Argument preview: Tolling the statute of limitations for insider trading claims

Section 16(b) of the Exchange Act provides that “no . . . suit shall be brought more than two years after the date such profit was realized” from the alleged shortswing transactions. Next Tuesday, in Credit Suisse v. Simmonds, the Court will hear oral argument on the question whether that two-year statute of limitations period is subject to tolling and, if so, what the duration of any such tolling is.

As the Ninth Circuit explained below, there are three competing interpretations of the Section 16(b) limitations period: “(1) a ‘strict’ approach under which the statute is treated as a statute of repose—that is, a firm bar that is not subject to tolling; (2) a ‘notice’ or ‘discovery’ approach like the one that had been applied by the district court, ‘under which the time period is tolled until the Corporation had sufficient information to put it on notice of its potential § 16(b) claim’; and (3) a ‘disclosure’ approach ‘under which the time period is tolled until the insider discloses the transactions at issue in his mandatory § 16(a) reports.’”

Simmonds filed fifty-four actions against underwriters alleging violation of Section 16(b) in connection with their purchase and sale of securities during Initial Public Offerings. Thirty of the fifty-four underwriters successfully moved to dismiss the claims at the district court level based on Simmonds’s failure to make a statutory demand for relief. The remaining twenty-four underwriters successfully moved to dismiss based on statute of limitations grounds, arguing that Simmonds knew or should have known of the facts underlying the claims years earlier even though none of the underwriters ever filed Rule 16(a) reports. Accordingly, the district court dismissed the claims against all fifty-four underwriters defendants.

Relying on its prior decision in Whittaker v. Whittaker Corp. (1981), the Ninth Circuit applied the “disclosure” approach and reversed.  In so doing, the Ninth Circuit indicated that it was bound by its own prior decision in Whittaker, explaining that “the fundamental holding” of that case is that the two-year statute of limitations “begins to run from the time that the defendant files a Section 16(a) disclosure statement.” Because Simmonds alleges that Credit Suisse and the other petitioners “did not file any Section 16(a) reports,” it continued, it “conclude[d] that Simmonds’s claims are not time-barred.”

 Merits briefing

In their brief on the merits, Credit Suisse and the other petitioners advance two primary arguments why the underlying Section 16(b) claims were untimely and the decision below should therefore be reversed.  First, they claim that Section 16(b)’s limitations period constitutes a statute of repose that is not subject to extension by tolling under any circumstances.  Alternatively, they argue that even if the limitations period were subject to tolling, “[u]nder no circumstances is there any basis for extending that time limit beyond the point at which a reasonably

diligent securities owner knew, or should have known, the facts underlying a Section 16(b) action.”  Because the court below determined that all facts necessary for a potential claim had been known or knowable notwithstanding their failure to file Section 16(a) reports, they conclude that the actions below were untimely and must be dismissed even if some level of tolling is permitted.

In support of the decision below, Simmonds argues that Section 16(b) works in tandem with Section 16(a) and that “Section 16(b) enforcement requires Section 16(a) disclosure.”  Simmonds attacks petitioners’ claim that the Section 16(b) limitations period is a statute of repose by noting that the text references whether a cause of action may or must be brought within a certain time; it does not address the duration of the underlying right as a statute of repose normally does.  Simmonds also notes that alleged violators should not benefit from the failure to comply with their Section 16(a) reporting obligations by having the time for filing of claims against them run while they are out of compliance with their own disclosure obligations.  Finally, Simmonds argues that the Ninth Circuit rule provides a workable and fair bright-line rule for application of Section 16(b).

The United States weighs in

The federal government filed an amicus brief in support of neither party in which it advocates a middle ground:  it rejects both petitioners’ argument that the two-year limitations period for Section 16(b) claims cannot be equitably tolled under any circumstance and Simmonds’s argument that equity invariably tolls the limitations period until the filing of a Section 16(a) report.  Instead, the government argues, “Section 16(b)’s two-year limitations is equitably tolled until a reasonably diligent security holder knows or should know the facts underlying his claim.”

Potential significance

Affirmance by the Court of the Ninth Circuit decision below would facilitate the broadest possible enforcement of Section 16(b) by corporations and their shareholders by ensuring the longest possible period for filing such claims.  Alternatively, adoption of the standard proposed by either petitioners or the government would likely lead to the dismissal of more Section 16(b) claims at the pleading stage.