One of the core benefits of class action litigation is that one lead plaintiff can pursue an action for the benefit of a large group of similarly-situated persons. For decades, non-named, so-called “absentee” class members could sit back and allow the named plaintiffs to litigate on their behalf. If the absentee class members were happy with the case progression and/or any settlement, they could participate, but if they were dissatisfied they could exercise their right to “opt out” of the class and pursue claims individually. Unfortunately, within the U.S. Court of Appeals for the Second Circuit, that has changed.
As we have written about in the past, in Police and Fire Retirement System of the City of Detroit v. IndyMac MBS, Inc., No. 11-2998 (2d Cir. June 27, 2013) (“IndyMac“), the Second Circuit held that the three-year statute of repose, contained in the Securities Act of 1933, could not be tolled during the pendency of the class action. (A statute of repose extinguishes a claim after a certain time period by cutting off the right to sue, even if a potential claim has yet to accrue.) Although Indy Mac conflicts with Tenth Circuit law, the Supreme Court refused to address this conflict, leaving IndyMac the controlling law in the Second Circuit.
As predicted, the IndyMac decision is leading to harsh and inequitable results, especially for cases pending in Connecticut, Vermont and New York (where a significant number of securities class actions are filed). Lower courts have expanded the IndyMac ruling beyond the context of the 1933 Act to encompass other securities class action claims under the Securities Exchange Act of 1934 and have also used the ruling to dismiss “opt out” actions.
Two recent cases show just how dangerous the IndyMac decision can be for investors.
AIG
The first case stems from a class action filed in May 2008, suing American International Group, Inc. (“AIG”) and other individual defendants in connection with alleged misleading statements made by AIG concerning its exposure to the U.S. subprime residential mortgage market prior to the financial market meltdown in 2008. In 2014, the class action settled for $970.5 million and received final approval earlier this year. Certain shareholders opted out of the settlement class to file their own individual complaints against the defendants. The case is captioned Kuwait Investment Office, et al. v. American International Group, Inc., et al., No. 11-cv-8403 (S.D.N.Y. Sept. 10, 2015).
Responding to the opt-out complaints, AIG and other defendants moved to dismiss many of the claims, arguing that the current opt-out claims were time barred under the reasoning of IndyMac. Raising several arguments to distinguish their claims, the opt-out plaintiffs were unsuccessful in avoiding the application of the IndyMac decision. Specifically, the opt-out plaintiffs first argued that IndyMac did not preclude tolling in their action because complaints had been filed in the instant case, as opposed to the motions to intervene that were filed in IndyMac. However, the AIG district judge soundly rejected this argument noting that the Second Circuit made no distinction between complaints and intervention motions in IndyMac. Next, the judge rejected the opt-out plaintiffs’ contention that the effective date for the filing of their action was the date the class action was filed (and tolling was therefore irrelevant), finding that an opt-out plaintiff is no longer a member of the certified class and cannot benefit from the original filing date. Finally, the judge rejected the assertion that IndyMac was wrongly decided and that the court should follow the authority of the Tenth Circuit, which found that tolling applied to the statute of repose. Denying the opt-out plaintiffs’ request to rule contrary to the Second Circuit, the judge held, “IndyMac is the controlling authority in this Circuit and requires the Court to reject Plaintiffs’ contrary lines of reasoning.” Based on its application of IndyMac, the AIG court dismissed numerous claims under the Securities Act of 1933 and Securities and Exchange Act of 1934 as untimely.
Bear Stearns
The Second Circuit now faces an identical issue in SRM Global Limited Partnership v. Bear Stearns Companies L.L.C., 14-507 (2d Cir.) (“Bear Stearns“). Just last month, the Second Circuit heard oral argument on whether and how the IndyMac decision should affect opt-out claimants.
Bear Stearns collapsed in March of 2008. Shortly thereafter, an initial class action case was filed and vigorously litigated for several years. The case settled in May of 2012 for $294.9 million. Class members received notice of the settlement, but one hedge fund, SRM Global Master Fund Limited Partnership (“SRM”), exercised its right to opt out of the settlement in August of 2012. SRM filed its own complaint in April, 2013.
The Bear Stearns defendants filed a motion to dismiss, arguing that SRM’s claims were untimely because they were not filed until April 2013, more than five years after the transactions at issue and the collapse of Bear Stearns. SRM argued that its claims were tolled during the pendency of the initial class action; however, the district court disagreed and held that under IndyMac the statute of repose could not be tolled. SRM appealed to the Second Circuit and oral argument was held August 30, 2015. A decision is expected in the next few months.
Conclusion
As these corollary cases demonstrate, the risks are exceedingly high for investors, who previously could remain safely on the sidelines while a securities class action was being litigated. Most institutional investors have no interest in rushing to court in cases where their interests are already being adequately protected, but IndyMac is now forcing those absentee class members to remain diligent throughout pending litigation to ensure that they properly preserve their right to opt out of pending class actions. In Bear Stearns, the Second Circuit has the chance to narrow the impact of IndyMac, but in the meantime, institutional investors must closely monitor pending class actions, even from the sidelines.