December 13, 2004
Statutes of Limitations Under Sarbanes-Oxley: Some Current Issues and Recent CaselawI. Introduction
In July 2002, Congress passed the Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 745 (codified in scattered sections of 11, 15, 18, 28 and 29 of the U.S. Code). Among a host of provisions providing for expanded obligations of directors and outside auditors, new filing and certification requirements, including attendant civil and criminal penalties for violations, etc., Congress made provision for a new, extended statute of limitations. Far from clarifying the situation, the new provision has spawned a new area of litigation and a host of issues which the courts are in the process of resolving -- at times, somewhat inconsistently -- or can be expected to confront. This outline examines some of the recent decisions and key issues facing the courts and practitioners.
II. The Pre-Sarbanes-Oxley Statute of Limitations Landscape for Securities Law Claims
A. Claims Under the Securities Act of 1933
1. Claims can be stated for conduct not involving fraud, including strict liability for issuers and negligence claims against officers, directors and others. Securities Act of 1933 [the “Securities Act”], 15 U.S.C. Section 77a, et seq., at Sections 11 (15 U.S.C. Section 77k) and 12 (15 U.S.C. Section 77l). See, e.g., Rombach v. Chang, 355 F.3d 164, 169 n.4 (2d Cir. 2004) (“Neither Section 11 nor Section 12(a)(2) requires that plaintiffs allege the scienter or reliance elements of a fraud cause of action”); In re WorldCom, Inc. Sec. Litig., 2004 U.S. Dist. LEXIS 11696, *9 (S.D.N.Y. June 29, 2004) (Section 11 “imposes strict liability on issuers for the accuracy of statements in issuing documents”); In re Qwest Communications Int’l Sec. Litig., 2004 U.S. Dist LEXIS 584, *63 (D. Colo. Jan. 13, 2004) (a “defendant may be liable under Section 11 for negligent material misstatements or omissions”).
2. The Securities Act contains a statute of limitations with two “triggers.”See 15 U.S.C. Section 77m:
“No action shall be maintained to enforce any liability created under [section 11] or [section 12(a)(2)] unless brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence, or, if the action is to enforce a liability created under [section 12(a)(1)], unless brought within one year after the violation upon which it is based. In no event shall any such action be brought to enforce a liability created under [section 11] or [section 12(a)(1)] more than three years after the security was bona fide offered to the public, or under [section 12(a)(2)] more than three years after the sale.”
3. Issues still are arising, and being resolved, as to the Securities Act’s statute of limitations.
As to when the limitations periods begin to run, for example, one recent decision is of particular note. P. Stolz Family P’ship, L.P. v.Daum, 355 F.3d 92 (2d Cir. 2004), addressed, as an issue of first impression in the Second Circuit, whether the Securities Act’s three-year statute of repose begins to run when the security was first offered to the public or last bona fide offered to the public. Adopting the view of the majority of the courts to examine the issue, the Second Circuit held that the statute of repose begins to run when the security is first offered to the public. Id. at 106.
B. Claims under the Securities Exchange Act of 1934
1. Claims under the Securities Exchange Act of 1934 [the “Exchange Act”]must sound in fraud. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976). However, most courts hold that recklessness will also satisfy the“scienter” requirement. See, e.g., Rolf v. Blythe, Eastman Dillon & Co., 570 F.2d 38, 47 (2d Cir. 1978); see also In re Silicon Graphics Inc. Sec. Litig., 183 F.3d 970, 976 (9th Cir. 1999); Anixter v. Home-Stake Prod. Co., 77 F.3d 1215, 1233 (10th Cir. 1996); Broad v. Rockwell Int’l Corp., 642 F.2d 929, 961 (5th Cir. 1981) (severe recklessness); Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1039–40 (7th Cir. 1977).
2. In contrast to the Securities Act, the Exchange Act contains no statute of limitations. In Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 363 (1991), the Supreme Court ruled that the statute of limitations for ‘34 Act claims is the two-pronged, one-year/three-year statute of limitations applicable to Securities Act claims.
3. Issues continue to be litigated, though generally as to the application of legal principles in particular cases, rather than as to the establishment of the legal principles themselves. For example, LC Capital Partners, L.P. v. Frontier Ins. Group, Inc., 318 F.3d 148, 154 (2d Cir. 2003), addressed and clarified the law as to when the statute of limitations begins to run, based on the plaintiff being on notice, often phrased as when plaintiff has a duty of inquiry. The court there distinguished two different fact scenarios -- with the conduct, or inaction, of the plaintiff being determinative of the starting date:
“The duty of inquiry results in the imputation of knowledge of a fraud in two different ways, depending on whether the investor undertakes some inquiry. If the investor makes no inquiry once the duty arises, knowledge will be imputed as of the date the duty arose. However, if the investor makes some inquiry once the duty arises, we will impute knowledge of what an investor ‘in the exercise of reasonable diligence, should have discovered’concerning the fraud, and in such cases the limitations period begins to run from the date such inquiry should have revealed the fraud.”
