Section 11 of the Securities Act of 1933 gives purchasers of securities a cause of action when there are misrepresentations in a registration statement. Section 13 states, in part, that: “In no event shall any such action be brought to enforce a liability created under section [11] of this title more than three years after the security was bona fide offered to the public . . . .” In California Public Employees’ Retirement System v. ANZ Securities, Inc., the Supreme Court held that this portion of Section 13 is a statute of repose that is not subject to tolling by the filing of a class action complaint.

CalPERS purchased Lehman Brothers Holdings, Inc.’s securities through public offerings in 2007 and 2008. Shortly after Lehman Brothers filed for bankruptcy in September 2008, a putative class action was filed alleging securities violations based on the sale of Lehman Brothers stock in the 2007 and 2008 public offerings. The putative class action was consolidated with other securities suits brought against Lehman Brothers in a single multidistrict litigation. In February 2011, which was more than three years after the relevant CalPERS’s purchases, CalPERS filed a separate complaint alleging identical securities law violations as the class action complaint. CalPERS’s individual suit was consolidated with the multidistrict litigation. When the putative class action settled, CalPERS opted out of the class, choosing instead to pursue its individual suit. The defendants then moved to dismiss CalPERS’s individual suit, arguing that the Section 11 violations were untimely under the three-year exclusion period in Section 13. CalPERS responded that that the three-year exclusion period was tolled during the pendency of the class action lawsuit and relied on the tolling of a different statute of limitations established in American Pipe & Construction Co. v. Utah. The district court disagreed and dismissed CalPERS’s lawsuit. The Second Circuit affirmed and the Supreme Court granted certiorari.

Justice Kennedy authored the Court’s opinion and affirmed the Second Circuit. The Court began by analyzing whether the language in Section 13 is a statute of repose or a statute of limitations. A statute of limitations is designed to encourage a plaintiff to diligently pursue claims and begins to run when the claim accrues. In contrast, a statute of repose is designed to provide a defendant with certainty that it is free of liability after a certain time and begins to run on the date of the defendant’s last culpable act or omission. The three-year period in Section 13 is a statute of repose because it runs from the date of the defendant’s last culpable act, and because its explicit language, “[i]n no event,” creates a set bar against any future liability.

The Court then explained that a statute of repose is not subject to equitable tolling. Instead, a statute of repose can only be tolled when there is “a particular indication that the legislature did not intend the statute to provide complete repose but instead anticipated the extension of the statutory period under certain circumstances.” Examples of this legislative indication can be found in certain statutes of repose (e.g., 29 U.S.C. § 1113). But there is no such legislative indication in Section 13. The Court then easily rejected CalPERS principal argument that the three-year period in Section 13 was tolled during the pendency of the class action lawsuit because the American Pipe tolling CalPERS sought to apply to the statute of repose was equitable tolling. And in contrast to Section 13’s statute of repose, the statute that was tolled in American Pipe was a statute of limitations, which can be tolled through equitable tolling. Accordingly, the Court affirmed the dismissal of CalPERS’s Section 11 claims as untimely.

The Court’s decision provides securities litigation defendants with certainty about the exact time when potential liability for Section 11 claims will be extinguished. Plaintiffs, on the other hand, now know that they must timely file separate protective actions during the pendency of a class action if they wish to preserve the choice of opting-out of the class action.


While you might have heard that the House has passed a bill that would repeal portions of the Dodd-Frank Act (a bill enacted in July 2010 in the wake of the Great Recession to provide additional government regulation of the financial industry), you might not have heard that the nearly 600 page “Financial CHOICE Act of 2017” (H.R. 10) has provisions covering a broad range of topics that could have a significant impact on government regulatory agencies as well as require a number of specific changes to the Securities and Exchange Commission. While these changes will only take effect if or when the Senate passes the Financial Choice Act, the Financial Choice Act is a bill worth monitoring to see what changes may come. A few of the more notable changes proposed in the bill include:

