Securities Law Alert
In This Edition:• Supreme Court: American Pipe Does Not Permit Unnamed Class Members to Bring a New Class Action
After the Expiration of the Applicable Limitations Period• Supreme Court: SEC’s Administrative Law Judges Are “Officers” Subject to the Appointments Clause• Supreme Court: Grants Certiorari to Consider Whether a Misstatement Claim That Does Not Satisfy theJanus Standard Can Be Pursued as a Fraudulent Scheme Claim• Tenth Circuit: A Company Has No Duty to Disclose Preliminary Merger Discussions Provided It Does
Not Say Anything “Inconsistent” With the Existence of Such Discussions• New York Court of Appeals: Three-Year Statute of Limitations Applies to Martin Act Claims
May/June 2018

Simpson Thacher
litigators are“[u]niformly excellent
in all respects.”–The Legal 500 2018

Supreme Court: American
Pipe Does Not Permit
Unnamed Class Members
to Bring a New Class Action
After the Expiration of the
Applicable Limitations Period
On June 11, 2018, the Supreme Court
unanimously held that the tolling ofindividual claims established in American
Pipe & Constr. Co. v. Utah, 414 U.S.
538 (1974),1 does not toll limitations
periods for successive class claims. China
Agritech v. Resh, 2018 WL 2767565 (2018)(Ginsburg, J.). Thus, individual claimants that
could invoke American Pipe tolling for theirindividual claims may not bring putative class
1. The American Pipe Court held that “the commencement of aclass action suspends the applicable statute of limitations as toall asserted members of the class who would have been parties
had the suit been permitted to continue as a class action.”

Simpson Thacher & Bartlett LLP

claims if such class claims would be barred by
the applicable statute of limitations.
In concluding that American Pipe tolling
does not permit follow-on class actions
after the expiration of the relevant statute oflimitations, the Court focused heavily on thereasoning behind American Pipe. The Court
explained that “[t]he watchwords of American
Pipe are efficiency and economy of litigation”
and stated that “[e]xtending American Pipetolling to successive class actions does notserve that purpose.” The Court observed thatthe “‘efficiency and economy of litigation’ that
support tolling of individual claims . . . do notsupport maintenance of untimely successiveclass actions.” Instead, the Court notedthat class claims should be made soon after
the first action seeking class certification.
The Court reasoned that while economy oflitigation favors delaying the limitation period
for individual claims until class certification
is denied because a certification grant would
eliminate the need for individually assertedclaims, the opposite is true for competingclass representative claims: when class
treatment is appropriate, it is best for all
possible representatives to be known so the
district court can select the best plaintiff.
The Court also analyzed the impact of theFederal Rules of Civil Procedure and thePrivate Securities Litigation Reform Act
of 1995 (“PSLRA”) on class litigation andsecurities suits. Rule 23 mandates thatclass certification be resolved at “an early
practicable time,” indicating a preference forthe preclusion of untimely class actions. The
Court noted that the PSLRA—which governs
the China Agritech litigation—requires
publication of class notices shortly after
commencement of a securities class action.
The Court reasoned that this rule aims toalert all potential class representatives to thelitigation and to afford them an opportunity
to demonstrate their suitability to serve as
lead plaintiff.

The Court also explained that plaintiffs
usually must show that they have been
diligent in pursuing their claims to benefit
from equitable tolling. In American Pipe,
the Court noted that tolling was permissible
because the intervening individual plaintiffs
had not “slept on their rights,” but instead
relied on the class representative to protect
their interests. Here, however, a “would-beclass representative who commences suit after
expiration of the limitation period . . . canhardly qualify as diligent in asserting claims
and pursuing relief.”
The Court expressed concern that applying
American Pipe tolling to successive classclaims would permit the statute of limitations
to be extended indefinitely, noting that“[e]ndless tolling of a statute of limitations is
not a result envisioned by American Pipe.”

Additionally, the Court rejected concernsthat its decision would lead to a “needlessmultiplicity” of class action filings because:(i) there is no showing that the Circuits thatdeclined to apply American Pipe to classactions have experienced a disproportionate
amount of protective class action filings;
and (ii) a plaintiff that wants to lead a classalready has incentive to file early and little
reason to delay.
The Court also rejected the argument that
limiting American Pipe tolling to individual
claims was contrary to the Rules Enabling
Act, noting that claimants have no substantive
right to bring untimely claims. The Court
explained that Rule 23 does not require classactions to be revived when individual claims
are tolled. Indeed, “the [Federal] Rules do
not offer . . . a reason to permit plaintiffs toexhume failed class actions by filing new,untimely class claims.”
Justice Sotomayor concurred with theoutcome, but opined that the majority erredin adopting an unnecessarily broad rule.
Justice Sotomayor expressed her view that
the American Pipe tolling doctrine should
apply to permit plaintiffs to file new classactions in cases that are not subject to the
PSLRA. Justice Sotomayor pointed to the
Court’s precedent in Shady Grove Orthopedic
Assocs., P.A. v. Allstate Ins. Co., 559 U.S.
393 (2010), which held that there must bea special reason for treating class actions
differently from individual claims. The PSLRA
and its procedural requirements, particularly
the requirement to notify potential
lead plaintiffs of a pending class action,
distinguishes securities law class actions fromthose not governed by the PSLRA. Justice
Sotomayor observed that Rule 23 generally
lacks a requirement to provide precertification
notice to putative class members and “in noway ensures that potential lead plaintiffs
know about the putative class action or about
their opportunity to represent the class.” Shedisagreed with the majority’s view that its
ruling would encourage class representatives
to come forward early in the process to “aid”
the court in selecting the best lead plaintiff.
Justice Sotomayor stated that “in suits notcovered by the PSLRA, absent class members
may not know of the pending class action
early enough to ‘aid’ the court, and will likely
have to file a completely separate lawsuit if
what they seek is lead-plaintiff status.”2Supreme Court: SEC’s
Administrative Law Judges
Are “Officers” Subject to the
Appointments Clause
On June 21, 2018, the Supreme Court heldthat the administrative law judges (“ALJs”)
for the SEC’s in-house courts are “Officers”
subject to the Appointments Clause of theUnited States Constitution. Lucia v. S.E.C.,
2018 WL 3057893 (2018) (Kagan, J.).
Pursuant to the Court’s ruling, SEC staff
members may no longer name ALJs. The
SEC’s ALJs may only be appointed by the SEC
itself, a court of law, or the President.

Background
The Appointments Clause states that the
President “shall nominate, and by and with
the Advice and Consent of the Senate, shallappoint . . . Officers of the United States.” U.S.
Const. art. II, § 2, cl. 2. The Appointments
Clause further provides that “Congress may
by Law vest the Appointment of such inferior
Officers as they think proper, in the President
alone, in the Courts of Law, or in the Heads ofDepartments.”
In Raymond J. Lucia Cos. v. SEC, 832 F.3d
277 (D.C. Cir. 2016), the D.C. Circuit heldthat the SEC’s ALJs are not “Officers of theUnited States” within the meaning of the
Appointments Clause because they have noauthority to issue “final decisions” of the SEC.
The D.C. Circuit found it significant that the
SEC has a discretionary right to review theaction of any ALJ as it sees fit, either on its
own initiative or upon a petition for review
filed by a party or aggrieved person. In theevent that “no review of the initial decision
is sought or ordered,” the SEC will issue anorder stating that it has declined review andspecifying the date that the ALJ’s sanctions,
if any, will take effect. The D.C. Circuitemphasized that the ALJ’s initial decision
becomes final only upon issuance of the
SEC’s order.
In Bandimere v. SEC, 844 F.3d 1168 (10thCir. 2016), however, the Tenth Circuit
rejected final decision-making power as
the key criterion for assessing whether the
Appointments Clause applies. The Tenth
Circuit relied on the Supreme Court’s decisionin Freytag v. Commissioner of Internal
Revenue, 501 U.S. 868 (1991) to hold that

the SEC’s ALJs are “inferior officers” whomust be appointed in conformity with the
Appointments Clause.
The defendant in Lucia petitioned the Court
for certiorari to resolve the circuit split, inhopes of erasing the adverse judgment of the
SEC’s ALJ against him. The defendant argued
that if the SEC ALJ who presided over his casewas not properly appointed, then the ALJ
lacked the constitutional authority to issue
the ruling in that matter.

Court Relies on Freytag to HoldThat SEC ALJs Are Officers Within
the Meaning of the Appointments
ClauseThe Court explained that the “sole question”
before the Court was whether the SEC’s ALJs
“are ‘Officers of the United States’ or simply
employees of the Federal Government.”2 If
the SEC’s ALJs were considered “part of thebroad swath of ‘lesser functionaries’ in the
Government’s workforce,” then it would not
matter how the ALJs were appointed. But if
the SEC’s ALJs were deemed to be “Officers,”
then the ALJs could be constitutionallyappointed only by the President, a court oflaw, or the head of a department. The Court
noted that the SEC itself “counts as a Headof a Department” for Appointments Clausepurposes. Instead of appointing the ALJs
itself, however, the SEC “left the task of
appointing ALJs . . . to SEC staff members.”
The Court stated that there are two key
requirements for an individual to qualify as
an officer under the “Court’s basic frameworkfor distinguishing between officers andemployees.” First, “an individual must occupya ‘continuing’ position established by law toqualify as an officer.” Second, the individual
must “exercis[e] significant authority
pursuant to the laws of the United States.”
The Court explained that the “significant
authority” test is “focused on the extent of
power an individual wields in carrying out his
assigned functions.”
The Court found it unnecessary to elaborateon the “‘significant authority’ test” establishedin Buckley v. Valeo, 424 U.S. 1 (1976) toresolve the question of whether the SEC’s
2. The Court declined the Government’s invitation to consider
the constitutionality of statutory restrictions on the removal of
SEC ALJs. The Court explained that it did not grant certiorari
to review this question, and noted that no court has yet
addressed the issue.
3

ALJs are officers. The Court found that its
ruling in Freytag v. Commissioner, 501 U.S.
858 (1991) “necessarily decides this case.”
The Court stated that in Freytag, it “applied
the unadorned ‘significant authority’ test to
adjudicative officials who are near carbon
copies of the [SEC’s] ALJs.”
The Freytag Court held that special trial
judges (“STJs”) of the United States Tax
Court were “inferior officers” subject to the
Appointments Clause. In relatively minor
matters, STJs had the authority to issue final
decisions. In more substantial matters, STJs
prepared proposed findings and an opinion
for the Tax Court judge to consider. The
Freytag Court determined that STJs were
subject to the Appointments Clause because
they held ongoing statutorily establishedpositions and “exercise[d] significant
discretion” in the course of executing“important functions” in connection withadversarial tax hearings.

The Lucia Court found that “Freytag says
everything necessary to decide this case.”
First, the SEC’s “ALJs, like the Tax Court’s
STJs, hold a continuing office established bylaw.” Second, the SEC’s “ALJs exercise thesame ‘significant discretion’ when carryingout the same ‘important functions’ as STJs
do.” The Court emphasized that “[b]oth setsof officials have all the authority needed
to ensure fair and orderly adversarial
hearings—indeed, nearly all the tools offederal trial judges.” The Court explainedthat the SEC’s ALJs, like the STJs at issue in
Freytag, (1) “take testimony,” (2) “conduct
trials,” (3) “rule on the admissibility ofevidence,” and (4) “have the power to enforce
compliance with discovery orders.” The Lucia
Court emphasized that “point for point—straight from Freytag’s list—the [SEC’s] ALJs
have equivalent duties and powers as STJs in
conducting adversarial inquiries.”

The Lucia Court further found that SEC “ALJs
issue decisions much like that in Freytag—
except with potentially more independent
effect.” The Court explained that in major
cases, a Tax Court judge must “always
review an STJ’s opinion.” An STJ’s “opinion
counts for nothing unless the regular judge
adopts it as his own.” The Court noted that“[b]y contrast, the SEC can decide against
reviewing an ALJ decision at all.” The ALJ’s
decision then becomes final and stands asa decision of the SEC. The Court concluded
that this “last-word capacity makes this ana fortiori case: If the Tax Court’s STJs are
officers, as Freytag held, then the [SEC’s]
ALJs must be too.”Court Holds Petitioner Is Entitledto a New Hearing Before a Different
SEC ALJ
As a remedy, the Court held that petitioner
was entitled to a hearing before a different
SEC ALJ than the one who initially heard andruled on his case. The Court reasoned thateven if that ALJ has “received (or receives
sometime in the future) a constitutional
appointment,” he “cannot be expected toconsider the matter as though he had not
adjudicated it before.” The Court found that“[t]o cure the constitutional error, another
ALJ (or the [SEC] itself) must hold the newhearing to which [petitioner] is entitled.”

