Supreme Court Action: Class Action Status and Statutes of Limitations in Securities Fraud Cases

Here are summaries of the two cases issued yesterday by the U.S. Supreme Court.  The first is Amgen v. Connecticut Retirement Plans and Trust Funds (11-1085).  It concerns the burden of proof in a private securities-fraud case where the plaintiffs seek class action status.  Connecticut Retirement sued Amgen over allegedly misleading statements on which Connecticut Retirement claims to have relied upon.  Connecticut Retirement sought class action status under Federal Rule of Civil Procedure 23 which was opposed by Amgen.  There is a rebuttable presumption that members of the class relied on material misrepresentations in an efficient market under the fraud-on-the-market theory, which does not require direct reliance to be proved.  

Amgen opposed the class action certification on the theory that plaintiffs had to show the materiality of Amgen’s alleged misrepresentations before the class could be certified.  The District Court rejected that assertion and certified the class.  The Ninth Circuit affirmed.  The Supreme Court affirmed holding that Rule 23 does not require that level of proof in order for a class to be certified.  The rule demands that questions of law or fact predominate over questions affecting individual plaintiffs.  Materiality of Amgen’s alleged misrepresentations is measured against an objective evidentiary standard that applies to the class.  If the proof fails, the litigation ends.  Thus no individual questions could predominate as the case would be over.  A second issue in the case was the rejection of rebuttal evidence presented by Amgen when it disputed the class certification.  The Court said Amgen attempted to litigate the merits of the case at the class certification stage, which was not required under the standards of Rule 23.  Justice Ginsburg delivered the opinion of the Court which was joined by Chief Justice Roberts, and Justices Breyer, Alito, Sotomayor, and Kagan.  Justice Alito filed a concurring opinion.  Justice Scalia filed a dissenting opinion.  Justice Thomas filed a dissenting opinion which was joined by Justice Kennedy in full and by Justice Scalia except for part I-B. 

The second case, Gabelli v. SEC (11-1274), concerns the starting point for the running of the Statute of Limitations in an investment fraud case brought by the Securities and Exchange Commission under the Investment Advisors Act.  The Act makes it illegal for investment advisors to defraud their clients.  The general statute of limitations places a five year limit for suit from the date the claim first accrued.  The SEC sued Gabelli for civil penalties under the act in 2008 for fraudulent activity between 1999 and 2002.  Gabelli moved to dismiss the case as time barred and the District Court granted the motion.  The Second Circuit reversed, holding that the statute of limitations started running at the time the violation was discovered. 

The Supreme Court reversed.  It said the most natural reading of the statutory language is that the statute runs from the time the fraud accrued, not when it was discovered.  That language is: 

“Except as otherwise provided by Act of Congress, an action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise, shall not be entertained unless commenced within five years from the date when the claim first accrued if, within the same period, the offender or the property is found within the United States in order that proper service may be made thereon.”  28 U. S. C. §2462. 

The discovery rule may work in situations where the plaintiff is an individual suing for compensation.  The government is not that type of plaintiff.  The SEC seeks civil fines instead.  Applying the rule to government would be a challenge to the courts.  It’s more difficult to determine things such as when the government knew or should have known about the fraud compared to private individuals who are seeking redress as defrauded victims.  Chief Justice Roberts delivered the opinion for a unanimous Court.  [MG]