Securities Law Alert• Supreme Court: SEC Claims for Disgorgement in Enforcement Actions Are Subject to Section 2462’s
Five-Year Statute of Limitations• Ninth Circuit: American Pipe Tolls the Class Claims of Unnamed Plaintiffs Even If Class Certification
Was Denied in the Prior Timely-Filed Action on Substantive Grounds• Tenth Circuit: Plaintiffs Asserting ERISA Breach of Fiduciary Duty Claims Bear the Burden of Proving
Loss Causation• Delaware Chancery Court: Merger Price Negotiated in a Robust Sales Process Is the Best Evidence ofFair Value Where the Company Did Not Prepare Management Projections in the Ordinary Course of
Business
June 2017

Supreme Court: SEC
Claims for Disgorgement in
Enforcement Actions Are
Subject to Section 2462’s FiveYear Statute of Limitations
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On June 5, 2017, the Supreme Court
unanimously held that disgorgement in an
SEC enforcement action for violation of
the securities laws is a “penalty” subject toSection 2462’s five-year statute of limitations.
Kokesh v. SEC, 2017 WL 2407471 (2017)(Sotomayor, J.).
Section 2462 provides that SEC claims forcivil monetary penalties must be brought
within five years of the date the claim accrues.
Gabelli v. SEC, 568 U.S. 442 (2013). Section
2462 states: “Except as otherwise provided by
Act of Congress, an action, suit or proceeding
for the enforcement of any civil fine, penalty,
or forfeiture, pecuniary or otherwise, shallnot be entertained unless commenced within
five years from the date when the claim
first accrued.”

The Court began its analysis by noting thehistory of the remedies sought by the SEC andthe lack of statutory authorization for claims
for disgorgement.1 The Court then turned
to Section 2462’s text and determined what
constitutes a “penalty.” The Court defined a“penalty” as “a ‘punishment, whether corporalor pecuniary, imposed and enforced by theState, for a crime or offen[s]e against its
laws.’” Id. (quoting Huntington v. Attrill, 146
U.S. 657 (1892)). Applying this definition, theCourt reasoned that a remedy’s status as apenalty depends on two factors: first, whether
the wrong it redresses is a public or private
wrong and, second, whether the remedy is
imposed to punish and deter, rather than tocompensate a victim for his or her loss.
The Court found that disgorgement redresses
a public wrong—a violation against the UnitedStates, not a particular individual. The Court
also concluded that disgorgement is imposed
1. Congress has authorized disgorgement in the SEC’s own
administrative proceedings, 15 U.S.C. § 78u–2(e), and monetary
penalties in civil suits, 15 U.S.C. § 77t(d). However, it has never
specifically authorized disgorgement as a remedy in enforcement
actions by the SEC. Disgorgement remains an implied equitable
remedy to be defined and applied by the courts.

primarily as a deterrent. The Court observedthat there is no statutory requirementthat courts distribute disgorged funds to a
defendant’s victims and courts infrequently
do so. Accordingly, the Court held thatdisgorgement “bears all the hallmarksof a penalty” and “[t]he 5-year statute oflimitations in § 2462 therefore applies when
the SEC seeks disgorgement.”
Finally, the Court responded directly to
the U.S. Government’s argument thatdisgorgement is “remedial” rather than“punitive” because it merely restores thedefendant to his or her position before theviolation occurred. The Court noted thatdisgorgement sometimes leaves a defendantworse off than if he or she had not violated
the securities laws and is therefore punitive.