Justices Thomas and Gorsuch,
Concurring, Posit That the Test
for an Officer Is the Exercise of an
Ongoing Statutory Duty
In a concurring opinion, Justice Thomas,
joined by Justice Gorsuch, observed that
“this Court will not be able to decide every
Appointments Clause case by comparing it
to Freytag.” Justice Thomas stated that any
individual who is “continuously responsible”
for an “an ongoing statutory duty” is an officer
under the Appointments Clause.

Justice Breyer, Concurring,
States That the Court Should
Have Resolved the Caseon Statutory Rather Than
Constitutional Grounds
In an opinion concurring in the judgment inpart and dissenting in part, Justice Breyer,
joined in part by Justices Ginsburg and
4

Sotomayor, expressed the view that the
Court should have decided the case basedon an application of the Administrative
Procedure Act rather than an interpretationof the Appointments Clause. Justice Breyer
stated that it was not possible to resolve
the constitutional question “without
knowing the answer to [the] different,
embedded constitutional question”—“theconstitutionality of the statutory ‘for cause’removal protections that Congress provided
for administrative law judges,” which the
majority declined to consider. Justice Breyer
observed that holding that ALJs are officers“is, perhaps, to hold that their removal
protections are unconstitutional.” Finally,
Justice Breyer, joined here by Justices
Ginsburg and Sotomayor, stated that he saw“no reason why” the same ALJ could notrehear petitioner’s case, as the same judges
routinely preside over new trials on reversal.

Justices Sotomayor and Ginsburg,
Dissenting, State That Only
Individuals With Final DecisionMaking Authority Are Officers
Subject to the Appointments Clause
In a dissenting opinion, Justice Sotomayor,
joined by Justice Ginsburg, expressed theview that “one requisite component of‘significant authority’ is the ability to makefinal, binding decisions on behalf of theGovernment.” Justice Sotomayor concluded
that “[SEC] ALJs are not officers because theylack final decision-making authority.” Sheobserved that “a person who merely advises
and provides recommendations to an officer
would not herself qualify as an officer.”Supreme Court: Grants
Certiorari to Consider
Whether a Misstatement
Claim That Does Not Satisfy
the Janus Standard Can Be
Pursued as a Fraudulent
Scheme ClaimOn June 18, 2018, the Supreme Court granted
certiorari to consider whether a misstatement
claim that does not satisfy the standard
set forth in Janus Capital Group v. First
Derivative Traders, 564 U.S. 135 (2011) for
Rule 10b-5(b) claims can serve as the basis fora fraudulent scheme claim under Rules 10b5(a) and (c), as well as Sections 17(a)(1) and(3) of the Securities Act of 1933.3 Lorenzo v.
SEC, No. 17-1077.
Rule 10b-5(b) renders it unlawful “[t]o make”
any material misstatement or omission “inconnection with the purchase or sale of any
security.”4 The Janus Court limited the scopeof liability under Rule 10b-5(b) by holdingthat “the maker of a statement is the personor entity with ultimate authority over thestatement, including its content and whether
and how to communicate it.” The Court
made it clear that “[o]ne who prepares or
publishes a statement on behalf of anotheris not its maker” and therefore cannot be
subject to liability for that statement under
Rule 10b-5(b).
In Lorenzo v. SEC, 872 F.3d 578 (D.C. Cir.
2017), the District of Columbia Circuit
relied on Janus to hold that a broker who
distributed false statements that wereauthored and approved by his boss could
not be liable under Rule 10b-5(b). The
broker claimed that “he [had] sent the email
messages at the behest of his boss” who had
3. Rules 10b-5(a) and (c) render it unlawful “[t]o employ any
device, scheme or artifice to defraud,” or “[t]o engage in any
act, practice, or course of business which operates or would
operate as a fraud or deceit upon any person, in connection
with the purchase or sale of any security.” Section 17(a)(1)and (3) of the Securities Act of 1933 similarly prohibit the“employ[ment] of any device, scheme, or artifice to defraud”
or “engage[ment] in any transaction, practice, or courseof business which operates or would operate as a fraud or
deceit upon the purchaser” in connection with “the offer orsale of any securities (including security-based swaps) or any
security-based swap agreement.”
4. Section 17(a)(2) similarly prohibits “obtain[ing] moneyor property by means of any” material misstatement oromission in connection with “the offer or sale of any securities(including security-based swaps) or any security-based swap
agreement.”5

“supplied the content of the false statements”
and “approved the messages for distribution.”
The D.C. Circuit found that the broker’s
boss, rather than the broker, had “ultimate
authority over the substance and distributionof the emails” within the meaning of Janus.
Although the D.C. Circuit found no basis forholding the broker liable under Rule 10b-5(b),the D.C. Circuit found the broker liable under
Rules 10b-5(a) and (c) and Section 17(a)(1)of the Securities Act of 1933. The court
determined that the broker’s “own activerole in producing and sending the emails
constituted employing a deceptive ‘device,’‘act,’ or ‘artifice to defraud’ for purposes of
liability” under Rules 10b-5(a) and (c) andSection 17(a)(1). The D.C. Circuit found that
there was “no blanket reason . . . to treat thevarious provisions as occupying mutually
exclusive territory, such that false-statementcases must reside exclusively within theprovince of Rule 10b-5(b).” The court heldthat “Rules 10b-5(a) and (c), as well as
Sections 10(b) [of the Securities Exchange Actof 1934] and 17(a)(1) [of the Securities Act],may encompass certain conduct involving thedissemination of false statements even if thesame conduct lies beyond the reach of Rule10b-5(b).”Like the D.C. Circuit, the Eleventh Circuit
has determined that “even a person . . . who
is not the ‘maker’ of an untrue statement of amaterial fact, nonetheless could be liable asa primary violator of Rule 10b-5(a) and (c).”SEC v. Big Apple Consulting USA, 783 F.3d
786 (11th Cir. 2015). However, the Second,
Eighth and Ninth Circuits have held thatmisstatements and omissions alone cannot
give rise to a claim for scheme liability under
Rules 10b-5(a) and (c).5
Citing this circuit split, the broker-defendant
in Lorenzo petitioned the Court for certiorari
to address the question of “whether amisstatement claim that does not meet theelements set forth in Janus can be repackaged
5. See Lentell v. Merrill Lynch & Co., 396 F.3d 161 (2d Cir. 2005)(holding that plaintiffs cannot assert “a market manipulation
claim under Rule 10b-5(a) and (c)” if “the sole basis for suchclaims is alleged misrepresentations or omissions”); Public
Pension Fund Grp. v. KV Pharm. Co., 679 F.3d 972 (8th Cir.
2012) (“[A] scheme liability claim must be based on conductbeyond misrepresentations or omissions actionable under
Rule 10b-5(b).”); WPP Luxembourg Gamma Three Sarl v. Spot
Runner, 655 F.3d 1039 (9th Cir. 2011) (“A defendant may
only be liable as part of a fraudulent scheme based uponmisrepresentations and omissions under Rules 10b-5(a) or(c) when the scheme also encompasses conduct beyond thosemisrepresentations or omissions.”).

and pursued as a fraudulent scheme claim.”
Petition for a Writ of Certiorari, Lorenzo
v. SEC, 2018 WL 656234 (Jan. 26, 2018).
The broker-defendant argued that the D.C.
Circuit’s decision will enable private plaintiffs
to “sidestep” the Janus standard by bringing
misstatement claims as fraudulent scheme
claims under Rules 10b-5(a) and (c). The
broker-defendant contended that “allow[ing]a private plaintiff to use a fraudulent scheme
theory to pursue primary liability against adefendant who did not make a misstatement
would erase the distinction between primaryand secondary liability.”
The SEC responded that “nothing in the text,
structure, history or purpose of the relevant
provisions suggests that the references to‘statement[s]’ in Section 17(a)(2) and Rule10b-5(b) mean that a fraud claim based on
false claims can proceed only under those
two provisions.” Brief for the Respondent
in Opposition, Lorenzo v. SEC, 2018 WL
2063084 (May 2, 2018). The SEC argued thata person may be liable for “disseminating a
false statement” under the scheme liability
provisions of Rule 10b-5 and Section 17(a)regardless of whether that person can faceliability for making that same statement.
The Court will hear the Lorenzo case in
October Term 2018. A date for oral argument
has not yet been set.

