829 F.3d 173
2d Cir.2016Background
- SRM Global Master Fund (SRM), a private investment fund, sued Bear Stearns, several officers, and Deloitte in 2013 alleging material misstatements in Bear’s 2006–2007 Form 10-Ks and related securities fraud and common-law fraud.
- SRM alleged it bought, sold, or held Bear stock and entered into or unwound equity swaps in reliance on the defendants’ misrepresentations; it also asserted "holder" fraud claims for decisions to retain stock.
- Earlier putative class actions against the same defendants were filed in 2008 and later consolidated and settled; SRM excluded itself from that class and filed its own suit in 2013.
- Defendants moved to dismiss under 28 U.S.C. § 1658(b)(2) (five-year statute of repose for Section 10(b)/Rule 10b-5 claims), arguing SRM’s claims were time-barred and that class-action filing did not toll the repose period.
- The district court dismissed SRM’s Section 10(b)/Rule 10b-5 claims as time-barred, dismissed Section 20(a) claims for lack of a primary violation, and dismissed New York common-law fraud and holder claims for failure to adequately plead reliance.
- The Second Circuit affirmed: it held American Pipe tolling does not apply to § 1658(b)(2) and concluded SRM failed to plead justifiable reliance for its common-law fraud and holder claims.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether American Pipe tolling applies to 28 U.S.C. § 1658(b)(2) (five-year statute of repose for Section 10(b)/Rule 10b-5) | American Pipe tolling suspended the repose period because a putative class action was filed in 2008 | Section 1658(b)(2) is a statute of repose not subject to equitable tolling or enlargement by Rule 23/American Pipe | Tolling does not apply; § 1658(b)(2) bars SRM's Section 10(b)/Rule 10b-5 claims because no misrepresentations were alleged within five years of filing |
| Whether SRM pleaded justifiable reliance for New York common-law fraud (including specific purchase/sale or swap conduct) | SRM alleged reliance on 2006–2007 10-Ks in its analysis and decisions to buy, hold, sell, or unwind swaps | Allegations are conclusory and fail to specify actual transactions taken in reliance | Dismissed: complaint does not plausibly allege that SRM actually bought, sold, or unwound transactions in reliance, so reliance not pleaded |
| Whether New York recognizes "holder" fraud claims and whether SRM pleaded reliance for such claims | SRM assumed holder claims viable and pleaded reliance in deciding to hold | District court and defendants argued New York courts disfavor holder claims and SRM failed to plead reliance tied to holding decisions | Court did not decide the viability of holder claims but affirmed dismissal because SRM failed to plead reliance for holding decisions |
| Whether Section 20(a) control-person claims survive absent a viable primary Section 10(b) claim | N/A (derivative of primary liability) | Section 20(a) requires an underlying primary violation of Section 10(b) | Dismissed: Section 20(a) fails because primary Section 10(b) claim is time-barred |
Key Cases Cited
- American Pipe & Construction Co. v. Utah, 414 U.S. 538 (tolling rule for class actions)
- Merck & Co. v. Reynolds, 559 U.S. 633 (statutes of repose vs. limitations periods in securities law)
- Police & Fire Ret. Sys. of City of Detroit v. IndyMac MBS, Inc., 721 F.3d 95 (2d Cir. 2013) (American Pipe does not toll Securities Act repose)
- P. Stolz Family P’ship L.P. v. Daum, 355 F.3d 92 (statutes of repose defined as substantive)
- Wal-Mart Stores, Inc. v. Dukes, 564 U.S. 338 (Rule 23 cannot abridge substantive rights under the Rules Enabling Act)
- Bell Atl. Corp. v. Twombly, 550 U.S. 544 (pleading standard for plausibility)
- ECA, Local 134 IBEW Joint Pension Tr. of Chi. v. JP Morgan Chase Co., 553 F.3d 187 (Section 20(a) requires primary violation)
- ACA Financial Guaranty Corp. v. Goldman, Sachs & Co., 25 N.Y.3d 1043 (N.Y. requirement of justifiable reliance for fraud claims)