This Term, Supreme Court Will Decide Scope of Equitable Tolling under Exchange Act Short-Swing Trading Provision Two-Year Limitations Period

The Supreme Court will decide in the upcoming 2011-2012 term whether and under what circumstances the two-year time limit for bringing an action to recover insider short-swing trading profits pursuant to Section 16(b) of the Securities Exchange Act may be tolled for equitable reasons. In an amicus brief, the Solicitor General and the SEC said that Section 16(b)'s two-year limitations period should be equitably tolled until a reasonably diligent security holder would have discovered the transaction that is alleged to trigger a disgorgement obligation. The filing of a Section 16(a) report that accurately discloses the transaction will preclude further tolling, whether or not a particular plaintiff had actual knowledge that the report was submitted. But even without a Section 16(a) disclosure, said the government, circumstances may arise in which a reasonably diligent security holder would be aware of the relevant transaction. Credit Suisse Securities v. Simmonds, Dkt. No. 10-1261. At that point, the security holder is charged with knowing the facts that would form the basis for his or her action and has two years to bring an action to recover any short-swing profits. That approach balances the need for effective enforcement of the disgorgement obligation for short-swing profits with the need for finality on long-settled transactions, reasoned amicus, in a manner that comports with the background rules that have historically governed the application of statutory limitations periods. Because security holders have the ultimate authority to sue for enforcement of Section 16(b), said amicus, it is their knowledge of facts, and not the issuer's knowledge, that determines the running of the limitations period. Security holders have the right to bring suit under Section 16(b) precisely to prevent concerted action between the issuer and the insiders whose profits are sought to be recovered. A panel of the Ninth Circuit Court of Appeals held that the two-year limitations period in Section 16(b) is tolled until the insider discloses his or her transactions in a Section 16(a) filing, regardless of whether the plaintiff knew or should have known of the conduct at issue. That approach is inconsistent with the background rules described above, contended amicus. Section 16(b)'s limitations period should be tolled until a reasonably diligent security holder knows or should know the facts that would form the basis of a short-swing claim, said amicus. Although a Section 16(a) report will usually provide the first public notice that a short-swing transaction has occurred, continued the government's brief, that information may come to light in other ways as well. Amicus therefore contended that the court of appeals erred in holding that, as a matter of equity, the statute is invariably tolled until a Section 16(a) report is filed. Sections 16(a) and (b) are designed to operate together: The two provisions cover the same class of insiders, and Section 16(a)'s disclosure requirement serves in large part to bring to light the short-swing transactions covered by Section 16(b). But allowing Section 16(b)'s limitations period to be triggered by public disclosures other than Section 16(a) statements would not sever the connection between the two provisions. The two provisions may thus be read as a coherent whole without taking the further and unwarranted step of treating Section 16(a) statements as the only means by which shareholders may be placed on notice of insiders' short-swing transactions.

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