Tenth Circuit: A Company
Has No Duty to Disclose
Preliminary Merger
Discussions Provided It
Does Not Say Anything“Inconsistent” With the
Existence of Such Discussions
On May 11, 2018, the Tenth Circuit heldthat an energy company and its executives
had no duty to disclose preliminary merger
discussions with a competing energy firm
because defendants had not made any
statements that were “inconsistent” with thepossibility that the company was engaging insuch discussions. Emps. Ret. Sys. of Rhode
Island v. Williams Cos., 889 F.3d 1153 (10thCir. 2018) (Hartz, J.). The Tenth Circuit
further found that the merger discussions
were not material under the probability/
6

magnitude test set forth in Basic v. Levinson,
485 U.S. 224 (1988).
The merger discussions at issue took placeshortly after defendants announced that thecompany intended to merge with its affiliate,
which was majority-owned by the company.
Following the announcement, plaintiffs
purchased shares in the affiliate company.
Several weeks later, the competing energy
firm announced that it intended to merge
with the company, and that this merger would
preclude the company’s planned merger
with its affiliate. The stock price of shares in
the affiliate company subsequently dropped.
Plaintiffs brought suit alleging that they
overpaid for the affiliate’s shares because ofdefendants’ failure to disclose the merger
discussions with the competing energy firm.
Plaintiffs also contended that defendants
falsely represented that the company’s merger
with its affiliate “was a done deal.” The
district court dismissed plaintiffs’ claims, andplaintiffs appealed.

to, its affiliate company. The court reasoned
that defendants did not make any statementsthat were “inconsistent” with the fact that thecompany was engaging in merger discussions
with a competing firm.
In reaching this conclusion, the Tenth
Circuit found persuasive the Ninth Circuit’s
decision in Brody v. Transitional Hospitals
Corp., 280 F.3d 997 (9th Cir. 2002) andthe Second Circuit’s decision in Glazer
v. Formica Corp., 964 F.2d 149 (2d Cir.
1992). In Brody, the Ninth Circuit found acompany had no duty to disclose acquisition
proposals when it announced its plan to buyback thousands of the company’s shares.
The Ninth Circuit held that the securities
laws do not require “complete” disclosures
because “[n]o matter how detailed andaccurate disclosure statements are, there
are likely to be additional details that could
have been disclosed but were not.” Similarly,
in Glazer, the Second Circuit held that “themere fact that exploration of merger or LBO
possibilities may have reached a stage wherethat information may be considered material
does not, of itself, mean that the companies
have a duty to disclose.”

Merger Discussions Are Typically
Not Material Unless the Parties
Have Evidenced “a Serious
Commitment to Consummate
the Transaction”

Rule 10b-5 Does Not Impose aStand-Alone Duty to Disclose
Merger Discussions
The Tenth Circuit held that the company had“no duty under the securities laws to disclosethe merger talks” with the competing energy
firm. The court emphasized that “Rule 10b-5
does ‘not create an affirmative duty to disclose
any and all material information.’” Id.
(quoting Matrixx Initiatives v. Siracusano,
563 U.S. 27 (2011)). Rather, Rule 10b-5
requires disclosure “only when necessary to
make statements made, in the light of thecircumstances in which they were made, notmisleading.” Id. (quoting Matrixx, 563 U.S.
27). The Tenth Circuit found defendants had
no duty to disclose the merger discussions
at issue because defendants did not speak to
the possibility that the company might merge
with any entities other than, or in addition