C. Applicability of Rule 9(b), Fed. R. Civ. P., to Securities Act Claims
1 Rule 9(b) requires pleading of particularized facts as to “all averments of fraud.” Specifically: “In all averments of fraud or mistake, the circumstances constituting fraud or mistake shall be stated with particularity. Malice, intent, knowledge, and other condition of mind of a person may be averred generally.”
2. The Private Securities Litigation Reform Act of 1995 (“PSLRA”), 15 U.S.C. § 78u-4(b)(1), reaffirms and/or heightens (depending on which Circuit one is in) the requirement that the facts as to the alleged fraud be pled with particularity:
“In any private action arising under this chapter in which the plaintiff alleges that the defendant—
(A) made an untrue statement of a material fact; or
(B) omitted to state a material fact necessary in order to make the statements made, in the light of the circumstances in which they were made, not misleading; the complaint shall specify each statement alleged to have been misleading, the reason or reasons why the statement is misleading, and, if an allegation regarding the statement or omission is made on information and belief, the complaint shall state with particularity all facts on which that belief is formed.”
Compare, e.g., Novak v. Kasaks, 216 F.3d 300, 309–10 (2d Cir. 2000) (vacating district court’s dismissal of complaint and holding that Congress adopted Second Circuit’s pre-PSLRA pleading standard, allowing scienter to be satisfied by pleading facts demonstrating either motive and opportunity, or strong circumstantial evidence of recklessness);In re Advanta Corp. Sec. Litig., 180 F.3d 525, 534–35 (3d Cir. 1999) (affirming district court’s dismissal of complaint and holding that Congress adopted Second Circuit pre-PSLRA standard); with In re Silicon Graphics, Inc. Sec. Litig., 183 F.3d 970, 979 (9th Cir. 1999) (affirming district court’s dismissal of complaint and holding that facts demonstrating motive and opportunity are insufficient to establish scienter; rather, plaintiffs must plead facts demonstrating a strong inference of deliberate recklessness); Bryant v. Avado Brands, Inc., 187 F.3d 1271, 1283 (11th Cir. 1999) (reversing district court’s dismissal of complaint and following Ninth Circuit’s rationale in Silicon Graphics).
3. Rule 9(b) by its terms looks to whether there are “averments of fraud,”not “claims for relief sounding in fraud.” Nevertheless, courts have split on the question of whether, when a complaint includes both Securities Act and Exchange Act claims, Rule 9(b)’s pleading requirements should apply to the Securities Act claims (on the theory that the complaint’s“averments of fraud” apply to all of the fact pleadings), or if the SecuritiesAct claims should be exempt from such requirement (on the theory that regardless of the complaint’s averments, there is no requirement that a plaintiff establish fraud to state a Securities Act claim).
Compare, e.g., Rombach v. Chang, 355 F.3d 164, 171 (2d Cir. 2004) (affirming district court’s dismissal of complaint and holding that Rule 9(b)’s heightened pleading standard applied to Securities Act claims “premised on allegations of fraud”); In re Stac Electronics Sec. Litig., 89 F.3d 1399, 1404–05 (9th Cir. 1996) (same); Melderv. Morris, 27 F.3d 1097, 1100 n.6 (5th Cir. 1994) (same), with In re NationsMart Corp. Sec. Litig., 130 F.3d 309, 315 (8th Cir. 1998) (reversing district court’s dismissal of Section 11 claim and holding that Rule 9(b)’s heightened pleading standard did not apply since fraud is not an element of such claim); Friedman v. Rayovac Corp., 295 F. Supp. 2d 957, 978–79 (W.D. Wis. 2003) (denying motion to dismiss Securities Act claims based on failure to plead with particularity and holding that Rule 9(b)’s heightened pleading standard did not apply to such claims).
4. Under the pre-Sarbanes-Oxley regime, this pleading dichotomy did not have consequences impacting on statute of limitations considerations -- but it very well may under that Act, as discussed below.
III. The Sarbanes-Oxley Act’s Statute of Limitations: What Does It Say?
A. Background: Events between passage of PSLRA and passage of Sarbanes-Oxley -- and the resulting Congressional pressure to make a host of substantive changes to securities and related laws, imposing new requirements on officers and directors, imposing new penalties, etc. -- prompted proposals to lengthen statutes of limitation for private litigation.
1. For examples of statements in Congress, see remarks from legislators such as the following: (i) Senator McCain –“This amendment also extends the current statute of limitations for matters concerning securities fraud, deceit or manipulation. The current statute of limitations for securities fraud cases is short given the complexity of many of these matters, and defrauded investors may be wrongly stopped short in their attempts to recoup their losses under current law. . . . Because this statute of limitations is so short, the worst offenders may avoid accountability and be rewarded if they can successfully cover up their misconduct for merely three years. The more complex the case, the easier it will be for these wrongdoers to get away with fraud. . . .” 148 Cong. Rec. S 6524, 6528–29 (July 10, 2002); (ii) Senator Leahy – “We extend the statute of limitations in securities-fraud cases – something that would’ve helped so many people who were defrauded by Enron and others.” Conference Report on Corporate Responsibility Legislation: Hearing on H.R. 3637 before Conference Comm., 107th Cong. at 12 (2002); and (iii) Senator Gramm – “When the Senator was talking about letting people off the hook, surely everybody understands that our system has no ex post facto laws. So if the provision raising that statute of limitations to 5 years became law, it would have no effect on anybody who has committed one of these violations about which we are talking.” 148 Cong. Rec. S 6524, 6537 (July 10, 2002).
