Plaintiff, a shareholder of Brocade Communications System, Inc. (Brocade), brought an action on behalf of Brocade to recover “short swing profits.” Plaintiff alleged that four of Brocade’s top officers received these profits in violation of Section 16(b) of the Securities Exchange Act of 1934 because defendants sold shares of Brocade stock within six months of their receipt of options for those shares from the company. The United States District Court for the Northern District of California dismissed the action for failure to state a claim, without resolving defendant’s alternative argument that the claim was time barred.

On appeal, after questioning whether the basis of the District Court’s ruling was correct, the Ninth Circuit considered the statute of limitations issue. Defendants argued that the dismissal should be upheld because plaintiff failed to bring the action within the applicable two year time period. Plaintiff argued that the statute of limitations should be tolled because defendants, who as insiders were required to publicly disclose their sales under Section 16(a), falsely reported that their sales were exempt from Section 16(b) because they had been approved by Brocade’s board of directors. Plaintiff challenged defendant’s position, claiming that because the options had been “backdated,” they were not approved “in advance” by the Board, which according to plaintiff, was required in order for the exemption to apply.

In upholding the dismissal of plaintiff’s action, the Ninth Circuit rejected the argument that the public filing of the allegedly erroneous Section 16(a) reports tolled the period of limitations. The Court reasoned that granting a toll would essentially eliminate the period of limitations in any Section 16(b) action in which an exemption to Section 16(b) was implicated. If a toll were permitted whenever the legitimacy of the claimed exemption was questioned, a full lawsuit would be required to determine if the exemption was validly claimed in order to determine whether a toll was permitted. Recognizing that permitting a lawsuit to proceed in these circumstances would “nullify” the limitations period whenever an exemption was challenged, the Court held that the limitations period begins to run when the transaction in question is disclosed regardless of whether the disclosure erroneously claims an exemption. (Roth v. Reyes, No. 07-16805, 2009 WL 1564228 (9th Cir. 2009))