United States: 2017 Year In Review: Securities Litigation And Regulation

The securities litigation and regulatory landscape in 2017 defies simple categorization. Plaintiffs filed 226 new federal class actions in the first half of 2017, more than double the average rate over the last 20 years,1 and an additional 99 federal class actions in the third quarter of 2017.2 In contrast, new SEC enforcement proceedings declined. After staying on pace with the prior two years with 45 new enforcement actions against public company-related defendants in the first half of fiscal year 2017, the SEC filed only 17 new enforcement actions against public company-related defendants in the second half of the year.3 The apparent decrease in initiation of enforcement proceedings coincides with the arrival at the SEC of Chairman Walter J. Clayton, who has expressed the view that enforcement actions against issuers rather than individual wrongdoers too often punish the very investors they seek to protect.4

Amidst this activity, there were a number of important legal and regulatory developments, including in the following areas:

  • Statutes of Limitations and Repose: The Supreme Court held that the SEC's disgorgement remedy is subject to a five-year statute of limitations, and that a pending class action does not toll the three-year statute of repose under the Securities Act of 1933 (the "Securities Act") for opt-out plaintiffs.
  • Class Actions: The Second Circuit held that questions regarding whether activity in the U.S. warrants application of the federal securities laws under Morrison may constitute individual issues that defeat the "predominance" requirement for class certification. The Second Circuit also approved the use of indirect evidence of market efficiency in evaluating whether the fraud-on-the-market presumption applies for purposes of certifying a class action asserting a claim under Section 10(b) of the Securities Exchange Act of 1934 ("Exchange Act"). The Supreme Court granted certiorari in a case that will require it to decide whether state courts retain concurrent jurisdiction over securities claims covered by the Securities Litigation Uniform Standards Act of 1998 ("SLUSA").
  • Securities Fraud: The Second Circuit confirmed the operative test to determine the materiality of an omission of interim financial information, and also held that national securities exchanges may face liability in private securities litigation. The Ninth Circuit extended the Omnicare test for determining when statements of opinion are actionable to Section 10(b) claims. The United States District Court for the District of Utah held that, in actions brought by the SEC, Section 10(b) of the Exchange Act and Section 17(a) of the Securities Act should be applied to extraterritorial transactions to the extent that the "conduct and effects" test can be satisfied.
  • Insider Trading: Following the Supreme Court's decision in Salman v. United States, the Second Circuit held that a gift of insider information may be illegal even if the tipper lacks a meaningfully close relationship with the tippee.
  • Indemnification: The United States District Court for the Southern District of New York held that public policy prohibits an underwriter from seeking contractual indemnification of settlement costs from an issuer unless the underwriter has demonstrated that it was without fault.
  • Whistleblower Actions: The Supreme Court granted certiorari to consider whether whistleblowers who report securities law violations to their internal managers, not to the SEC, are entitled to utilize the anti-retaliation protections in the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act").
  • Securities Regulation and Enforcement: The SEC determined that certain applications of distributed ledger or blockchain technology, such as bitcoin and similar "coins," can be securities subject to regulation under the federal securities laws. The new leadership focused the SEC's enforcement priorities on cybersecurity, protecting retail investors, and pursuing individual violators, and attempted to cure doubts about the authority of its Administrative Law Judges. The House of Representatives passed the Financial CHOICE Act, which would require changes to many aspects of SEC enforcement practices.

I. Statutes of Limitations and Repose

A. SEC Disgorgement Remedy Subject to Five-Year Statute of Limitations

In Kokesh v. SEC,5 the Supreme Court held that the SEC's ability to seek disgorgement as a remedy in an enforcement action is subject to a five-year statute of limitations under 28 U.S.C. § 2462, which provides that "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."6 In 2009, the SEC brought an enforcement action against Charles Kokesh in the United States District Court for the District of New Mexico, alleging that Kokesh misappropriated $34.9 million from two investment firms that he operated. Following a jury verdict in favor of the SEC, the District Court entered a permanent injunction enjoining Kokesh from violating certain provisions of the federal securities laws, imposed a civil penalty, and ordered disgorgement of profits. Although the District Court limited recovery of the civil penalty to funds Kokesh received within five years of the SEC's filing of its complaint, the Court ordered full disgorgement of $34.9 million in ill-gotten gains, holding that the five-year statute of limitations under 28 U.S.C. § 2462 does not apply to disgorgement because it is not a "civil fine, penalty, or forfeiture."7 The Tenth Circuit affirmed the District Court's judgment with respect to disgorgement.

