In 2011, when I first started writing about the statute of repose, which sets an absolute time limit on how long a plaintiff can wait to file a claim, I routinely called it obscure, a shadowy corollary to the better-known statute of limitations. By now, of course, you know that the time lag between the financial crisis and litigation stemming from it has brought the statute of repose out of the shadows. But a 28-page decision Wednesday by U.S. District Judge Robert Sweet of Manhattan, in a case involving an alleged scheme to short a doomed-to-fail collateralized debt obligation, asked and answered a question that still seems to be unclear in the 2nd Circuit: When does the clock start ticking on the absolute time bar?

Sweet's ruling came in a securities fraud suit by the Italian bank Intesa Sanpaolo, which purchased a $180 million credit default swap on the highest-rated tranches of a CDO called Pyxis in April 2007. Apparently unbeknownst to Intesa, the CDO had been stuffed with dreck for the express purpose of sending it into default, in yet another alleged scheme in which a savvy but ruthless hedge fund anticipated the housing crash and secretly shorted CDOs it was purportedly backing with equity investments. In this case, according to Sweet's ruling, the part of the ruthless hedge fund was played by Magnetar. Also allegedly in on the scheme were the CDO's arranger - Credit Agricole's investment banking arm, known as Calyon - and the collateral manager, Putnam Advisory. Intesa's lawyers at Quinn Emanuel Urquhart & Sullivan claimed that Calyon and Putnam went along with Magnetar's plot to short the CDO in exchange for outsize deal fees.

Intesa filed its suit in federal court in April 2012. As you might expect, defense lawyers from Skadden, Arps, Slate, Meagher & Flom (for Calyon); Milbank, Tweed, Hadley & McCloy (for Putnam); and Kirkland & Ellis (for Magnetar) argued that the Italian bank had waited too long, based both on the two-year statute of limitations and the five-year statute of repose.

Sweet's opinion explains that the U.S. Supreme Court established a starting point for the statute of limitations on federal securities fraud claims in its 2010 ruling in Merck v. Reynolds. And though the defendants in the Intesa case said the bank was put on notice by articles about Magnetar's backstage involvement in the Pyxis CDO that ran in 2008, Sweet said those news accounts weren't sufficient specifically to alert Intesa to the defendants' supposedly fraudulent intent. He said the bank's notice dated to the public emergence of damning emails in a 2011 filing in another investor's case against Magnetar. "Since certain facts relevant to scienter were first revealed in these emails," Sweet wrote, "Intesa cannot be said to have discovered 'the facts constituting the violation' until July 21, 2011." Intesa's suit, in other words, was well within the two-year window provided by the statute of limitations.

But it wasn't within the five-year statute of repose, Sweet wrote. There's no Supreme Court guidance on when that begins, nor does Sweet cite direct precedent from the 2nd Circuit Court of Appeals that sets a clear standard. (As I've reported, the appeals court is considering a different but related question about whether the statute of repose can be tolled by a class action filing.) Quinn Emanuel, pointing to a 2010 ruling by U.S. District Judge Victor Marrero in Anwar v. Fairfield Greenwich, argued that the clock starts on the statute of repose when the fraudulent transaction takes place. Intesa bought the $180 million Pyxis credit default swap on April 24, 2007, the bank said, so its filing on April 6, 2012, was within the five-year time frame.

Sweet disagreed that the clock starts when the deal closes. He said that under a 2011 ruling by the 2nd Circuit in City of Pontiac General Employees' Retirement System v. MBIA, the statute of repose begins when the last purported misrepresentation was made.

The judge backed into that conclusion. The MBIA ruling addressed the statute of limitations, not the statute of repose. So Sweet engaged in some inference to read the appeals court's intent on repose, writing that because the 2011 opinion holds that the "two-year post-discovery deadline begins to run at the time of purchase," it "thereby (implies) that the five-year post-violation deadline must be triggered by some other event." Both Calyon and Putnam had their final communications with Intesa before April 4, 2007, Sweet said, so the Italian bank's fraud suit wasn't filed in time.

Sweet gave the bank leave to file an amended complaint, so Intesa will get another chance to allege that it was misled after April 4, 2007. If that doesn't work, there's always New York State Supreme Court, where the statute of limitations on fraud is a generous six years.

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