The Supreme Court/The Supreme Court.iso/pc/ascii/1990/90_333/90_333.d3

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Subject: 90-333 -- DISSENT, LAMPF v. GILBERTSON




    SUPREME COURT OF THE UNITED STATES


No. 90-333



LAMPF, PLEVA, LIPKIND, PRUPIS & PETIGROW, PETITIONER v. JOHN GILBERTSON et
al.

on writ of certiorari to the united states court of appeals for the ninth
circuit

[June 20, 1991]



    Justice Kennedy, with whom Justice O'Connor joins, dissenting.

    I am in full agreement with the Court's determination that, under our
precedents, a uniform federal statute of limitations is appropriate for
private actions brought under MDRV 10(b) of the Securities Exchange Act of
1934 and that we should adopt as a limitations period the
1-year-from-discovery rule Congress employed in various provisions of the
1934 Act.  I must note my disagreement, however, with the Court's
simultaneous adoption of the three-year period of repose Congress also
employed in a number of the 1934 Act's provisions.  This absolute time-bar
on private MDRV 10(b) suits conflicts with traditional limitations periods
for fraud-based actions, frustrates the usefulness of MDRV 10(b) in
protecting defrauded investors, and imposes severe practical limitations on
a federal implied cause of action that has become an essential component of
the protection the law gives to investors who have been injured by unlawful
practices.
    As the Court recognizes, in the absence of an express limitations
period in a federal statute, courts as a general matter should apply the
most analogous state limitations period or, in rare cases, no limitations
period at all.  This rule does not apply, however, "when a rule from
elsewhere in federal law clearly provides a closer analogy than available
state statutes, and when the federal policies at stake and the practical
ities of litigation make that rule a significantly more appropriate vehicle
for interstitial lawmaking."  DelCostello v. Teamsters, 462 U. S. 151, 172
(1983); see Reed v. United Transportation Union, 488 U. S. 319, 324 (1989).
Applying this principle, the Court looks first to the express private
rights of action in the 1934 Act itself to find what it believes are the
appropriate limitations periods to apply here.  One cannot fault the
Court's mode of analysis; given that MDRV 10(b) actions are implied under
the 1934 Act, it makes sense for us to look to the limitations periods
Congress established under the Act.  See DelCostello, supra, at 171; United
Parcel Service, Inc. v. Mitchell, 451 U. S. 56, 68, n. 4 (1981).  That does
not relieve us, however, of our obligation to reject a limitations rule
that would "frustrate or significantly interfere with federal policies."
Reed, 488 U. S., at 327.  When determining the appropriate statute of
limitations to apply, we must give careful consideration to the policies
underlying a federal statute and to the practical difficulties aggrieved
parties may have in establishing a violation.  Ibid.; Wilson v. Garcia, 471
U. S. 261, 268 (1985).
    This is not a case where the Court identifies a specific statute and
follows each of its terms.  As the Court is careful to note, the 1934 Act
does not provide a single limitations period for all private actions
brought under its express provisions.  Rather, the Act makes three separate
and distinct references to statutes of limitations.  The Court rejects
outright one of these references, a 2-year statute of repose for actions
brought under MDRV 16 of the 1934 Act, 15 U. S. C. MDRV 78p(b), and
purports to follow the other two.  15 78i(e), 78r(c).  The latter two
references employ 1-year, 3-year schemes similar to one the Court
establishes here, but each has its own unique wording.  The Court does not
identify any reasons for finding one to be controlling, so it is
unnecessary to engage in close gramatical construction to separate the
1-year discovery period from the 3-year statute of repose.
    It is of even greater importance to note that both of the statutes in
question relate to express causes of action which in their purpose and
underlying rationale differ from causes of action implied under MDRV 10(b).
The limitations statutes to which the Court refers apply to strict
liability violations or, in the case of MDRV 78i(e), to a rarely used
remedy under MDRV 9 of the 1934 Act.  See L. Loss, Fundamentals of
Securities Regulation 920 (2d ed. 1988).  Neither relates to a cause of
action of the scope and coverage of an implied action under MDRV 10(b).
Nor does either rest on the common law fraud model underlying most MDRV
10(b) actions.
    Section 10(b) provides investors with significant protections from
fraudulent practices in the securities markets.  Intended as a
comprehensive antifraud provision operating even when more specific laws
have no application, MDRV 10(b) makes it unlawful to employ in connection
with the purchase or sale of any security "any manipulative or deceptive
device or contrivance" in violation of the Securities and Exchange
Commission's rules.  15 U. S. C. MDRV 78j.  Although Congress gave the
Commission the primary role in enforcing this section, private MDRV 10(b)
suits constitute "an essential tool for enforcement of the 1934 Act's
requirements," Basic Inc. v. Levinson, 485 U. S. 224, 231 (1988), and are "
`a necessary supplement to Commission action.' "  Batemen Eichler, Hill
Richards, Inc. v. Berner, 472 U. S. 299, 310 (1985) (quoting J. I. Case Co.
v. Borak, 377 U. S. 426, 432 (1964)).  We have made it clear that rules
facilitating MDRV 10(b) litigation "suppor[t] the congressional policy
embodied in the 1934 Act" of combating all forms of securities fraud.
Basic, supra, at 245.
    The practical and legal obstacles to bringing a private MDRV 10(b)
