Toward a Just Measure of Repose: The Statute of Limitations for Securities Fraud.

ABSTRACT Statutes of limitations, a long-standing bulwark of civil litigation, mitigate the risk that evidence of meritorious claims will become stale and relieve defendants who might be exposed to claims from unending uncertainty about whether claims will be brought. But these twin rationales are balanced against allowing plaintiffs sufficient time to discover and file meritorious claims. This balance is manifest in the judicial and congressional effort to fashion a statute of limitations for securities fraud claims. The Supreme Court in Merck & Co. v. Reynolds recently attempted to strike that balance in its interpretation of the statute of limitations for securities fraud claims under section 10(b) and Rule 10b-5. But we show that the Court has failed. Merck presents a pleading trap for victims of securities fraud that will preclude the adjudication of meritorious claims. Moreover, the Supreme Court's Merck decision exemplifies a much more serious problem with the entire limitations regime for securities fraud. We demonstrate that the discovery provision in that regime should be discarded for a singular statute of repose as the discovery provision unnecessarily precludes meritorious claims without providing any more support for the twin rationales beyond what is already provided by a statute of repose alone. The repose provision by itself reduces the use of stale evidence and litigation uncertainty and it does not unnecessarily preclude meritorious claims. In this sense, our proposal bucks the trend of scholarship addressing the statute of limitations that advocates eliminating limitations periods entirely. We find that insights from behavioral economics and practical realities of market activity justify some measure of repose. Thus, we advocate abolishing the discovery provision in the statute of limitations but keeping the statute of repose. TABLE OF CONTENTS INTRODUCTION I. THE SUPREME COURT, CONGRESS, AND THE STATUTE OF LIMITATIONS FOR PRIVATE SECURITIES FRAUD A. Statutes of Limitations, Repose, and Discovery-Accrual B. The Supreme Court's Limitations Period 1. "Discovery" 2. "The Facts Constituting the Violation" C. Congress and the Sarbanes-Oxley Act II. MERCK & CO. V. REYNOLDS AND THE IMPORTANCE OF THE STATUTE OF LIMITATIONS A. Vioxx, Heart Attacks, and Stock Fraud B. The Supreme Court 1. "Discovery" 2. "'The Facts Constituting the Violation" 3. Justice Scalia's Concurrence C. The Reach of Merck and Subprime Litigation III. THE DANGERS OF MERCK AND ABOLISHING DISCOVERY-ACCRUAL A. The Problematic Incorporation of Scienter 1. Scienter on the Offensive: Collective Scienter and Core Operations 2. The Pleading Game Plaintiffs Cannot Win 3. Failing To Achieve Uniformity in the Statute of Limitations B. The Illusory Benefits to a Discovery Provision 1. The Practical Realities of Securities Litigation and Prompt Filing 2. The Discovery of Merited Section 10(b) and Rule 10b-5 Claims 3. The Discovery Provision's Increased Costs Associated with Securities Litigation IV. MARKET FUNCTIONS, BEHAVIORAL ECONOMICS, AND THE CASE FOR RETAINING REPOSE FOR SECURITIES FRAUD ACTIONS A. Loss Aversion and Nonculpable Market Participants B. Event-Accrual and the Five-Year Statute of Repose CONCLUSION INTRODUCTION Statutes of limitations have been part of the architecture of civil litigation for centuries. (1) These limitations are designed to mitigate the risk that evidence of meritorious claims will become stale and to relieve potential defendants from unending uncertainty about whether they will be brought into court. (2) The "stale evidence" rationale is rooted in the premise that resolving claims on their merits is more likely if the evidence, including testimony based on recall, is produced closer in time to the event that gives rise to the claim. …