Supreme Court Rejects Open-Ended Tolling Of Section 16(B) Claims

The Supreme Court yesterday limited the ability to bring short-swing profit claims years after the alleged improper trading, in Credit Suisse Securities (USA) LLC v. Simmonds, No. 10-1261 (U.S. Mar. 26, 2012). The Court split 4-4 on the question of whether equitable tolling even applies to the two-year period for bringing claims under Section 16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as Chief Justice Roberts did not participate in the decision. The Court thus effectively left that issue open for another day. Nevertheless, the eight-Justice Court held unanimously that, assuming the two-year period can be extended, the tolling rules articulated by the Ninth and Second Circuits impermissibly deviated from ordinary equitable tolling principles.

BACKGROUND

Simmonds confronted the intersection of Section 16(a) and Section 16(b) of the Exchange Act. Section 16(a) imposes disclosure obligations on certain insiders. Anyone who directly or indirectly owns more than 10% of any equity security (subject to certain exemptions), or who is an officer or director of the issuer of such a security, must file statements with the Securities and Exchange Commission disclosing that person's beneficial ownership. The disclosure statements, filed on Form 4, must also be updated in the event of a change of ownership.

Section 16(b), in turn, imposes a form of strict liability on certain insiders that trade in corporate securities. The statute creates a civil action that permits a corporation, or any security holder of that corporation on the corporation's behalf, to bring suit against an officer, director, or beneficial owner of more than 10% of a publicly held corporation who realizes any profits from the purchase and sale, or sale and purchase, of the corporation's securities within any six-month period. Section 16(b) states that "no such suit shall be brought more than two years after the date such profit was realized."

The plaintiff, daughter of one of her lawyers who purchased her shares years after the events in question, filed 55 nearly identical actions in 2007 under Section 16(b) against investment banks that had underwritten various initial public offerings between 1998 and 2000. In each case, she alleged that the investment banks, as an underwriting group, had been the beneficial owner of more than 10% of the stock of the issuing company, and thus subject to the requirements of Section 16(b). The defendants did not file...