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  • Exchange Act Claim Survives Because Sarbanes-Oxley’s Two Year Statute Of Limitations Extended The Time For Plaintiffs To Initiate Section 18 Claim

    On September 14, 2018, United States District Court Judge Michael Shipp of the District of New Jersey declined to dismiss as untimely plaintiffs’ claim against a major pharmaceutical company (the “Company”) and certain of its executives under Section 18 of the Securities Exchange Act of 1934.  Pentwater Equity Opportunities Master Fund Ltd v. Valeant Pharmaceuticals International, Inc., No. 1707552 (D.N.J. Sep’t 14, 2018).  In denying defendants’ motion to dismiss, the Court deepened a split among courts over whether the Sarbanes-Oxley Act of 2002 (“SOX”) extends the time to file a Section 18 claim to two years of when the violation is discovered.
  • New York Court Of Appeals Holds That Claims Under New York’s Martin Act Are Subject To A Three-Year Statute Of Limitations
    On June 12, 2018, a 4-1 majority of the New York Court of Appeals held that claims under New York’s Martin Act are not governed by the six-year statute of limitations generally applicable to common law fraud claims, but rather by the three-year limitations period applicable to actions to recover based on liabilities created by statute.

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  • Supreme Court Rules That Successive Class Actions Are Not Tolled Under American Pipe

    On June 11, 2018, the Supreme Court of the United States held that the tolling rule first stated in American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974) cannot salvage otherwise-untimely successive class claims.  China Agritech, Inc. v. Resh, No. 17-432, __ S. Ct. __, 2018 WL 2767565.  In American Pipe, the Court held that the timely filing of a class action tolls the applicable statute of limitations for all persons encompassed by the class complaint.  The issue presented in China Agritech was whether American Pipe tolling can salvage an untimely successive class claim.  The Sixth Circuit and the Ninth Circuit ruled that American Pipe tolling applied to successive class action lawsuits, while certain other circuits, including the First, Second, Fifth, and Eleventh, held that American Pipe tolling did not apply.  In China Agritech, the Court resolved the circuit split and unanimously held that, upon denial of class certification, a putative class member may only intervene as an individual plaintiff or commence an individual suit, but may not commence a new class action beyond the time allowed by the applicable statute of limitations.

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  • United States Supreme Court Considers Application Of American Pipe Tolling To Subsequent Class Actions

    On Monday, March 26, 2018, the United States Supreme Court heard oral argument in an appeal that presents the question whether American Pipe tolling—which provides that the pendency of a class action generally tolls the statute of limitations for claims of individual members of the putative class—applies not just to subsequent individual actions but also to subsequent class actions.  Transcript, China Agritech, Inc. v. Resh, No. 17-432 (U.S. argued Mar. 26, 2018).  Plaintiffs, alleged owners of shares in China Agritech, filed a putative securities fraud class action following the filing of two other similar class actions for which class certification had been denied.  There was no dispute that the claims of the individual named plaintiffs were timely under the tolling rule of American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974).  The district court, however, dismissed the class claims as time-barred, only to be later reversed by the Ninth Circuit.  The Circuit Courts of Appeals have reached varying conclusions regarding whether, or the circumstances in which, the filing of a putative but ultimately not certified class action will operate to toll subsequently-asserted class claims, thereby allowing for the seriatim filing of otherwise time-barred class actions in the hope that a class may eventually be certified.  The China Agritech case provides an opportunity for the Supreme Court to resolve the conflict.

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  • Sixth Circuit Reverses Dismissal Of Putative Class Action, Finding Third-Party Complaints May Be Sufficiently “True” To Constitute New Information Under A Loss Causation Analysis

    ​On December 13, 2017, the United States Court of Appeals for the Sixth Circuit reversed the dismissal of a consolidated putative class action against Community Health Systems, Inc. (“Community”), its CEO, and CFO.  Norfolk Cty. Ret. Sys. et al. v. Cmty. Health Sys., Inc. et al., No. 16-6059 (6th Cir. Dec. 13, 2017).  Plaintiffs—shareholders of Community—alleged that Community and certain of its officers had violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 by fraudulently inflating Community’s share price through false and misleading statements regarding Community’s operating model.  Plaintiffs alleged that the value of Community’s shares fell immediately in April 2011 after a Community competitor, Tenet Healthcare Corporation, publicly disclosed in a civil complaint against Community expert analyses alleging that Community’s profits depended largely on Medicare fraud, and fell further in October 2011 after one of Community’s officers admitted to certain of Tenet’s allegations.  Judge Kevin H. Sharp of the United States District Court for the Middle Division of Tennessee dismissed the putative class action complaint, finding that while plaintiffs had sufficiently pled that defendants intentionally made misleading statements, they had not adequately alleged that the misleading statements had caused plaintiffs’ losses because the disclosures came in the form of Tenet’s complaint—and was therefore regarded by the market as mere “allegations” rather than truth.  The Sixth Circuit reversed.

