I love when arcane cases at the U.S. Supreme Court prompt trash talking from eminent litigators.
In a new Supreme Court brief on behalf of underwriters accused of defrauding California’s state employees’ pension fund, Paul Clement of Kirkland & Ellis warned the justices not to be duped by the pension fund’s sleight-of-hand – not on the real issue in the case and not on underlying policy.
Clement’s brief accused the California Public Employees’ Retirement System of “brazen disregard” for the Supreme Court’s framing of the question presented in the case. And in the event that his first use of “brazen” didn’t make the point, Clement repeated it later in the brief: “This court should not reward such a brazen end-run around its explicit decision to limit the grant of certiorari.”
In response, CalPERS counsel Thomas Goldstein of Goldstein & Russell told me in an email that he gets why the underwriters have resorted to a “hopeless” argument: “Their argument on the merits of it is just so bad that they had to try something,” Goldstein said.
Peppery, right? Especially for a securities case that doesn’t have much of a public profile.
Here’s the background, in case you somehow haven’t been paying attention to CalPERS v. ANZ Securities. Clement represents underwriters, including ANZ, of Lehman Brothers debt offerings from 2007 and early 2008, before the investment bank went under. Those underwriters were sued in a 2008 class action. CalPERS separately sued the defendants in 2011, and, when the class action settled, opted out to continue with its own suit. But in 2016, the 2nd U.S. Circuit Court of Appeals ruled that CalPERS had waited too long to sue. Reiterating its 2013 decision in In re IndyMac, the appeals court said the Securities Act’s three-year statute of repose is an absolute time bar that gives defendants the substantive right to be free of the specter of lawsuits after a prescribed time. The statute of repose, according to the 2nd Circuit, cannot be tolled by the filing of class action.
The Supreme Court, as you know, ruled in 1974’s American Pipe v. Utah that the filing of a class action tolls the statute of limitations in securities fraud litigation. But the court has also held, most recently and emphatically in 2014’s CTS v. Waldburger that the statute of limitations and the statute of repose are distinct.
In 2016, a plethora of certiorari petitions asked the Supreme Court to decide whether American Pipe tolling also applies to the statute of repose. The justices picked the CalPERS case as their vehicle. CalPERS’ petition for certiorari presented two questions: the first about American Pipe tolling and the statute of repose; the second on whether, despite the statute of repose, a member of an uncertified class action can file an individual suit based on the same claims as those of the class. The Supreme Court granted review only of the first question.
The issue of whether the statute of repose can be tolled is really slippery. It depends on the nature of repose, different flavors of tolling (it can be equitable or legal) and interplay between the Rules Enabling Act and the federal rule governing class actions.
As I reported last month, Goldstein & Russell’s merits brief for CalPERS offered a relatively easy way to grab hold of the question. Instead of grappling with the Rules Enabling Act, equitable authority and substantive rights, the brief said, the justices should simply apply their own American Pipe terminology and conclude that the filing of a class action “brings the action for all members, whether named or not.” Under that definition, CalPERS “brought” its case against the Lehman underwriters when the class action was filed, well within the three-year statute of repose for Securities Act claims.
That’s the argument that Clement attacked as an improper end-run in the underwriters’ merits brief. In effect, the brief argued, Goldstein & Russell is trying to re-introduce the question the Supreme Court decided not to review. “Petitioner describes this argument as the ‘easiest path to reversal,’ but that ‘path’ faces a rather significant roadblock: namely, the fact that the court expressly declined to grant certiorari on this issue,” the brief said. “That was no accident, as the court was considering multiple petitions, some raising one issue and others raising two…. Undeterred, petitioner has now fully briefed both questions (leading with the non-granted question, no less) despite this court's explicit instructions to the contrary.”
The underwriters contend this is actually an easy case. American Pipe established equitable tolling of the statute of limitations when a class action has been filed. The statute of repose is not an equitable principle but a substantive legal right for defendants. If the Securities Act’s three-year time limit on claims is a statute of repose – as the underwriters argue it is, based, among other things, on the law’s legislative history – American Pipe doesn’t apply.
“This court has made clear that statutes of repose confer substantive rights on defendants to be free from suit after a specified period,” the brief said. “Under the Rules Enabling Act, courts may not apply the Federal Rules of Civil Procedure in a manner that would ‘abridge, enlarge or modify any substantive right.’”
The underwriters’ brief also said CalPERS and its amici (who include dozens of other institutional investors, law professors and retired federal judges) have promulgated an evidence-free argument that courts will be flooded with protective opt-out suits by pension and healthcare funds if the Supreme Court agrees with the 2nd Circuit. CalPERS and its amici had said the 2nd Circuit holding would undermine the efficiency class actions are supposed to promote. But according to the underwriters, CalPERS and its friends have come up with only one example – securities fraud litigation against the Brazilian company Petrobras - of a case that has generated the predicted tsunami of opt-outs, even though it has been several years since the 2nd Circuit first decreed that class actions don’t toll the statute of repose.
In fact, the underwriters argued, the Supreme Court has good policy reasons to agree with the 2nd Circuit. When Congress enacted securities litigation reform in 1995, it encouraged institutional investors to step up to lead class actions. If the Supreme Court allows big pension and healthcare funds to back out of class actions whenever they please, the underwriters said, smaller and less sophisticated investors will suffer.
I’m sure we’ll soon see amicus briefs echoing the underwriters’ policy contentions. Oral arguments are scheduled for April 17.