April 14, 2017

The U.S. Supreme Court is set to hear arguments next week in a pair of securities cases, one of which could affect the SEC’s ability to pursue enforcement actions involving dated conduct (Kokesh v. SEC , U.S., 4/18/17).

In the enforcement case, the investment adviser principal who was ordered to pay $35 million in disgorgement is arguing that the Securities and Exchange Commission waited too long to sue him.

In the second case, the justices will determine the fate of a class lawsuit against the underwriters of more than $31 billion in Lehman Brothers’ debt offerings (Calif. Pub. Emp. Ret. Sys. v. ANZ Securities, Inc., U.S., No. 16-373, 4/17/17). The central question is whether the filing of a class action stops the clock on a three-year time limit set out in 1933 Securities Act Section 13. The resolution depends on whether the high court’s tolling decision in American Pipe & Constr. Co. v. Utah, 414 U.S. 538 (1974), applies.

“This case is of enormous practical importance to investors—particularly institutional investors,” Washington attorney Daniel S. Sommers of Cohen Milstein Sellers & Toll PLLC, told Bloomberg BNA.

In January, the justices agreed to take up the appeal from the California Public Employees’ Retirement System, which alleged that the underwriters didn’t disclose risks related to Lehman investments in subprime mortgages prior to the firm’s collapse. CalPERS claimed it lost millions of dollars when the investment bank failed in September 2008.

The district court dismissed the claims as time-barred and the U.S. Court of Appeals for the Second Circuit affirmed. The appeals court said that the inapplicability of American Pipe tolling to a statute of repose “turns on the nature of the tolling rule and its ineffectiveness against statutes of repose, not on whether the named plaintiffs also have standing to assert claims on behalf of a class.” The decision conflicted with a Tenth Circuit ruling that a pending class action tolls the ‘33 Act’s statute of repose.

In its petition to the high court, CalPERS told the justices that its ’33 Act Section 11 claims would have been timely if the three-year statute of repose had been tolled by the filing of a class lawsuit based on the same alleged misconduct.

“If the Supreme Court disregards its own precedent in American Pipe, investors will no longer be able to rely upon the filing of a class action to protect their rights as they have for decades,” Sommers said. Instead, they’ll be forced to file their own separate lawsuits in order to ensure that their claims don’t become time-barred, resulting in a costly and needless scenario, he said.

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