Supreme Court Rejects Perpetual Tolling Of Section 16(B) Claims Against Corporate Insiders

In a decision issued earlier this week, Credit Suisse Securities (USA) LLC v. Simmonds,1 the Supreme Court held that the two-year time limit for bringing an action under Section 16(b) of the Securities and Exchange Act of 1934 is not tolled by the corporate insider's failure to file a Section 16(a) disclosure statement. Rather, the usual rules of equitable tolling apply. The Supreme Court's ruling overturns a thirty year-old Ninth Circuit decision, Whittaker v. Whittaker Corp, 639 F.2d 516 (9th Cir. 1981).

Background

Section 16(a) requires a director, officer, or beneficial owner of more than ten percent of a public company's equity securities to disclose all transactions involving those securities.2 Section 16(b) permits a corporation or a shareholder (on behalf of a corporation) to bring an action against corporate insiders who realize a profit from the purchase and sale of the corporation's equity securities within a six-month period. Section 16(b) is a strict liability statute and provides that "no such suit shall be brought more than two years after the date such profit was realized."3

In 2007, Simmonds filed 55 lawsuits under Section 16(b) to recoup profits realized by certain financial institutions (the "underwriters") in connection with various initial public offerings ("IPOs") in the late 1990s and 2000. Simmonds alleged that the underwriters inflated prices of certain securities in connection with these IPOs, allowing them to profit from the aftermarket sales. Simmonds also claimed that the underwriters had failed to comply with Section 16(a).4

The lawsuits were consolidated and the underwriters moved to dismiss on the ground that Section 16(b)'s two-year time period had expired long before Simmonds filed the suits. The district court granted the underwriters' motion to dismiss the complaints holding that "all of the facts giving rise to Ms. Simmonds' complaints against the [u]nderwriter [d]efendants were known to the shareholders of the [i]ssuer [d]efendants for at least five years before these cases were filed."5 The Ninth Circuit reversed. Citing Whittaker v. Whittaker Corp, 639 F.2d 516 (9th Cir. 1981), the Ninth Circuit held that the lawsuits were timely because the statute of limitations is tolled until an insider discloses his transactions in a Section 16(a) filing (the "Whittaker rule").6

The Underwriters petitioned the Supreme Court for certiorari on the ground that the two-year time limit for bringing an action under...