Ninth Circuit: American
Pipe Tolls the Class Claimsof Unnamed Plaintiffs Even
If Class Certification Was
Denied in the Prior TimelyFiled Action on Substantive
Grounds
On May 24, 2017, the Ninth Circuit held that
the American Pipe tolling doctrine permits
plaintiffs to bring a new class action after
the expiration of the statute of limitations if
they were unnamed plaintiffs in a timely-filed
putative class action, even if class certification
was denied in the prior action on substantive
grounds and the new action asserts similarclass claims. Resh v. China Agritech, 2017
WL 2261024 (9th Cir. 2017) (Fletcher, J.).2
In Korwek v. Hunt, 827 F.2d 874 (2d Cir.
1987), the Second Circuit considered thissame question and held that American Pipe
2. In Resh, the named plaintiffs had been unnamed members of
two previously uncertified classes. Class certification was denied
in the first action for failure to demonstrate market efficiency for
purposes of the fraud-on-the-market presumption of reliance.
Certification was denied in the second action based on thenamed plaintiffs’ failure to meet Rule 23(a)(3)’s typicality
requirement and class counsel’s failure to meet the requirementof Rule 23(a)(4). The named plaintiffs in the Resh action
contended that the denial of certification in the first action “wasbased upon the particular lead plaintiffs’ experts’ deficiencies
rather than any suitability of the claims for class treatment.”
Resh v. China Agritech, 2014 WL 12599849 (C.D. Cal. Dec. 1,2014). The district court found the Resh plaintiffs were essentially“argu[ing] that class certification was denied not because theclaims were not suitable for class certification, but rather, because
the plaintiffs failed to establish that the claims were not suitablefor class certification.”“does not apply to permit a plaintiff to file asubsequent class action following a definitive
determination of the inappropriateness ofclass certification.”3
Pursuant to the American Pipe tolling
doctrine, “the commencement of a classaction suspends the applicable statute oflimitations as to all asserted members of theclass who would have been parties had thesuit been permitted to continue as a classaction.” American Pipe & Construction Co.
v. Utah, 414 U.S. 538 (1974). The American
Pipe Court held that “unnamed membersof an uncertified class could intervene
as individual plaintiffs in the individual
suit that remained even if the statutory
limitations period had passed.” Resh, 2017
WL 2261024. In Crown, Cork & Seal Co. v.
Parker, 462 U.S. 345 (1983), “the Supreme
Court extended American Pipe to permit
tolling not only for individual intervention in
the named plaintiffs’ original suit, but also
for individual filing of entirely new suits.”
Resh, 2017 WL 2261024. The Ninth Circuit
found that American Pipe and Crown, Cork
& Seal left “open the question [of] whether
such plaintiffs may bring a new suit as aclass action.”
Relying on its prior decision in Catholic
Social Services v. INS, 232 F.3d 1139 (9thCir. 2000), the Ninth Circuit found that“the availability of a subsequent classaction … depend[s] on the operation of
preclusion and preclusion-related principles”
and not general tolling principles. In Catholic
Social Services, the Ninth Circuit held thatunnamed members of a timely-filed putativeclass action could bring a class action after
the expiration of the statute of limitations
where certification was vacated in the priorclass action based on an intervening change
in the law. The Catholic Social Services court
explained that the case before it did not
involve “a statute of limitations question” but“rather, a question of whether plaintiffs whose
individual actions are not barred may bepermitted to use a class action to litigate thoseactions.” 232 F.3d 1139. The Ninth Circuit
in Resh found the Catholic Social Services
3. Many courts have agreed with the Second Circuit’s approachin Korwek. See, e.g., Yang v. Odom, 392 F.3d 97 (3d Cir. 2004)(“[T]his Court agrees with the Korwek line of cases insofar as
they refuse to toll limitations periods for substantively identicalclass actions in which the earlier putative class was denied
certification because the substantive claims were inappropriate
for class treatment. Our review of the case law of the Circuits
which have addressed the issue reveals them to be unanimous on
this point.”).
2

holding was not limited only to “certain
categories of class action denials,” such as
those based on the deficiencies of a classrepresentative. 2017 WL 2261024. Rather, theResh court determined that Catholic Social
Services applies equally to cases in whichclass certification was previously denied basedon a substantive deficiency in the class itself.
The Resh court found the Supreme Court’s
decision in Shady Grove Orthopedic Assocs.,
P.A. v. Allstate Ins. Co., 559 U.S. 393 (2010)“confirmed” this interpretation. The Shady
Grove Court held that “for purposes of classcertification,” courts must “look only to thecriteria of Rule 23 and not to ‘some otherlaw.’” Resh, 2017 WL 2261024 (quoting
Shady Grove, 559 U.S. 393). The Resh court
reasoned that “[t]here is nothing in thecertification criteria of Rule 23 that tells us tolook to whether the statute of limitation has,or has not, been tolled.”

