Most public pension funds are named plaintiffs in very few securities class actions. If a plaintiff with a bigger loss steps forward, most funds are content to remain “absentee” class members, secure in the knowledge that they can share in any eventual recovery or file their own case later if needed.
That ability to wait before deciding whether to file an individual complaint is made possible by something called “tolling” – a mechanism that suspends the deadlines by which purported class members’ claims must be filed. Until recently, a purported class action was presumed to protect the rights of those absentee class members.
Now, in a case with important implications for institutional investors, the U.S. Supreme Court has agreed to resolve an appeals court split as to whether the filing of a class action complaint does indeed trigger tolling for absentee class members of the statute of repose (the three-year period by which investors must bring suit under the 1933 Securities Act).
The appeal, Public Employees’ Retirement System of Mississippi v. IndyMac MBS, Inc., concerns investors in mortgage-backed securities issued by IndyMac Bancorp, Inc. The initial IndyMac complaint asserted class claims on behalf of investors in dozens of MBS offerings. But the lower court dismissed all claims related to offerings the lead plaintiffs did not purchase. In response, institutional investors that purchased dismissed offerings stepped forward to intervene. But the district court said those motions as untimely because they were filed more than three years after the securities were offered and, hence, time-barred under the statute of repose.
On appeal to the Second Circuit Court of Appeals, investors invoked the Supreme Court’s 1974 decision in American Pipe & Construction Co. v. Utah, which held that the filing of a timely class action suspends, or tolls, the statute of limitations for anyone who would have been a member of the class. Investors argued that American Pipe tolling should extend to statutes of repose. But the Second Circuit disagreed, holding that the filing of the initial complaint did not toll the statute of repose for absentee class members.
Berman DeValerio represents the Wyoming Retirement System and the Wyoming State Treasurer’s Office as lead plaintiffs in the IndyMac class action, as well as the Los Angeles County Employees Retirement Association, one of the parties before the Supreme Court.
If the Supreme Court sides with the Second Circuit, institutional investors may be forced to file “protective” appearances in many class actions – or risk finding out later that their claims are time-barred. At the very least, they will need to track statute of limitations in cases that impact them. And, if their losses are too small to warrant suing on their own, they may find themselves flat out of luck if a judge rules that their purchases are outside the class.
The Supreme Court has the opportunity to preserve an important investor protection jeopardized by the Second Circuit. It would defeat the point of having class actions if every investor potentially affected were forced to spend the time and money necessary to analyze each pending claim – and to file duplicative complaints and appearances at the outset of the case to preserve their rights. Such “protective” filings would create additional work for investors, clog already overburdened courts and eliminate the types of procedural efficiencies class actions were designed to create.
A ruling is expected by mid-2015.
*In August 2017, our firm name changed to Berman Tabacco. Case references and content published before that date may refer to the firm under our prior name, Berman DeValerio.