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US Supreme Court rules it is too late to claim Lehman damages

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A ruling by the US Supreme Court will impact the time frame for investors to assert individual claims for compensation of damages through courts, lawyers have warned.

The court ruled that the California Public Employees’ Retirement System (CalPERS) could not sue a number of banks over losses resulting from the Lehman Brothers bankruptcy in September 2008.

The case, CalPERS v ANZ Securities, was about the Lehmans bankruptcy but centred on the time frame available for investors to pursue lawsuits when seeking recovery of damages under US securities laws.

The ruling said the filing of a class action did not satisfy the three-year time period for parties pursuing individual claims for recovery of damages.

Generally, US securities laws provide a three-year time limit for strict liability claims on securities purchased in public offerings, and a five-year time limit for securities fraud claims based on open market purchases.

“The decision serves as a major wake-up call to identify and follow securities class actions of interest across the country, to ensure that valuable individual securities fraud claims are protected and preserved.”

Blair Nicholas, lawyer

Legal precedent dating back to the 1970s established that filing a class action satisfied all time periods governing class members’ individual claims for recovery, including both the statute of limitations and the statute of repose for securities claims. It meant individuals could pursue separate claims outside of a class action suit at a later date.

However, this was overturned in 2014 in a case related to IndyMac, an American mortgage provider that collapsed a few months before Lehman Brothers in 2008. The IndyMac ruling meant that, if a US class action was formally certified by the court after the statute of repose expired, class members would not be able to pursue their own lawsuit later. It is nearly nine years since Lehman Brothers collapsed.

CalPERS had opted out of a class action against ANZ Securities and other banks, preferring to pursue an individual action. But the Court of Appeals – relying on the IndyMac ruling – dismissed this action on the grounds that it had commenced after the statute of repose had expired. CalPERS applied to the Supreme Court to review and overturn the IndyMac ruling.

CalPERS was supported by 75 investors with over $4trn in assets under management, including European pension funds APG, AP1, Industriens Pension, and the Universities Superannuation Scheme, as well as Aegon Asset Management, Blue Sky Group, MP Investment Management, PGGM Investments, SEB Investment Management, and Storebrand.

However, in a 5-4 decision, the Supreme Court judges upheld the IndyMac ruling.

The judges’ verdicts

Judge Anthony Kennedy, delivering the ruling, said: “The three-year time bar in… the Securities Act is a statute of repose. Its purpose and design are to protect defendants against future liability. The statute displaces the traditional power of courts to modify statutory time limits in the name of equity.”

But Judge Ruth Ginsburg, dissenting, said: “The decision disserves the investing public that [the Securities Act of 1933] was designed to protect. The harshest consequences will fall on those class members, often least sophisticated, who fail to file a protective claim within the repose period.”

She added: “[It] will also gum up the works of class litigation. Defendants will have an incentive to ‘slow-walk’ discovery and other precertification proceedings so the clock will run on potential opt-outs. Any class member with a material stake in a… case, including every fiduciary who must safeguard investor assets, will have strong cause to file a protective claim before the three-year period expires.”

Blair Nicholas, a senior partner at Bernstein Litowitz Berger & Grossmann (BLBG), who prepared the institutional investors’ filing, said: “The case has important practical consequences for investors and their fiduciaries, but also provides much-needed clarity.

“As Judge Ginsberg correctly observed, the decision serves as a major wake-up call to both fiduciaries and investors to identify and follow securities class actions of interest across the country, to ensure that valuable individual securities fraud claims are protected and preserved.”

Otherwise, Nicholas said, “the claim may lapse with investors left holding the bag, as they are now legally precluded from relying on the class action case to protect their individual claims for recovery of what are, in many cases, substantial securities fraud damages”.

He said that pursuing certain opt-outs can result in a major upside recovery for investors, but they must be extremely selective in the opt-outs they pursue because it could prove costly both in terms of time and money.

Total funds recovered for investors in securities class actions in the US during 2016 amounted to $9.3bn (€8.1bn), according to corporate governance advisers Institutional Shareholder Services.

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