To the extent this rule might “lead to abusive
filing of repetitive class actions,” the Reshcourt stated that “the current legal system
is adequate to respond to such a concern.”
The court explained that “if it is clear that a
proposed class is not viable under Rule 23, as
evidenced by an earlier federal court decision,
potential future plaintiffs (or, more precisely,
their attorneys) will have little to gain fromrepeatedly filing new suits.” The court
reasoned that “[a]ttorneys who are going tobe paid on a contingency fee basis, or in somecases based on a fee-shifting statute, at somepoint will be unwilling to assume the financial
risk in bringing successive suits.”
Moreover, the Resh court found that“ordinary principles of preclusion andcomity will further reduce incentives to
re-litigate frivolous or already dismissed classclaims, and will provide a ready basis for
successor federal district courts to deny classaction certification.”4

Tenth Circuit: Plaintiffs
Asserting ERISA Breach of
Fiduciary Duty Claims Bear
the Burden of Proving Loss
Causation

The Resh court concluded that “permitting
future class action named plaintiffs, whowere unnamed class members in previously
uncertified classes, to avail themselves ofAmerican Pipe tolling would advance thepolicy objectives that led the Supreme Court
to permit tolling in the first place.” The Reshcourt reasoned that this “rule creates nounfair surprise to defendants because thependency of a prior class suit has alreadyalerted them ‘not only [to] the substantive
claims being brought against them, but also[to] the number and generic identities of thepotential plaintiffs who may participate in
the judgment.’” Id. (quoting American Pipe,
414 U.S. 538). The Resh court explained that
this “[t]he rule also promotes economy oflitigation by reducing incentives for filing
duplicative, protective class actions.”

On June 5, 2017, the Tenth Circuit held thatthe burden to prove loss causation in an
ERISA breach of fiduciary duty action “falls
squarely on the plaintiff.” The Pioneer Ctrs.
Holding Co. Emp. Stock Ownership Plan andTr. v. Alerus Fin., 2017 WL 2415949 (10thCir. 2017) (McHugh, J.). The Tenth Circuit’s
decision deepened a circuit split on this issue.
Pursuant to 29 U.S.C. § 1109(a), “a fiduciary
who breaches its duties under ERISA shallbe personally liable for ‘any losses to theplan resulting from each such breach.’” Id.
(quoting 29 U.S.C. § 1109(a)). The Tenth
Circuit noted that “[t]he plain language
4. The Resh court found the Supreme Court’s decision in Smith
v. Bayer Corp., 564 U.S. 299 (2011) instructive on this point.
In Smith, the Supreme Court held that class certification ina federal suit did not bar class certification in a parallel state
court suit because the named plaintiffs in the state court suit
were only unnamed members of the class in the federal court
suit. In response to defendants’ concern regarding the “serial
relitigation of class certification,” the Court suggested that“traditional principles of stare decisis and comity, combined withthe possibility of removal under the Class Action Fairness Act
or consolidation by the Panel on Multidistrict Litigation, wereadequate to the task of protecting defendants.” Resh, 2017 WL
2261024 (discussing Smith, 564 U.S. 299).
3

of § 1109(a) establishes liability for losses‘resulting from’ the breach, which … indicatesthat there must be a showing of some causal
link between the alleged breach and theloss plaintiff seeks to recover.” The court
underscored that “the statute is silent as towho bears the burden of proving a resulting
loss.”The Tenth Circuit explained that “[w]herea statute is silent on burden allocation, ‘theordinary default rule [is] that plaintiffs bear
the risk of failing to prove their claims.’” Id.
(quoting Schaffer ex rel. Schaffer v. Weast,
546 U.S. 49 (2005)). The court recognizedthat “[t]here are exceptions to the default
rule, such as when ‘certain elements of aplaintiff’s claim … can fairly be characterized
as affirmative defenses or exemptions.’” Id.
(quoting Schaffer, 546 U.S. 49). The court
noted that “[a]nother exception to the default
rule unique to the fiduciary duty question
arises under the common law of trusts.” Thecourt stated that “[t]rust law advocates aburden-shifting paradigm whereby once abeneficiary has succeeded in proving that thetrustee has committed a breach of trust andthat a related loss has occurred, the burden
shifts to the trustee to prove that the loss
would have occurred in the absence of thebreach.”The Tenth Circuit determined that none ofthese exceptions to the default rule apply to
ERISA breach of fiduciary duty claims. The
court stated that “nothing in the languageof § 1109(a) or in its legislative history …
indicates a Congressional intent to shift theburden to the fiduciary to disprove causation.”
Moreover, the court found no evidence “thatsuggests Congress intended to make thelack of causation an affirmative defense or
an exemption to liability.” The Tenth Circuit
concluded that “causation is an element of
the [ERISA breach of fiduciary duty] claim
and that the plaintiff bears the burden ofproving it.”
The Tenth Circuit noted that “[t]he majorityof federal circuits that have considered
the issue … have refused to incorporate
any burden shifting into ERISA breachof fiduciary duty claims.”5 However, thecourt observed that “some circuits have
5. Id. (citing Wright v. Or. Metallurgical Corp., 360 F.3d 1090
(9th Cir. 2004); Silverman v. Mut. Benefit Life Ins. Co. 138
F.3d 98 (2d Cir. 1998); Kuper v. Iovenko, 66 F.3d 1447 (6th Cir.
1995), abrogated on other grounds by Fifth Third Bancorp v.
Dudenhoeffer, 134 S. Ct. 2459 (2014); Willett v. Blue Cross & Blue
Shield of Ala., 953 F.2d 1335 (11th Cir. 1992)).