  • Enhancement of SEC civil penalties for violations of securities laws including tripling the amount of monetary fines when the penalty is tied to illegal profits and permitting penalties equal to investor loss in cases involving “fraud, deceit, manipulation, or deliberate or reckless disregard of a regulatory requirement.”
  • Requiring all financial regulators to complete a cost-benefit analysis of any new regulation.
  • Creating a process to permit a recipient of a Wells notice to appear before the Commission in-person.
  • Publication of an updated enforcement manual outlining the SEC’s policies and procedures.
  • Repealing the authority of the SEC to prohibit persons from serving as officers or directors. Amending the Investment Company Act of 1940 to heighten the pleading standard and require a security holder of a registered investment company to state with particularity all facts forming the basis of their breach of fiduciary claim under Section 36(b) and raising the burden from a “preponderance of the evidence” standard to a “clear and convincing evidence” standard.

Looking forward, it is clear that changes could be coming. Those changes could greatly impact how federal securities regulations are created, enforced, and even litigated. We’ll be keeping an eye on this bill to see what come to fruition and so should you.


In Kokesh v. SEC, the Supreme Court determined that the five-year statute of limitations for any “action, suit or proceeding for the enforcement of any civil fine, penalty, or forfeiture, pecuniary or otherwise” in 28 U.S.C. § 2462 applies to claims for disgorgement sought by the SEC as a sanction for violations of the federal securities laws. On October 4, 2009, the SEC brought an enforcement action against Kokesh based on his alleged violations of the securities laws between 1995 and 2009. After a jury found Kokesh liable, the district court imposed a civil penalty based solely on Kokesh’s conduct after October 4, 2004, concluding that the five-year statute of limitations in 28 U.S.C. § 2462 precluded any civil penalty based on Kokesh’s conduct five years before the SEC brought suit. The district court, however, ordered Kokesh to disgorge $34.4 million based on violations going all the way back to 1995—with $29.9 million of that amount resulting from violations before October 4, 2004—because the district court reasoned that disgorgement is not a penalty to which 28 U.S.C. § 2462 applied. The Tenth Circuit affirmed, and the Supreme Court granted certiorari.

Justice Sotomayor, writing for a unanimous court, concluded otherwise. She relied on a 1892 Supreme Court case that defined “penalty” as “punishment, whether corporal or pecuniary, imposed and enforced by the State, for a crime or offen[s]e against its laws.” Huntington v. Attrill, 146 U.S. 657, 667 (1892). From this definition, Justice Sotomayor distilled two principles. First, a penalty redresses a wrong to the public. Second, a penalty is intended to punish and to deter others from committing similar offenses, as opposed to compensating the victim. The Supreme Court reasoned that the disgorgement sought by the SEC is a remedy for violations of public laws against the United States, as opposed to violations against the aggrieved individual. Furthermore, disgorgement is punitive because it is primarily intended to deter violations of the federal securities laws “by depriving violators of their ill-gotten gains.” The Supreme Court noted that in many instances the disgorged funds do not compensate the victims, such as instances when it is not feasible to identify them. Based on the two principles distilled from the definition of penalty, the Supreme Court concluded that SEC sought disgorgement falls within the five-year statute of limitations in 28 U.S.C. § 2462 because disgorgement goes beyond compensation and is intended to punish wrongdoers for violating public laws. Kokesh v. SEC, No. 16-529, 2017 WL 2407471 (2017).


In Pinto Technology Ventures, L.P. v. Sheldon (opinion here), the Supreme Court of Texas enforced a forum-selection clause in an amended shareholder agreement, requiring much of the underlying equity-dilution dispute to be litigated in Delaware. The Court upheld the clause’s validity and explored its scope, in terms of the claims and issues covered, and its enforcement by and against nonsignatories. Because the forum-selection clause appeared in a shareholder agreement, the Court had no cause to address the looming issue in this area—the enforcement by courts outside Delaware of a clause in a corporation’s bylaws, unilaterally adopted by its board of directors, that mandates exclusive jurisdiction in Delaware courts for all internal corporate claims, including all derivative actions, pursuant to the recently enacted Section 115 of the Delaware General Corporation Law.


Judge Neil Gorsuch’s confirmation hearings do not begin until March 20th, but if he is confirmed to replace the seat vacated by the late Justice Antonin Scalia, Judge Gorsuch could bring some skepticism of securities litigation plaintiffs to the high court. Although Judge Gorsuch has only authored a handful of opinions analyzing securities litigation cases while on the bench for the Tenth Circuit Court of Appeals, two opinions stand out as worth analyzing to give some insight into his views of securities litigation.

