Securities Regulation Daily Wrap Up, FRAUD AND MANIPULATION—6th Cir.: Court holds statute of repose not subject to tolling, affirms dismissal as untimely, (May 20, 2016)

By Kevin Kulling, J.D.

The Sixth Circuit has upheld the dismissal of multiple securities fraud actions brought by investors against several Regions Morgan Keegan investment funds after the funds sustained “catastrophic” losses. Affirming the district court’s finding that the actions were time-barred, the court held that claims with repose periods of three and five years were not subject to tolling and were barred in their entirety (Stein v. Regions Morgan Keegan Select High Income Fund, Inc., May 19, 2016, Clay, E.)

Parties to the action. The parties on appeal consisted of several groups of investors who brought federal claims against Regions Morgan Keegan Select High Income Fund, RMK High Income Fund, the RMK Advantage Income Fund, the RMK Strategic Income Fund and the RMK Multi-Sector High Income Funds (collectively, the Funds).

Underlying violations. After the Funds lost nearly 90 percent of their value in 2007 and 2008, management of the funds was turned over to a different investment adviser in July 2008.

Investors brought their action in October 2013, alleging that the significant losses occurred because the Funds were overvalued and heavily concentrated in certain types of risky securities. The complaint alleged that the funds unlawfully concealed their risks, overvaluation, and lack of diversification from investors and from the SEC, and that the plaintiff investors relied on these material misrepresentations of fact in deciding to invest in the Funds.

The district court dismissed the claims on the ground that they were barred by applicable statutes of limitations found in the Securities Act and the Exchange Act.

Limitations and repose. The appellate court noted that actions based on violations of the Securities Act were subject to a limitations period of one year after the discovery of an untrue statement or omission, and a three-year statute of repose. The court also noted that actions based on violations of the Exchange Act were subject to a limitations period of two years after discovery of the facts constituting the violation or a statute of repose consisting of five years after such violation.

Tolling of statutes. Investors sought to apply the doctrine of American Pipe & Construction Co. v. Utah to argue that the relevant statutes of limitation and of repose were tolled. The court noted that the investors had sought recourse in arbitration or in court by early 2010 and had clearly discovered the facts constituting the violation several years prior to bringing the action that was pending before the court. Because the claims were brought after the applicable one-year or two-year statute of limitations, the claims were potentially barred. But the claims would be saved, the court said, if the applicable statute of limitations was tolled, as the investors argued it was, pursuant to American Pipe, when several class actions were filed in federal court in 2007. The court said, however, that because the investors filed the action during the pendency of the class certification proceedings, they forfeited American Pipe tolling with respect to the defendants named in that case.

Regardless of its analysis concerning whether the statute of limitations tolling applied and to whom, the court ultimately found the statutes of repose to be dispositive as to all claims.

Statute of repose. The court said that because the investors filed their respective complaints more than five years after the funds turned over management to another investment adviser, which would be the last possible date of potential violations, all of their claims were barred by the relevant three- or five-year statutes of repose.

The noted the distinction between statutes of limitations and repose. A statute of limitations creates a time limit for suing in a civil case, based on the date when the claim accrued, the court said, quoting Supreme Court decisions. However, a statute of repose puts an outer limit on the right to bring a civil action, which is measured not from the date on which the claim accrued, but instead from the date of the last culpable act or omission of the defendant, the court said.

The court said that statutes of repose affect rights, remedies, and rules of decision. They confer on defendants a right to be free of liability by imposing an absolute temporal bar on claims, prevent recovery by plaintiffs after the repose period, and impose the additional decision rule that court must rule in defendants’ favor if plaintiffs delay beyond the statutory period to bring suit, the court said. Because statutes of repose give priority to defendants’ right to be free of liability after a certain absolute period of time, the panel stated that it joins the Second Circuit in holding that, “regardless of whether American Pipe tolling is derived from courts’ equity powers or from Rule 23, it does not apply to statutes of repose.”

The case is No. 15-5903.

Attorneys: Scott T. Beall (Tate Lazarini & Beall PLC) for Andrew M. Stein. Kevin C. Logue (Paul Hastings LLP) for Regions Morgan Keegan Select High Income Fund, Inc., RMK High Income Fund, Inc. and RMK Strategic Income Fund, Inc.

Companies: Regions Morgan Keegan Select High Income Fund, Inc.; RMK High Income Fund, Inc.; RMK Strategic Income Fund, Inc.

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