Saturday, March 15, 2014

As long as the Supreme Court keeps granting cert in securities cases, I will have things to blog about

On Monday, the Supreme Court agreed to hear Public Employees’ Retirement System of Mississippi v. IndyMac MBS, Inc., No. 13-640, concerning American Pipe tolling of statutes of repose.  Depending on how the Court chooses to frame the issues, the holding could extend to countless class actions, or it could even be securities-specific, based solely on the PSLRA.

[Read more after the jump]

In American Pipe & Construction Co. v. Utah(1974), the Supreme Court held that when class certification was denied for lack of numerosity, the limitations period would be tolled against individual absent class members who then sought to intervene to bring lawsuits on their own behalf.  The holding was based in large part on policy considerations – to refuse tolling would force absent class members to file their own individual “protective” actions against the possibility of an eventual denial of class certification.  Later, in Crown, Cork & Seal Co. v. Parker (1983), the Court extended the holding beyond would-be intervenors to individuals who file their own independent actions. 

At present, the circuits are split on the precise scope of American Pipe tolling.   The Eleventh Circuit has held that limitations periods are tolled only for subsequent individual actions – subsequent class actions are forbidden.  See Griffin v. Singletary, 17 F.3d 356 (11th Cir. 1994).

The majority view, however, permits subsequent class actions, so long as the defect that doomed the original class is not relevant to the subsequent class – i.e., so long as the same issues are not being relitigated.  So, for example, if the original class failed because the representative was not adequate under Rule 23, a new class action may be filed; however, if the original action failed because for lack of numerosity, subsequent classes will be barred.  See, e.g., McKowan Lowe & Co. v. Jasmine, Ltd., 295 F.3d 380 (3d Cir. 2002).

The issue that arises in IndyMac is what happens when it comes to statutes of repose, rather than statutes of limitation.  In Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson(1991), the Supreme Court held that Congress did not intend “equitable tolling”to apply to statutes of repose.  But, leaving aside the question whether American Pipe tolling is properly categorized as “equitable,” Lampf wasn’t addressing anything like American Pipe.  In Lampf, the Court was dealing with a 1/3 year scheme, where plaintiffs were granted a 1 year period from discovery of the fraud, or three years from the date of the misconduct, to bring suit.  In that context, the Court held that tolling the repose period to account for delayed discovery would undermine the distinction set by Congress between the 1 and 3 year periods.

Nonetheless, several courts – and, most significantly, the Second Circuit in IndyMac – have taken Lampf to mean that even American Pipe tolling is impermissible for statutes of repose.  Other courts, by contrast, have permitted it.  See Joseph v. Wiles, 223 F.3d 1155 (10th Cir. 2000).

This issue is, of course, critical to class action administration.  If the repose period is not tolled, that would mean that any defect in the class certification process could doom all of the plaintiffs’ claims (more on that below).  It certainly would mean that members of the plaintiff class would be unable to opt-out – perhaps to reject a settlement they viewed as unfavorable – because they’d have no ability to file their own lawsuit.  Courts might be forced to deem all classes “superior” to individual actions under Rule 23(b)(3), because by the time the class certification decision is made, individual actions might be unavailable.  And so on.

But there’s actually more to the issue than that, which adds considerable complexity to the problem.

IndyMac involves Section 11 of the Securities Act, which allows securities purchasers to bring claims based on false statements in registration statements.  The defendants, IndyMac and various others, were alleged to have held offerings of 106 different series of  mortgage-backed certificates over a three year period.  Each new issuance was backed by a different trust, with a different set of mortgages, with a different registration statement (the different registration statements used several of the same documents – the same shelf registration statements, updated with prospectuses and prospectus supplements – but each new set of offering documents is formally deemed to be a different registration statement under SEC rules).

Originally, several plaintiffs filed complaints relating to IndyMac MBS.  On July 29, 2009, the district court consolidated the cases and appointed as lead plaintiffs the Wyoming State Treasurer and the Wyoming Retirement System, who together had purchased in 15 of the 106 MBS offerings.  In so doing, the court determined that under a preliminary assessment, the Wyoming entities satisfied the criteria of Rule 23.  See 15 USC § 77z-1.

The Wyoming entities filed a new complaint in October 2009 alleging that the registration statements for all 106 IndyMac MBS offerings were defective, for similar reasons (i.e., they all misdescribed the quality of the mortgages backing the offerings, the procedures used by IndyMac to vet the mortgages, and so forth).

Later, on June 21, 2010, the court held that because the Wyoming entities had not themselves purchased the majority of MBS included in the action, they had no standing to represent absent class members who had made such purchases.  In other words, the court held that a purchaser of one security has no standing to represent purchasers of other, similar securities, in a securities class action.  The court reached this determination not in the context of a motion for class certification, and without any examination of the practicalities of how the case was to be tried, but in the context of a motion to dismiss.

