Wednesday, July 5, 2017

Clock Runs Out on CALPERS' Lehman Claims

Supreme Court Upholds Strict Time Limit in Federal Securities Class Actions

Author: David Schwartz J.D. CPA

On June 26, 2017, the Supreme Court handed down a 5-4 decision which ended California Public Employees' Retirement System’s (“CaLPERS”) efforts to spin off its own Lehman-related claims from a larger class action because the claims were filed late.  The Court held that the three-year time limit in Section 13 of the Securities Act of 1933 is a statute of repose. Consequently, the Court held that the filing of a class action suit under Section 13 does not stop the clock on the statute of limitations for plaintiffs who subsequently opt-out of the class to pursue individual lawsuits.


The case arose from global investment bank Lehman Brothers’ operations in the years just before the firm declared bankruptcy in 2008. During the time between July 2007 and January 2008, Lehman raised more than $31 billion through debt offerings, and CalPERS, the largest pension fund in the United States, bought millions of dollars of those securities underwritten by several dozen financial firms, including ANZ Securities Inc. On June 18, 2008, other pension funds filed a putative class action in the Southern District of New York, alleging that parties, like defendant ANZ Securities, who were involved in underwriting the debt offerings were liable for false and misleading statements in the registration statements. The class suit ended in 2011 when the parties to the class action reached a settlement, and the district court preliminarily certified a class for settlement purposes. At that time, CalPERS opted out of the class to pursue its own claims individually. By the time CaLPERS filed its individual lawsuit in 2011, more than three years had passed since the offerings in dispute had taken place. On this basis, the district court dismissed CalPERS' opt-out suit as untimely. On appeal, the Second Circuit affirmed the dismissal, holding that the three-year time limit in Section 13 had not been tolled by the filing of the class action in 2008. Rather, the three-year statute of limitations continued to run despite CaLPERS' later decision to opt out of the class. 


CaLPERS appealed to the Supreme Court, and the Court agreed in January 2017 to decide on the issue of whether the timely filing of a class action lawsuit stops the running of the three-year time limit for individual class members to bring their claims under Section 13 of the Securities Act.  


As expressed in CaLPERS’ brief: “This case presents two questions about whether ... a member of a putative damages class can opt out of the class action and pursue its individual claims if the class action was timely, but the individual class member’s complaint was filed more than three years after the offending conduct such that it could arguably be barred by a three-year statute of repose,”


Ultimately, the Court held:


“[t]he three-year limit is a statute of repose.  And the object of a statute of repose, to grant complete peace to defendants, supersedes the application of a tolling rule based in equity. . . No feature of § 13 provides that deviation from its time limit is permissible in a case such as this one.  To the contrary, the text, purpose, structure, and history of the statute all disclose the congressional purpose to offer defendants full and final security after three years.”


Justice Ginsburg, joined by Justices Breyer, Sotomayor, and Kagan, dissented from the majority ruling arguing that the decision “disserves the investing public that [the law] was designed to protect.” Justice Ginsburg further warned that “[t]he harshest consequences will fall on those class members, often least sophisticated, who fail to file a protective claim within the repose period.”  She added: “[It] will also gum up the works of class litigation. Defendants will have an incentive to ‘slow-walk’ discovery and other precertification proceedings so the clock will run on potential opt-outs. Any class member with a material stake in a… case, including every fiduciary who must safeguard investor assets, will have strong cause to file a protective claim before the three-year period expires.”


The case is California Public Employees’ Retirement System v. ANZ Securities, Inc., et al. (“CalPERS”) (No. 16–373, 2017 WL 2722415) (U.S. June 26, 2017).  The slip opinion is available at: