Investors who previously assumed their claims were covered by certain securities class actions must now step forward to preserve their rights, following a recent federal appeals court ruling against pension funds looking to recover their losses in mortgage-backed securities.
In Police and Fire Retirement System of the City of Detroit v. IndyMac MBS, Inc., No. 11-2998 (2d Cir. June 27, 2013), the Second Circuit U.S. Court of Appeals affirmed a lower court’s rejection of attempts by pension funds to intervene in a securities class action and protect the rights of investors in certain mortgage-backed securities offerings by IndyMac Bank. The Second Circuit agreed with the lower court that the claims in question were untimely, based on the applicable three-year statute of repose of the 1933 Securities Act. A statute of repose bars any claim brought after the specified time period expires. The Second Circuit affirmed despite the fact that the original and timely class action complaint had asserted claims related to the offerings in question.
The ruling casts doubt on the effectiveness of class actions to protect the rights of investors whose claims may or may not be covered by a complaint brought on their behalf. Rather than rely on the pendency of a class action to protect their rights, or at least stop the clock on the applicable statute of repose, such investors must now take legal action such as moving to intervene to preserve their rights.
Berman DeValerio represents the Los Angeles County Employees Retirement Association, one of the appellants in the Second Circuit. Berman DeValerio also represents the Wyoming State Treasurer and Wyoming Retirement System, lead plaintiffs in the class action that continues in the District Court. The firm, in consultation with its clients and other intervenors, is considering whether to initiate a further appeal.
The issue before the Second Circuit was whether the filing of a class action complaint stopped (or “tolled”) the statute of repose clock from running for all claims asserted on behalf of absentee class members. The complaint in IndyMac had asserted claims on behalf of investors in dozens of mortgage-backed securities offerings. The lower court dismissed many of those claims, however, because neither of the two lead plaintiffs in the case had standing to bring them -had not themselves invested in certain offerings. In response, other pension funds that had invested in the offerings and did have standing to bring such claims moved to intervene in the case. The district court denied the motions to intervene because, by the time the pension funds acted, the three-year statute of repose (measured from the time the mortgage-backed securities were first offered to the public) had expired.
On appeal, the pension funds argued that the initial complaint stopped the clock on the statute of repose on their claims because, as a putative class action, the complaint encompassed their claims. Therefore, they reasoned, the original complaint protected the rights of all similarly situated investors during its pendency and the statute of repose could not run against those investors’ claims until either dismissal or denial of class certification.
The Second Circuit disagreed. In a case of first impression in the Circuit, It held that a statute of repose creates a “substantive right,” namely a defendant’s right to be free of liability after a certain time. As such, the class action tolling rule, articulated by the U.S. Supreme Court in American Pipe v. Utah and which remains the subject of conflicting interpretation in appeals and lower courts, could not apply to stop the clock running on the pension funds’ claims. This holding is contrary to that of the 10th Circuit and several SDNY district court rulings.
In light of the IndyMac decision, investors who once “sat back” and relied on a filed class action to protect their rights now face considerable uncertainty. These formerly “passive” class members must now take legal action to protect their rights within the three-year time limit imposed by the statute of repose. Whenever questions exist about a lead plaintiff’s ability to prosecute a claim, such investors will have to intervene or file lawsuits of their own to avoid a timeliness bar to their claims.
Given the notorious length of time modern securities cases take to litigate, absent class members will now find themselves forced into court frequently – whenever the resolution of motions to dismiss or for class certification takes longer than three years from the date of a securities’ offering.
“Requiring investors to file individual suits for fear of losing their rights long before the resolution of class action claims eviscerates the very procedural efficiencies class actions are designed to create,” said Nicole Lavallee, managing partner of Berman DeValerio’s San Francisco office. “Plaintiffs, absent class members, defendants and the courts will all suffer from the ensuing confusion and expense.”
*In August 2017, our firm name changed to Berman Tabacco. Case references and content published before that date may refer to the firm under our prior name, Berman DeValerio.