Sarbanes’ Statute of Limitations/Repose Applies to Investment Advisors Act Claims, At Least Where Fraud Is Alleged and Probably Always
The plaintiff in Thomas v Met. Life Ins. Co., 2008 U.S. Dist. LEXIS 82201 (W.D. Okla. Oct. 16, 2008), a putative class action, brought suit alleging material omissions under §§ 206 and 215 of the Investment Advisors Act of 1940 ("the IAA"), 15 U.S.C. § 80b-5 — namely, the alleged failure to disclose conflicts of interest created by MetLife's commission structures, fees, job-retention policies and other incentives which allegedly motivated MetLife representatives “to think first of their own financial interest in maximizing their sales of MetLife's proprietary products.” If the pre-Sarbanes Oxley statute of limitations/repose applied, the case was time barred; if not, not:
***MetLife first contends that this action is barred by the applicable statute of repose because it was filed on January 31, 2007, more than three years after the Thomases purchased the life insurance policy in question.... This argument depends upon the validity of MetLife's argument that the extended periods for filing suit provided for by Sarbanes-Oxley do not apply to the Thomases' breach of fiduciary duty claims because such IAA claims do not require proof of fraud. The Thomases disagree, arguing that the extended Sarbanes-Oxley limitations and repose periods apply to all IAA claims regardless of whether proof of fraud is required to support those claims. Additionally, the Thomases argue that Sarbanes-Oxley certainly applies to the Thomases' claims in this action because the Thomases' claims are supported with allegations of fraudulent conduct. ***
In Kahn [v. Kohlberg, Kravis, Roberts & Co., 970 F.2d 1030, 1039 (2d Cir. 1992)], the Second Circuit adopted the federal Securities Acts, rejecting state laws and other federal laws as sources for IAA limitations and repose periods.... Kahn concluded that, "[T]he one/three year period used in the Securities Acts is the most appropriate [for IAA claims] since it reflects the accepted balancing of the same interests and is consistently applied to claims posing the similar factual and legal issues [as those posed by claims under the IAA]." ... The plaintiffs in Kahn had argued that the one- and three-year periods of the federal securities laws should only apply to fraud-based securities claims, and not to plaintiffs' IAA claims which focused on the investment adviser's fiduciary duty and imposed a stricter standard of conduct.... Kahn rejected the plaintiffs' arguments, siding with the defendants in that case, who argued that the limitations and repose periods from the federal Securities Acts should apply. ...[T]he desire for consistency, and the similarity of purpose between the Securities Acts and the IAA, provided much of the rationale for borrowing the one- and three-year periods from the federal Securities Acts. This court agrees that consistency is important when determining limitations and repose periods for IAA claims.
This court is not persuaded by MetLife's district court authorities cited for the proposition that the limitations and repose periods of Sarbanes-Oxley do not apply to IAA claims because the IAA does not require proof of fraud. MetLife relies on Phoenix Four, Inc. v. Strategic Resources Corp. , 2006 WL 399396, *6-8 (S.D.N.Y. 2006) and Kleinman v. Oak Associates, Ltd., 2007 WL 2071968, *2-3 (N.D. Ohio 2007). Phoenix Four applied the pre-Sarbanes-Oxley one- and three-year periods based on the fact that Kahn applied those same periods, with no discussion of the fact that Sarbanes-Oxley had not been enacted when Kahnwas decided, and with no discussion of the rationale applied in Kahn.... Kleinman, in turn, cites to Phoenix.... Although Kleinman notes that Kahn was decided pre-Sarbanes-Oxley, Kleinman does not discuss whether, had Kahn been decided after Sarbanes-Oxley, the Second Circuit would have applied the extensions of Sarbanes-Oxley to all IAA claims in the interest of consistency. MetLife also relies on Norman v. Salomon, 350 F. Supp. 2d 382 at 391, for the proposition that IAA claims are not necessarily fraud claims, because the IAA's purpose is much broader, reflecting congressional intent to eliminate and expose conflicts of interest on the part of investment advisors. In the portion of the Norman decision that addresses limitations issues, however, Norman notes the parties' agreement that the IAA claims were governed by the two- and five-year extended limitations and repose periods provided by Sarbanes-Oxley Act....
Some courts have applied the expanded two- and five-year Sarbanes-Oxley periods to IAA claims, in varying circumstances, without discussion. See Broadhead Ltd. Partnership v. Goldman, Sachs & Co., 2007 WL 951623 at *6 (E.D. Tex. 2007) ("[T]he Sarbanes-Oxley Act requires a plaintiff to bring a claim for violation of the [IAA] within five years after the violation or two years after discovery of the violation, whichever is earlier."). And see Flood v. Makowski, 2004 WL 1908221 at *32 (M.D. Pa. 2004) ("[T]he IAA does not contain an express statute of limitations. However, the Sarbanes-Oxley Act of 2002...created a statute of limitations applicable to the IAA."). Other courts have assumed, for purposes of discussion only, that Sarbanes-Oxley may apply to IAA claims. See, e.g., Wuliger v. Anstaett, 363 F. Supp. 2d 917, 932-33 (N.D. Ohio 2005) ("Assuming arguendo that Sarbanes-Oxley applies to some of the Receiver's claims under the IAA, application of the two year state of limitations...still places this claim outside the applicable limitations period.").
Finally, although it may or may not be advisable to make the applicability of certain limitations or repose periods dependent upon the specific nature of the IAA claims alleged, fraudulent conduct is repeatedly alleged in this action in support of plaintiffs' breach of fiduciary theory of liability....
Held, “the extended time periods of Sarbanes-Oxley apply to the Thomases' claims, extending the period within which suit could be commenced to the earlier of two years from the date of discovery of the conduct in issue or five years from the date of the Thomases' purchase of the insurance policy.... The applicable period of repose is five years under Sarbanes-Oxley, and this action was brought within that five-year period.”
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