On March 10th, the U.S. Supreme Court agreed to consider whether the three-year window for filing a securities claim is suspended if investors can prove that they would have been plaintiffs in a previous class action, had it not been dismissed. The case at issue in front of the Court is Public Employees’ Retirement System of Mississippi v. IndyMac MSB Inc., et. al., a mortgage-backed securities class action.
Plaintiffs brought the putative class action in 2009, alleging that IndyMac sold certificates backed by bad residential mortgage loans. However, after appointing the Wyoming Retirement System as the lead plaintiff, the court ruled in 2010 that the Retirement System lacked standing to bring certain claims. Accordingly, the Public Employees’ Retirement System of Mississippi (MissPERS) and others sought to intervene to take its place. MissPERS’s request for intervention, however, was denied by the trial court because more than three years had by then passed since the certificates were issued.
MissPERS appealed the decision, citing American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974). American Pipe held that the commencement of the original class suit tolls the running of the statute of limitations for all purported class members who make timely motions to intervene. This tolling doctrine was designed to keep identical lawsuits from clogging the courts. American Pipe has been applied in countless class actions as an accepted practice to ensure that absent class members have fair opportunities to litigate their claims.
Despite the historical precedent–and the Supreme Court’s explicit instruction that the pendency of a class action tolls the statute of limitations until class certification has been denied–the U.S. Court of Appeals for the Second Circuit upheld the lower court’s ruling. According to the Second Circuit, the Rules Enabling Act provides that the Federal Rules of Civil Procedure, “shall not abridge, enlarge or modify any substantive right,” and forbids interpreting Rule 23 as tolling a statute of repose.
The Second Circuit’s ruling is important for a number of reasons. First, that circuit hears the lion’s share of securities class actions–nearly double the number of such cases at the next highest circuit. With more than 200 securities class actions filed in the Second Circuit each year, there are hundreds of thousands, if not millions, of investor claims at stake here, along with more than $200 billion in losses.
Second, defendants in securities class actions will likely urge other courts to adopt the Second Circuit’s reasoning, and should that happen, investors will have to act preemptively and start filing their own individual suits or motions to intervene in the event that a court denies certification and the “repose” period has expired. This behavior, in turn, will flood the federal and state courts with protective suits and motions, which is precisely the situation the Court sought to avoid with American Pipe.
And third, one of the main purposes of class action litigation is to enable the pooling of resources to make it cost-effective to hold defendants accountable. Failing to permit tolling will either increase individual costs or impede the litigation of worthy claims because plaintiffs won’t be able to rely on other plaintiffs to represent their interests.
The Supreme Court will hear oral arguments and issue a decision in its next term, which begins in October and ends in June 2015.
–Mary Ellen Egan