B. The New Statute of Limitations: A “two-year/five-year rule” replaces the old “one-year/three-year rule” -- for SOME federal securities law claims.
1. Section 804(a) of Sarbanes-Oxley amends 28 USC § 1658(b) to provide:
“Notwithstanding subsection (a), a private right of action that involves a claim of fraud, deceit, manipulation, or contrivance in contravention of a regulatory requirement concerning the securities laws . . . may be brought not later than the earlier of
(1) 2 years after the discovery of the facts constituting the violation; or
(2) 5 years after such violation.
2. Section 804(b) provides:
“The limitations period provided by section 1658(b) of title 28, United States Code, as added by this section, shall apply to all proceedings addressed by this section that are commenced on or after the date of enactment of this Act.”
3. Section 804(c) provides: “Nothing in this section shall create a new, private right of action.”
IV. The Statute of Limitations under Sarbanes-Oxley: What Does It Mean?
A series of issues have arisen under the Act: [i] does it apply to claims under the Securities Act ? [ii] does it apply to revive claims that already were time-barred at the time Sarbanes-Oxley was enacted (indeed, is it retroactive at all)? and [iii] how, if at all, does the new statute of limitations come into play where a plaintiff either (a) drops pre-Sarbanes-Oxley complaints/parties/claims and then re-files post-Sarbanes-Oxley or (b) adds parties by post-Sarbanes-Oxley amendments to complaints filed pre-Sarbanes-Oxley?
A. Applicability of the new, extended statute of limitations to Securities Act claims
1. Consistent with the plain language of the Act -- i.e., “a private right of action that involves a claim of fraud, deceit, manipulation, or contrivance” -- courts have held that the new statute of limitations does not apply to ‘33 Act claims. Rather, those claims continue to be governed by the statute of limitations in the Securities Act itself.
2. Friedman v. Rayovac Corp., 295 F. Supp. 2d 957, 978-79 (W.D. Wis. 2003), involved plaintiffs who filed suit against certain parties before Sarbanes-Oxley was enacted, but who then amended their complaint to add a new defendant after the statute was enacted. The court held that given the nature of a cause of action under the Securities Act, the Securities Act claims were time-barred under the statute of limitations in that Act, and such claims were not governed by the longer limitations period in Sarbanes-Oxley.
3. In In re WorldCom Inc. Sec. Litig., 294 F. Supp. 2d 431, 444 (S.D.N.Y. 2003), Judge Cote reached the same conclusion. The court there noted that Section 804 of Sarbanes-Oxley, by its terms, applies to claims involving “fraud, deceit, manipulation, or contrivance in contravention of the ‘securities laws.” Noting that the complaint before it “repeatedly disavows that its claims are anything other than strict liability or negligence claims, and explicitly states that its claims do not allege fraud,” and that Section 11 of the Securities Act does not sound in fraud, the court held that the new Sarbanes-Oxley statute of limitations did not apply. Id. at 441. Indeed, the court so held, notwithstanding plaintiffs’ contention that the claims arose out of accounting manipulations, and therefore fell within the “manipulation or contrivance” language of Sarbanes-Oxley. The court also relied on the fact that Congress could have provided that the new statute of limitations applies to all claims under any of the securities laws, but had not done so.
4. Accord, Lieberman v. Cambridge Partners, L.L.C., 2004 WL 1396750, at *3 (E.D. Pa. June 21, 2004) (holding that extended statute of limitations did not apply to Securities Act claims and granting motion to dismiss); In re FirstEnergy Corp. Sec. Litig., 316 F. Supp.2d 581, 601–02 (N.D. Ohio 2004) (holding that extended statute of limitations did not apply to Securities Act claims but reserving judgment on when plaintiff had inquiry notice of defendant’s alleged fraud).
5. There are potentially significant implications of the Rayovac/WorldComline of cases beyond their pure statute of limitations holdings.
