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
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
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.
Follow us on Twitter: @AlisonFrankel, @ReutersLegal | Like us on Facebook