On March 26, 2012, the Supreme Court handed down their decision in Credit Suisse Securities LLC v. Simmonds partially resolving the issue of how long an investor can wait before filing a lawsuit seeking to hold underwriters and corporate insiders accountable for profits from short swing trades.
In 2007, Vanessa Simmonds filed numerous actions against underwriters of various initial public offerings (IPOs) that occurred during the late 1990s and 2000s. Simmonds alleged that under §16(b) of the Securities Exchange Act of 1934, the defendants should have to disgorge, or give up, the profits stemming from these issuances. Simmonds claims these insiders owned more than 10% of the outstanding stock of the relevant companies, subjecting them to the disgorgement of profits under §16(b) and the reporting requirements of §16(a). §16(b) imposes strict liability on any officer, director, or beneficial owner of a public company who realizes profits from the purchase and sale of the corporation’s securities within a six-month time period. Shareholders can sue to force these insiders to return any profits from short-swing trades whether or not the transaction was conducted with improper purpose, such as trading on inside information or intent to profit from inside information. The statute imposes a 2 year statute of limitations that is triggered when the profits are realized. Simmonds claims that the insiders failed to file any disclosure forms thereby failing to comply with §16(a), which in her opinion would have triggered the two year statute of limitations.
The statue of limitations is at issue as many of Simmonds claims were filed almost ten years after the IPOs took place. The trial court initially dismissed Simmonds’ claims based on a statute of limitations violation. Simmonds’ appealed to the Ninth Circuit, where the court reversed in favor of Simmonds and held that the two-year statute of limitations under §16(b) does not begin until the corporate insiders disclose the transactions in regulatory filings known as Form 4. Therefore, Simmonds’ statute of limitations had not tolled because the defendants did not file Forms 4 reporting the sales. The Ninth Circuit was following their own precedent set by Whittaker v. Whittaker, which held that the §16(b) statute of limitations is not tolled until a disclosure filing is made, which in Simmonds’ claims were never filed because the underwriters were operating under the good faith underwriting exception to the filing requirements.
The Supreme Court granted certiorari to resolve the issue regarding the tolling of the statute of limitations under §16(b). The issue was important for the numerous defendants as an open-ended tolling period could open up investment banks to years old claims of short-swing profit violations. The other defendants include well-known Wall Street firms such Bank of America Corp. and subsidiaries of Goldman Sachs Group, Deutsche Bank AG, J.P. Morgan Chase & Co, Citigroup Inc., and Morgan Stanley.
Three main interpretations of the statute of limitations were presented to the Supreme Court. Simmonds argued that the failure to file public disclosure statements allows equitable tolling so long as the disclosure statement remains outstanding. Equitable tolling allows extensions of statutes of limitations in situations where a defendant fraudulently concealed wrongdoing. Credit Suisse posited that the statutory language of §16(b) clearly does not allow for equitable tolling under any circumstances. Finally, the government took the middle ground and argued in their amicus brief that §16(b)’s statute of limitations is subject to traditional equitable tolling grounds, until the plaintiff has actual or constructive notice of the facts underlying the claim.
In an 8-0 opinion written by Justice Scalia, the Supreme Court held that the statute is express in that the two-year statute of limitations begins on the date the short-swing profit is realized and not on the date a Form 4 is filed as Simmonds had argued. Chief Justice Roberts took no part in this decision. The Supreme Court rejected the Ninth Circuit’s Whittaker rule and a similar Second Circuit ruling. The Court criticized the Ninth Circuit’s opinion for creating the possibility of liability in perpetuity.
Unfortunately, this unanimous decision did not actually fully resolve the issue. The decision may seem to provide officers and directors with more protection against stale claims, but it still remains to be decided under what circumstances the doctrine of equitable tolling could apply to §16(b)’s statute of limitations. The Court split 4-4 on whether the law permits any extension of the statute of limitations beyond two years, thereby leaving intact the portion of the Ninth Circuit’s decision permitting extension of the deadline under some circumstances. It remains unclear what these circumstances are and whether they apply in the present case. The appeals court will now consider whether Simmonds had enough information about the alleged wrongdoings that she should have filed her suits sooner.
If the second issue is resolved in favor of not allowing equitable tolling under §16(b) and the statute of limitations begins when profits are realized, insiders will be further insulated against belated short-swing profit suits. At the same time, it will be harder for shareholders to bring suits under §16(b) if they cannot rely upon regulatory disclosures to notify them of potential short-swing profit violations.
On the other hand, this decision should give comfort to corporate insiders who feared that a decision in favor of Simmonds could expose them to potential §16(b) claims indefinitely.