(a) Application of Rule 9(b) Pleading Standards to ’33 Act Claims: The decisions put plaintiffs’ counsel in an interesting conundrum in a frequently encountered situation: that is, where plaintiffs plead both Securities Act and Exchange Act claims in the same complaint. Plaintiffs regularly are met with motions to dismiss the Securities Act claims on the ground that the complaint as a whole contains “averments of fraud,” and thus should have to meet the pleading requirements of Rule 9(b). See,e.g., Point II.C., above. In response, plaintiffs consistently argue that Securities Act claims, even if combined in a Rule 10b-5 pleading, are not and should not be subject to Rule 9(b) pleading requirements, because the claims do not sound in fraud -- indeed, as noted in WorldCom, plaintiffs’ pleadings often expressly disclaim any such fraud assertion. Now, however, so arguing should preclude them, under cases like Rayovacand WorldCom, from trying to invoke the new, longer statute of limitations.In contrast, to the extent plaintiffs argue that their claims should be encompassed by the new statute of limitations, they all but assure that they are bringing themselves under Rule 9(b). See generally Irwin H. Warren and Jennifer Rosen, “Recent Decisions Narrowly Construe the Application of the New Statute of Limitations Provision of Sarbanes-Oxley,” Corporation (Aspen Feb. 2, 2004).
(b) Application of Rule 9(b) Pleading Standards to Claims Under Section 20(a) of the Exchange Act: As the new statute of limitations only applies to fraudulent or manipulative conduct, plaintiffs will face the same issue as to claims under Section 20(a) of the Exchange Act: that is, to the extent plaintiffs argue that “culpable participation” (and hence pleading with particularity) is not required, they should be relegated to the one-year/three-year (non-fraud) limitations period. To the extent they argue that conduct should be subject to the longer period under Sarbanes-Oxley, they should have to plead with particularity.
B. Revival of Time-Barred Claims and Retroactivity
Section 804(b) of Sarbanes-Oxley provides that its new statute of limitations applies “to all proceedings addressed by this section that are commenced on or after the date of enactment of this Act.” Numerous courts have been addressing the question of whether the statute of limitations therefore applies to revive previously time-barred claims.
1. General Principles of Retroactivity and Revival
(a) Retroactivity and even revival of time-barred civil claims is not constitutionally proscribed, per se. In Campbell v. Holt, 115 U.S. 620, 628–29 (1885), the Supreme Court held that a provision in Texas’s post-Civil War constitution did not violate defendant’s due process rights, even though it effectively stripped defendant of a statute of limitations defense. The Court stated: “We certainly do not understand that a right to defeat a just debt by the statute of limitations is a vested right, so as to be beyond legislative power in a proper case. . . . It violates no right of [the defendant], therefore, when the legislature says time shall be no bar, though such was the law when the contract was made.” Id.
(b) `However, retroactivity in general -- and revival of claims, in particular -- is highly disfavored. “[T]he presumption against retroactive legislation is deeply rooted in our jurisprudence, and embodies a legal doctrine centuries older than our Republic. Elementary considerations of fairness dictate that individuals should have an opportunity to know what the law is and to conform their conduct accordingly; settled expectations should not be lightly disrupted.” Landgraf v. USI Film Prods., 511 U.S. 244, 265 (1994).
(c) The three-part test for determining whether a statute should apply retroactively is set forth in Landgraf, 511 U.S. at 280, as follows:
“When a case implicates a federal statute enacted after the events in suit, the court’s first task is to determine whether Congress has expressly prescribed the statute’s proper reach. If Congress has done so, of course, there is no need to resort to judicial default rules. When, however, the statute contains no such express command, the court must determine whether the new statute would have retroactive effect, i.e., whether it would impair rights a party possessed when he acted, increase a party’s liability for past conduct, or impose new duties with respect to transactions already completed. If the statute would operate retroactively, our traditional presumption teaches us that it does not govern absent clear congressional intent favoring such a result.”
(d) Courts have strictly applied Landgraf to reject retroactive application of statutes, including, in particular, to reject revival of time-barred claims.
(i) Chenault v. United States Postal Serv., 37 F.3d 535, 539 (9th Cir. 1994), applying Landgraf, held: “[A] newly enacted statute that lengthens the applicable statute of limitations may not be applied retroactively to revive a plaintiff’s claim that was otherwise [time-]barred under the old statutory scheme because to do so would ‘alter the substantive rights’ of a party and ‘increase a party’s liability.’ In this case the rights of defendant would be altered and its liability increased because it would be forced to defend an action that was previously time-barred.”
(ii) Due to the “absence of a clear statutory expression of congressional intent,” the Supreme Court in Hughes Aircraft Co. v. United States, ex rel. Schumer -- citing Chenault -- refused to apply a statutory amendment so as to allow plaintiffs to assert a previously foreclosed qui tam claim because the “amendment would revive the action, subjecting Hughes to previously foreclosed qui tam litigation, much like extending a statute of limitation after the pre-existing period of limitations has expired impermissibly revives a moribund cause of action.” 520 U.S. 939, 950, 952 (1997).
(iii) In Martin v. Hadix, 527 U.S. 343 (1999), the Supreme Court applied Landgraf and found that even though Congress had amended a statute to provide that a fee cap applied to “any action brought” in which attorney’s fees are authorized, Congress did not thereby clearly prescribe the temporal reach of that statute. The Court stated: “[A]lthough the word ‘any’ is broad, it stretches the imagination to suggest Congress intended, through the use of this one word, to make the fee limitations applicable to all fee awards.” Id. at 353-354.
