On September 14, 2018, United States District Court Judge Michael Shipp of the District of New Jersey declined to dismiss as untimely plaintiffs’ claim against a major pharmaceutical company (the “Company”) and certain of its executives under Section 18 of the Securities Exchange Act of 1934. Pentwater Equity Opportunities Master Fund Ltd v. Valeant Pharmaceuticals International, Inc., No. 1707552 (D.N.J. Sep’t 14, 2018). In denying defendants’ motion to dismiss, the Court deepened a split among courts over whether the Sarbanes-Oxley Act of 2002 (“SOX”) extends the time to file a Section 18 claim to two years of when the violation is discovered.

Plaintiffs alleged that defendants engaged in a scheme to use a secret pharmacy network, deceptive pricing and reimbursement practices, and fictitious accounting to artificially inflate the Company’s revenues and profits. Specifically, plaintiffs alleged that the Company concealed from investors its clandestine network of controlled pharmacies and other deceptive practices that drove its purported growth and inflated its stock price to over $260 per share while exposing the Company to massive risks. Plaintiffs alleged that upon the revelation of defendants’ false and misleading statements, the Company’s stock price declined. Plaintiffs asserted claims under Sections 10(b), 18(a), and 20(b) of the Exchange Act, and Rule 10b-5.

Defendants moved to dismiss as untimely plaintiffs’ claim under Section 18(a), which imposes liability for misstatements in documents required to be filed under the Exchange Act. Section 18’s statute of limitations provides that “[n]o action shall be maintained to enforce any liability created under this section unless brought within one year after the discovery of the facts constituting the cause of action.” 15 U.S.C. § 78r(c). Plaintiffs allegedly discovered the facts constituting the cause of action on August 10, 2016 and filed their complaint on September 27, 2017, outside of Section 18’s statute of limitations. Plaintiffs argued, however, that SOX extended to two years the statute of limitations applicable to certain “private right[s] of action that involve[ ] a claim of fraud, deceit, manipulation, or contrivance in contravention of a regulatory requirement concerning the securities laws…of the Securities Exchange Act of 1934.” 28 U.S.C. § 1658(b).

Adopting the Court of Appeals for the Second Circuit’s conclusion in Dekalb County Pension Fund v. Transocean Ltd., 817 F.3d 393 (2d Cir. 2016), the court held that claims under Section 18(a) sound in fraud and that the extended limitations period in SOX therefore applies. Although its reasoning was not included in its decision, the Second Circuit in Dekalb had concluded that Section 18(a) sounds of fraud, and is therefore within the claims covered by the extended SOX limitations period because it imposes liability “unless the person sued shall prove that he acted in good faith and had no knowledge that such statement was false or misleading,” 15 U.S.C. § 78r(a). Notably, other district courts, even within the Third Circuit, have reached a different conclusion, holding that the extended SOX limitations period does not apply to Section 18(a) because fraudulent intent is not required to sustain a claim. See, e.g., In re Able Labs. Sec. Litig., 2008 WL 1967509 (D.N.J. Mar. 24. 2008); WM High Yield Fund v. O’Hanlon, 2005 WL 6788446 (E.D. Pa. May 13, 2005). The Court of Appeals for the Third Circuit has not yet addressed the issue.

Pentwater Equity Opportunities Master Fund Ltd v. Valeant Pharmaceuticals International, Inc.