April 27, 2021

By Carol V. Gilden and Jan E. Messerschmidt

Securities fraud claims brought under Section 10(b) of the Exchange Act are subject to two separate timeliness provisions: a two-year statute of limitations and a five-year statute of repose. These two provisions begin running on different dates. For the two-year limitations period, the clock starts running when the plaintiff discovers the “facts constituting the violation.” The five-year repose period, on the other hand, begins from the defendant’s last culpable act, regardless of whether the plaintiff knows about it or not. By pairing a shorter statute of limitations with a longer statute of repose, the Supreme Court has explained, the two provisions work in tandem to give “leeway to a plaintiff who has not yet learned of a violation,” while protecting “the defendant from an interminable threat of liability.”

Earlier this year, two district court decisions in the Second Circuit— Abu Dhabi Investment Authority v. Mylan N.V. et al. and In re Teva Securities Litigation—illustrated the significant challenges that the statute of repose can present for plaintiffs alleging securities frauds that last longer than five years. Stemming from Mylan’s and Teva’s involvement in multiyear schemes to fix the prices of generic drugs, investors in the two cases alleged that the companies engaged in anticompetitive conduct to inflate the prices of their generic drugs and made a series of false and misleading statements over the course of more than five years as to the reasons underlying their purported business success. In each case, the defendants filed partial motions to dismiss, seeking dismissal of any claims to the extent they were based on allegedly false and misleading statements made more than five years before the complaints were filed.

Both courts granted the motions. Framing the relevant question to be what constitutes a “violation” under the Exchange Act, the two courts rejected the plaintiffs’ arguments that the repose period should be measured from the last misrepresentation or omission that the defendants made. Because a single misstatement can alone constitute a violation of the Exchange Act, the courts reasoned that the repose period runs from the date that each misstatement or omission was made. As a result, the courts dismissed claims based on misstatements or omissions made more than five years before the complaint was filed. The two decisions are the latest in a recent trend within the Second Circuit, with courts departing from some earlier decisions that had measured the repose period from the last misrepresentation. In so doing, these courts rejected that approach as tantamount to a “continuing violations” or “equitable tolling” theory, which the Supreme Court has repeatedly held to be inconsistent with statutes of repose.

Due to this trend in the case law, plaintiffs should be particularly mindful in cases involving longrunning frauds to file complaints as early as possible to avoid application of the statute of repose to bar parts of their claims, that is, to bar recovery on misrepresentations or omissions occurring early on in the fraud. In many cases, doing so will not be particularly difficult. After learning about a securities violation, plaintiffs have little reason to delay filing their complaint, whether it be in connection with a class action or an individual, direct action; after all, the sooner they can file their complaint, the sooner they can recover the money they lost as a result of the fraud. And while a fraud is necessarily secret at the beginning, it usually does not take longer than five years for the truth to come out. But that is not always the case.

So, what happens when a defendant successfully keeps a fraud under wraps for more than five years? Or, more egregiously, what happens when a defendant is continuing to deceive investors, even as the truth of a longrunning fraud is slowly leaking out? The decision in In re Teva Securities Litigation suggests one possible approach. In that case, class action plaintiffs argued at oral argument that while a single misrepresentation or omission can constitute a violation of subsection (b) of Rule 10b-5, the other two provisions of Rule 10b-5—subsections (a) and (c)— applied in that case. Commonly considered together as the “scheme liability” provisions, subsections (a) and (c) make it unlawful to “employ any device, scheme, or artifice to defraud” or to “engage in any act, practice, or course of business” to defraud investors. Plaintiffs argued that because those provisions make a scheme to defraud a violation of Rule 10b-5, the statute of repose for such fraudulent schemes should run from the end of the scheme, rather than each misstatement made in furtherance of the scheme. While the court ultimately held that the plaintiffs did not sufficiently allege scheme liability, the court indicated that if adequately alleged, scheme liability allegations could protect plaintiffs from statute of repose defenses. Such arguments are particularly promising in the wake of the Supreme Court’s decision in Lorenzo v. SEC, which indicated that scheme liability claims can potentially be based on misrepresentations or omissions, an approach which had been foreclosed by prior case law in many circuits, including the Second Circuit.

While further development of the law in this area is necessary, plaintiffs exploring this approach should take care to include allegations that sufficiently allege scheme liability in a manner that incorporates any misrepresentation allegations as part of the alleged scheme.