(iv) In I.N.S v. St. Cyr, the Supreme Court stated that “cases where this Court has found truly ‘retroactive’ effect adequately authorized by statute have involved statutory language that was so clear that it could sustain only one interpretation.” 533 U.S. 289, 313 (2001) (citing Lindhv. Murphy, 521 U.S. 320, 328, n.4 (1997)). See also, e.g., Millionv. Frank, 47 F.3d 385, 390 (10th Cir. 1995) (stating that “[w]e are guided by Landgraf and the principles espoused therein,” and holding that an amendment to the Civil Rights Act of 1964, which extended the filing period for a discrimination claim, but which was enacted after plaintiff’s claim had already expired, did not revive the time-barred claim because “instructions from Congress” were lacking).
2. District Courts’ Application of Landgraf and its Progeny to Sarbanes-Oxley
Numerous district courts have addressed the issue of whether the new statute of limitations in Sarbanes-Oxley applies retroactively to revive time-barred claims.
(a) Plaintiffs seeking to invoke the longer statute of limitations of Sarbanes-Oxley have argued that both the language and the legislative history of the Act support its application to revive time-barred claims. The first court to examine the issue concluded that Sarbanes-Oxley did apply retroactively so as to revive time-barred claims. In Roberts v. Dean Witter Reynolds, Inc., 2003 WL 1936116 (M.D. Fla. Mar. 31, 2003), appeal pending, plaintiff filed his securities fraud complaint after the enactment of Sarbanes-Oxley. His claims had expired prior to the enactment of the Act. Defendants moved to dismiss on the ground that the Sarbanes-Oxley Act did not revive previously time-barred claims. The court first addressed whether the plain language of the Act clearly indicated that it should apply retroactively, and concluded that it did not, noting “that Congress did not use the phrase ‘retroactive application’ in the statute itself.” Id. at *3. The court therefore turned to the legislative history for guidance, and concluded that such“history reveals that Congress intended to lengthen the statute of limitation to enable people who lost their life-savings to companies like Enron to recover some of their investments. To do so, the amendment must be given retroactive application.” Id. The conclusion in Roberts that the new statute revives time-barred claims was adhered to in a later decision by a different judge in the same court. See In re Sawtek, Inc. Sec. Litig., 2003 U.S. Dist. LEXIS 25757, at *10 (M.D. Fla. Dec. 19, 2003). Significantly, the Sawtek court reached the same result but with the opposite reasoning: “This Court finds it difficult – if not impossible– to read [§ 804(b)] in any other way than as the plain language suggests. The language clearly and unambiguously states that the new limitations period applies to all proceedings (i.e., cases) commenced (i.e., filed) on or after the Act’s enactment (i.e., July 30, 2002). Thus, if a proceedingwas commenced after July 30, 2002 – such as the instant case – then the new, longer statute of limitations would apply.”
(b) It appears that every other court in every other district that has considered the issue, however, has rejected application of Sarbanes-Oxley to revive time-barred claims. See Zurich Capital Markets, Inc.v. Coglianese, 2004 WL 2191596, at *9 (N.D. Ill. Sep. 23, 2004) (Sarbanes-Oxley does not revive stale claims); In re ADC Telecomm., Inc., Sec. Litig., 331 F. Supp. 2d 799, 802–03 (D. Minn. 2004) (same),appeal pending; L-3 Communications Corp. v. Clevenger, 2004 WL 1941248, at *3 (E.D. Pa. Aug. 31, 2004) (same); Johnsonv. Aljian, 2004 U.S. Dist. LEXIS 14986, at *22–*23 (C.D. Cal. July 30, 2004) (same); In re WorldCom, Inc. Sec. Litig., 2004 WL 1435356, at *12 (S.D.N.Y. June 28, 2004) (same); Lieberman v. Cambridge Partners, L.L.C., 2004 WL 1396750, at *3 & n.12 (E.D. Pa. June 21, 2004) (same), appeal pending; In re Enron Corp. Sec., Derivative & ERISA Litig., 2004 WL 405886, at *17 (S.D. Tex. Feb. 25, 2004) (same); In re Enterprise Mortgage Acceptance Co., LLC, Sec. Litig., 295 F. Supp. 2d 307 (S.D.N.Y. 2003) (same); Glaser v.Enzo Biochem, Inc., 303 F. Supp. 2d 724, 734 (E.D. Va. 2003) (same),appeal pending; In re Heritage Bond Litig., 289 F. Supp. 2d 1132, 1148 (C.D. Cal. 2003) (same).