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  • Second Circuit Affirms $800 Million Judgment Under Securities Act And Certain State “Blue Sky” Laws, Addressing A Variety Of Securities Act Questions

    On September 28, 2017, the United States Court of Appeals for the Second Circuit affirmed a judgment, entered after a bench trial by Judge Denise Cote of the United States District Court for the Southern District of New York, awarding $806 million for claims brought under Sections 12(a)(2) and 15 of the Securities Act of 1933 (the “Securities Act”) and provisions of the D.C. and Virginia “blue sky” laws in connection with the sale of residential mortgage backed securities (“RMBS”) to the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae).  Fed. Hous. Fin. Agency for Fed. Nat’l Mortg. Ass’n v. Nomura Holding Am., Inc., —F.3d—, 2017 WL 4293322 (2d Cir. 2017).  The trial court found that the RMBS prospectus supplements falsely stated that the underlying loans had been originated generally in accordance with the mortgage originators’ loan underwriting guidelines.  In a 151-page opinion, the Second Circuit affirmed Judge Cote’s legal rulings and factual findings.  Many of the issues addressed in the opinion relate specifically to RMBS and the RMBS securitization process and are beyond the scope of this summary.  Several of the Second Circuit’s key holdings regarding the interpretation and application of the Securities Act may be of broader applicability and are highlighted below, although many such holdings also appear to have been informed to some degree by the specific context of the decision.

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  • SDNY Judge Adheres To Prior Ruling That Discovery Rule Applies To Securities Act Statute Of Limitations

    On July 28, 2017, Judge Victor Marrero of the United States District Court of the Southern District of New York denied a motion for reconsideration of an earlier decision declining to dismiss as untimely a putative class action asserting claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (the “Securities Act”).  Xiang v. Inovalon Holdings, Inc., No. 16 Civ. 4923 (S.D.N.Y. July 28, 2017).  In denying reconsideration, the Court held that the “discovery rule” adopted by the United States Supreme Court in Merck & Co. v. Reynolds, 559 U.S. 633 (2010) in the context of claims brought under the Securities Exchange Act of 1934 (the “Exchange Act”) also applies to claims brought under the Securities Act.  Under the “discovery rule” adopted in Merck, the statute of limitations begins to run when a reasonably diligent plaintiff would have discovered the facts constituting the securities law violation.  This is distinguished from “inquiry notice,” under which the statute of limitations begins to run when facts would lead a reasonably diligent plaintiff to investigate whether it has a claim.  The decision deepens a split in the Southern District of New York (and elsewhere) over the issue of whether Merck applies to claims under the Securities Act.  

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  • Holding Defendants’ Knowledge Of Potential Tax Issues Subject To Disclosure Under Item 303, Southern District Of New York Denies In Part And Grants In Part Motion To Dismiss Securities Act Claims

    On May 23, 2017, Judge Victor Marrero of the United States District Court for the Southern District of New York denied in part and granted in part a motion to dismiss a putative securities class action against Inovalon Holdings, Inc. (“Inovalon”), six of Inovalon’s officers and directors (the “Individual Defendants”), and nine underwriters of Inovalon’s IPO (the “Underwriter Defendants”).  Xiang v. Inovalon Holdings, Inc., No. 16-CV-4923 (VM).  Plaintiffs asserted claims under Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 (“Securities Act”) on the basis of alleged misstatements in Inovalon’s IPO registration statement and prospectus.  The Court dismissed the Section 12 claims against the Individual Defendants and found the remaining claims to be adequately pleaded.

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  • Southern District Of New York Dismisses Securities Fraud Claims As Time-Barred And Inadequately Pleaded 

    On February 27, 2017, Judge Katherine Polk Failla of the United States District Court for the Southern District of New York dismissed with prejudice a putative class action brought on behalf of purchasers of Wal-Mart de México SAB de CV (“Wal-Mex”) American Depositary Shares (“ADRs”) against Wal-Mex, Wal-Mart Stores, Inc. (“Wal-Mart”), and two Wal-Mex executives.  Fogel v. Wal-Mart de México Sab de CV, — F. Supp. 3d —, 2017 WL 751155 (S.D.N.Y. 2017).  The complaint alleged that defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder based on allegations that Wal-Mex’s annual reports for 2004 through 2011 failed to disclose an alleged bribery scheme.  In a detailed and thorough opinion that provides an overview of the state of Rule 10b-5 jurisprudence in the Second Circuit, the Court held that many of plaintiff’s claims were time barred, and that plaintiff failed to state a claim with respect to those claims that were timely.

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  • Southern District Of New York Partially Grants Motion To Dismiss Securities Claims In Virtus Investment Partners Securities Litigation

    On July 1, 2016, Judge William Pauley III of the United States District Court for the Southern District of New York granted in part and denied in part a motion to dismiss a putative class action concerning Virtus Investment Partners, the parent of an investment advisory company that managed and provided advice to mutual funds.  See Youngers v. Virtus Inv. Partners Inc., No. 15-cv-8262 (S.D.N.Y. July 1, 2016).  Plaintiffs purported to assert claims under Section 10(b) of the Securities Exchange Act of 1934 and Sections 11 and 12(a)(2) of the
    Securities Act of 1933, on behalf of investors who purchased shares in certain Virtus mutual funds between May 8, 2010 and December 22, 2014.  Plaintiffs’ allegations concerned statements in the funds’ registration statement that the above-market performance of the funds using a particular investment strategy (the “AlphaSector” strategy) was calculated based on live trading since 2001.  Plaintiffs alleged that the pre-2008 returns were actually generated using only back-testing, as the algorithm was not developed until 2008.  

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