Impact Of SOX 804 Decision Unclear, May Be Broad

As we reported last year, the Second U.S. Circuit Court of Appeals in New York recently ruled against the retroactive application of Sarbanes-Oxley Section 804, which is the provision extending the statute of limitations on securities fraud cases.

Before Sarbanes-Oxley, shareholders needed to file securities fraud claims within one year of discovering the fraud, and within three years of the fraudulent incident. SOX 804 lengthened those limitations to two years and five years, respectively.

In some cases, however, the narrower statutes of limitations had already expired by the time of SOX 804's passage. Investors who were affected in cases such as these had hoped that SOX 804 would apply retroactively—extending the statute of limitations on their expired cases and thereby still allowing them to file suit against the companies. The Dec. 13 ruling ended those hopes for all cases filed in New York's Second Circuit Court.

Impact Unclear

Talley

"It's hard to tell exactly how many cases were affected by the one-year statute extension,” says Eric Talley, a USC Law School Professor and Director of USC's Center in Law, Economics & Organization. “I haven't tabulated the complainants statements of when they reported learning of fraud, and I don't think it's part of any data set out there," he adds.

However, securities litigation experts note that number is probably pretty small, and Talley agrees. "When we look at the three-year statute of limitations,” he says, “maybe about a dozen cases were affected by the ruling, so it's a pretty modest number."

According to Talley, it is also difficult to estimate the number of cases that might have been filed in the Second Circuit Court if the ruling had gone in favor of retroactive extensions of the statutes of limitations, but he placed the figure "on the order of 60 to 70 suits, could be more."

The mean settlement amounts for securities fraud cases in this district hovered around $20 million, Talley said, and the median settlement amount was approximately $5 million.

SEC Rebutted

Prezioso

The case has important implications for the SEC, and in September the Commission’s General Counsel Giovanni Prezioso filed an amicus curiae in support of retroactive application of SOX 804. Amicus briefs present a third party’s point of view in a case, and the SEC usually submits them if the case could have a "substantial precedential impact," limit the Commission's jurisdiction, or cause a conflict between the federal securities laws and other federal or state law.

Prezioso filed the brief with U.S. Court of Appeals for the Second Circuit, "urging this court to hold that the amended statute of limitations permits investors to bring claims that are timely under the new limitations provision, regardless of whether those investors’ claims had become barred prior to the enactment of the amendment under the former limitations period."

The Second Circuit's decision, however, ran counter to Prezioso’s interpretation.

Carton

But according to Bruce Carton, executive director of Institutional Shareholder Services' Securities Class Action Services, it isn't unusual for the court and the SEC not to see eye-to-eye on an issue such as this. "The courts value the opinion of the SEC, but they are two different programs with two different agendas,” says Carton.

That’s because Commission has an enforcement program whose efforts could be better facilitated by a judiciary that supports its regulatory regime. “But that may not be what the federal courts think is the proper interpretation of the statute,” says Carton, “because they're looking at Congressional intent."

Not The Final Word

Talley at USC agrees. "This is exactly the holding that I would have predicted,” he says. “It is very consistent with most of the case law on retroactivity."

According to Talley, The Sarbanes-Oxley Act of 2002 was not specific enough for the Second Circuit. "Unless there is a clearly manifested attempt by Congress to make an act retroactive,” he says, “courts will generally refuse to do so."

Still, the Second Circuit's ruling is not the final word—it is only the first circuit court to hand down an opinion on SOX 804 retroactivity, and the other circuit courts are not bound to follow the precedent. "The Ninth Circuit hasn't ruled yet," cautions Talley. "It's very possible that other circuits might go the other way.”

Warren

But Irwin Warren, partner at Weil, Gotshal & Manges, recently told Compliance Week that that is not likely. According to Warren, the decision “will be very persuasive on the other courts. The Second Circuit is very highly respected."

Still, Talley argues that other courts might not agree with the latest decision. “They [the courts] don't treat each other's opinions as compelling authority,” he says, “and the Ninth Circuit has a pretty well known reputation for bucking trends.” The result, according to Talley, could be investors filing claims in preferential states. “We could see a lot of forum shopping here,” he says, “where, for companies that traded on a national exchange, it wouldn't be too hard to find shareholders in whatever state you want and file there in search of a different court opinion."