(c) The rationale of those courts has been quite consistent:
(i) The courts have repeatedly found that the statutory language is not clear -- and that there is no wording or indication in Sarbanes-Oxley’s language of revival, or addressing time-barred claims, or even retroactivity.See, e.g., In re Enron Corp. Sec., Deriv. & ERISA Litig., 2004 WL 405886, at*17 (S.D. Tex. Feb. 25, 2004) (given “what this court finds is an absence of any expression of specific intent that Sarbanes-Oxley should apply retroactively, either in the Act or the legislative history, the Sarbanes-Oxley Act’s extended limitations period cannot revive stale claims”); In re Enterprise Mortgage Acceptance Co., LLC, Sec. Litig., 295 F. Supp. 2d 307, 312–13 (S.D.N.Y. 2003) (holding that“there is no clear language in the statute stating that it applies retroactively or that it operates to revive time-barred claims” and that “[i]f Congress wanted Section 804 to clearly revive time-barred claims, it could have used the unambiguous language it had used in previous statutes that revived formerly time-barred claims”); In re ADC Telecomm., Inc. Sec. Litig., 331 F. Supp. 2d 799, 802–04 (D. Minn. 2004) (“the language of the Act does not contain a clear prescript by Congress for the statute to apply retroactively or to revive previously time-barred claims”); Johnsonv. Aljian, 2004 U.S. Dist. LEXIS 14986, at *13 (C.D. Cal. July 30, 2004) (finding “no express language in the [Act] authorizing retroactive application of the statute of limitations provision of the [Act],” or“preclud[ing] such retroactive application, either”).
(ii) These courts have all found an adverse retroactive effect on defendants under Landgraf;
(iii) None of these courts has found that the legislative history clearly compels a conclusion of revival -- indeed, some have found the legislative history to be to the contrary. See, e.g., In re Enterprise Mortgage Acceptance Co., LLC, Sec. Litig., 295 F. Supp. 2d 307, 316 (S.D.N.Y. 2003) (noting that “none of Senator Leahy’s statements referred to reviving time-barred claims nor did he make any statements that clearly show the Act intended for the resurrection of time-barred claims”; and that the “‘section-by section analysis’ of the Act, which was included in the Congressional Record by unanimous consent of the Senate also does not show Congress clearly meant to revive time-barred claims”); Johnsonv. Aljian, 2004 U.S. Dist. LEXIS 14986, at *22 (C.D. Cal. July 30, 2004) (holding that by reading § 804(a) and § 804(c) together, “it is clear Congress did not intend to revive time-barred claims”); AIG Asian Infrastructure Fund, L.P. v. Chase Manhattan Asia Ltd., No. 02 Civil 10034, slip op. at 12 (S.D.N.Y. Mar. 31, 2004) (Wood, J.), appealpending (concluding that “there is no clear congressional intent rebutting the traditional presumption against retroactivity”).
3. Circuit Courts’ Consideration of Revival
(a) As indicated above, the issue is now on appeal in at least five Circuits.
(b) The SEC has submitted an amicus brief in the Second Circuit on the appeal in AIG Asian Infrastructure Fund, L.P. v. Chase Manhattan Asia Ltd., taking the position that the statute should be applied retroactively to revive time-barred claims, but basically repeating the arguments of the private plaintiffs. (As the issue involves the meaning of a statute, the SEC has not argued that its view of the law is entitled to any special weight).
(c) It has been aptly noted that interpreting Sarbanes-Oxley to revive time-barred claims “would yield the absurd result that a four-year old claim asserted on July 29, 2002 (the day before the Act was enacted) would be time[-]barred, while the same claim, filed by a more dilatory plaintiff one day later, would be deemed timely. This irrational result is readily avoided by enforcing the plain language of the Act, so that it extends the limitations period, but does not revive claims that were already time-barred. . . .” Richard A. Rosen and Daniel J. Kramer, “ A Litigator’s Perspective on Sarbanes-Oxley: An Assessment of Some Key Issues,”Sec. Reg. & Law Rep (BNA), 140, 142 (Jan. 27, 2003) (emphasis in original).
(d) In a December 6, 2004 decision, the Second Circuit became the first Court of Appeals to rule on the issue of revival: the court, in a unanimous opinion authored by Judge Cabranes, affirmed the District Court and squarely held that Sarbanes-Oxley does not revive previously time-barred claims.In re Enterprise Mortgage Acceptance Co., LLC Sec. Litig., Nos. 03-9261, 03-9265, 04-0392, slip op. (2d Cir. Dec. 6, 2004). The court strictly followed the Landgraf test, and the analysis of Judge Kram in her decision dismissing the claims. See id. at 7. In particular, the Second Circuit first held that the language of Sarbanes-Oxley did not, on its face, clearly provide for revival: the statute “contains none of the unambiguous language that the Supreme Court has asserted would amount to an express retroactivity command . . . nor that which Congress has used in previous statutes to indicate its intent to revive time-barred claims.” Id. at 9 (citation omitted). The Second Circuit also held “that the legislative history of Section 804 does not clearly indicate that Congress intended that Section 804 apply retroactively to revive expired securities fraud claims.” Id. at 11 (citation omitted). Finally, the Court of Appeals held that the application of Sarbanes-Oxley to revive time-barred claims would have an impermissible retroactive effect under Landgraf and its progeny. See id. at 12–14. Because the Court rejected revival, it did not reach the issue of whether plaintiffs' filing of their new complaint constituted “commence[ment]” of new “proceedings” under the Act. See id. at 9 n.3.
