Securities Regulation Daily Proxy claims not subject to SOX’s repose extension, clock runs of last violation
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Thursday, March 17, 2016

Proxy claims not subject to SOX’s repose extension, clock runs of last violation

Proxy claims not subject to SOX’s repose extension, clock runs of last violation

By Amy Leisinger, J.D.

A Second Circuit panel affirmed a district court’s dismissal of an Exchange Act Section 14(a) claim as time-barred by the applicable three-year statutes of repose. According to the panel, while Sections 9(f) and 18(a) of the Act provide for private rights of action that involve fraud and thus qualify for the five-year statute of repose applicable under the Sarbanes-Oxley Act, Section 14(a) claims do not necessarily involve fraud and remain subject to the three-year statute of repose. Further, the panel found, the statute of repose applicable to Section 14(a) begins to run on the date of the defendant’s last culpable act or omission, and the plaintiff’s complaint does not “relate back” to the earlier complaint filed by a different party. The court also affirmed the dismissal of a Section 20(a) controlling person claim for failure to state a claim (DeKalb County Pension Fund v. Transocean Ltd., March 17, 2016, Cabranes, J.).

Dismissal. According to the original September 2010 complaint, a proxy statement contained false representations and material omissions regarding Transocean Inc.’s compliance with environmental laws, which came to light after a Transocean drilling rig exploded. On December 3, 2010, DeKalb County Pension Fund made its first appearance in the action and moved to be appointed as lead plaintiff. In June 2013, the defendants moved to dismiss the plaintiffs’ claims as time-barred by Section 14(a)’s three-year statute of repose.

The Southern District of New York concluded that the statute of repose for actions under Exchange Act Section 14(a) is three years and runs from the date of the alleged violation. Further noting in its opinion that the Second Circuit had determined that the repose period is not subject to tolling under the U.S. Supreme Court’s standard in American Pipe & Construction Co. v. Utah and that a Section 14(a) claim does not qualify for SOX’s fraud-based extended statute of repose, the court found that the plaintiff’s late entry into the litigation resulted in its claims being time-barred.

Statute of repose. In an earlier case, the panel noted, the Second Circuit determined that the implied private rights of action in Exchange Act Section 14 are “analogous” to the express private rights of action in Sections 9(f) and 18(a) and borrowed the three-year statute of repose then-applicable to those sections. Section 804(b) of the Sarbanes-Oxley Act extended the statute of repose applicable to certain private rights of action involving fraud to five years, the panel stated, and Sections 9(f) and 18(a) clearly provide for claims involving proof of fraudulent intent. However, the panel found, Section 14(a) does not directly provide such a private right of action. Congress was aware of case law finding negligence to be the minimum standard of culpability for Section 14(a) violations when it extended the statute of repose for fraud claims, and statutory determinations must preempt court decisions “borrowing” a statute of repose for other private rights of action. The three-year statute of repose will continue to apply to Section 14(a) claims, the panel concluded.

Last culpable act. The panel also found that the statute of repose applicable to Section 14(a) begins to run on as of the date of the last culpable act or omission. The pension fund argued that the panel must determine whether the “violation” standard of Section 9(f) or the “accrual” stand of Section 18(a) is most analogous to Section 14(a), but the panel noted that, as stated above, Section 14(a) claims do not demand fraud and that, in any case, the discovery rule does not extend to statutes of repose. An injury need not have occurred, let alone be discovered, for the statute of repose to begin to run, the panel found, and the statutory period is to be measured from the date of the violation.

Other contentions. The panel also rejected the argument the lead-plaintiff motion should “relate back” to the original complaint, finding that there was no “understandable” or “honest” mistake concerning which party had the right to file suit. Further, the court found, neither the PSLRA nor American Pipe apply to toll the statute of repose applicable to Section 14(a). The district court’s decision must be affirmed, the panel concluded.

The case is No. 14-0894-cv.

Attorneys: Thomas L. Laughlin (Scott + Scott LLP) for DeKalb County Pension Fund. Peter Ligh (Sutherland Asbill & Brennan LLP) and John W. Spiegel (Munger, Tolles & Olson LLP) for Transocean Ltd. and Transocean Inc.

Companies: Transocean Ltd.; Transocean Inc.

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