Cert Granted in Section 16 Case

By Cydney Posner

It's hard to imagine, but yesterday, The Supreme Court granted cert in a Section 16(b) case.  (How long has it been since that happened??) Unfortunately, the SCt is not going to consider whether to do away with Section 16 altogether. No, it's about the applicable statute of limitations. Here is the question presented:

"Whether the two-year time limit for bringing an action under Section 16(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78p(b), is subject to tolling, and, if so, whether tolling continues even after the receipt of actual notice of the facts giving rise to the claim."

Here's the background and some analysis from The D&O Diary.

"The Ninth Circuit, following its own prior precedent, held that the two-year statute operates as a "notice" statute, and the running of the statute is tolled until there has been adequate disclosure of the trade. Because the statute begins to run only when the defendant files a Section 16(a) disclosure statement, and because the defendants did not file a Section 16(a) statement, the Ninth Circuit held that the claims are not time-barred.

"In an unusual twist, Judge Smith, the author of the opinion for the three judge panel, added an additional opinion "specially concurring" in the result and expressing his view that the two-year statute of limitations is a statute of repose, and that were it not for the prior Ninth Circuit precedent on which the court relied in deciding this case, he would have voted that the Section 16(b) cases could not be brought more than two years after the short-swing trades took place.

"The defendants affected by the Court's ruling on the statute of limitation filed a petition for a writ of certiorari with the United States Supreme Court and on June 27, 2011, the Court granted the petition….

"The Court has only just accepted this case and it has not yet been briefed, much less argued. The Supreme Court does not explain why it takes up the cases it takes up. But I have to say that it doesn't seem very likely that the Supreme Court took up this case to affirm the Ninth Circuit's holding. I have no idea how five or more votes on this case will line up, but if I had to predict I would guess that the Court will say that two-year statute of limitations in Section 16(b) operates as a statute of repose.

"It seems that Judge Smith's unusual appended opinion specially concurring in the holding but in effect dissenting from the Ninth Circuit's precedent operated like an entreaty to the Supreme Court to clean up the situation.

"The one wild card is that Chief Justice Roberts may not participate in this case. The Court's June 27 order specifies that Roberts did not participate in consideration of the cert petition. He may be conflicted out, perhaps as a result of his prior activities while in private practice. If Roberts does not participate, the conservative majority that lined up together this past term on the Janus Capital (refer here) and Wal-Mart Stores case (here) may not be able to put together the five votes to control the outcome. In which case, the outcome of the Supreme Court review may be too close to call."

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