This was actually a very controversial holding, and one that is subject to a considerable amount of debate.  Other courts have held – both within the securities context and outside of it – that the similarity of a named plaintiff’s claims to the claims of absent plaintiffs is not a matter of standing, but a matter of compliance with Rule 23 – or at the very least, should not be assessed until the class cert stage.  For example, in the context of false advertising, a plaintiff who bought one product is often permitted to represent plaintiffs who bought other, similar, products, so long as the allegedly false statements are similar across products.  In the employment context, plaintiffs who held one job may represent absent class members who held other, similar jobs, and so forth.  That said, the issue of a named plaintiff’s “standing” to advance the claims of absent class members who have similar, but not identical, injuries is one that has taken on a particular significance in numerous securities lawsuits brought in the wake of the financial crisis. 

Anyway, in response to this ruling (actually, about a month before it, because the district court had indicated what it planned to do), new plaintiffs – including the Public Employees’ Retirement System of Mississippi (MissPERS) – sought to intervene, to revive some of the dismissed claims.  The district court denied the motion, on the ground that: (1) the 3-year repose period for Section 11 claims had expired; (2) American Pipe tolling did not extend to statutes of repose; and (3) the new claims would not “relate back” under Federal Rule of Civil Procedure 15(c) because that would simply be an end-run around the American Pipe rule.

On appeal, the Second Circuit affirmed.  However, the court noted that since the district court’s decision, it had added some clarity to the standing issue.  In NECA-IBEW Health & Welfare Fund v. Goldman Sachs & Co., 693 F.3d 145 (2d Cir. 2012), it held that a purchaser in one MBS offering has standing to represent purchasers in different MBS offerings, so long as there is some overlap – even a peppercorn’s worth, apparently – between the originators of the mortgages included in the two MBS series.  Thus, the court recognized that there was a possibility that the Wyoming entities did, in fact, have standing to represent absent purchasers on some of the dismissed claims. 

The court also conducted a different Rule 15(c) analysis than had the district court.  Rather than simply hold that Rule 15(c) does not apply to statutes of repose, the court held that Rule 15(c) would not apply in situations like this one, where the original named plaintiffs did not have “standing” to represent absent parties.  The court also expressed doubt that a new plaintiff – other than the original named plaintiff – could utilize Rule 15(c) at all as a mechanism for entering a putative class action.

The Supreme Court has now granted certiorari on the American Pipe issue, but it seems to me it is impossible to examine that question without getting into the scope of Rule 15(c), because there are many situations where the addition of named plaintiffs may be essential to the administration of a class action.

For example:

For cases brought under the PSLRA, the statute provides that once a complaint is filed, other members of the putative class have as many as 80 days to apply to be lead plaintiff – and are not obligated to file their own complaints to do so.  Thus, the statute itself contemplates that the new plaintiffs will not be barred by either the limitations period or the repose period from entering the action.  If American Pipe does not toll the repose period, then Rule 15(c) must be available – even though the Second Circuit expressed doubt that Rule 15(c) could be used in this manner.

Courts often find that they need to create subclasses, with different (new) class representatives.

Courts must consider whether a class action is “superior” to individual actions under Rule 23(b)(3) when making a certification decision, taking into account the practical realities of whether individual actions are even available to absent class members.  It is difficult to imagine how individual actions would ever be superior if they are all time-barred.

The original named plaintiff may settle her claims and refuse to continue as representative.  If this occurs before a class is certified, once again, new plaintiffs may either wish to amend under Rule 15(c) or take advantage of American Pipe to intervene/file new complaints.

Absent class members may choose to opt out rather than accept what they believe to be an unfavorable settlement.

These and countless other scenarios are critical considerations in any class action, and they depend on American Pipe tolling, and/or liberal interpretations of Rule 15(c) and Rule 24.  Thus, it seems impossible that the Court can wade into this dispute without considering the interaction of Rule 23, Rule 24, and Rule 15 – particularly in situations like this, where the original complaint identified all of the absent class members, where a preliminary determination by the district court appointing lead plaintiffs identified no defect in the lead plaintiffs’ standing, and where the correct standing rule was, at best, in flux – indeed, the rule finally settled upon by the Second Circuit was not one that any court had anticipated (and seems almost entirely arbitrary, in that there is no reason to believe that a minute overlap of mortgage originators will make any difference to how, as a practical matter, MBS cases are litigated). 

I’ll be posting more about this case, but it seems to me that the fundamental problem is traceable back to the standing determination – but the Supreme Court hasn’t granted cert on that issue, which leaves the entire case in something of an awkward procedural posture.

In any event, though the Court could use the IndyMac case to reach a broad pronouncement about American Pipe, it's equally possible, I believe, that the Court could reach a narrow determination limited to the PSLRA - such as, for example, a determination that tolling was appropriate given the district court's preliminary Rule 23 assessment as part of its lead plaintiff appointment, or even that the PSLRA's lead plaintiff provisions indicate a congressional endorsement of tolling for securities cases.

 

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