Securities — Is There a Continuing Fraud Exception to the Statute of Repose? Caselaw Split

Carlucci v. Han, 886 F. Supp. 2d 497 (E.D. Va. 2012):

1. Section 10(b) Claim

Section 10(b) claims are subject to a two-year statute of limitations and a five-year statute of repose. 28 U.S.C. § 1658(b). A statute of limitations is "[a] law that bars claims after a specified period; specif[ically], a statute establishing a time limit for suing in a civil case, based on the date when the claim accrued." Black's Law Dictionary 1450-51 (8th ed. 2004). It is often subject to a "discovery rule," meaning that it does not begin to run until the plaintiff is aware (or should be aware) of his claim. By contrast, a statute of repose is "[a] statute barring any suit that is brought after a specified time since the defendant acted." Id. at 1451. The statute of repose serves as a fixed "cutoff," and is not subject to equitable tolling. Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 363, 111 S. Ct. 2773, 115 L. Ed. 2d 321 (1991). The Court will consider the statute of repose and the statute of limitations separately.

a. Statute of Repose

The statute of repose for a Section 10(b) claim "starts to run on the date the parties have committed themselves to complete the purchase or sale transaction." Arnold v. KPMG LLP, 334 F. App'x 349, 351 (2d Cir. 2009); see also Stichting Pensioenfonds ABP v. Countrywide Fin. Corp., 802 F. Supp. 2d 1125, 1134 (C.D. Cal. 2011). Here, Carlucci filed suit on April 24, 2012. Defendants argue that because Carlucci purchased eight notes prior to April 24, 2007, his Section 10(b) claim — to the extent it is based on those notes — is barred by the statute of repose.

Carlucci responds that his Section 10(b) claim is timely as to all of the notes he purchased under the "continuing fraud exception." (Opp'n [Dkt. 32] 12.) Under this exception, a plaintiff may not assert a claim more than five years after a defendant's final violation of Section 10(b). Goldenson v. Steffens, 802 F. Supp. 2d 240, 259 (D. Me. 2011). But, "when a defendant has committed a violation within the repose period, it allows a plaintiff to hold the defendant accountable for previous violations that are part of the same scheme." Id. District courts in the First Circuit have applied the continuing fraud exception to Section 10(b)'s statute of repose, while district courts in the Fifth and Ninth Circuits have rejected it. District courts in the Second Circuit are split.

Footnote 9. Carlucci cites one case claiming that "the weight of authority, including in t[he] [Second] Circuit, dictates that the five year statute of repose first runs from the date of the last alleged misrepresentation regarding related subject matter." See Plymouth Cnty. Ret. Ass'n v. Schroeder, 576 F. Supp. 2d 360, 378 (E.D.N.Y. 2008). This claim is dubious, given that another judge in the Eastern District of New York has stated the opposite. See In re Comverse Tech., Inc. Sec. Litig., 543 F. Supp. 2d 134, 155 (E.D.N.Y. 2008) ("The weight of authority in this circuit is skeptical of the application of the continuing violations doctrine in securities fraud cases.") (collecting cases). It is further belied by the number of cases in the Fifth and Ninth Circuits rejecting the continuing fraud exception. See, e.g., Wolfe v. Bellos, No. 3:11-cv-02015, 2012 U.S. Dist. LEXIS 26452, 2012 WL 652090, at *6 (N.D. Tex. Feb. 28, 2012); Betz v. Trainer Wortham & Co., Inc., 829 F. Supp. 2d 860, 864 (N.D. Cal. 2011); In re Brocade Commc'ns Sys. Derivative Litig., 615 F. Supp. 2d 1018, 1035 (N.D. Cal. 2009); Engel v. Sexton, Nos. 06-10447, 06-10547, 07-116, 2009 U.S. Dist. LEXIS 12778, 2009 WL 361108, at *15 (E.D. La. Feb. 11, 2009); In re Maxim Integrated Prods., Inc. Derivative Litig., 574 F. Supp. 2d 1046, 1071 (N.D. Cal. 2008); In re Affiliated Computer Servs. Derivative Litig., 540 F. Supp. 2d 695, 701 (N.D. Tex. 2007); In re Zoran Corp. Derivative Litig., 511 F. Supp. 2d 986, 1014 (N.D. Cal. 2007); Clayton v. Landsing Pac. Fund, Inc., No. 01-3110, 2002 U.S. Dist. LEXIS 9446, 2002 WL 1058247, at *2-3 (N.D. Cal. May 9, 2002). <

The Court agrees with those courts rejecting application of the continuing fraud exception to Section 10(b)'s statute of repose. Such an exception is akin to a "continuing violation or fraudulent concealment theory premised on equitable tolling." Wolfe v. Bellos, No. 3:11-cv-2015, 2012 U.S. Dist. LEXIS 26452, 2012 WL 652090, at *6 (N.D. Tex. Feb. 28, 2012); see also Clayton v. Landsing Pac. Fund, Inc., No. 01-3110, 2002 U.S. Dist. LEXIS 9446, 2002 WL 1058247, at *3 (N.D. Cal. May 9, 2002) (rejecting continuing fraud exception under the rationale that "[plaintiffs] are trying to dress an equitable tolling argument in new clothing to avoid the harsh result that the Lampf rule requires" (quoting Durning v. Citibank, Int'l, 990 F.2d 1133, 1136 (9th Cir. 1993))). The Supreme Court has made clear, however, that Section 10(b)'s statute of repose is not subject to equitable tolling. Lampf, 501 U.S. at 363.