The Tenth Circuit further held that even if
defendants had a duty to disclose the merger
discussions with the competing energy
firm, plaintiffs “failed to adequately allege
that the discussions were material.” Thecourt explained that Basic’s “probability/
magnitude” test governs the question of“when preliminary merger discussions arematerial.” This “fact-specific” inquiry requires
courts to “analyze the probability that amerger will succeed and the magnitude of
the transaction.” The Tenth Circuit explainedthat “merger discussions are generally
not material in the absence of a serious
commitment to consummate the transaction.”
The Tenth Circuit noted that in Jackvony v.
RIHT Financial Corp., 873 F.2d 411 (1st Cir.
1989), a decision authored by now-Justice
Stephen Breyer, the First Circuit held thatmerger talks were not material because there
were “no concrete offers, specific discussions,or anything more than vague expressions7

of interest.” The First Circuit reasoned
that announcements of such “‘tentative
feelers’ . . . would more likely confuse, thaninform, the marketplace.” Similarly, in Taylor
v. First Union Corp. of S.C., 857 F.2d 240(4th Cir. 1988), the Fourth Circuit foundthat the merger discussions at issue were notmaterial because they were “preliminary,contingent, and speculative.” The Fourth
Circuit explained that requiring disclosureof such discussions would “threaten tobury the shareholders in an avalanche oftrivial information.”“Guided by these decisions,” the Tenth Circuit
found that plaintiffs failed to plausibly allege
that, at the time of the claimed omission,
the company was likely to merge with thecompeting energy firm. The court noted that
there were no allegations of “concrete offers,
specific discussions, or anything more thanvague expressions of interest.” The court
determined that the allegations were “fully
consistent with there being no commitment
whatsoever.” The court also found that there
were no factual allegations that investors“would reasonably view such a combination
as fatal to” the company’s planned merger
with its affiliate.

New York Court of Appeals:
Three-Year Statute ofLimitations Applies to Martin
Act Claims
On June 12, 2018, the New York Court ofAppeals (the “Court of Appeals”) held thatclaims brought under the Martin Act, New
York’s blue sky law, are governed by thethree-year statute of limitations set forthin New York Civil Practice Law and Rules(“CPLR”) 214(2), which applies to actions “torecover upon a liability, penalty or forfeiture
created or imposed by statute.” People bySchneiderman v. Credit Suisse Sec. (USA),2018 WL 2899299 (N.Y. 2018) (DiFiore, C.J.).
The Court of Appeals reversed the ruling of
the Appellate Division, First Department,
which held that the six-year statute oflimitations set forth in CPLR 213(8) foractions “based upon fraud” applies to Martin
Act claims. The Court of Appeals also found
CPLR 213(1), which establishes a six-year
statute of limitations for actions “for which nolimitation is specifically prescribed by law,”inapplicable to Martin Act claims.
The Court of Appeals explained that CPLR
214(2)’s three-year statute of limitations
applies “where liability would not exist but
for a statute.” CPLR 214(2) does not govern“claims which, although provided for ina statute, merely codify or implement an
existing common law liability.” To determine
whether CPLR 214(2)’s three-year statute oflimitations applies to Martin Act claims, theCourt of Appeals considered “whether theMartin Act creates liabilities that did not exist
at common law.”

The Court of Appeals noted that the Martin
Act “authorizes the Attorney General toinvestigate and enjoin fraudulent practices
in the marketing of stocks, bonds and othersecurities within or from New York State.” To
prevail in enforcement proceedings brought
under the Martin Act, “the Attorney Generalneed not prove scienter or intentional fraud[or] reliance on the part of any investor.”
The Court of Appeals observed that it has“repeatedly held that the Martin Act does
not create a private right of action in favorof parties injured by prohibited fraudulent
practices.” The court has also previously
ruled that “a private litigant may not pursue
a common-law cause of action where theclaim is predicated solely on a violationof the Martin Act or its implementing
regulations and would not exist but for the
statute.” Id. (quoting Assured Guaranty(UK) Ltd. v. J.P. Morgan Inv. Mgmt., 18
N.Y.3d 341 (N.Y. 2011) (emphasis omitted)).
The Court of Appeals found these decisions
confirm that “the Martin Act covers somefraudulent practices not prohibited elsewherein statutory or common law.” Based on its
determination that “the Martin Act imposes
numerous obligations—or ‘liabilities’—that
did not exist at common law,” the Court ofAppeals held that the three-year statute of8