1. The litigated cases that have focused on revival seem to assume that (for they need not decide whether) the new statute of limitations applies retroactively, to extend a limitations period that had not yet expired at the time Sarbanes-Oxley was enacted, even though the conduct occurred prior to passage of the Act. Some courts addressing the simple retroactivity/extension of a limitations period issue have so held, and have so applied the Act to post-enactment claims, even if the action itself commenced prior to passage of Sarbanes-Oxley.
2. Rayovac, as noted above, involved a complaint that was filed against certain defendants prior to the enactment of Sarbanes-Oxley. After Sarbanes-Oxley was adopted, plaintiffs amended their complaint to add a new defendant, against which plaintiffs asserted Securities Act and Exchange Act claims. The one-year/three-year limitations periods of the Securities Act and Lampf had not expired when the original complaint was filed, but the one-year period had run by the time of the amendment. The court dismissed the Securities Act claims on the ground that the new statute of limitations did not apply to such claims (as noted above) -- but it held that the Exchange Act claims were not time-barred. “Section 804(b). . . provides that the new limitations period ‘shall apply to all proceedings addressed by this section that are commenced on or after the date of enactment of this Act.’ This provision makes clear Congress’ intent to permit application of the new statute of limitations to some conduct that occurred before the statute was enacted on July 31, 2002.” Rayovac, 295 F. Supp. 2d at 975. The court apparently concluded that plaintiffs could have just filed a new complaint (rather than amending) to assert the claims, and therefore should not have been prejudiced by filing the same claims in an amendment to the prior pleading. Note, however, because the claim against the new defendant would not have been time-barred at the time of Sarbanes-Oxley’s enactment, there was no revival issue. Query: given the test for retroactivity set forth in Landgraf, why does it make any sense to apply Sarbanes-Oxley retroactively at all? Perhaps its the notion that if the Act applies to“all proceedings commenced on or after the date” as opposed to “all conduct engaged in on or after the date,” it must contemplate, as theRayovac court concluded, application to “some conduct” that had occurred pre-effective date, in order to be invoked in a proceeding commenced on the date of the Act.
For other cases addressing, and reaching inconsistent conclusions on the issue, see: Zurich Capital Markets Inc. v. Coglianese, 2004 WL 2191596, at *10 (N.D. Ill. Sept. 23, 2004) (holding that plaintiffs were entitled to Sarbanes-Oxley’s extension of statute of limitations since their 10b-5 claim was not time-barred under Lampf’s statute of limitations when Sarbanes-Oxley was enacted); ATO RAM, II, Ltd.v. SMC Multimedia Corp., 2004 WL 744972, at *5 (S.D.N.Y. Apr. 7, 2004) (same); but see In re Dynegy Inc., Sec. Litig., 339 F. Supp. 2d 804, 889 (S.D. Tex. 2004) (disagreeing with Rayovac and holding that an amended complaint adding a party to a complaint that was filed prior to the enactment of Sarbanes-Oxley was not a new “proceeding” and therefore was not entitled to Sarbanes-Oxley’s statute of limitation extension);In re Enron Corp. Sec., Deriv. & “ERISA” Litig., 2004 WL 405886, at *16 n.42 (S.D. Tex. 2004) (same).
D. The Courts’ Assessment of Creative Efforts By Plaintiffs’ Counsel to Invoke Sarbanes-Oxley to Revive Time-Barred Claims
Plaintiffs faced with (or anticipating) motions to dismiss based on statutes of limitations have shown some creativity in an effort to come within the extended limitations period of Sarbanes-Oxley, but the courts have been less than sympathetic.
1. In In re Enterprise Mortgage Acceptance Co., LLC, Sec. Litig., 295 F. Supp. 2d 307 (S.D.N.Y. 2003), aff’d, Nos. 03-9261, 03-9265, 04-0392, slip op. (2d Cir. Dec. 6, 2004), plaintiffs filed suit prior to Sarbanes-Oxley’s enactment. Defendants moved to dismiss on, inter alia, statute of limitations grounds. Plaintiffs, in their opposition brief -- filed after Sarbanes-Oxley was passed -- advised the court that they agreed that certain of their claims were time-barred and that they therefore were no longer pursuing those claims. However, after Roberts held that time-barred claims were revived under Sarbanes-Oxley, plaintiffs filed new actions, asserting those identical claims against the identical defendants: plaintiffs argued that these were new “proceedings” commenced after Sarbanes-Oxley and thus were timely under the new statute of limitations. The court rejected the argument and held that the claims were barred. The Second Circuit affirmed on the ground that Sarbanes-Oxley did not revive time-barred claims and it was therefore unnecessary for the court to address the new “proceedings”issue. See slip op. at 9 n.3.
