Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson/Dissent Kennedy

by Anthony Kennedy

Justice KENNEDY, with whom Justice O'CONNOR joins, dissenting.

I am in full agreement with the Court's determination that, under our precedents, a uniform federal statute of limitations is appropriate for private actions brought under § 10(b) of the Securities Exchange Act of 1934 and that we should adopt as a limitations period the 1-year-from-discovery rule Congress employed in various provisions of the 1934 Act. I must note my disagreement, however, with the Court's simultaneous adoption of the three-year period of repose Congress also employed in a number of the 1934 Act's provisions. This absolute time-bar on private § 10(b) suits conflicts with traditional limitations periods for fraud-based actions, frustrates the usefulness of § 10(b) in protecting defrauded investors, and imposes severe practical limitations on a federal implied cause of action that has become an essential component of the protection the law gives to investors who have been injured by unlawful practices.

As the Court recognizes, in the absence of an express limitations period in a federal statute, courts as a general matter should apply the most analogous state limitations period or, in rare cases, no limitations period at all. This rule does not apply, however, "when a rule from elsewhere in federal law clearly provides a closer analogy than available state statutes, and when the federal policies at stake and the practicalities of litigation make that rule a significantly more appropriate vehicle for interstitial lawmaking." DelCostello v. Teamsters, 462 U.S. 151, 172, 103 S.Ct. 2281, 2295, 76 L.Ed.2d 476 (1983); see Reed v. United Transportation Union, 488 U.S. 319, 324, 109 S.Ct. 621, 625, 102 L.Ed.2d 665 (1989). Applying this principle, the Court looks first to the express private rights of action in the 1934 Act itself to find what it believes are the appropriate limitations periods to apply here. One cannot fault the Court's mode of analysis; given that § 10(b) actions are implied under the 1934 Act, it makes sense for us to look to the limitations periods Congress established under the Act. See DelCostello, supra, 462 U.S., at 171, 103 S.Ct., at 2294; United Parcel Service, Inc. v. Mitchell, 451 U.S. 56, 68, n. 4, 101 S.Ct. 1559, 1567, n. 4, 67 L.Ed.2d 732 (1981). That does not relieve us, however, of our obligation to reject a limitations rule that would "frustrate or significantly interfere with federal policies." Reed, 488 U.S., at 327, 109 S.Ct., at 627. When determining the appropriate statute of limitations to apply, we must give careful consideration to the policies underlying a federal statute and to the practical difficulties aggrieved parties may have in establishing a violation. Ibid.; Wilson v. Garcia, 471 U.S. 261, 268, 105 S.Ct. 1938, 1942-1943, 85 L.Ed.2d 254 (1985).

This is not a case where the Court identifies a specific statute and follows each of its terms. As the Court is careful to note, the 1934 Act does not provide a single limitations period for all private actions brought under its express provisions. Rather, the Act makes three separate and distinct references to statutes of limitations. The Court rejects outright one of these references, a 2-year statute of repose for actions brought under § 16 of the 1934 Act, 15 U.S.C. § 78p(b), and purports to follow the other two. §§ 78i(e), 78r(c). The latter two references employ 1-year, 3-year schemes similar to one the Court establishes here, but each has its own unique wording. The Court does not identify any reasons for finding one to be controlling, so it is unnecessary to engage in close gramatical construction to separate the 1-year discovery period from the 3-year statute of repose.

It is of even greater importance to note that both of the statutes in question relate to express causes of action which in their purpose and underlying rationale differ from causes of action implied under § 10(b). The limitations statutes to which the Court refers apply to strict liability violations or, in the case of § 78i(e), to a rarely used remedy under § 9 of the 1934 Act. See L. Loss, Fundamentals of Securities Regulation 920 (2d ed. 1988). Neither relates to a cause of action of the scope and coverage of an implied action under § 10(b). Nor does either rest on the common law fraud model underlying most § 10(b) actions.

Section 10(b) provides investors with significant protections from fraudulent practices in the securities markets. Intended as a comprehensive antifraud provision operating even when more specific laws have no application, § 10(b) makes it unlawful to employ in connection with the purchase or sale of any security "any manipulative or deceptive device or contrivance" in violation of the Securities and Exchange Commission's rules. 15 U.S.C. § 78j. Although Congress gave the Commission the primary role in enforcing this section, private § 10(b) suits constitute "an essential tool for enforcement of the 1934 Act's requirements," Basic Inc. v. Levinson, 485 U.S. 224, 231, 108 S.Ct. 978, 983, 99 L.Ed.2d 194 (1988), and are " 'a necessary supplement to Commission action.' " Batemen Eichler, Hill Richards, Inc. v. Berner, 472 U.S. 299, 310, 105 S.Ct. 2622, 2628, 86 L.Ed.2d 215 (1985) (quoting J.I. Case Co. v. Borak, 377 U.S. 426, 432, 84 S.Ct. 1555, 1560, 12 L.Ed.2d 423 (1964)). We have made it clear that rules facilitating § 10(b) litigation "suppor[t] the congressional policy embodied in the 1934 Act" of combating all forms of securities fraud. Basic, supra, 485 U.S., at 245, 108 S.Ct., at 990.

