Court Opinion

ID: 8411929
Source: CourtListenerOpinion
Date Created: 2022-11-02 19:15:05.300839+00
Date Added: 2024-06-11T16:47:54.382013
License: Public Domain

M. SMITH, Circuit Judge, specially
concurring:
The statutory text of Section 16(b) provides that “no such suit shall be brought more than two years after the date such profit was realized.” 15 U.S.C. § 78p(b). In my view, “no suit” means no suit, and “two years after the date such profit was realized” means two years after the insider’s final profitable transaction, regardless of when — or even if — a Section 16(a) report is filed. The text of the statute sets a firm bar against Section 16(b) suits filed more than two years after the transaction is completed. Accordingly, I agree with the Supreme Court’s dictum that Section 16(b) “sets a 2-year ... period of repose.” Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 360 n. 5, 111 S.Ct. 2773, 115 L.Ed.2d 321 (1991).
This straightforward textual reading is further confirmed by comparing the language of Section 16(b) with the language of the other statutes of limitations in our securities laws. See Lampf, 501 U.S. at 360-61 & nn. 5-7, 111 S.Ct. 2773. The Court in Lampf explained that language such as Section 16(b)’s “no such suit shall be brought” creates periods of repose that are not subject to tolling. Id. at 360-61, 363, 111 S.Ct. 2773. In addition, the general securities fraud statute of limitations added by the Sarbanes-Oxley Act of 2002, 116 Stat. 801, provides that securities fraud suits “may be brought not later than ... 5 years after such violation.” 28 U.S.C. § 1658(b)(2). The Supreme Court recently noted that this provision “giv[es] defendants total repose after five years.” Merck & Co., Inc. v. Reynolds, — U.S. -, 130 S.Ct. 1784,1797, 176 L.Ed.2d 582 (2010) (emphasis added). There is little meaningful distinction between the language of 28 U.S.C. § 1658(b)(2) and Section 16(b) — one provides that suits “may be brought not later than ... 5 years after such violation,” and the other provides that “no such suit shall be brought more than two years after the date such profit was realized.” To me, this nearly identical language should “giv[e] defendants total repose” under both statutes. See Merck, 130 S.Ct. at 1797.
There are numerous reasons why Congress would elect to create a firm two-year period of repose for Section 16(b) actions. Although there is no direct evidence of *1100Congress’s intent, the legislative history has left behind an intriguing clue. When the Senate and House of Representatives passed their respective bills that later became the Exchange Act, the House of Representatives’s version did not even provide for a private right of action under Section 16(b), whereas the Senate’s version provided a right of action but omitted a statute of limitations. Romeo & Dye, supra, § 1.02[3][b][vi], It is reasonable to infer that the House negotiators, in reaching a compromise with the Senate over the inclusion of a private right of action, might have bargained to include a stringent statute of limitations to circumscribe that right of recovery.
Admittedly, the legislative history is inconclusive, but a restrictive statute of limitations is eminently logical. Section 16(b) imposes an inflexible penalty on corporate insiders even if they are not at fault and third parties are unharmed. As Section 16(b)’s critics have noted, its disgorgement provision “is little more than a trap for the unwary.” Id. § 9.01[ll][a], It makes no sense to allow individuals to be hauled into court years — or even decades — after they unintentionally violate Section 16. Our holding in Whittaker creates the possibility that “a claim that affects long-settled transactions might hang forever over honest persons.” Litzler v. CC Investments, L.D.C., 362 F.3d 203, 208 n. 5 (2d Cir.2004) (Jacobs, J., concurring). Whittaker could lead to the anomalous situation in which a corporate officer who mistakenly calculates the six-month short-swing period can be compelled to disgorge his trading profits decades after the fact, whereas a culpable officer who engages in fraudulent insider trading becomes immune from civil suit after five years as long as his trades were spaced more than six months apart. I fail to see the logic behind such a result, and I fear that Whittaker failed to foresee such anomalies.
I note that Whittaker was motivated by the well-intentioned concern that corporate insiders could avoid Section 16(b) liability if they flout Section 16(a)’s reporting requirements. However, I do not believe that this concern warrants the creation of never-ending liability for corporate directors, officers, and shareholders. The Exchange Act is a comprehensive statute that was designed to address various types of wrongdoing. It is inappropriate for us to use Section 16(b), which prohibits certain types of insider trading, to enforce the policies of Section 16(a), which requires disclosure of insider trading. The Exchange Act creates more than adequate enforcement mechanisms for enforcing Section 16(a)’s disclosure requirements. If the insiders do not file their reports, they may be held professionally, civilly, or criminally liable for failing to do so. See, e.g., 15 U.S.C. § 78ff(a) (criminal penalties); In re Gold, Exchange Act Release No. 34-51585, 85 S.E.C. Docket 724 (Apr. 20, 2005) (professional and civil penalties). And if the insiders withhold their Section 16(a) reports in order to profit from inside information, they may be subjected to Rule 10b-5 securities fraud actions. See, e.g., In re Daou Sys., Inc., 411 F.3d 1006, 1022-24 (9th Cir.2005).
Ultimately, I believe that Whittaker’s cure is worse than the disease it intended to address. I would have preferred to adopt any one of the three alternatives to Whittaker: the statute of repose approach, Lampf, 501 U.S. at 360 n. 5, 111 S.Ct. 2773, the actual notice approach, Litzler, 362 F.3d at 208, or the hybrid approach that tolls the statute in eases of “fraud or concealment,” id. at 208 n. 5 (Jacobs, J., concurring). Of these three approaches, the statutory text and statutory structure clearly point toward the repose approach. Were it not for Whittaker, I would hold that Section 16(b) suits may not be *1101brought more than two years after the short-swing trades take place.
Despite these concerns, I am compelled to follow Whittaker. See Miller v. Gammie, 335 F.3d 889, 899 (9th Cir.2003) (en banc). Accordingly, I concur with the panel’s decision.