2. In re Enron Corp. Sec., Deriv. & “ERISA” Litig., 2004 WL 405886, (S.D. Tex. 2004), involved a motion to intervene in a proceeding in which the complaint, alleging claims under Section 10(b) of the Exchange Act, had been filed before, but amended eight months after, Sarbanes-Oxley became effective. The proposed intervenor and the defendant disagreed over whether the amended complaint was a “new proceeding” within the meaning of Section 804. The proposed intervenor’s claims would have been barred under the former one-year statute of limitations -- but it argued that the amended pleading was a “new proceeding” and, therefore, that Sarbanes-Oxley applied and that its claim was timely. The court rejected revival and held that because the amended complaint merely modified the original complaint’s allegations about events that occurred before the original complaint was filed, the amended complaint was not a “new proceeding.” Id. at *13. The court stated: “To permit a plaintiff to file a new second suit or a new claim or add a new party in order to circumvent a statute of limitations and expand his legal rights, especially where the clear language of the statute [i.e., referring to Section 804] reflects Congress’ intent not to permit such expansion, as here, would create legal chaos.” Id. at *16 n.42.
3. In re Compuware Associates 2002 Sec. Litig., 02-CR-1266 (TCP) (E.D.N.Y. Dec. 3, 2003) (Platt, J.), aff’d, Nos. 03-9261, 03-9265, 04-0392, slip op. (2d Cir. Dec. 6, 2004), involved plaintiffs who filed a complaint in February 2002 against Computer Associates over its 1999 and 2000 10-K filings. Plaintiffs then filed a complaint in October 2002 against Ernst & Young (“E&Y”) over its alleged role in preparing those filings. E&Y argued that the “proceeding” in this case was commenced in February 2002, before Sarbanes-Oxley took effect. It also argued that plaintiffs’ claims were time-barred prior to the enactment of Sarbanes-Oxley, and could not be revived. The court first found that the October 2002 claim against E&Y related back to the February 2002 claim against Computer Associates and that plaintiffs therefore were not entitled to the longer statute of limitations provided by Sarbanes-Oxley for suits commenced after July 2002. The court then found that plaintiffs’claims against E&Y were barred by the one-year/three-year statute of limitations because by the time plaintiffs impleaded E&Y in October 2002, they had been on notice since the Spring and Summer of 2001 that the accuracy of the 10Ks was in doubt. Finally, the court held that Sarbanes-Oxley does not revive time-barred claims. The Second Circuit affirmed -- but rejected the lower court’s reasoning that “relation back” considerations under Rule 15 precluded plaintiffs’ “new ‘proceeding’” argument. Seeslip op. at 6 n.2.
4. See also In re Heritage Bond Litig., 289 F. Supp. 2d 1132 (C.D. Cal. 2003). There, plaintiffs filed their third amended complaint prior to the enactment of Sarbanes-Oxley. These claims were barred by the pre-Sarbanes-Oxley statute of limitations. They then filed a new and separate complaint against the same parties, asserting the same claims, after Sarbanes-Oxley was enacted. All of the cases were then consolidated. The court held that,“while the amended statute of limitations may apply to proceedings filed after passage of the Act, it cannot apply to claims already barred at the time of its enactment, regardless of the filing date. As a result, Plaintiffs’federal securities claims . . . which were time-barred as of July 30, 2002 . . . cannot be revived by the amended statute of limitations.” Id. at 1148.
5. Friedman v. Rayovac, 295 F. Supp. 2d 957 (W.D. Wis. 2003), however, came out the opposite way. Plaintiffs filed suit in May 2002, before Sarbanes-Oxley was enacted. Their claims were timely. Plaintiffs amended and added a new defendant, Thomas H. Lee Partners (“Partners”),in January 2003. Partners argued, and plaintiffs did not deny, that plaintiffs were on inquiry notice as of September 2001. Partners contended that the one-year statute of limitations applied -- because that was what was in effect when the conduct occurred -- and that the plaintiffs’ claims against it were barred as of September 2002. The court disagreed, and found that Congress intended the new statute of limitations to apply to “some conduct”that occurred before Sarbanes-Oxley was enacted. The court then held that January 2003, as opposed to May 2002, was the date on which “proceedings”commenced against Partners. Because these “proceedings” were commenced after Sarbanes-Oxley was enacted, the court found that the two-year statute of limitations applied, and that this limitations period had not expired as of January 2003. (As noted above, the court was not faced with the issueof revival, because the original statute of limitations had not expired at the time Sarbanes-Oxley was enacted: rather, the court was dealing with whether Sarbanes-Oxley extended an unexpired limitations period, or if the new pleading related back for limitations purposes to the original complaint).
The foregoing makes clear only a few concepts: [i] the case law is not entirely consistent on a variety of issues; [ii] a number of those existing issues should be resolved by the appellate courts in the next year (though query whether the appellate rulings in this regard will be any more consistent -- or inconsistent -- than they have been with such issues as the pleading standards under the PSLRA); and [iii] as usual, one can expect continuing development in both the strategies and legal arguments of the plaintiffs’bar, in an effort to take advantage of the longer limitations period, and the resulting caselaw that addresses those strategies.