The practical and legal obstacles to bringing a private § 10(b) action are significant. Once federal jurisdiction is established, a § 10(b) plaintiff must prove elements that are similar to those in actions for common-law fraud. See Herman & MacLean v. Huddleston, 459 U.S. 375, 103 S.Ct. 683, 74 L.Ed.2d 548 (1983). Each requires proof of a false or misleading statement or material omission, Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 97 S.Ct. 1292, 51 L.Ed.2d 480 (1977), reliance thereon, Basic, 485 U.S., at 243, 108 S.Ct., at 989; cf. id., at 245, 108 S.Ct., at 990 (reliance presumed in § 10(b) cases proving "fraud-on-themarket"), damages caused by the wrongdoing, Randall v. Loftsgaarden, 478 U.S. 647, 663, 106 S.Ct. 3143, 3152-3152, 92 L.Ed.2d 525 (1986), and scienter on the part of the defendant, Ernst & Ernst v. Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d 668 (1976). Given the complexity of modern securities markets, these facts may be difficult to prove.

The real burden on most investors, however, is the initial matter of discovering whether a violation of the securities laws occurred at all. This is particularly the case for victims of the classic fraud-like case that often arises under § 10(b). "[C]oncealment is inherent in most securities fraud cases." American Bar Association, Report of the Task Force on Statute of Limitations for Implied Actions, 41 Bus.Lawyer 645, 654 (1985). The most extensive and corrupt schemes may not be discovered within the time allowed for bringing an express cause of action under the 1934 Act. Ponzi schemes, for example, can maintain the illusion of a profit-making enterprise for years, and sophisticated investors may not be able to discover the fraud until long after its perpetration. Id., at 656. Indeed, in Ernst & Ernst, the alleged fraudulent scheme had gone undetected for over 25 years before it was revealed in a stock broker's suicide note. 425 U.S., at 189, 96 S.Ct., at 1378-1379.

The practicalities of litigation, indeed the simple facts of business life, are such that the rule adopted today will "thwart the legislative purpose of creating an effective remedy" for victims of securities fraud. Agency Holding Corp. v. Malley-Duff & Associates, Inc., 483 U.S. 143, 154, 107 S.Ct. 2759, 2766, 97 L.Ed.2d 121 (1987). By adopting a 3-year period of repose, the Court makes a § 10(b) action all but a dead letter for injured investors who by no conceivable standard of fairness or practicality can be expected to file suit within three years after the violation occurred. In so doing, the Court also turns its back on the almost uniform rule rejecting short periods of repose for fraud-based actions. In the vast majority of States, the only limitations periods on fraud actions run from the time of a victim's discovery of the fraud. Shapiro & Blauner, Securities Litigation in the Aftermath of In Re Data Access Securities Litigation, 24 New England L.Rev. 537, 549-550 (1989). Only a small minority of States constrain fraud actions with absolute periods of repose, and those that do typically permit actions to be brought within at least five years. See, e.g., Fla. § 95.11(4)(e) (1991) (5-year period of repose); Ky. § 413.120(12) (1990) (10-year period of repose); Mo. § 516.120(5) (1986) (10-year period of repose). Congress itself has recognized the importance of granting victims of fraud a reasonable time to discover the facts underlying the fraud and to prepare a case against its perpetrators. See, e.g., Interstate Land Sales Full Disclosure Act, 15 U.S.C. § 1711(a)(2) (action may be brought within three years from discovery of violation); Insider Trading and Securities Fraud Enforcement Act of 1988, 15 U.S.C. § 78t-1(b)(4) (action may be brought within five years of the violation). The Court, however, does not.

A reasonable statute of repose, even as applied against fraud-based actions, is not without its merits. It may sometimes be easier to determine when a fraud occurred than when it should have been discovered. But more important, limitations periods in general promote important considerations of fairness. "Just determinations of fact cannot be made when, because of the passage of time, the memories of witnesses have faded or evidence is lost." Wilson, 471 U.S., at 271, 105 S.Ct., at 1944. Notwithstanding these considerations, my view is that a 3-year absolute time bar is inconsistent with the practical realities of § 10(b) litigation and the congressional policies underlying that remedy. The 1-year-from-discovery rule is sufficient to ensure a fair balance between protecting the legitimate interests of aggrieved investors, yet preventing stale claims. In the extreme case, moreover, when the period between the alleged fraud and its discovery is of extraordinary length, courts may apply equitable principles such as laches should it be unfair to permit the claim. See DelCostello, 462 U.S., at 162, 103 S.Ct., at 2289; Holmberg v. Armbrecht, 327 U.S. 392, 66 S.Ct. 582, 90 L.Ed. 743 (1946). A 3-year absolute bar on § 10(b) actions simply tips the scale too far in favor of wrongdoers.

The Court's decision today forecloses any means of recovery for a defrauded investor whose only mistake was not discovering a concealed fraud within an unforgiving period of repose. As fraud in the securities markets remains a serious national concern, Congress may decide that the rule announced by the Court today should be corrected. But even if prompt congressional action is taken, it will not avail defrauded investors caught by the Court's new and unforgiving rule, here applied on a retroactive basis to a pending action.

With respect, I dissent and would remand with instructions that a § 10(b) action may be brought at any time within one year after an investor discovered or should have discovered a violation. In any event, I would permit the litigants in this case to rely upon settled Ninth Circuit precedent as setting the applicable limitations period in this case, and join Justice O'CONNOR's dissenting opinion in full.

Notes