Opinion analysis: Occupying the “reasonable middle ground” on tolling of insider trading claims

In a predictable decision, the Court determined that the limitations period for insider trading claims under Section 16(b) of the Securities Exchange Act of 1934 is not as novel as either of the parties advocated and that, instead, it remains subject to traditional equitable tolling analysis as argued by the government.

On Monday, the Supreme Court vacated and remanded the Ninth Circuit’s decision, holding instead that the two-year time period for actions under Section 16(b) is not automatically subject to equitable tolling pending the filing by an insider of the public disclosure statement required by Section 16(a) of the Act.

In so ruling, the Court declined to adopt either of the bright-line standards offered by parties – that is, the position of respondent Vanessa Simmonds that such claims are always subject to equitable tolling until Section 16(a) disclosures are made or petitioner Credit Suisse’s contention that such claims are never subject to equitable tolling because the statute requires that no suit “shall be brought more than two years after the date that such profit was realized.”

Instead, the Court took a middle ground and remanded the consolidated actions for the lower courts to determine whether equitable tolling would be appropriate based on the facts pleaded in the complaints .  This outcome tracked the interpretation advocated by the government and described at argument by the Assistant to the Solicitor General as the “reasonable middle ground.”

Section 16(b) creates a cause of action so that “a corporation or security holder of that corporation may bring suit against the officers, directors, and certain beneficial owners of the corporation who realize any profits from the purchase and sale, or sale and purchase, of the corporation’s securities within any 6-month period.”  As the Court explained, citing one of its own prior decisions: “[t]he statute imposes a form of strict liability” and requires insiders to disgorge these “short-swing” profits “even if they did not trade on inside information or intend to profit on the basis of such information.”

Vanessa Simmonds brought claims in federal district court against dozens of financial institutions based on allegations that the underwriters of certain initial public offerings, together with corporate insiders, “owned in excess of 10% of the outstanding stock during the relevant time period, which subjected them to both disgorgement of profits under §16(b) and the reporting requirements of §16(a).”  The parties do not dispute that, throughout the litigation, the financial institution defendants, including Credit Suisse, have contested whether Section 16 even applies to their conduct and did not ever file Section 16(a) disclosure statements.

After the nearly identical fifty-five actions were consolidated for pretrial purposes, the district court granted the motion to dismiss filed by twenty-four of the financial institutions, including Credit Suisse, on the basis that alleged claims under Section 16(b) were brought long after Section 16(b)’s two-year limitation period had expired.  The district court declined to apply equitable tolling to the claims. The Ninth Circuit reversed.  Based on its prior decision in Whittaker v. Whittaker Corp., the Ninth Circuit held that Section 16(b)’s two-year limitations period is “tolled until the insider discloses his transactions in a Section 16(a) filing, regardless of whether the plaintiff knew or should have known of the conduct at issue.”

Both in their briefing and at oral argument, the parties and the government offered the Justices three strikingly different interpretations of the applicability of equitable tolling in the context of Section 16.  Simmonds advocated the Ninth Circuit rule that a corporate insider’s failure to file a Section 16(a) public disclosure statement automatically triggered equitable tolling of a related Section 16(b) claim against the insider for so long as the disclosure statement remains outstanding.  Credit Suisse asserted that the Section 16(b) limitations period constituted a statute of repose and, accordingly, that such claims should not be subject to equitable tolling in any circumstance based on statutory language which provides that “no such suit shall be brought more than two years after the date such profit was realized.”  The government advanced a middle-ground position that such claims should be subject to traditional notions of equitable tolling to the point that until a plaintiff had “actual or constructive notice of the facts underlying her claim” without regard to any intent or conduct by the defendant.

Writing for a unanimous Court, Justice Scalia framed the issue in the case in a manner that would prove immediately troubling to Simmonds: “We consider whether the 2-year period to file suit against a corporate insider under §16(b) of the Securities Exchange Act of 1934, 15 U. S. C. §78p(b), begins to run only upon the insider’s filing of the disclosure statement required by §16(a) of the Act, §78p(a).”

The Court provided an authoritative “no” to that question for three distinct reasons.  First, the Court found that such automatic tolling would be at odds with the text of Section 16(b).  Justice Scalia noted that the Section 16(b) imitations period references “the date such profit was realized” and observed that “Congress could have very easily provided that ‘no such suit shall be brought more than two years after the filing of a statement under subsection (a)(2)(C).’ But it did not.”  Second, the Court determined that the Whittaker rule was divorced from “long-settled equitable-tolling principles” in that such a rule would not require a plaintiff to demonstrate her own diligence in pursuing her claims nor the existence of “extraordinary” circumstances standing in her way.  Third, the Court concluded, to hold (as Simmonds urged) such automatic tolling applied even after a plaintiff knew of her claim,would also “quite certainly be inequitable and inconsistent with the general purposes of statutes of limitation,” which the Court described as “to protect defendants against stale or unduly delayed claims.”  The Court also dispensed quickly with Simmonds’s assertion that the Whittaker rule of automatic equitable tolling should be affirmed to provide bright-line guidance for parties and courts, writing “[o]f course this argument counsels just as much in favor of the ‘statute of repose’ rule that petitioners urge (that is, no tolling whatever) as it does in favor of the Whittaker rule. No tolling is certainly an easily administrable bright-line rule.”

In the end, the Court declined to adopt either of the respective bright-line rules advocated by the parties.  Chief Justice Roberts took no part in the consideration or decision of the case and his absence left the Court split four to four with respect to the Ninth Circuit’s determination that Section 16(b)’s two-year limitations period does not establish a statute of repose immune to equitable tolling.  Accordingly, the Court affirmed without precedential value that portion of Ninth Circuit opinion and remanded the actions to the lower courts “to consider how the usual rules of equitable tolling apply to the facts of this case.”