The Supreme Court reversed in an unanimous decision, holding that disgorgement is a "penalty" under 28 U.S.C. § 462. The Court explained that the purpose of disgorgement, to deter future violations by requiring the forfeiture of profits from securities violations, is "inherently punitive."8 The remedy is not compensatory in nature because, when it seeks disgorgement, the SEC does so on behalf of the public at large, rather than on behalf of "an aggrieved individual,"9 and profits are paid to the district court," not to victims.10 Thus, the Court ruled that the SEC may not seek disgorgement for misappropriation that occurred more than five years before the SEC filed its complaint.11

Kokesh further limits the remedies available to the SEC outside the five-year limitations period set forth in 28 U.S.C. § 462, which the Supreme Court previously held applies to statutory monetary penalties.12 Kokesh likely will have several important effects in SEC enforcement actions, including potentially reducing the SEC's leverage in settlement negotiations, limiting investigations involving older conduct, and motivating the SEC to seek tolling agreements to extend the limitations period as much as possible. Steve Peikin, Co-Director of the Division of Enforcement, remarked that, in light of Kokesh, the SEC "[has] no choice but to respond by redoubling our efforts to bring cases as quickly as possible."13 The SEC also may attempt to seek remedies other than disgorgement in order to avoid the potential preclusive effect of the five-year limitations period. For example, post-Kokesh, the Eighth Circuit held that a permanent injunction enjoining the defendant from future violations of the securities laws was not a "penalty" under 28 U.S.C. § 462 because "[t]he historic injunctive process was designed to deter, not to punish."14

B. Statute of Repose Not Tolled Under American Pipe

In California Public Employees Retirement System v. ANZ Securities, Inc.,15 the Supreme Court held that the American Pipe doctrine does not toll the three-year statute of repose under Section 13 of the Securities Act.

In 2008, investors brought a putative class action asserting claims under Section 11 of the Securities Act against Lehman Brothers Holdings Inc. in the United States District Court for the Southern District of New York. The plaintiffs alleged that the Lehman Brothers' registration statement for certain securities offerings contained material misstatements and omissions. California Public Employees Retirement System ("CalPERS") opted out of a subsequent class settlement and in 2011 filed an individual action against Lehman Brothers in the Northern District of California. Lehman Brothers moved to dismiss the individual action, arguing that the claims were untimely under the three-year statute of repose since the registration statements containing the alleged misstatements were filed in 2007 and 2008. CalPERS countered that the three-year time bar was tolled under American Pipe, in which the Supreme Court ruled that the statute of limitations for individual claims of absent class members may be tolled on equitable grounds while a timely-filed class action is pending.16 The District Court rejected the tolling argument and dismissed CalPERS' individual action as untimely. The Second Circuit affirmed.

The Supreme Court granted certiorari and affirmed. The Supreme Court distinguished American Pipe, explaining that the equitable justifications for tolling a statute of limitations are not applicable to statutes of repose such as Section 13. Unlike a statute of limitations, which "[is] designed to encourage plaintiffs to pursue diligent prosecution of known claims,"17 the "object of a statute of repose, to grant complete peace to defendants, supersedes the application of a tolling rule based in equity."18 "[T]he text, purpose, structure, and history of [Section 13] all disclose the congressional purpose to offer defendants full and final security after three years."19 As a statute of repose, Section 13 "displaces the traditional power of courts to modify statutory time limits in the name of equity."20

ANZ should incentivize larger stockholders to file individual actions under Section 11 relatively soon after a class action complaint is filed. The impact of ANZ may be limited, however, given that several circuits (including the Second Circuit, Sixth Circuit, and Eleventh Circuit) previously had held that the three-year statute of repose is not tolled under American Pipe.21 For average investors, moreover, the costs of filing individual actions will continue to far outweigh the benefits, muting concerns that ANZ will open the "floodgates" to individual securities fraud actions.

To view the full article click here


1 Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse, Securities Class Action Filings: 2017 Midyear Assessment, https://www.cornerstone.com/Publications/Reports/Securities-Class-Action-Filings-2017-Midyear-Assessment.

2 Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse, Securities Class Action Filings: 2017 Q3, https://www.cornerstone.com/Publications/Research/Securities-Class-Action-Filings-2017-Q3.

3 Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse, Sec Enforcement Activity: Public Companies and Subsidiaries, https://www.cornerstone.com/Publications/Reports/SEC-Enforcement-Activity-2017-Update.

4 See Hearing Before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, Nomination of Jay Clayton, S. Hrg. 115-9 (Mar. 23, 2017) ("There should be deterrence at the company level [but] shareholders do bear those costs . . . . I firmly believe that individual accountability drives behavior more than corporate accountability.").

5 137 S. Ct. 1635, 1638-44.

6 28 U.S.C. § 2462

7 137 S. Ct. at 1643-44.

8 Id. at 1641.

9 Id. at 1643.

10 Id. at 1644.

11 Id.

12 See Gabelli v. SEC, 568 U.S. 442, 454 (2013).

13 Steven R. Peikin, Co-Director, Enforcement Division, "Reflections on the Past, Present, and Future of the SEC's Enforcement of Foreign Corrupt Practices Act," https://www.sec.gov/news/speech/speech-peikin-2017-11-09.

14 SEC v. Collyard, 861 F.3d 760, 764 (8th Cir. 2017) (citation omitted).

15 137 S. Ct. 2042, 2049-55 (2017).

1 American Pipe & Constr. Co. v. Utah, 414 U.S. 538, 556 (1974).

17 137 S. Ct. at 2049.

18 Id. at 2052.

19 Id.

20 Id. at 2055.

21 See Police & Fire Ret. Sys. of City of Detroit v. IndyMac MBS, Inc., 721 F.3d 95 (2d Cir. 2013); Stein v. Regions Morgan Keegan Select High Income Fund, Inc., 821 F.3d 780 (6th Cir. 2016); Dusek v. JPMorgan Chase & Co., 832 F.3d 1243, 1249 (11th Cir. 2016).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions