US Supreme Court Holds that 3-Year Time Limit to Challenge Registration Statements Cannot Be Tolled, Precluding Opt-Out Plaintiffs from Filing Individual Actions

Officers, directors, and underwriters frequently become targets of securities fraud litigation after a public offering. In a landmark case decided yesterday, the U.S. Supreme Court provides defendants with another tool to defeat these lawsuits. It held that Section 11 challenges to a registration statement must be filed within three years after the public offering—there are no exceptions, and there is no tolling. This time bar applies even to plaintiffs who wish to opt-out of class actions in order to pursue their own individual action. 

Under Section 11 of the Securities Act of 1933, investors can challenge alleged misstatements or omissions in a registration statement. These lawsuits target not only the officers and directors of the company, but also any securities underwriters. Importantly, however, Section 13 states that “[i]n no event shall any such action be brought . . . more than three years after the security was . . . offered to the public.” 

In California Public Employees’ Retirement System v. ANZ Securities, Inc., et al, No. 16-373, the largest public pension fund in the country, CalPERS, chose to opt-out of a class action challenging the registration statement of Lehman Brothers Holdings Inc. and instead pursue its own individual action. Lehman Brothers argued that CalPERS could not pursue its own individual action because that action was filed more than three years after the public offering. CalPERS argued that the three-year period was tolled during the pendency of the class action filing. 

The U.S. Supreme Court held that the three-year time limitation admits no exceptions. Whereas a statute of limitations is designed to encourage diligent prosecution of known claims, statutes of repose reflect legislative judgment that, after a prescribed amount of time, defendants should be free from liability. For this reason, while statute of limitations may be tolled for equitable reasons, statutes of repose cannot. 

There could be no dispute that the statute at issue here is a statute of repose because the three-year time bar made no exceptions and ran from the date of the public offering (i.e., the date of the alleged culpable act), not from the date plaintiff discovered the claim. This was fatal to CalPERS claim. Although CalPERS also argued that three year time limitation was satisfied because “an” action—the class action—was filed within three years, the Court rejected this argument, holding that the statute applies to all actions. 

Conclusion 

Rather than agreeing to the settlement reached in the class action, CalPERS chose to opt-out of the class and pursue its own individual action. But its individual action was untimely because it was filed more than three years after the public offering. CalPERS now finds itself having opted out of the class yet unable to pursue its own individual action. In the future, this ruling will require opt-out plaintiffs to act much earlier, and in many cases, without first having the benefit of knowing details about the terms of any potential class settlement. Plaintiffs are essentially now forced to file any opt-out before the three-year statue of repose runs, regardless of the procedural posture of the pending class action. The U.S. Supreme Court’s decision yesterday is thus important to all companies, directors, officers, and underwriters who frequently face securities fraud litigation after public offerings. They can now rest assured that no new litigation—not even from opt-out plaintiffs—can be initiated more than three years after the public offering.