In MHC Mutual Conversion Fund, L.P. v. Sandler O’Neill & Partners, L.P., Judge Gorsuch analyzed the issue of when Section 11 of the Securities Act of 1933 imposes liability on issuers who offer statements of opinions. 761 F.3d 1109, 110 (10th Cir. 2014). Judge Gorsuch thoroughly analyzed the case law and determined that there were three possibilities: (1) an issuer’s opinions about future events can never be actionable, (2) “a plaintiff must show both that the defendant expressed an opinion that wasn’t his real opinion (sometimes called ‘subjective disbelief’) and that the opinion didn’t prove out in the end (sometimes called ‘objective falsity’),” and (3) when a fiduciary or someone who holds himself out to be an expert offers an opinion that lacks an objectively reasonable basis. Id at 1112-15 (emphasis original). Although Judge Gorsuch seemed inclined to go with the second possibility as the correct standard, he concluded that he did not have to select a single approach because in the case at hand, plaintiffs’ complaint failed even under the third, investor-friendly, objectively reasonable basis test. Id. at 1117. Notably, when the Supreme Court looked at the same issue a year later in Omnicare, Inc. v. Laborers District Council Construction Industry Pension Fund, it followed Judge Gorsuch’s inclination. Now, under Section 11, an affirmative statement of opinion is only actionable when it is incorrect and when the speaker did not actually hold the stated belief. 135 S. Ct. 1318, 1326 (2015). This standard is more favorable to issuers than the objectively reasonable basis standard Judge Gorsuch seemed less inclined to adopt.

Even more telling is Judge Gorsuch’s opinion in ACAP Financial, Inc. v. SEC. In that case, the court denied a petition for review of an SEC review of a FINRA decision that imposed a $125,000 fine on a broker-dealer and its registered representative and suspended the registered representative from the securities industry for six months for failing to take sufficient steps to guard against the petitioners’ involvement in trading unregistered shares. 783 F.3d 763, 765 (10th Cir. 2015). Although the Court did not find any reason to overturn the SEC’s punishment based on the grounds raised by the petitioners, Judge Gorsuch noted that the petitioners failed to raise what he considered to be the more substantive arguments. Id. at 767-69. For example, Judge Gorsuch took the time to note that the petitioners did not argue that the SEC used this administrative proceeding to expand the definition of “egregious” and then retroactively applied that expanded definition to petitioners. Id. at 767. Nor did petitioners challenge the SEC’s ability to employ multi-factor balancing tests in deciding what sanctions to issue against petitioners. Id. at 769. As Judge Gorsuch noted somewhat wistfully, “the petitioners before us have repeatedly demurred when presented with the opportunity to challenge the propriety of the SEC’s decisionmaking process.” Id.

This opinion closely echoes Judge Gorsuch’s opinion—and concurrence to his own majority opinion—in Gutierrez-Brizuela v. Lynch. That case was not a securities litigation case but dealt with whether the Bureau of Immigration Affairs could retroactively apply a policy that interpreted an ambiguous statute contrary to a Tenth Circuit opinion. 834 F.3d 1142, 1143 (10th Cir. 2016). Judge Gorsuch determined that the Bureau of Immigration Affairs could not retroactively apply its policy, but he wrote separately in a concurring opinion to criticize the Chevron doctrine, which requires a court to give deference to an executive agency’s interpretation of an ambiguous statute when the agency’s interpretation is reasonable. Id. at 1149-58 (Gorsuch, J., concurring). In Judge Gorsuch’s view, de novo judicial review about what an ambiguous law means should replace the judicial deference given to the executive agency’s interpretation under the Chevron doctrine. Id. at 1158. As alluded to in ACAP Financial, Judge Gorsuch’s view of increasing judicial supervision of an executive agency’s interpretations would include increased judicial supervision of the SEC.

