Exclusive Online Only ContentSifma: "No Purpose Served" By Extending the Time Limit To Sue for Fraud
August 19, 2009
The Securities Industry and Financial Markets Association contends that when a plaintiff in a case of fraud has not conducted any investigation of the charges “no purpose would be served by extending the time within which to sue.’’
The financial industry trade group’s assertion came in a friend-of-the-court briefing filed this week in conjunction with a case before the U.S. Supreme Court where a large drug company’s had moved to dismiss a shareholder suit on the grounds that the time to file had passed.
In the case, involving the anti-inflammatory drug Vioxx, Merck & Co. had contended that the case brought by investor Richard Reynolds and other parties should be precluded by the passage of a two-year time limit imposed on investors to investigate and take action on frauds they believe are committed. The two-year limit typically takes place from when the first “storm warnings” surface.
A lower court sided with Merck, saying the first inkling that the efficacy of Vioxx might be in question came in September 2001 when the FDA made public a warning letter in which it accused Merck of engaging in deception and misleading conduct regarding the safety of Vioxx.
But a higher court ruled that the relevant warning to the investing public came in October 2003, with the publication of a study by a hospital affiliated with Harvard University that found an increased risk of heart attack in patients taking Vioxx, compared to patients taking Celebrex or a placebo.
That ruling allowed the case to continue, but has been brought to the Supreme Court for a ruling on when the statute of limitations on bringing a suit on a claim of securities fraud begins to run.
In its “amicus” brief, Sifma argues that a plaintiff must begin to investigate when there is a notice that an injury could be occurring, “regardless of whether the plaintfiff had knowledge of (a) defendant’s culpability.”
The ruling by the U.S.Court of Appeals for the Third Circuit, which took the later start date for the statute of limitations to begin to run, also was “unworkable,’’ Sifma said, on four grounds.
First, that “lawyer-driven litigation remains the norm in the securities law arena.” These lawyers know how to and do begin investigations “as soon as misstatements are revealed.” This is their “stock in trade” and they are incented to find and check out storm warnings, because “that is how they get clients and cases and, hence, how they get paid.”
Second, the Third Circuit’s approach “would give rise to intractable problems” because different courts might apply different limitation periods to “the same claims depending on how the facts are pled.” A plaintiff “already under a duty to investigate a potential misstatement should not be permitted to turn a blind eye to the possibility that (a) misstatement was intentionally made.”
Third, the Third Circuit’s standard “would require courts to engage in rank speculation” about what a hypothetical investor “might have found depending on what the investor might have done.’’ This would sidestep, its brief indicated, the question of whether the plaintiff actually investigated for fraud and what it found.
Fourth, the statute of limitations can’t be tied to a requirement to plead facts. If there is such a link “plaintiffs in all sorts of cases will be encouraged to pursue stale claims on the basis that they required more time to discover facts.” Facts that would be, Sifma said, “sufficient to meet whatever pleading standard applies.”
