New England Biz Law Update
Securities fraud plaintiffs could not revive time-barred claims under the extended statute of limitations under the Sarbanes-Oxley Act, the 2nd U.S. Circuit Court of Appeals has ruled.
A three-judge panel of the court rejected the plaintiffs’ argument that they could retroactively file suit on claims that had expired prior to the passage of Sarbanes-Oxley.
“Congress did not clearly provide for retroactive application of Section 804 of Sarbanes-Oxley,” wrote Judge Jose A. Carbanes. “Revival of previously stale securities fraud claims has an impermissible retroactive effect.”
This issue is being hotly contested in federal courts around the country. The 2nd Circuit’s decision is the first federal appeals decision on the matter. According to published reports, four district courts have ruled on the issue, with at least one trial judge ruling Sarbanes-Oxley does allow for retroactive claims.
The sweeping corporate governance reform bill, passed July 30, 2002, extended the time investors could sue companies for fraud to within two years from discovering fraud and within five years after the violation occurred. The time period previous to the Act was one year and three years, respectively.
Two cases were before the court. One involved a suit filed by Aetna Life Insurance Co. and others against Enterprise Mortage Acceptance Co. LLC for alleged misrepresentations and omissions related to EMAC securities. The plaintiffs amended their complaints to include claims related to securities bought in 1998 and 1999, which were barred under the pre-Sarbanes-Oxley statute of limitations.
The other case is a class action pertaining to alleged securities fraud at Computer Associates International Inc. The plaintiffs added Ernst & Young as a defendant three months after the enactment of Sarbanes-Oxley based on the firm’s audit of Computer Associates.
(In re Enterprise Mortgage Acceptance Co., LLC, Securities Litigation, Docket Nos. 03-9261, 03-9265, 04-0392. Click here to read opinion.)
The panel indicated that a statute could be applied retroactively only if Congressional intent to do so is clearly expressed in the law.
But such an intent is absent from Sarbanes-Oxley, according to the court: “[N]either the language nor the legislative history of Section 804 requires that we … apply [it] retroactively to revive plaintiffs’ previously expired securities fraud claims. [We] instead defer to the longstanding presumption against retroactive application.”
The plaintiffs sought retroactive application on the basis of language in Section 804 that the revised statute of limitations “shall apply to all proceedings … that are commenced on or after the date of enactment of this Act.” The plaintiffs’ claims in question were filed after the Act became effective.
They also pointed to language in the Act stating that it was not creating a new private right of action. Accordingly, they argued, Congress was only lengthening the statute of limitations and not expanding the types of securities claims.
However, the panel concluded that these provisions were not “unmistakably clear” that Congress intended revival of stale securities claims.
The presumption against retroactivity is based on the notion that individuals should have an opportunity to know what the law is and to conform their conduct accordingly, the panel noted.
Extending the statute of limitations retroactively would increase the defendants’ liability for past conduct when they reasonably believed they were immune from litigation, Carbanes wrote. Such a retroactive effect is not permitted absent Congressional intent to impose it, he said.
The Securities and Exchange Commission filed an amicus brief in a separate proceeding before the 2nd Circuit raising the same issue, arguing Sarbanes-Oxley permitted retroactive filing of stale claims if they occurred within the new five-year period.
The SEC expressed a concern that many investors hurt in the recent spate of financial fraud committed by numerous companies would otherwise have no recourse.
The panel was not persuaded, however, noting that Section 804 of the Act covers private actions only. “Section 804 … is not a statute that the SEC has been entrusted to administer and therefore its viewpoint is not entitled to deference,” Carbanes wrote.
