On December 5, 2012, Berman DeValerio Partner Joseph J. Tabacco, Jr. appeared before the Second Circuit Court of Appeals to argue an appeal involving an issue that could have far-reaching consequences for institutional investors who have relied on pending class actions to protect their rights but chosen to remain absent class members. The appeal in In re IndyMac Mortgage-Backed Securities Litigation, S.D.N.Y. 09-Civ.-04583 (LAK), concerns the question of whether the filing of a class action complaint satisfies and/or tolls the statute of repose not only for the named plaintiffs, but also for absentee class members who may later seek to intervene in, or opt out of, the litigation.
A “statute of repose” defines the time period during which a plaintiff must bring a cause of action. Under the Securities Act of 1933, a plaintiff has three years from the date of offering and/or the date of the transaction at issue to bring a claim for untrue statements made in offering materials. After the three-year period runs, the claims are forever barred.
The question before the Second Circuit is whether the filing of an initial class action complaint within the three-year period stops the running of the clock on the statute of repose for all asserted claims on behalf of absentee class members. Specifically, IndyMac involves a class action brought by investors in numerous IndyMac mortgage-backed securities. The initial complaints sought to represent investors in several IndyMac offerings, including offerings not purchased by the initial plaintiff or lead plaintiffs Wyoming Retirement System and Wyoming State Treasurer, both represented by Berman DeValerio. The U.S. District Court for the Southern District of New York dismissed all claims for offerings that the lead plaintiffs did not purchase. In response, several institutional investors brought motions to intervene to preserve their rights and bring back claims for the previously dismissed offerings. The District Court denied, in part, the motions to intervene on the basis that they were untimely. The District Court reasoned that because the motions to intervene were filed more than three years after the transactions at issue, the intervenors’ claims were barred by the statute of repose.
At the hearing, Tabacco argued that the District Court committed a reversible error because the claims were unquestionably timely. As Mr. Tabacco argued, while the motions to intervene were filed more than three years after the transactions, all of those same claims and offerings were included and asserted in the initial complaint, and that the initial complaint was brought well within the three-year statute of repose. Citing to the Supreme Court’s decision in American Pipe and its progeny, Tabacco argued that the initial complaint satisfied the statute of repose as to all potential class members.
The ultimate ruling by the Second Circuit could have dramatic consequences for institutional investors. If the Second Circuit affirms, then investors would no longer be able to “sit back” and rely on the pendency of a filed class action to protect their rights. Because securities class actions are notoriously lengthy, the decision whether to opt out of a case or a settlement often occurs more than three years after the transactions at issue. So, if the initial filing of the class action would not toll the claims for purported class members, then any opt-out rights would be rendered meaningless.
The entire aim of representative class actions is to promote efficiencies not only for the court hearing the case but for the litigants and proposed class members as well. Requiring every potential investor to file an individual complaint or risk losing its claims would turn the class action mechanism on its head and create procedural chaos. As. Tabacco urged the Court, the District Court decision simply cannot stand.
The Second Circuit took the matter under advisement, and a decision should be issued within the next several months. Tabacco was assisted in the appeal by Berman DeValerio attorneys Nicole Lavallee, Patrick Egan and Anthony Phillips.
– December 6, 2012
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