaintiff’s team noted, only one federal judge had weighed in on the issue of whether Sarbanes-Oxley could be used to revive an otherwise expired claim. In Roberts v. Dean Witter Reynolds Inc., U.S. District Judge Richard A. Lazarra of the Middle District of Florida concluded that Congress unquestionably had the right to extend limitation periods and therefore revive previously expired claims. Lazarra found that Sarbanes-Oxley extended limitation periods, quoting a section of the law that said it “shall apply to all proceedings addressed by this Section that are commenced on or after the enactment of this Act.” That extension, Lazarra said, applied regardless of when the alleged violation occurred. “This language, standing alone, seems to presume that the act affords redress for violations that had already occurred before July 30, 2002,” Lazarra concluded, referring to the day President Bush signed the bill into law. But Brody found that since the Roberts decision, a strong trend has emerged in the other direction. Brody found that the U.S. Supreme Court’s 1997 decision in Hughes Aircraft Co. v. United States noted in dicta that “extending a statute of limitations after the pre-existing period of limitations has expired impermissibly revives a moribund cause of action.” The justices, Brody found, have insisted that there is a strong presumption against finding that a new statute of limitations may be applied retroactively. Under Landgraf, Brody said, Congress has the power to override the presumption against retroactive application of the new limitations period, but the justices have held that it must do so “with the requisite clarity that the law be applied retrospectively” and that “the standard for finding such unambiguous direction is a demanding one.” The plaintiff’s team insisted that the plain language of Sarbanes-Oxley necessitates a finding that its new, more generous time limits apply to any complaint filed after the law was passed. By stating that the new time limits “shall apply to all proceedings … that are commenced on or after the date of enactment of this act,” they said, Congress intended for all complaints filed on or after July 30, 2002 to be considered under the Sarbanes-Oxley period, irrespective of the date of the underlying conduct. Brody found that the plaintiff’s reading of the law was “not an unreasonable literal interpretation,” but that it was nonetheless “simply one such interpretation.” The defense view was also reasonable, Brody found, in interpreting the statute as applying to all new suits alleging conduct that was not previously time-barred. As a result, Brody concluded that the language of the statute is ambiguous and therefore must be subjected to the U.S. Supreme Court’s strong presumption against retroactivity. “It is not impossible that Congress did in fact intend claims like L-3′s to be revived, but the statute is not ‘so clear that it could sustain only one interpretation.’ Therefore, the statute cannot overcome the presumption against applying it to previously time-barred claims,” Brody wrote. “Because the language … is ambiguous, I am bound to apply the Landgraf-Hughes presumption against revival of time-barred claims. Under the Lampf statute of limitations, plaintiff’s claims were time-barred after August 13, 2001 — nearly a year before Sarbanes-Oxley was passed,” Brody wrote. In an interview, lead plaintiff’s lawyer Siembieda said he has not yet reviewed Brody’s decision and has not yet discussed with his client whether to appeal. But Siembieda said L-3 may also consider the option of skipping the appeal in favor of immediately filing its state law claims — which where unaffected by Brody’s ruling — in the Philadelphia Court of Common Pleas. The defense lawyers who filed the three successful motions to dismiss included teams led by attorneys Alexander Kerr and Peter J. Boyer of McCarter & English; Elizabeth F. Abrams and John F. Smith of Reed Smith; and Ralph A. Siciliano and Lewis Donald Prutzman of Tannenbaum Helpern Syracuse & Hirschtritt in New York. A phone call to McCarter & English was not returned by press time.

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