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United States: Supreme Court’s Credit Suisse Securities Decision Shields Corporate Insiders From Endless Liability For Short-Swing Profits Under § 16(B) Of The Securities Exchange Act Of 1934
Corporate officers and directors received some assurance from
the Supreme Court on Monday that they will not be required to
defend against decades-old claims to disgorge short-swing profits.
In Credit Suisse Securities LLC v. Simmonds, the Supreme
Court unanimously overturned a lower court decision that would have
allowed shareholders to sue insiders for "short-swing"
profits under § 16(b) of the Securities Exchange Act of 1934
for an indefinite period of time so long as Forms 4 describing the
transactions were not filed, and regardless of whether the
plaintiff knew of the challenged conduct. The Supreme Court's
decision prevents significant erosion of § 16(b)'s statute
of limitations and provides officers and directors with some
protection against stale claims.
Section 16(b) imposes "strict liability" on any
officer, director, or beneficial owner of a public company who
realizes profits from the purchase and sale of the
corporation's securities within a six-month time period. This
"short-swing profits" rule allows shareholders to sue for
disgorgement of any profits realized in such a sale, whether the
transactions were conducted with any improper purpose or not. The
rule is intended to act as a broad prophylactic against the
"unfair use of information" by corporate insiders. A
well-organized plaintiffs' bar actively monitors public reports
of insiders' securities transactions in order to pursue such
disgorgement claims.
In 2007, Vanessa Simmonds filed 55 actions against the
underwriters of initial public offerings in the late 1990s and
2000. She alleged that corporate insiders and the underwriters
conspired to drive up the price of the securities in the
aftermarket, and as a result made short-term profits when they sold
their personal shares. Ms. Simmonds claimed that the defendants
should be forced to disgorge their profits to the issuers under
§ 16(b).
That statute, however, contains a two-year statute of
limitations that is triggered the day profits are realized.
Simmonds' claims were filed almost ten years after the
fact. As a result, the trial court dismissed her claims. On appeal,
the U.S. Court of Appeals for the Ninth Circuit reversed, holding
that the statute of limitations was tolled because the defendants
did not file Forms 4 reporting the sales. Although tolling is an
"equitable" doctrine that can delay a limitations period
where a reasonably diligent plaintiff could not have discovered the
underlying cause of action, the Ninth Circuit incongruously held
that it should apply regardless of whether "the plaintiff knew
or should have known of the conduct at issue."
In a short, direct, and unanimous opinion, the Supreme Court
reversed. The Court stressed that the Ninth Circuit's decision
was inconsistent with the express directive in the statute that the
two-year clock begins on "the date [the short-swing] profit
was realized"—not on the date a Form 4 is filed. The
court of appeals also ignored the essential requirements of the
equitable tolling doctrine that the plaintiff prove "(1)
that he has been pursuing his rights diligently, and (2)
that some extraordinary circumstances stood in his way."
According to the Supreme Court, the Ninth Circuit disregarded both
elements. Finally, the Court noted the court of appeals'
anomalous conclusion that extended the two-year limit even though
the plaintiff was so fully aware of her claim that she had filed
her complaint.
The Supreme Court's decision leaves open whether
§16(b)'s limitations period is a statute of repose that
imposes an absolute two-year deadline in every case and is never
subject to equitable tolling—even if the shareholder is
unaware of the claim. The eight members of the Court who heard the
case were equally divided on that question and did not decide it;
Chief Justice Roberts recused himself. If that issue reaches the
Court in the future, it could grant insiders even greater security
against belated short-swing profit suits. In the meantime,
opportunistic plaintiffs who seek to recover short-swing profits
from age-old securities transactions will find their claims barred
unless they can meet the rigorous requirements of the traditional
equitable tolling doctrine.
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