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(Article from Securities Law Alert, February 2017) 

For more information, please visit the Securities Law Alert Resource Center

On January 13, 2017, the Supreme Court granted certiorari to address two significant questions involving the limitations periods for securities claims. In California Public Employees' Retirement System v. ANZ Securities (No. 16-373) (CalPERS), the Court will consider whether American Pipe tolling applies to the three-year statute of repose set forth in Section 13 of the Securities Act of 1933. In Kokesh v. SEC (No. 16-529), the Court will determine whether the five-year limitations period set forth in 28 U.S.C. § 2462 applies to SEC claims for disgorgement.

Court Will Address Circuit Split on Whether American Pipe Tolling Applies to Section 13’s Three-Year Statute of Repose

In American Pipe & Construction v. Utah, 414 U.S. 538 (1974), the Supreme Court held that “the commencement of a class action suspends the applicable statute of limitations as to all asserted members of the class who would have been parties had the suit been permitted to continue as a class action.”

The Second Circuit has previously determined that American Pipe tolling does not apply to Section 13’s three-year statute of repose, which governs claims under Sections 11 and 12 of the Securities Act. Police & Fire Ret. Sys. of Detroit v. IndyMac MBS, 721 F.3d 95 (2d Cir. 2013) (IndyMac). The IndyMac court emphasized that “statutes of repose create a substantive right in those protected to be free from liability after a legislatively-determined period of time.” Earlier this year, the Sixth Circuit relied on IndyMac to find American Pipe tolling inapplicable to statutes of repose, including Section 13. Stein v. Regions Morgan Keegan Select High Income Fund, 821 F.3d 780 (6th Cir. 2016).

Both the Second and Sixth Circuits disagreed with the Tenth Circuit’s decision in Joseph v. Wiles, 223 F.3d 1155 (10th Cir. 2000), which held that American Pipe tolling does in fact apply to Section 13’s statute of repose. The Tenth Circuit reasoned that “[s]tatutes of repose are intended to demarcate a period of time within which a plaintiff must bring claims or else the defendant’s liability is extinguished.” The court found that in the case before it, “the claim was brought within this period on behalf of a class of which [plaintiff] was a member.” The Tenth Circuit further stated that “[t]olling the limitations period while class certification is pending does not compromise the purposes of statutes of limitations and repose” because the filing of a class action places defendants “on notice of the substantive claim as well as the number and generic identities of potential plaintiffs.”

In CalPERS, the Court granted certiorari to address the question of whether “the filing of a putative class action serve[s], under the American Pipe rule, to satisfy the three-year time limitation in Section 13 of the Securities Act with respect to the claims of putative class members.”[1]

Court Will Address Circuit Split on Whether Section 2462’s Five-Year Statute of Limitations Applies to SEC Claims for Disgorgement 

Pursuant to 28 U.S.C. § 2462, the SEC and other federal government entities may not bring any “action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture” more than five years after the claim first accrued.

In SEC v. Graham, 823 F.3d 1357 (11th Cir. 2016), the Eleventh Circuit held that Section 2462’s limitations period applies to SEC claims for disgorgement. The court reasoned that disgorgement is a type of “forfeiture” within the meaning of Section 2462. 

Several months later, the Tenth Circuit expressly disagreed with the Eleventh Circuit and held that Section 2462 does not apply to SEC claims for disgorgement. SEC v. Kokesh, 834 F.3d 1158 (10th Cir. 2016). The Tenth Circuit found that when “read in the context of government causes of action,” the word “forfeiture” was intended to refer to the historical meaning of that term: “an in rem procedure to take tangible property used in criminal activity.” The Tenth Circuit concluded that “[t]he nonpunitive remedy of disgorgement does not fit” in that category.[2]

The Supreme Court granted certiorari to review the Tenth Circuit’s decision in Kokesh to determine whether Section 2462 reaches SEC claims for disgorgement.