On June 27, 2011, the Supreme Court granted certiorari in Credit Suisse Securities (USA) LLC v. Simmonds, No. 10-1261, to review a ruling by the Ninth Circuit concerning the limitations period applicable to claims, under Section 16(b) of the Securities Exchange Act, for recovery of short-swing profits. Section 16(b) allows public companies to recover profits that their directors and officers, and certain holders of at least 10 percent of their shares, realize by purchasing and selling the company’s equity securities within a six month period. Although the statute’s express purpose is to “prevent the unfair use of information that may have been obtained by” officers, directors and significant shareholders, it permits such recovery without regard to whether the trades actually involved the use of non-public information. Section 16(b) explicitly authorizes the company or a shareholder (if the company fails to take action following a demand) to sue to recover short-swing profits, but provides that “no such suit shall be brought more than two years after the date such profit was realized.”
Plaintiff in Credit Suisse purported to assert Section 16(b) claims against underwriters that assisted over 50 different companies in conducting public offerings of securities. Several of the underwriters argued that the two-year period in Section 16(b) barred plaintiff’s claims because the underlying facts all had been disclosed publicly years earlier, in registration statements for the offerings and in complaints from prior related litigation. The Ninth Circuit disagreed and held that, irrespective of when a company (or the shareholder suing on its behalf) gains constructive or actual knowledge of trades giving rise to short-swing profits, the two-year period under Section 16(b) is equitably tolled until the defendant discloses those trades on Form 4, as Section 16(a) of the Securities Exchange Act and related SEC rules require. The court noted that prior circuit precedent — the decision nearly thirty years earlier in Whittaker v. Whittaker Corp., 639 F.2d 516 (9th Cir. 1981), cert. denied, 454 U.S. 1031 (1981) — dictated its holding. Judge Milan Smith, who authored the Ninth Circuit’s Credit Suisse opinion, also filed a special concurrence stating that, absent Whittaker, he would have held that the two-year period in Section 16(b) is a statute of repose, not subject to equitable tolling.
Like the Ninth Circuit, the Second Circuit and lower federal courts in other Circuits have held that the two-year period in Section 16(b) is a statute of limitations, subject to equitable tolling where the defendant director, officer or substantial shareholder fails to disclose the trades at issue in accord with Section 16(a) and related rules. But under the Second Circuit’s approach, equitable tolling ends, and the two-year period begins to elapse, when “the claimant or (depending on the circumstances) the company gets actual notice that a person subject to Section 16(a) has realized specific short-swing profits that are worth pursuing.” Litzler v. CC Investments, L.D.C., 362 F.3d 203, 208 (2d Cir. 2004). Moreover, as Judge Smith and Chief Judge Jacobs recognized in Credit Suisse and Litzler, the Supreme Court has — in the context of ruling on the time within which private plaintiffs must assert fraud claims under Section 10(b) of the Securities Exchange Act and SEC Rule 10b-5 — previously described the twoyear period in Section 16(b) as a “period of repose.” See Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 360 n.5 (1991).
Although the Supreme Court declined to review Whittaker, the Court in Credit Suisse has agreed to consider whether, as Judge Smith’s concurrence suggests, the two-year period in Section 16(b) is a statute of repose, and hence not subject to equitable tolling at all. The Court also agreed to consider whether equitable tolling, if it applies in Section 16(b) cases, can continue after the plaintiff has actual notice of the facts giving rise to the claim. Both are important questions for directors, officers and institutional investors who may be subject to the disclosure requirements of Section 16(a) and claims for disgorgement of short-swing profits under Section 16(b).