U.S. Supreme Court Refuses to Adopt a Bright-Line Rule on Limitation Periods for Corporate Insider Profit Claims

There is little law in Canada regarding if and how limitation periods applicable to statutory causes of actions in securities legislation can be tolled. For many public companies, this can create uncertainty regarding whether investor lawsuits are statute-barred.

For example, the limitation period in s. 138 of the Ontario Securities Act, which covers causes of action brought in respect of misrepresentations in prospectuses, offering memoranda and circulars, is the earlier of 180 days after the plaintiff first had knowledge of the facts giving rise to the cause of action, or three years after the date of the transaction that gave rise to the cause of action.

This language appears clear on its face, but there is not much Canadian guidance on what happens, for example, if a material fact is omitted from a prospectus, but this omission is not disclosed for more than three years: is a potential litigant out of luck, based on a strict reading of the statute? Or is the limitation period tolled until disclosure of the omission is made, based on principles of equity?

Background

The U.S. Supreme Court, in the context of s. 16(b)of the Securities Exchange Act of 1934, considered a similar issue and came to something of a “middle ground” in the recent Credit Suisse Securities (USA) LLC v. Simmonds. Under s. 16(b), shareholders may sue officers, directors and other corporate insiders who use “short-swing” transactions (that is, sale and purchase or purchase and sale within a six-month period) to profit, and seek to have the profit disgorged. The section also provides that no lawsuits can brought more than two years after the date such profit was realized.

Decision

Simmonds involved numerous nearly identical lawsuits commenced in 2007 by an investor, Vanessa Simmonds, who owned shares in a number of tech companies. In the 1990s and 2000, the companies’ IPOs had been underwritten by Credit Suisse and others, and Ms. Simmonds alleged that the underwriters had manipulated share prices by engaging in “short-swing” transactions. Before the Ninth Circuit, Ms. Simmonds successfully argued that the limitation period in s. 16(b) was tolled until the filing of a statement regarding profits made under s. 16(a) of the Act.

The Supreme Court rejected this proposition – but also rejected the proposition that the limitation period in s. 16(b) can never be tolled because of the plain language that no lawsuits could be brought more than two years after profits were realized.

Rather, instead of adopting a “bright-line” rule, the Court returned Ms. Simmonds’ lawsuits to the lower courts to determine whether equitable tolling principles would apply to the specific facts, apparently supporting the position advocated by the government: that when a matter is not disclosed, the limitation period may be tolled until the claimant has “actual or constructive notice” of the facts underlying her claim, separate and apart from the conduct of the defendant.

Potential Significance

The decision in Simmonds may impact future decisions by Canadian courts on whether statutory limitations on investor claims in securities legislation may be tolled in the event that misrepresentations or omissions are concealed or not disclosed by a public company.

Case Information

Credit Suisse Securities (USA) LLC v. Simmonds

Docket: No. 10-1261

Date of Decision: March 26, 2012

bright-line rule equitable tolling principles limitation periods misrepresentations in prospectuses Securities Act Securities Exchange Act securities litigation short-swing transactions statutory cause of action

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