The Securities and Exchange Commission is reportedly pushing to give investors with expired fraudulent claims against companies more time to sue.
In a friend-of-the-court brief filed last week, the SEC asked the Second U.S. Circuit Court of Appeals in New York to make Section 804 of the Sarbanes-Oxley Act retroactive, according to The Wall Street Journal. The provision made it possible for investors to file suits within two years of discovering fraud and within five years after the alleged violation occurred.
Before the July 30, 2002, enactment of Sarbanes-Oxley, investors had to file suits within one year of discovery and three years of the violation, noted the paper. The SEC reportedly fears that unless the act’s extension is applied broadly, some investors who lost money in the wave of recent fraud cases will have no legal recourse because the three-year statute will already have expired.
State employees with pensions in Washington, Georgia, and Ohio, for example, have been unable to bring claims based on alleged securities fraud at Enron Corp. in 1997 and 1998 because the statute expired, according to the paper.
The SEC filed its brief in a case in which AIG Asian Infrastructure Fund LP unsuccessfully sued Chase Manhattan Asia Ltd. and J.P. Morgan Partners, units of J.P. Morgan Chase, in connection with the 1998 purchase of securities. The U.S. District Court for the Southern District of New York rebuffed the claim, declaring that Congress didn’t “explicitly state that [Sarbanes-Oxley] will be applied retroactively,” according to the Journal.
But the SEC disagrees. The commission insisted that the law was passed because “the pre-Sarbanes statute of limitations for private securities-fraud actions was inappropriately short and left many existing defrauded investors without recourse in the complicated and long-standing frauds then being uncovered,” the newspaper reported.
Other courts have also taken a view at odds with the commission. According to The Legal Intelligencer, U.S. District Judge Anita Brody recently cited a 1994 U.S. Supreme Court decision that there is a strong presumption against retroactive application of any new limitation period.
Since the text of Sarbanes-Oxley is ambiguous, Brody found, she was forced to apply the presumption that the new limits cannot be applied retroactively in her opinion in the case, L-3 Communications Corp. v. Clevenger, according to the report.
L-3, a defense contractor, alleged that it was the victim of a fraud scheme to artificially inflate the price of a company it acquired in August 1998. It discovered the alleged fraud in January 2002 but did not file its suit until July 2003. If the Sarbanes time limits applied, the deadline would be set at August 2003, according to the Intelligencer.
Brody’s decision came despite citations by the plaintiff’s team of a case from the Middle District of Florida, in which Judge Richard Lazarra concluded that Sarbanes-Oxley did indeed extend limitation periods. Lazarra quoted a section of the law that said it “shall apply to proceedings addressed by this Section that are commenced on or after the enactment of this Act.”
Lazarra had reportedly also noted that “this language, standing alone, seems to presume that the act afford[s] redress for violations that had already occurred before July 30, 2002,” the day President Bush signed the bill into law. It remains to be seen whether the court of appeals in New York will make a similar decision.