Leave time for trouble: the limitations periods under the securities laws.

• Author: Kaufman, Michael J.

1. INTRODUCTION II. THE LIMITATIONS PERIODS UNDER THE SECURITIES LAWS A. The Purposes of the Securities Laws ' Limitations Periods 1. Allowing Sufficient Time to Investigate and File a Securities-Fraud Case 2. The "Stale Evidence" Rationale 3. The "Litigation Uncertainty" Rationale B. The General Models of Limitations Periods. 1. Statutes of Limitations 2. Statutes of Repose. 3. Jurisdictional Time Limits C. The Securities Laws ' Hybrid Limitations Periods 1. The One- and Three-Year Limitations Period Under Section 13 of 1933 Act 2. The Two- and Five-Year Limitations Period for Section 10(b) of the 1934 Act III. TOLLING PRINCIPLES TO ARREST THE SECURITIES LAWS' LIMITATIONS PERIODS A. Equitable Tolling B. Equitable Estoppel C. Forfeiture and Waiver IV. SPECIAL TIMELINESS RULES APPLICABLE TO PUTATIVE SECURITIES CLASS ACTIONS A. American Pipe's Common-Law Rule for Putative Class Members 1. Opt-Outs After Class Certification 2. Opt-Outs Before Class Certification B. American Pipe's Questionable Application to Statutes of Repose 1. Federal Courts Applying American Pipe to the Securities Laws' Repose Provisions 2. Federal Courts Refusing to Apply American Pipe to the Securities Laws' Statutes of Repose C. American Pipe's Relevance to Securities Litigation 1. The Securities Laws Build in Delay Before Class Certification 2. Institutional Investors Rely on American Pipe 3. A World Without American Pipe. V. REMEDYING THE UNCERTAIN APPLICATION OF LIMITATIONS PERIODS WITH TOLLING AGREEMENTS VI. CONCLUSION I. INTRODUCTION

   In securities-fraud cases, the stakes are high and the litigation is costly, complicated, and time-consuming. Many people invest in the markets, directly or indirectly, to help buy a home, save for retirement, or send children to college. Thus, allegations that fraud tampered with these investments are serious. For these investors, a legitimate securities -fraud suit may present the opportunity to recover these savings, retirement nest eggs, or children's college funds that were lost, not because of risk attendant to investment generally, but because of fraud. A securities-fraud suit is serious for companies as well. For companies, the threat of a securities-fraud suit stands out as a nasty attack on business reputation and a significant litigation risk. Companies have every interest in getting these suits dismissed at the earliest practical time.

   Whether a securities-fraud suit is timely is an elementary and crucial question for both sides because failing to file within the limitations periods can be case dispositive. The securities laws set time limits for bringing lawsuits based on when a reasonable investor would have discovered the fraud and when the fraud occurred. If investors do not comply with these time limits, then they are barred from the courthouse--no matter how egregious the scheme or how great their loss. The seemingly draconian result is justified by limitations periods' salutary purposes. For one, deadlines ensure that evidence is relatively fresh, which promotes resolution on the merits. In addition, a time limit allows defendants and others to rest easy knowing that after a certain time, their past transactions will not unravel with a lawsuit.

   Legal deadlines are supposed to set clear rules for what is timely and what isn't. (1) Far from easy to apply, however, the law of limitations periods for securities cases is a collection of unsettled questions. This Article discusses the securities laws' legal deadlines and finds that the uncertainty with which they apply renders them less effective than they otherwise could be. Questions linger about whether the securities laws' limitations periods afford any room for equitable exceptions, like tolling, estoppel, or forfeiture. And, as of late, questions concerning how limitations periods apply to securities class actions have come to the fore. But uncertainty in the law of limitations benefits no one. Absent clear timeliness rules, litigants and the system expend time and money resolving purely procedural issues. (2)

   But litigants need not wait for the judiciary or the legislature to resolve the ambiguity of limitations periods. Instead, the parties themselves can accomplish the laudable aims of limitations periods (saving merited claims, deterring the use of stale evidence, and preventing litigation uncertainty) by entering into tolling agreements. This Article shows that tolling agreements should validly arrest the securities laws' limitations periods--the statutes of limitations and the statutes of repose. Thus, this Article advocates "leav[ing] time for trouble" (3) by using tolling agreements to arrest limitations periods and remedy the unclear application of statutory timeliness bars.

