On March 26, 2012, the US Supreme Court (Supreme Court) issued an opinion vacating the US Court of Appeals for the Ninth Circuit's (Ninth Circuit) decision in Credit Suisse Securities (USA) LLC, et al. v. Simmonds, which had found that defendants' failure to make timely disclosures of ownership interests under Section 16(a) of the Exchange Act tolled the two-year statute of limitations for bringing a case seeking disgorgement of short-swing profits under Section 16(b) of the Exchange Act. The Supreme Court vacated the Ninth Circuit's opinion and remanded to the lower courts for their consideration on how the usual rules of equitable tolling apply to the facts of this case.

Under Section 16(b) of the Exchange Act, a corporation or its securityholders may sue corporate Section 16 Insiders who realize profits from the purchase and sale or sale and purchase of the corporation's securities within any six-month period. The statute of limitations for bringing these suits is two years after the insider realized the profit.

In 2007, respondent Vanessa Simmonds filed multiple Section 16(b) actions claiming that, in connection with various public offerings in the late 1990's and 2000, petitioners and others inflated the stocks' aftermarket prices, which allowed them to profit from the aftermarket sales. Simmonds also claimed that petitioners had failed to comply with the requirement under Section 16(a) of the Exchange Act that insiders publicly disclose any changes to their ownership interests by filing a beneficial ownership report with the SEC (typically on Forms 3, 4 and 5). That failure, she claimed, tolled the two-year statute of limitations.

The US District Court for the Western District of Washington dismissed the complaints as barred by the statute of limitations. The Ninth Circuit reversed, citing its prior decision in Whittaker v. Whittaker Corp. which held that the limitations period is tolled until an insider files the Section 16(a) report, regardless of whether the plaintiff knew or should have known of the conduct at issue. Courts in several jurisdictions have followed the Whittaker precedent.

Petitioners appealed the decision to the Supreme Court.

The Supreme Court held that, even assuming that the Section 16(b) two-year limitations period can be extended, the Ninth Circuit erred in determining that the limitations period is tolled until an insider files a Section 16(a) beneficial ownership report. The eight Justices joining the opinion were equally divided on whether the two-year period could be extended at all, affirming that portion of the Ninth Circuit's ruling without precedential value.

The plain text of Section 16(b), the Supreme Court reasoned, starts the clock from the date the profit was realized and, therefore, does not support the Whittaker rule. If Congress had intended the possibility of tolling the limitations period until the filing of a Section 16(a) beneficial ownership report, it would have expressly provided so.

The Supreme Court also held that the Whittaker rule is not supported by the background rule of equitable tolling for fraudulent concealment. Equitable tolling allows a claim to be made after the statutory period has expired if inequitable circumstances have prevented the plaintiff from bringing the action within the applicable statute of limitations. Tolling ends when fraudulently concealed facts are, or should have been, discovered by the plaintiff. Allowing tolling to continue beyond that point would be inconsistent with the general purpose of a statute of limitations, which is to protect defendants against stale claims. The Supreme Court expressed concern that the Whittaker rule would force parties that are plausibly unaware or disclaim that they are insiders or part of an insider group to either file a Section 16(a) report or face an unending Section 16(b) claim.

The Supreme Court vacated the Ninth Circuit's opinion and remanded to the lower courts for their consideration on how the usual rules of equitable tolling apply to the facts of this case.

In a footnote, the Supreme Court also rejected the approach of the US Court of Appeals for the Second Circuit in Litzler v. CC Investments, L. D. C., 362F.3d 203 (2004), where the court ruled that the period is tolled until a plaintiff has actual notice that an insider has realized short-swing profits.

As a result of this case, it will become more difficult for plaintiffs to successfully argue for the tolling of the limitations period in Section 16(b) cases. The failure of insiders to comply with Section 16(a) reporting will no longer automatically toll the statute of limitations. Instead, to bring a case after the two-year statute of limitations, plaintiffs must rely on the doctrine of equitable tolling. In short, a plaintiff must establish that:

To learn more about insider liability for short-swing profits, see Practice Note, Section 16(b) Short-swing Profit Liability: The Perils of Turning a Quick Profit.