(Article from Securities Law Alert, March 2016)
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Second Circuit: (1) Three-Year Statute of Repose Applies to Claims Alleging Materially Misleading Proxy Statements Under Section 14(a), and (2) the Repose Period Begins to Run on the Date of the Most Recent Alleged Violation
On March 17, 2016, the Second Circuit held that the five-year statute of repose established by the Sarbanes-Oxley Act of 2002 (“SOX”) for certain fraud claims does not apply to claims brought under Section 14(a) of the Exchange Act, which prohibits material misleading proxy statements. DeKalb Cty. Pension Fund v. Transocean, 2016 WL 1055363 (2d Cir. 2016) (Cabranes, J.) (Transocean). The court determined that Section 14(a) claims still remain subject to the three-year statute of repose that applied before the passage of SOX. The Second Circuit further held that the statute of repose for Section 14(a) claims “begin[s] to run on the date of the defendant’s last culpable act or omission.”
Background
Section 14(a) of the Exchange Act prohibits material misrepresentations and omissions in proxy statements sent to shareholders of registered securities. There is no express private right of action under Section 14(a), nor is there a statute of repose that expressly governs Section 14(a) claims.
In Ceres Partners v. GEL Associates, 918 F.2d 349 (2d Cir. 1990), the Second Circuit held that a three-year statute of repose applies to Section 14(a) claims. The Ceres court reasoned that “the implied private rights of action in Section 14 were ‘analogous’ to the express private rights of action in Sections 9(f) and 18(a)” of the Exchange Act [1] because all three provisions were “‘designed to ensure that security holders receive full disclosure.’” Transocean, 2016 WL 1055363 (quoting Ceres, 918 F.2d 349). Given the “common goals” of the three provisions, the court “borrowed the three-year statutes of repose applicable to Sections 9(f) and 18(a) . . . and applied them to Section 14.”
In 2002, SOX established a new five-year statute of repose, codified at 28 U.S.C. § 1658(b), for certain securities fraud claims, specifically to “private right[s] of action that involve[ ] a claim of fraud, deceit, manipulation, or contrivance.”
Second Circuit Holds § 1658(b)’s Five-Year Statute of Repose Does Not Apply to Section 14(a) Claims Because Those Claims Do Not Necessarily Involve Fraud
The case before the Second Circuit concerned claims under Section 14(a), Rule 14a-9, and Section 20(a) alleging that an October 2, 2007 proxy statement issued in connection with a proposed merger between Transocean and GlobalSantaFe Corporation contained material misrepresentations and omissions. The eventual lead plaintiff did not appear in the case until December 2010, more than three years after the proxy statement was issued. On March 14, 2014, the Southern District of New York dismissed plaintiffs’ Section 14(a) claim as untimely; plaintiffs appealed. Plaintiffs contended that § 1658(b)’s five-year statute of repose―rather than the three-year statute of repose adopted in Ceres―applies to claims brought under Section 14(a).
On appeal, the Second Circuit began its analysis by considering whether § 1658(b)’s five-year statute of repose applies to claims under Section 9(f) and Section 18(a) of the Exchange Act. The court concluded that Section 9(f) falls within the scope of § 1658(b) because it “contain[s] requirements of both manipulative motive and willfulness.” The court determined that § 1658(b) also applies to Section 18(a) because “[a] plaintiff asserting a Section 18(a) claim is, in essence, asserting a fraud claim.”
In light of these findings, the Second Circuit observed that “the landscape has fundamentally changed since [it] decided Ceres.” The court explained that if it “were to take the same analytical approach that [it] took in Ceres . . . i.e., borrow the statutes of repose applicable to Sections 9(f) and 18(a)—the statute of repose applicable to Section 14(a) would be five years.” The Second Circuit noted that “this would be an absurd result” and “undeniably contrary to clearly expressed congressional intent.” The court explained that “Congress has specified that § 1658(b) applies only to ‘private right[s] of action that involve[] a claim of fraud, deceit, manipulation, or contrivance,’ which Section 14(a) does not.”
The Second Circuit stated that it “assume[s] that Congress is aware of existing law when it passes legislation.” The court presumed that Congress knew that: (1) courts had long permitted plaintiffs to bring private actions under Section 14(a), and (2) Ceres and numerous other decisions had borrowed the three-year statutes of repose applicable to Sections 9(f) and 18(a) and applied them to Section 14(a). The Second Circuit reasoned that “Congress must have known that, by extending only the statute of repose applicable to ‘private right[s] of action that involve[] a claim of fraud, deceit, manipulation, or contrivance,’ the statutes of repose applicable to Section 14(a) would remain intact.”
The Second Circuit “therefore [held] that the same three-year statutes of repose that [it] applied to Section 14 in Ceres . . . still apply to Section 14(a) today.”
Second Circuit Holds the Statute of Repose for Section 14(a) Claims Begins to Run on the Date of the Last Alleged Violation
The Second Circuit next considered when the statute of repose for Section 14(a) claims begins to run, and held that it “begin[s] to run on the date of the violation.”
As an initial matter, the court deemed it immaterial that the text of the statute of repose that applied to Section 18(a) claims prior to the enactment of § 1658(b) indicated that the clock did not begin to run until “after such cause of action accrued.”[2] The court explained that in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350 (1991), the Supreme Court “recognized that the [Exchange Act’s] statutes of repose, including those in Sections 9(f) and 18(a), all ‘relate to . . . three years after violation,’ regardless of any differences in statutory language” (quoting Lampf, 501 U.S. 350).
The Second Circuit further held that the “discovery rule” does not toll the three-year statute of repose for Section 14(a) claims until the date the alleged fraud was discovered or “could have been discovered in the exercise of reasonable diligence.” The court deemed the “discovery rule” inapplicable both because “Section 14(a) claims do not demand fraud” and “also because the discovery rule does not extend to statutes of repose.” The court explained that applying the “discovery rule” to statutes of repose would “defeat their distinct purpose, which is to effect a legislative judgment that a defendant should be free from liability after the legislatively determined period of time.” The Second Circuit underscored that “an injury need not [even] have occurred, much less have been discovered, for a statute of repose to begin to run.”
The court concluded “that, like all statutes of repose, the statutes of repose applicable to Section 14(a) begin to run on ‘the date of the [defendant’s] last culpable act or omission.”
[1] Section 9(f) provides a private right of action for certain types of securities price manipulation. Section 18(a) provides a private right of action to purchasers who relied on materially misleading statements or omissions in documents filed with the SEC under the Exchange Act.
[2] The text of the statute of repose that previously applied to Section 9(f) claims, however, provided that the clock begins to run “after such violation.”