Supreme Court Rejects Ninth Circuit Rule On Tolling For Short-Swing Trading Claims

In Credit Suisse Securities (USA) LLC v. Simmonds, No. 10-1261, ___ U.S. ___, 2012 WL 986812 (Mar. 26, 2012), the U.S. Supreme Court unanimously rejected the Ninth Circuit's 30-year-old rule that tolls the statute of limitations for short-swing profit claims under Section 16(b) of the Securities Exchange Act of 1934 until the insider discloses his transactions, typically in an SEC Form 4. Instead, the Court held that, to the extent that Section 16(b)'s statute of limitations is subject to tolling, courts must follow standard equitable tolling principles, which look to when the claimant discovers or should have discovered facts that support a claim. The Court left open the possibility that the statute of limitations for Section 16(b) claims may not be subject to tolling at all.

Short-Swing Profits Prohibited by Section 16(b)

Section 16(b) imposes a form of strict liability on executive officers, directors and 10% shareholders of public companies who both purchase and sell, or sell and purchase, their corporation's equity securities within a period of less than six months. The statute applies regardless of whether these corporate insiders actually had inside information. Under Section 16(b), a public company (or a security holder in the event that the company fails to pursue the claim) may sue these corporate insiders to compel disgorgement of all profits from such trades. Section 16(b) expressly states that "no such suit shall be brought more than two years after the date such profit was realized."

In 2007, Vanessa Simmonds filed 55 actions against the underwriters of various initial public offerings and insiders of the companies that were taken public, alleging that the defendants, as a group, were subject to, and had violated, both Section 16(b)'s prohibition on short-swing insider trading and Section 16(a)'s requirement to disclose changes to their beneficial ownership on Form 4.

The district court dismissed 24 of Simmonds' complaints on the ground that Section 16(b)'s two-year statute of limitation had expired years before she filed her suits. In re Section 16(b) Litig., 602 F. Supp. 2d 1202 (W.D. Wash. 2009). Relying on its decision in Whittaker v. Whittaker Corp., 639 F.2d 516 (9th Cir. 1981), the Ninth Circuit reversed, holding that the limitations period was tolled until the insiders disclosed the trades on a Form 4—and that tolling continued until such a disclosure occurred even if the plaintiff shareholder knew or should have known...