Supreme Court Sides with Investment Banks in Insider Trading Case

by Jim Orr

In Credit Suisse Securities (USA) LLC v. Simmonds, 132 S.Ct. 1414 (2012) the Supreme Court recently considered whether the deadline to file insider trading suits (“short-swing profit” claims) is put on hold until the insider publicly discloses the trades.

The case arises out of a series of Initial Public Offerings (IPOs) during the tech bubble of the late 1990s. The plaintiff was an investor who owned tech stocks underwritten by Credit Suisse and other investment banks. The plaintiff alleged that underwriters for these IPOs manipulated stock prices using “short-swing” transactions in violation of the insider trading laws.

The plaintiff asserted causes of action under § 16(b) of the Securities Exchange Act of 1934 against financial institutions that had underwritten initial public offerings (IPOs) in the late 1990s and 2000, including Credit Suisse Securities (USA) LLC.  Section 16(b) creates a cause of action for holders of securities against corporate officers, directors, or other owners who realize profits from the purchase and sale, or sale and purchase, of the corporation’s securities within any six-month period.  The statute imposes a form of strict liability and requires insiders to disgorge “short-swing” profits even if they were not trading on inside information. The plaintiff also claimed that the financial institutions had failed to comply with §16(a)’s requirement that insiders disclose any changes to their ownership interests.

Section 16(b) provides that suits must be brought within “two years after the date such profit was realized.”  The District Court for the Western District of Washington dismissed the Plaintiff’s suits on the ground that § 16(b)’s two-year time period had expired long before Plaintiff filed the suits. The United States Court of Appeals for the Ninth Circuit reversed, holding that § 16(b)’s limitations period is tolled “until the insider discloses his transaction in a Section 16(a) filing, regardless of whether the plaintiff knew or should have known of the conduct at issue.”

With Chief Justice Roberts recused, the Supreme Court voted 8-0 to reverse the Ninth Circuit.  The Court determined that “even assuming that the 2-year [period to bring a § 16(b) claim] can be extended, the Ninth Circuit erred in determining that it is tolled until the filing of a § 16(a) statement.” The Ninth Circuit had expressed the concern that “the unscrupulous” could avoid the effect of Section16(b) “by failing to file … reports in violation of subdivision (a) and thereby concealing from prospective plaintiffs the information they would need” to bring a claim under §16(b). The Supreme Court rejected that analysis, stating that Congress could have easily addressed that concern by having the statute of limitations begin running after the filing of a § 16(a) statement, but did not do so. The Court was also concerned tolling the statute of limitations until a § 16(a) statement was filed could result in “endless tolling in cases in which a reasonably diligent plaintiff would know of the facts underlying the action.”  The Supreme Court remanded for the lower courts to consider “how the usual rules of equitable tolling apply to the facts of this case.”

Significantly, the Court split 4 to 4 (with Justice Roberts not participating) and thus issued no decision on the issue of whether § 16(b) establishes a period of repose that is not subject to tolling.  If the Court ultimately determines that § 16(b) is not subject to tolling, such suits would apparently have to be brought within “two years after the date such profit was realized” even if the plaintiff has no knowledge or even reasonable means of knowing about the short-swing profit (probably in part because, as the Ninth Circuit noted “it would be a simple matter for the unscrupulous to avoid the salutary effect of Section 16(b) … simply by failing to file … reports in violation of subdivision (a) and thereby concealing from prospective plaintiffs the information they would need bring a § 16(b) action.”).

The Supreme Court opinion is available here: