Deja Vu All Over Again: Tolling of Opt-Out Suits by Class Members under the Securities Act Section 13

Abstract

This article analyzes and comments on the Supreme Court appeal in California Public Employees’ Retirement System v. ANZ Securities, Inc., No. 15-457, argued on April 17, 2017. The case is on appeal from the Second Circuit. The Court will decide whether the claims of class members who opt-out of a class action are tolled under the three-year period set forth in Section 13 of the Securities Act of 1933, allowing those claimants to pursue individual litigation.

Section 13 of the Securities Act contains two limitations provisions. The first requires aggrieved investors to bring an action within one year after the discovery of an untrue statement or omission, or after discovery through the exercise of reasonable diligence.  Section 13 further states that “In no event shall any action be brought to enforce a liability created under  . . . more than three years after the security was bona fide offered to the public.” 15 U.S.C. § 77(m). These Section 13 time limits suggest that a private party’s right to pursue Securities Act violations do not continue in perpetuity.

CalPERS opted-out of a class settlement and attempted to pursue litigation on it own behalf. ANZ moved to dismiss CalPERS’s claims as untimely. By the time CalPERS had filed its complaint, more than three years had passed since defendants had offered the debt securities to the public. In response to ANZ’s motion to dismiss, CalPERS maintained that Section 13 was a statute of limitations which tolled CalPERS’s claims during the class proceedings (citing American Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974)(American Pipe). In 2011, the district court disagreed and granted ANZ’s motion. In three separate opinions, the district court held that “statutes of repose, including the three-year period established by Section 13 of the Securities Act, are not tolled by the pendency of putative class actions.”

On CalPERS’s appeal, the Second Circuit unanimously held that CalPERS’s claims were barred by Section 13 of the Securities Act, relying on its precedent in IndyMac. See Police & Fire Ret. Sys. Of City of Detroit v. IndyMac MBS, Inc., 721 F.3d 95 (2d Cir. 2013), cert. granted sub nom. Pub. Emps.’ Ret. Sys. Of Miss. v. IndyMac MBS, Inc., 134 S. Ct. 1515 (2014), cert. dismissed as improvidently granted, 135 S. Ct. 42 (2014)(IndyMac).

The Second Circuit indicated that Section 13 was a statute of repose that extinguishes a plaintiff’s cause of action and is not subject to equitable tolling. The Second Circuit also rejected CalPERS’s theory that because it was a class member before it opted-out, its individual claims were brought in a timely manner for the purposes of Section 13, without the need for tolling. The court further opined that even if American Pipe tolling was not equitable, the Rules Enabling Act barred tolling the three year limitation period in Section 13. See 28 U.S.C. § 2072(b). Finally, the Second Circuit rejected CalPERS’s argument that tolling of Section 13’s three-year limitation was necessary to protect class members’ rights to opt-out, noting that an absent class member’s opt-out right does not confer additional benefits to a plaintiff’s action.

This CalPERS appeal essentially is an exact replay of same Section 13 issues that were briefed and argued to the Court during the 2014 Term in Public Employees’ Retirement System v. IndyMac MBS, Inc. In that appeal – as here --  the Court was asked to consider whether the American Pipe tolling decision applied to suspend the three-year time limit in the Securities Act regarding class members’ claims, or was an absolute bar to pursuing individual claims. Although the parties in IndyMac extensively briefed the issue concerning whether the Section 13 limitations embodied a statute of limitations or a statute of repose, the Court never decided the issue because the parties settled the case.  Consequently, the Court dismissed the appeal as improvidently granted. This CalPERS appeal affords the Court a second opportunity to resolve the meaning of the dual limitations periods set forth in Section 13.