2. THE LIMITATIONS PERIODS UNDER THE SECURITIES LAWS

   1. The Purposes of the Securities Laws ' Limitations Periods

      Limitations bars, including those governing securities cases, must balance competing aims. On the one hand, timeliness bars must be long enough to allow litigants enough time to discover and file merited claims. (4) On the other hand, timeliness bars must be short enough to mitigate the risk that evidence of merited claims will become stale (5) and relieve potential defendants and others from unending uncertainty about whether prior transactions will be scrutinized in court. (6)

      1. Allowing Sufficient Time to Investigate and File a Securities-Fraud Case

         Time limits for filing a securities-fraud action must account for the time it takes to uncover and investigate a securitiesfraud scheme. In general, plaintiffs file securities class actions within days or months of a company's announcement of bad news to the market. (7)

         Investors and their counsel are often fast to file a securities class action after a company announces bad news because, historically, the plaintiff who filed first was most likely to be appointed to lead the class. (8) The lead spot comes with the lions' share of attorneys' fees, which can be substantial in a securities case. (9) In 1995, however, Congress changed the procedure for selecting a lead plaintiff, instead adopting a mechanism that favored the presence of large institutional investors (e.g., pension funds) to serve in the lead-plaintiff role and presumably to slow the race to the courthouse. (10) But securities lawsuits are filed just as quickly after the Private Securities Litigation Reform Act (PSLRA) as before it. (11) The speed with which plaintiffs firms file lawsuits may be a byproduct of offering institutional investors preferred status under the PSLRA. (12) After the PSLRA, plaintiffs' law firms wooed institutional investors by offering to monitor these institutions' investments for free and to notify them when they may have a securities-fraud action. (13) These monitoring arrangements keep institutions up to date on potential securities cases. (14)

         Even though plaintiffs file securities cases quickly, these cases still take time to uncover and investigate. Fraud, by its nature, involves concealing the truth, and fraudulent schemes can be complex. Investors may not uncover the most extensive or corrupt scheme for some time. (15) Take for example, Ernst & Ernst v. Hochfelder, where the president of an investment firm perpetrated a Ponzi scheme for 25 years, which was uncovered only after he committed suicide and left a note explaining that the firm was bankrupt. (16) Occasionally, securities fraud will become known through chance, like through a remorseful fraudster's suicide note or where a scheme collapses under its own weight. (17) More common, however, is that the media, industry regulators, short sellers, stock analysts, etc., expose corporate fraud. (18) But these sources are not always obligated to reveal to the investing public what they know, let alone reveal what they know within a certain time.

         Even when plaintiffs get a whiff of fraud, plaintiffs still have to conduct a pre-filing investigation--without access to formal discovery--to uncover evidence sufficient to satisfy the securities laws' heightened pleading demands. (19) Just sifting through the sheer volume of information companies pour out into the public domain can take a while. (20) In addition, a key component to satisfying the pleading standard for securities claims and demonstrating a strong inference of scienter (a necessary component for liability under Rule 10b-5) often involves obtaining information from inside the company to show that what the company told the investing public wasn't matching what the company was saying internally. (21) One of the more common ways investors get the inside scoop is by talking with former employees whose accounts investors can put forward in the complaint, typically as allegations attributed to confidential witnesses. (22) Marshalling sufficient evidence takes time, and filing first and amending later is not without risk given that, in some courts, the liberal policy for amendments may be curtailed by the securities laws' heightened pleading standard. (23)

      2. The "Stale Evidence" Rationale

         The time allowed for uncovering, investigating, and filing a securities-fraud complaint must be balanced against competing aims, one of which is to prevent the use of stale evidence. The "stale evidence" rationale for limitations periods is rooted in the idea that claims are more likely to be resolved on their merits if litigants preserve, gather, and produce evidence closer in time to the event that gave rise to the claim. A lawsuit involves a fact-finding process of pleading, discovery, and trial, and this fact-finding process is more reliable if the evidence in the case is fresh. (24) Evidence is more likely to be preserved by plaintiffs and defendants if plaintiffs have a prompt deadline for filing. (25) Indeed, a timely suit gives defendants notice to start gathering evidence while that evidence is still fresh. (26)

         The risk of stale evidence is not absent in securities cases. First, even though the...