Argument recap: A middle ground on tolling of insider trading claims?

Yesterday the Court heard oral argument in Credit Suisse Securities v. Simmonds and considered whether the limitations period for Section 16(b) insider trading claims under the Exchange Act of 1934 is ever subject to tolling and, if so, for how long.  Section 16(b) provides a claim against corporate insiders for disgorgement to the corporation of any profits realized from the purchase and sale of company stock within a six-month period regardless of the defendant’s intent.

The parties presented the Court with two diametrically opposed interpretations of Section 16(b)’s statutory requirement that “no such suit shall be brought more than two years after the date such profit was realized.”  Credit Suisse argued that the statutory language constitutes a statute of repose never subject to tolling, while respondent Vanessa Simmonds argued that the Ninth Circuit was correct in holding that the limitations period for a Section 16(b) claim was always tolled until such time as a corporate insider had met his or her reporting obligations under Section 16(a).  By the end of the argument, it seemed that neither view would necessarily be adopted by a majority of the Justices and that a middle ground more consistent with traditional notions of equitable tolling would prevail.

Almost immediately, Christopher Landau – arguing on behalf of Credit Suisse – was greeted with questions from Justices Ginsburg and Kagan regarding why the Court should not view Section 16(b)’s limitations period as a “plain vanilla statute of limitations” subject to equitable tolling.  Justice Kagan described the legal “default position” as permitting equitable tolling.  Mr. Landau provided two primary responses why equitable tolling should be foreclosed.  First, contrary to the decision of the court below, the plain text of Section 16(b) provides a limitations period of two years that runs from the date that profit was realized, not from the date of filing of Section 16(a) reports.  Moreover, interpreting that limitations period as a statute of repose would be consistent with other provisions of the Exchange Act, including the limitations period for certain fraud claims.  Second, he argued that even if the two-year period could somehow be extended, Simmonds may not benefit from any such tolling due to her alleged lack of diligence in bringing a claim within two years.

In response to questions from Justice Sotomayor, Mr. Landau noted that Congress provided an outside three-year statute of repose for certain fraud-based claims under the Exchange Act, such as Sections 9(e) and 18(c), and that it would be anomalous for intentional fraudsters to be treated more favorably than insiders who could violate Section 16(b)’s prohibition on short-swing profits negligently and be caused to disgorge profits from such trades without any showing of intent on their part or any showing of injury to any party.  Justices Alito and Sotomayor questioned how a shareholder would ever know, as a practical matter, whether corporate insiders had made trades within the requisite six-month short-swing profit period if the corporate insiders had not complied with Section 16(a) reporting obligations.  Mr. Landau offered the possibility of trades being disclosed in other public filings or being known to brokers and then pivoted to attack the possible application of equitable tolling under the particular facts of this case.

Arguing on behalf of respondent Vanessa Simmonds, Jeffrey Tilden defended the Ninth Circuit decision by referencing the unique structure of Section 16(b) in which a plaintiff “suffers no injury and recovers no damages” and where there is no “triggering event” that would suggest harm to the plaintiff.  Mr. Tilden argued that Section 16(b) “is 99% of the time irrelevant without a 16a filing.”  Justice Alito questioned how the text of Section 16(b) could support a limitations period that would not run from “two years after the date such profit was realized,” but instead from the filing of the Section 16(a) report – which he described as a “completely different external event.”  Mr. Tilden emphasized that, as the Court has recognized, Sections 16(a) and 16(b) are interrelated, and he argued that reading the two sections together the two-year limitations period set forth in Section 16(b) applies only to corporate insiders who have actually filed Section 16(a) reports.  He concluded that “there is no statute of limitations in 16(b) for those who do not [file the required reports].”

Justices Kagan and Scalia questioned whether the Section 16(b) limitations period would run, regardless of whether Section 16(a) reports had been filed, if a reasonable person knew or should have known of the claim.  Mr. Tilden responded that Congress had specified that the information necessary to determine the existence must be disclosed in Section 16(a) filings and that there was no reason for shareholders to have to “go elsewhere” to find the information if corporate insiders had failed to comply with Section 16(a).  Justice Scalia pressed the fact that it appeared that in this case Simmonds had actual knowledge of the claims notwithstanding the failure of any of the petitioners to file any Section 16(a) reports.

Justice Sotomayor asked Mr. Tilden about what she described as “a very strong argument” for Credit Suisse:  because Congress had created in the Exchange Act a statute of repose for fraudulent conduct, “why they would not create a statute of repose for what is a strict liability statute?”  Mr. Tilden responded that unlike a fraud victim who will have some reason to know that he has been defrauded, the Section 16(b) plaintiff will not know of any such triggering event because he personally has suffered no injury.  Justice Scalia observed that the absence of an injury to Section 16(b) plaintiffs made it seem more, rather than less, likely that Congress would want to impose a statute of repose.  Justices Breyer and Kagan renewed questions regarding why the Section 16(b) limitations period should not be governed by equitable tolling like the vast majority of statutes of limitation.  Mr. Tilden responded that while he could not identify any other statute of limitations that was extended without a showing of reasonable diligence by the plaintiff, he also knew of no limitations period “that follows immediately on an affirmative disclosure obligation imposed on the defendant.”

Arguing on behalf of the United States, Assistant to the Solicitor General told the Court that Section 16(b) looks “for all intents and purposes like an ordinary statute of limitations” and should be subject to equitable tolling.  In doing so, he distinguished the position of the government from that of both Credit Suisse and Simmonds.  Under questioning from Justice Scalia, Mr. Wall emphasized the difference between Section 16(b) and the two-tiered limitations periods found elsewhere, which preclude claims from being made after the earlier of (1) a period after discovery of the violation or (2) a longer period after the violation.  In those instances, Mr. Wall argued there was a “structural inference” that Congress intended the longer of the two periods to be a statute of repose.  He contrasted that two-tiered structure with the single time period set forth in Section 16(b) and argued that Section 16(b)’s limitations period remained subject to traditional equitable tolling.  In response to an inquiry from Justice Kagan, Mr. Wall described the government’s position succinctly: a Section 16(b) claim should be tolled until the plaintiff has “actual or constructive notice of the facts underlying her claim” without regard to any intent or conduct by the defendant.  He ended his argument on a light note, telling the Court that the government had “occupied the reasonable middle ground.  Hope you like it.”

From all appearances, the Court will likely adopt some form of “middle ground” position between those advanced by Credit Suisse and Simmonds, and it may well conclude that the limitations period set forth in Section 16(b) is not nearly as unique as either of the parties has advocated – a conclusion that would lead to application of some form of equitable tolling.  Chief Justice Roberts recused himself and did not participate in the oral argument.