limitations set forth in CPLR 214(2) “governs
Martin Act claims.”
The Court of Appeals also considered thestatute of limitations applicable to claims
brought under § 63(12) of New York’s
Executive Law, which empowers the Attorney
General to bring enforcement proceedings
in connection with fraudulent practices. The
court observed that the statutory language
is “virtually identical to language found insection 352 of the Martin Act.” Nevertheless,because Executive Law § 63(12) “gives
the Attorney General standing to redress
liabilities recognized elsewhere in the law,”
the Court of Appeals held that courts must“‘look through’ Executive Law § 63(12) andapply the statute of limitations applicableto the underlying liability.” If the “conduct
underlying the Executive Law § 63(12)claim amounts to a type of fraud recognizedin the common law,” then “the action will
be governed by [the] six-year statute oflimitations” set forth in CPLR 213(8). But if
the conduct at issue is actionable only under
the Martin Act, then CPLR 214(2)’s three-year
statute of limitations applies.
In a lengthy dissenting opinion, Judge Rivera
expressed her view that the majority opinion“reads the CPLR and the Martin Act in a waythat undermines the Legislature’s purpose.”
She opined that “[a] construction that limits
actions under the Martin Act to three years
must be rejected as unsound.” She further
opined that the majority’s decision withrespect to the applicable statute of limitations
for claims brought under Executive Law§ 63(12) was based on the same “flawed
analysis” as the rest of the majority’s opinion.

This edition of the
Securities Law Alert was edited byAlexis S. Coll-Veryacoll-very@stblaw.com / +1-650-251-5201,
Susannah S. Geltman
sgeltman@stblaw.com / +1-212-455-2762,
Linton Mann III
lmann@stblaw.com / +1-212-455-2654,
and Cheryl J. Scarboro
cscarboro@stblaw.com /+1-202-636-5529.

9

New York

Los Angeles

Paul C. Curnin+1-212-455-2519
pcurnin@stblaw.com

Lynn K. Neuner+1-212-455-2696
lneuner@stblaw.com

Michael D. Kibler+1-310-407-7515
mkibler@stblaw.com

Stephen M. Cutler+1-212-455-2773
stephen.cutler@stblaw.com

Michael J. Osnato, Jr.
+1-212-455-3252
michael.osnato@stblaw.com

Chet A. Kronenberg+1-310-407-7557
ckronenberg@stblaw.com

Michael J. Garvey+1-212-455-7358
mgarvey@stblaw.com

Mark J. Stein+1-212-455-2310
mstein@stblaw.com

Deborah L. Stein+1-310-407-7525
dstein@stblaw.com

Susannah S. Geltman+1-212-455-2762
sgeltman@stblaw.com

Alan C. Turner+1-212-455-2472
aturner@stblaw.com

Palo AltoPaul C. Gluckow+1-212-455-2653
pgluckow@stblaw.com

Craig S. Waldman+1-212-455-2881
cwaldman@stblaw.com

Nicholas S. Goldin+1-212-455-3685
ngoldin@stblaw.com

George S. Wang
+1-212-455-2228
gwang@stblaw.com

Peter E. Kazanoff+1-212-455-3525
pkazanoff@stblaw.com

Jonathan K. Youngwood+1-212-455-3539
jyoungwood@stblaw.com

Joshua A. Levine+1-212-455-7694
jlevine@stblaw.com

David Elbaum
Senior Counsel+1-212-455-2861
david.elbaum@stblaw.com

Linton Mann III+1-212-455-2654
lmann@stblaw.com
Joseph M. McLaughlin+1-212-455-3242
jmclaughlin@stblaw.com

Janet A. Gochman
Senior Counsel+1-212-455-2815
jgochman@stblaw.com

Stephen P. Blake+1-650-251-5153
sblake@stblaw.com
Alexis S. Coll-Very+1-650-251-5201
acoll-very@stblaw.com
James G. Kreissman+1-650-251-5080
jkreissman@stblaw.com
Simona G. Strauss
Senior Counsel+1-650-251-5203
sstrauss@stblaw.com

Washington, D.C.
Jeffrey H. Knox
+1-202-636-5532
jeffrey.knox@stblaw.com
Cheryl J. Scarboro+1-202-636-5529
cscarboro@stblaw.com
Peter C. Thomas+1-202-636-5535
pthomas@stblaw.com

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attorney-client relationship. Simpson Thacher & Bartlett LLP assumes no liability in connection withthe use of this publication. Please contact your relationship partner if we can be of assistance regardingthese important developments. The names and office locations of all of our partners, as well as ourrecent memoranda, can be obtained from our website, www.simpsonthacher.com.
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