Footnote 10. The Fourth Circuit does not appear to have addressed this issue in the context of Section 10(b), but it has rejected the notion that a continuing violation theory tolls the statute of repose set forth in Section 13 of the '33 Act. See Caviness v. Derand Res. Corp., 983 F.2d 1295, 1301-02 (4th Cir. 1993). In support of its conclusion, the court cited Lampf's treatment of the "similar" limitation provisions under the '34 Act. Id.

The "unqualified" nature of the statute of repose was recently reaffirmed in Merck & Co., Inc. v. Reynolds, ___ U.S. ___, 130 S.Ct. 1784, 1797, 176 L. Ed. 2d 582 (2010). In that case, the defendant expressed concern that the Supreme Court's interpretation of the statute of limitations (discussed below) would give life to stale claims or subject defendants to liability for actions taken long ago. Id. The Supreme Court's response was that the statute of repose, which gives defendants "total" repose after five years, should assuage that fear. Id. Of course, if the continuing fraud exception were potentially applicable, the statute of repose would function much like a statute of limitations, and would not provide defendants with the sort of closure described by the Supreme Court.

In short, the Court rejects Carlucci's invitation to adopt the continuing fraud exception and, in effect, circumvent the Supreme Court's clear dictate that the statute of repose is an unqualified bar that may not be equitably tolled. Accordingly, Carlucci's Section 10(b) claim is barred by the statute of repose to the extent it is based on notes purchased prior to April 24, 2007.

b. Statute of Limitations

Defendants also argue that Carlucci's Section 10(b) claim is barred in part by the statute of limitations. As noted above, the statute of limitations on a Section 10(b) claim is two years. The Supreme Court recently held that the limitations period begins to run once the plaintiff discovers, or a reasonably diligent plaintiff would have discovered, the facts constituting the violation. Merck, 130 S.Ct. at 1798. Moreover, "facts showing scienter are among those that constitute the violation." Id. at 1796 (internal quotation marks and alteration omitted). In so holding, the Supreme Court expressly rejected "inquiry notice" as the relevant standard for Section 10(b) claims, stating that "the discovery of facts that put a plaintiff on inquiry notice does not automatically begin the running of the limitations period." Id. at 1798. In other words, "the limitations period commences not when a reasonable investor would have begun investigating, but when such a reasonable investor conducting such a timely investigation would have uncovered the facts constituting a violation." City of Pontiac Gen. Emps.' Ret. Sys. v. MBIA, Inc., 637 F.3d 169, 174 (2d Cir. 2011).

Footnote 11. Oddly, Defendants cite Merck for the proposition that the limitations period does not begin to run until discovery of the facts constituting the violation (including facts showing scienter), but then immediately apply the inquiry notice standard that Merck expressly rejected. (Defs.' Mem. [Dkt. 11] 8-9.) Defendants' reliance on inquiry notice reflects a fundamental misunderstanding of Merck.

Incorrectly applying inquiry notice as the relevant standard, Defendants reason that the limitations period commenced on June 1, 2007 (the maturity date of the April 1, 2007 note) because on that date Carlucci did not receive his promised payment and should have conducted a reasonable investigation to discover the facts underlying the fraud alleged. (Defs.' Mem. [Dkt. 11] 8-9.) They proceed to argue that Carlucci's Section 10(b) claim is therefore barred by the statute of limitations to the extent it is based on notes issued prior to April 24, 2010 (two years before he filed suit). (Defs.' Mem. 9.) However, Defendants fail to demonstrate, in accordance with Merck, that on June 1, 2007, Carlucci discovered, or a reasonably diligent plaintiff would have discovered, the facts constituting a violation of Section 10(b). Indeed, cases applying Merck have rejected the notion that poor performance of an investment is in itself sufficient to commence the limitations period. See In re Bear Stearns Mortgage Pass-Through Certificates Litigation, 851 F. Supp. 2d 746, 2012 U.S. Dist. LEXIS 45679, 2012 WL 1076216, at *15 (S.D.N.Y. Mar. 30, 2012) (finding that downgrade history of mortgage-backed securities did not convey facts sufficient to plead '33 Act claims, and hence did not trigger the statute of limitations). When Carlucci's Section 10(b) claim accrued is not clearly apparent on the face of the Complaint. As such, the Court rejects Defendants' argument that the Section 10(b) claim is barred in part by the statute of limitations.

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