Finally, a handful of other cases in which Judge Gorsuch sat on the panel but did not author the opinion involved what were largely pro-defendant results in private securities litigation cases. See, e.g., Farley v. Stacy, 645 F. App’x 684 (10th Cir. 2016); United Food & Commercial Workers Union Local 880 Pension Fund, 774 F.3d 1229 (10th Cir. 2014); Cook v. Baca, 512 F. App’x 810 (10th Cir. 2013); Thomas v. Metropolitan Life Ins. Co., 631 F.3d 1153 (10th Cir. 2011). Although these cases are not a crystal ball for determining how Judge Gorsuch would come out on the next securities litigation issue facing the Supreme Court, those opinions do give some indication that Judge Gorsuch may take a skeptical view of securities litigation lawsuits, especially cases involving the SEC’s discretion in making and applying policies and rules.


In shareholder derivative litigation, one of the earliest questions for a plaintiff is whether the directors of a company are sufficiently independent and disinterested to consider a shareholder demand or whether pre-suit demand is excused. In Delaware, demand excusal is provided for by Court of Chancery Rule 23.1. In a recent Delaware Supreme Court decision, Sandys v. Pincus, authored by Chief Justice Strine, the Court confronted this question and highlighted that: (1) courts must consider real-life dynamics and human nature when deciding whether directors are independent and disinterested and (2) plaintiffs should conduct an inquiry into director independence prior to filing, including utilizing the statutory procedures for books and records requests. Sandys v. Pincus, No. 157, 2016, 2016 Del. LEXIS 627 (Del. Dec. 5, 2016).

Sandys was a derivative action filed by shareholders of Zynga, Inc. The complaint asserted the CEO and other managers and directors were granted an exception to a company rule preventing insider sales of shares until three days after an earnings announcement. Taking advantage of this exception, insiders sold 20.3 million shares at $12 per share. Immediately after the earnings announcement, the price dropped to $8.52 per share. Within three months after the earnings announcement, the share value had fallen to $3.18 per share. The complaint alleged wrongdoing by the directors who approved this exception.

The Court of Chancery dismissed the complaint for failure to adequately plead demand excusal under Rule 23.1. In evaluating the independence and disinterestedness of Zynga’s nine directors, the Court of Chancery found that only two of those directors, the two who sold shares under the exception, were interested.

The Delaware Supreme Court reversed. In its opinion, the Court analyzed the independence and disinterestedness of three additional directors and determined that when looking at the real-world implications of their relationships to the Zynga CEO, who benefitted greatly from this exception, there was a reasonable doubt that these directors could have properly exercised independent and disinterested business judgment in responding to a pre-suit demand. The Court characterized one director, Ellen Siminoff, as a “close family friend of the CEO” relying almost entirely on the fact that Siminoff co-owned a private plane with the CEO. The Court analogized this co-ownership to family ties that, as a part of human nature, would call into question Siminoff’s independence and disinterestedness because jointly owning an airplane was an uncommon relationship with high expenses requiring a great deal of cooperation between Siminoff and the CEO. The Court also found that there was a reasonable doubt that directors John Doerr and William Gordon were independent or disinterested. This determination was based in part on the fact that Doerr and Gordon were partners in a venture capital firm that owned 9.2% of Zynga and that also invested in a company co-founded by the Zynga CEO’s wife. The Court, however, focused most heavily on the fact that Zynga did not consider Doerr or Gordon to be independent directors under the NASDAQ listing rules.

While the Court acknowledged that characterization for the NASDAQ listing rules is not dispositive in every case, the Court afforded great weight to Zynga’s determination that Doerr and Gordon lacked independence. While the Delaware Supreme Court reversed the Court of Chancery’s dismissal under Rule 23.1, the Delaware Supreme Court highlighted that the plaintiff had made the demand excusal determination more difficult by not conducting more pre-suit investigation or pleading more particularized facts as to the directors’ lack of independence. In particular, the Delaware Supreme Court emphasized that, while plaintiff made a pre-suit books and records request, the plaintiff had only sought books and records relating to the transaction he sought to redress. The Court said that plaintiff should have also used the books and records request to investigate the independence of the board. Companies should, therefore, expect prospective shareholder derivative plaintiffs to make greater use of books and records requests to inquire as to the independence of directors prior to filing.


Federal—A Change in Course for Financial Regulation and the SEC?

