Corporate Governance

The Supreme Court and the Mission to Restrict Investor Protection: Merck v. Reynolds (Part 9: An Initial Conclusion)

By J. Robert Brown

We are discussing the decision by the Supreme Court to grant cert in Merck v. Reynolds to address the statute of limitations under Rule 10b-5.

The case will now go before the US Supreme Court.  We will do our best to follow it, acquiring the relevant briefs.  It will likely generate some interest from amicus briefs and, given the Government's brief in Betz (suggesting that the Court take this case, see footnote 6), may even result in an opinion from the Justice Department and perhaps the SEC.

Were this a case unladen with ideological concern, it would be an interesting matter, at least for law professors who teach both securities and administrative law.  The case requires an analysis of federal common law and an examination of legislative history and statutory language.  It uses colorful meteorological terminology.

All of that said, the outcome would be relatively clear.  As we have been discussing, the concept of inquiry notice (storm warnings) imposed on plaintiffs in cases brought under Rule 10b-5 is an incorrect reading of the statute. The statute of limitations in 28 USC §1658 begins to run after "discovery of the facts constituting the violation." 

Plaintiffs are allowed to wait for the facts to emerge and can file suit within a two year period after they do.  They are not required to investigate.  Moreover, plaintiffs can wait for some evidence of wrongdoing.  In cases such as this, where wrongdoing depends almost exclusively on the defendant's beliefs, plaintiffs can wait until evidence surfaces suggesting a false belief.  Under that standard, the majority opinion in the Third Circuit ought to be upheld (although perhaps rewritten to get rid of the concept of inquiry notice).

Alas, after Stoneridge, there is a risk that the case will not be treated in such an academic fashion.  To the extent the philosophy in Stoneridge guides the analysis, the Court will be less concerned about statutory language and more concerned with any perceived extension of the reach of Rule 10b-5.

The cert petition and other primary materials can be found on the DU Corporate Governance web site.

Full post as published by The Race to the Bottom on June 25, 2009 (boomark / email).