incorporated the common law of trust’s
burden shifting into ERISA breach offiduciary duty claims.”6 The Tenth Circuit
declined to “follow these decisions” andrefused to “shift the burden to the fiduciaryonce the plaintiff establishes a prima facie
showing of loss related to the breach.”
The Tenth Circuit reasoned that “[w]here
the plain language of the statute limits thefiduciary’s liability to losses resulting froma breach of fiduciary duty, there seems little
reason to read the statute as requiring theplaintiff to show only that the loss is related
to the breach.” Moreover, the court foundthat adopting “the burden-shifting framework
could result in removing an important
check on the otherwise sweeping liability offiduciaries under ERISA.”

Delaware Chancery Court:
Merger Price Negotiated in a
Robust Sales Process Is theBest Evidence of Fair Value
Where the Company Did
Not Prepare Management
Projections in the Ordinary
Course of Business
On May 26, 2017, the Delaware Chancery
Court held that the deal price was the best
evidence of the fair value of a company’s
shares where the merger was the result of a“robust pre-signing auction among informed,
motivated bidders.” In re Appraisal of
PetSmart, 2017 WL 2303599 (Del. Ch. 2017)(Slights, V.C.). The court declined to relyon aggressive management projections thatwere not prepared in the ordinary courseof business to calculate fair value using a
discounted cash flow (DCF) analysis.
The court observed at the outset that theparties presented “two vastly different
valuations … based on two binary views of themost reliable means by which to determine
fair value—deal price versus a discounted
cash flow analysis.” The court noted that the$4.5 billion difference in the parties’ proposed
valuations left “much room for compromise.”
However, the court found no “path in the
6. Id. (citing Tatum v. RJR Pension Inv. Comm., 761 F.3d 346(4th Cir. 2014); McDonald v. Provident Indem. Life Ins. Co., 60
F.3d 234 (5th Cir. 1995); Martin v. Feilen, 965 F.2d 660 (8th Cir.
1992)).
4evidence to reach a fair value somewhere
between the values proffered by theparties.” The court explained that accepting
petitioners’ proposed valuation “would betantamount to declaring that a massive
market failure occurred … that caused[the company] to leave nearly $4.5 billion
on the table.” The court found the evidence
instead demonstrated that the company ran
a “well-constructed and fairly-implemented
auction process” in which none of the entities
involved “colluded with or otherwise favoredany bidder during the entirety of the process.”
Although the court was “confident thatthe deal price in this case [was] a reliableindicator of fair value,” the court nevertheless“approached the DCF valuations … with anopen mind.” The court explained that “[t]hefirst key to a reliable DCF analysis is theavailability of reliable projections of future
expected cash flows, preferably derived fromcontemporaneous management projections
prepared in the ordinary course of business.”
The court emphasized that “if the data inputs
used in the [DCF] model are not reliable,

then the results of the analysis likewise willlack reliability.”In the case before it, the court found that the
management projections were “not reliablestatements of [the company’s] expectedcash flows” for several reasons. First, thecompany “had not historically created fiveyear projections prior to the creation of theauction-related projections.” Second, thecompany’s management “did have a historyof preparing short-term forecasts that did notaccurately predict [c]ompany performance.”
Third, the court found that “management
did not believe that the projections they
were preparing actually offered reliable
projections of future performance.” Lastly,
the court noted that “the projections werecreated to be aggressive and extra-optimistic
about the future of the [c]ompany” inorder to “aid [the company] in its pursuitof strategic alternatives, including a sale ofthe [c]ompany.” The court concluded that“[a]ny DCF analysis that relie[d] upon the[m]anagement [p]rojections … would produce‘meaningless’ results.”

The Securities Law Alertis edited by Paul C. Gluckow
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