Bloomberg News

Investment Bank Dispute Ordered Reconsidered by High Court

March 26, 2012

The U.S. Supreme Court (1000L) told a lower court to reconsider deadlines for some securities lawsuits, in a dispute about whether investment banks must face accusations that they manipulated dozens of initial public offerings.

The 8-0 ruling today is a partial victory for seven Wall Street firms, including Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS), whose units were among the defendants in the case.

The ruling ordered lower courts to reconsider how long an investor can wait before filing lawsuits seeking to hold underwriters and corporate insiders accountable for “short swing” trades, those involving stock held for less than six months. Under federal securities law, insiders with large enough holdings must give back any profits from short-swing trades.

The high court overturned part of a decision by the 9th U.S. Circuit Court of Appeals, which said a two-year time limit for lawsuits over short-swing profits doesn’t begin until corporate insiders disclose the transactions in regulatory filings.

The justices split 4-4 on whether the law permits any extension of the deadline beyond two years after the stock-sale profits are realized. Chief Justice John Roberts didn’t participate in the case. The tie vote on that part of the case leaves intact the portion of the lower court decision that permits extensions of the deadline under some circumstances.

Further Proceedings

The justices, in an opinion written by Justice Antonin Scalia, sent the case back for further proceedings to determine what those circumstances may be, under rules that permit extensions of a statute of limitations in situations where a defendant has fraudulently concealed wrongdoing.

The justices told a federal appeals court to consider whether shareholder Vanessa Simmonds had enough information about the alleged wrongdoing that she should have filed suit sooner.

Investment banks had urged a firm two-year limit starting when stock-sale profits are realized, while Simmonds’s attorneys contended the two-year clock shouldn’t begin running until the insiders filed the disclosure forms.

Simmonds was a college student when she bought the stock in 55 companies that went public at the height of the IPO boom in the late 1990s and 2000. Her father, David Simmonds, is one of the lawyers pressing the case.

Other defendants include units of Citigroup Inc. (C), Credit Suisse Group AG (CS), Deutsche Bank AG (DB), JPMorgan Chase & Co. (JPM) and Bank of America Corp. (BAC), as well as Morgan Stanley and Goldman Sachs.

A federal appeals court previously threw out 30 of the suits on other grounds.

Unusual Provision

The short-swing provision is unusual because any money won in litigation goes to the company, not the plaintiffs. The driving force behind lawsuits is the prospect of attorney’s fees, the U.S. Chamber of Commerce said in court papers supporting the investment banks.

Roberts gave no reason for not participating in the case. The chief justice in some previous cases has disqualified himself because of financial conflicts of interest.

The case is Credit Suisse v. Simmonds, 10-1261.

To contact the reporter on this story: Greg Stohr in Washington at gstohr@bloomberg.net.

To contact the editor responsible for this story: Steven Komarow at skomarow1@bloomberg.net.


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