Shearman & Sterling LLP | Securities Litigation Blog | Second Circuit Holds That The American Pipe Class Action Tolling Rule Does Not Apply To Statute Of Repose<br >  
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  • Second Circuit Holds That The American Pipe Class Action Tolling Rule Does Not Apply To Statute Of Repose
     

    07/25/2016
    On July 14, 2016, the U.S. Court of Appeals for the Second Circuit upheld a decision dismissing claims against Bear Stearns Companies L.L.C. (“Bear Stearns”) for violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and common law fraud under New York law.  SRM Global Master Fund Ltd. P’ship v. Bear Stearns Cos. L.L.C., 14-507-cv, 2016 WL 3769735 (2d Cir. Jul. 14, 2016).  The Court held that the class action tolling rule set forth in American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), does not apply to 28 U.S.C. § 1658(b)(2), the five-year statute of repose that limits the time in which plaintiffs may bring various securities related claims, including under Section 10(b) of the Exchange Act.

    Plaintiff, a registered private investment fund, purchased Bear Stearns common stock and entered into swap agreements based on the value of Bear Stearns common stock.   SRM, 2016 WL 3769735, at *1.  In its complaint, plaintiff alleges that Bear Stearns made material misstatements and omissions which overstated the value of its assets, the adequacy of its liquid reserves, and the quality of its risk management framework.  Id.  Plaintiff alleges that it relied on the allegedly misstated material in Bear Stearns’ 10-Ks in (i) deciding whether to purchase Bear Stearns securities, and (ii) analyzing whether to liquidate, retain, or increase its investments in Bear Stearns.  Additionally, plaintiff asserted “holder claims,” alleging that Bear Stearns’ misrepresentations caused plaintiff to retain its Bear Stearns stock and not unwind its related swap agreements.  Id.  Plaintiff opted out of a putative class action against Bear Stearns, choosing instead to bring individual claims in April 2013.  Bear Stearns moved to dismiss, claiming that plaintiff’s claims were time-barred under the five-year statute of repose.  For its part, plaintiff argued that the filing of the putative class action against Bear Stearns in March 2008 tolled the statute of repose pursuant to the U.S. Supreme Court’s decision in American Pipe.  The tolling rule set forth in American Pipe suspends all applicable statutes of limitations to all asserted members of a class upon the commencement of a class action.   

    The Second Circuit in SRM concluded that the statute at issue — 28 U.S.C. § 1658(b)(2) — is a statute of repose, not a statute of limitations, because it “defines the right involved in terms of the time allowed to bring suit,” and as such is not subject to American Pipe tolling.  The Court held that the statute of repose was not a limitation of plaintiff’s remedy, but rather created a substantive right in defendants to be able to free from liability after five years.  The Court also cited its prior holding in Police & Fire Retirement Sys. of Detroit v. IndyMac MBS, Inc., where it similarly held that American Pipe tolling did not apply to the statute of repose in Section 13 of the Securities Act of 1933 (“Securities Act”).  In so holding, the Court rejected plaintiff’s attempt to draw textual distinctions between Section 13 of the Securities Act and the statute at issue in the present appeal, noting that their decision in IndyMac did not rely on the particular language of Section 13.  In addition to affirming the dismissal of the Section 10(b) claim as time-barred, the Court affirmed the dismissal of the Section 20(a) claim for failure to state a primary violation, and affirmed the dismissal of the common law fraud claim on the basis that New York law does not recognize holder fraud claims and for failure to adequately plead reliance. 
    CATEGORY: Statute of Repose

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