action are significant.  Once federal jurisdiction is established, a MDRV
10(b) plaintiff must prove elements that are similar to those in actions
for common-law fraud.  See Herman & MacLean v. Huddleston, 459 U. S. 375
(1983).  Each requires proof of a false or misleading statement or material
omission, Santa Fe Industries, Inc. v. Green, 430 U. S. 462 (1977),
reliance thereon, Basic, 485 U. S., at 243; cf. id., at 245 (reliance
presumed in MDRV 10(b) cases proving "fraud-on-themarket"), damages caused
by the wrongdoing, Randall v. Loftsgaarden, 478 U. S. 647, 663 (1986), and
scienter on the part of the defendant, Ernst & Ernst v. Hochfelder, 425 U.
S. 185 (1976).  Given the complexity of modern securities markets, these
facts may be difficult to prove.
    The real burden on most investors, however, is the initial matter of
discovering whether a violation of the securities laws occurred at all.
This is particularly the case for victims of the classic fraud-like case
that often arises under MDRV 10(b).  "[C]oncealment is inherent in most
securities fraud cases."  American Bar Association, Report of the Task
Force on Statute of Limitations for Implied Actions, 41 Bus. Lawyer 645,
654 (1985).  The most extensive and corrupt schemes may not be discovered
within the time allowed for bringing an express cause of action under the
1934 Act.  Ponzi schemes, for example, can maintain the illusion of a
profit-making enterprise for years, and sophisticated investors may not be
able to discover the fraud until long after its perpetration.  Id., at 656.
Indeed, in Ernst & Ernst, the alleged fraudulent scheme had gone undetected
for over 25 years before it was revealed in a stock broker's suicide note.
425 U. S., at 189.
    The practicalities of litigation, indeed the simple facts of business
life, are such that the rule adopted today will "thwart the legislative
purpose of creating an effective remedy" for victims of securities fraud.
Agency Holding Corp. v. Malley-Duff & Associates, Inc., 483 U. S. 143, 154
(1987).  By adopting a 3-year period of repose, the Court makes a MDRV
10(b) action all but a dead letter for injured investors who by no
conceivable standard of fairness or practicality can be expected to file
suit within three years after the violation occurred.  In so doing, the
Court also turns its back on the almost uniform rule rejecting short
periods of repose for fraud-based actions.  In the vast majority of States,
the only limitations periods on fraud actions run from the time of a
victim's discovery of the fraud.  Shapiro & Blauner, Securities Litigation
in the Aftermath of In Re Data Access Securities Litigation, 24 New England
L. Rev. 537, 549-550 (1989).  Only a small minority of States constrain
fraud actions with absolute periods of repose, and those that do typically
permit actions to be brought within at least five years.  See, e. g., Fla.
MDRV 95.11(4)(e) (1991) (5-year period of repose); Ky. MDRV 413.120(11)
(1990) (10-year period of repose); Mo. MDRV 516.120(5) (1986) (10-year
period of repose).  Congress itself has recognized the importance of
granting victims of fraud a reasonable time to discover the facts
underlying the fraud and to prepare a case against its perpetrators.  See,
e. g., Interstate Land Sales Full Disclosure Act, 15 U. S. C. MDRV
1711(a)(2) (action may be brought within three years from discovery of
violation); Insider Trading and Securities Fraud Enforcement Act of 1988,
15 U. S. C. MDRV 78t-1(b)(4) (action may be brought within five years of
the violation).  The Court, however, does not.
    A reasonable statute of repose, even as applied against fraud-based
actions, is not without its merits.  It may sometimes be easier to
determine when a fraud occurred than when it should have been discovered.
But more important, limitations periods in general promote important
considerations of fairness.  "Just determinations of fact cannot be made
when, because of the passage of time, the memories of witnesses have faded
or evidence is lost."  Wilson, 471 U. S., at 271.  Notwithstanding these
considerations, my view is that a 3-year absolute time bar is inconsistent
with the practical realities of MDRV 10(b) litigation and the congressional
policies underlying that remedy.  The 1-year-fromdiscovery rule is
sufficient to ensure a fair balance between protecting the legitimate
interests of aggrieved investors, yet preventing stale claims.  In the
extreme case, moreover, when the period between the alleged fraud and its
discovery is of extraordinary length, courts may apply equitable principles
such as laches should it be unfair to permit the claim.  See DelCostello,
462 U. S., at 162; Holmberg v. Armbrecht, 327 U. S. 392 (1946).  A 3-year
absolute bar on MDRV 10(b) actions simply tips the scale too far in favor
of wrongdoers.
    The Court's decision today forecloses any means of recovery for a
defrauded investor whose only mistake was not discovering a concealed fraud
within an unforgiving period of repose.  As fraud in the securities markets
remains a serious national concern, Congress may decide that the rule
announced by the Court today should be corrected.  But even if prompt
congressional action is taken, it will not avail defrauded investors caught
by the Court's new and unforgiving rule, here applied on a retroactive
basis to a pending action.    With respect, I dissent and would remand with
instructions that a MDRV 10(b) action may be brought at any time within one
year after an investor discovered or should have discovered a violation.
In any event, I would permit the litigants in this case to rely upon
settled Ninth Circuit precedent as setting the applicable limitations
period in this case, and join Justice O'Connor's dissenting opinion in
full.

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