President-elect Trump gave few specifics on how he would handle financial regulation and the SEC during his campaign. His comments regarding Dodd-Frank, including his promise to “dismantle” it, imply a new era of reduced regulation. But he also repeatedly criticized his opponent for being “owned” by big banks, and his website called for a “21st Century Glass-Steagall,” referring to the law that required separation between investment and commercial banking until its repeal in 1999. Trump’s choices during the transition, however, have now clarified his approach.

To lead the transition team’s efforts on financial regulation, Trump chose former SEC commissioner Paul Atkins. Atkins is a staunch libertarian, according to reporting by The Wall Street Journal, and he has long been critical of aggressive financial regulation.  Atkins’s role signals that the SEC will not likely follow the Labor Department’s footsteps in promulgating a tougher fiduciary duty rule. Atkins criticized the Labor Department rule, stating in a 2015 congressional hearing that the Labor Department “should go back to the drawing board.” Speculation is rampant about other potential changes, including scaling back corporate auditing requirements, shifting SEC focus from large corporate penalties to holding individuals accountable, and requiring whistleblowers to first report to their companies (for which Atkins advocated in 2011).

Answering those questions during his confirmation hearing is Trump’s selection to chair the SEC: corporate attorney Jay Clayton. Clayton is a partner with Sullivan & Cromwell in New York focusing on M&A and capital raising, along with representing clients in regulatory and enforcement actions. Commentators view this pick as signaling a shift in focus away from enforcement to other SEC goals. Critics note Clayton has spent years as a “Wall Street insider,” but outgoing Chair Mary Jo Wright praised Clayton as “very smart, very thoughtful, very knowledgeable of the markets and the securities laws and I think a terrific person.” Regardless, the general trend appears to be friendlier to Wall Street. Anthony Scaramucci, a hedge fund manager advising the transition team, said the new head of the SEC needed to “get back to reffing the game properly and end the demonization of Wall Street.”

Finally, the Director of the Consumer Financial Protection Bureau (created by Dodd-Frank), Richard Cordray, may be forced to step down under Trump, despite language in Dodd-Frank preventing the CFPB director’s removal except for cause. The statute creating the CFPB prohibits removal of the director of the agency except for cause during his five-year term, which would insulate the director from political change. In October, however, the D.C. Circuit Court of Appeals held that structure unconstitutional because it gave too much power and autonomy to the sole director. The Obama administration is appealing that ruling, but some legal scholars believe Trump can simply withdraw the appeal after his inauguration, leaving the D.C. Circuit’s ruling intact and allowing Trump to immediately remove Cordray. Trump certainly seems open to firing Cordray, as he met with Representative Randy Neugebauer from Texas, a strong CFBP critic, about possibly replacing Cordray.

State—Regulators Fear Federal Preemption of Enforcement

Paul Atkins has also allegedly been discussing “ways to ensure that federal securities laws preempt state [Blue Sky] laws” such as the New York Martin Act, as reported by Fox Business. This news, along with Trump’s comments regarding Dodd-Frank, has prompted state regulators to push back and assert their authority. “You need a national regulator; and if they can’t, the states need to do the job and should,” said William Galvin, secretary of the commonwealth of Massachusetts. “It sounds like we’re going to be under the same type of problems there were prior to the Great Recession, with securities and financial services being ‘lightly regulated,’” Galvin explained. “I think that’s a problem.”

Other state regulators have echoed Galvin’s sentiments. Mike Rothman, Minnesota’s commerce commissioner and president of the North American Securities Administrators Association, commented: “Any attempt to weaken the investor protections provided by state ‘Blue Sky’ laws would erode investor confidence and remove a vital first line of defense for all investors working to provide a secure future for themselves and their children.” And New York Attorney General Eric Schneiderman warned that “any attempt to gut these consumer and investor protections would severely undercut state police powers and only embolden those who seek to defraud and exploit everyday Americans.” “At a time of regulatory uncertainty at the federal level, it is essential that we maintain the very laws that have helped state and local law enforcement keep consumers and investors safe for over one hundred years,” he said. Schneiderman’s office recently reached a $25 million settlement agreement in New York’s case against Trump University for violation of state education laws, among other things.