U.S. Supreme Court Further Limits Tolling in the Class Action Context in China Agritech v. Resh

Davis Polk – 

The Supreme Court Holds that American Pipe Tolling Does Not Apply to Subsequent Class Actions; Clarifies that Five-Year Period for Section 10(b) Claims Is a Statute of Repose

On June 11, 2018, the United States Supreme Court handed down its decision in China Agritech v.
Resh, 1 holding that the American Pipe equitable tolling rule—which tolls the statute of limitations for
individual claims while a class action is pending—does not apply to subsequently filed class action
claims. The Court also clarified that the five-year limit on bringing claims under the Exchange Act is a
statute of repose. Accordingly, under the Court’s prior decision in CalPERS v. ANZ Securities, Inc., the
Exchange Act’s five-year statute of repose is not tolled by the filing of a class action lawsuit.
The China Agritech decision follows a trend set by other recent Supreme Court decisions limiting the
application of equitable doctrines to expand or contract a legislatively enacted statute of limitations.

American Pipe Tolling

In its landmark 1974 decision, American Pipe and Construction Co. v. Utah,  2 the Supreme Court held that
the filing of a class action tolls the statute of limitations for putative class members; thus, even if the
statute of limitations has run, putative class members are still free to join an existing class action,
intervene in the resulting individual action if class certification is denied, or bring an individual action if the
class action is dismissed.

Circuits had split on the issue of whether American Pipe equitable tolling applied to subsequently filed
class actions. For example, the Ninth Circuit held that it did, reasoning that doing so “would advance the
policy objectives that led the Supreme Court to permit tolling in the first place.”4

In contrast, other Circuits refused to apply American Pipe to prospective class actions, reasoning that doing so would allow plaintiffs to “stack one class action on top of another and continue to toll the statute of limitations indefinitely.”5

The China Agritech Decision

China Agritech involved the third of three class actions brought by purchasers of China Agritech’s
common stock. The first two class actions were brought within the applicable two-year statute of
limitations,

The Supreme Court held that American Pipe tolling does not apply to class actions. The Court reasoned
that the policy rationales supporting the tolling of individual claims do not apply to class claims. While it
may be efficient to delay the litigation of individual claims until after the class certification stage, there is
no efficiency in delaying future class litigation. Instead, the Court reasoned, Rule 23 and the Private
Securities Litigation Reform Act of 1995 (PSLRA) evince a preference to bring in all potential lead
plaintiffs and class counsel as soon as practicable so that a court may choose among the best
candidates.

The Court also expressed concern that applying American Pipe tolling to class actions
“would allow the statute of limitations to be extended time and again,” essentially allowing for endless
class litigation. The Court rejected arguments that its holding would result in duplicative, protective filings
(i.e., class actions filed solely to preserve the right to proceed in case the initial class action fails),
observing that there was no evidence of such filings in Circuits that had refused to apply American Pipe
tolling to subsequent class actions.

Justice Sotomayor filed a concurring opinion, arguing that the majority’s holding should be limited to
securities class actions under the PSLRA. Justice Sotomayor reasoned that there was no principled
grounds for treating individual and class claims differently, but that the tolling of securities class actions
was incompatible with the PSLRA’s requirement that prospective lead plaintiffs move the court to serve
as lead plaintiff.

In addition to addressing the inapplicability of American Pipe tolling to class claims, China Agritech also
clarified that the five-year limitation period applicable to Section 10(b) claims (and other fraud claims
under the Exchange Act) 6 is a statute of repose that imposes a “finite end” on the time to bring a claim,
notwithstanding any toll of the limitation period.

The Court foreshadowed that position last year in CalPERS v. ANZ Securities, Inc.7 by holding that a similarly worded three-year limit under the Securities Act is a statute of repose that is not tolled under American Pipe, and in subsequently denying certiorari petitions challenging two Court of Appeals cases holding that the Exchange Act’s five-year period is likewise a statute of repose.

Implications of the Supreme Court’s Decision

The China Agritech opinion will provide some certainty to companies facing securities class action
lawsuits by preventing the “stacking” of class actions, i.e., new class actions being filed after the statute of
limitations period following the failure of an earlier filed class action. While it is possible the opinion will
lead to more class actions being filed upfront in an attempt to preserve potential class claims, it seems
unlikely there will be a significant increase in activity. As the majority in China Agritech pointed out, there
is no evidence of increased protective filings in Circuits that had already refused to apply American Pipe
tolling to class claims.

Moreover, federal courts are already well-equipped to handle duplicative litigation.
The opinion is also consistent with the Supreme Court’s recent refusals to expand or contract statutes of
limitations through the use of judge-made doctrines. In addition to cases like China Agritech and
CalPERS, the Supreme Court’s decisions in Petrella v. Metro-Goldwyn-Mayer, Inc.8 and SCA Hygiene
Products v. First Quality Baby Products, LLC9 refused to apply laches to bar copyright and patent claims
that fall within a statutory limitations period.

6 See 28 U.S.C. § 1658(b) (providing that a “private right of action that involves a claim of fraud, deceit, manipulation, or contrivance in contravention of a regulatory requirement concerning the securities laws . . . may be brought not later than the earlier of (1) 2 years after the discovery of the facts constituting the violation; or (2) 5 years after such violation”).
7 137 S. Ct. 2042 (2017).
8 134 S. Ct. 1962 (2014).
9 137 S. Ct. 954 (2017).


US Seek Extradition of Silk Road Criminal Network Associate of Ross Ulbricht

Ross ullbricht silk road

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Roger Thomas Clark Was a Key Figure in the Development of Silk Road and Advised Ross Ulbricht on All Aspects of the Criminal Enterprise

Geoffrey S. Berman, the United States Attorney for the Southern District of New York, James D. Robnett, the Special Agent-in-Charge of the New York Field Office of the Internal Revenue Service, Criminal Investigation (“IRS-CI”), William F. Sweeney Jr., Assistant Director-in-Charge of the New York Field Office of the Federal Bureau of Investigation (“FBI”), and Angel M. Melendez, Special Agent-in-Charge of the New York Field Office of U.S. Immigration and Customs Enforcement’s Homeland Security Investigations (“HSI”), announced today the unsealing of an Indictment charging ROGER THOMAS CLARK, who was a senior adviser to Ross Ulbricht, a/k/a “Dread Pirate Roberts,” a/k/a “DPR,” the owner and operator of the “Silk Road” online illicit black market that operated from January 2011 until October 2, 2013.

During its operation, Silk Road was used by thousands of drug dealers and other unlawful vendors to distribute illegal drugs and other illicit goods and services to over a hundred thousand buyers, and to launder hundreds of millions of dollars derived from those unlawful transactions. CLARK was a close confidante of Ulbricht’s who advised him on all aspects of Silk Road’s operations, and who hired and managed a staff of computer programmers who helped develop Silk Road’s technical infrastructure. CLARK was arrested in Thailand on December 3, 2015, and was extradited to the United States today. CLARK is expected to be presented this afternoon before U.S. Magistrate Judge Gabriel W. Gorenstein. CLARK’s case is assigned to U.S. District Judge William H. Pauley III.

Manhattan U.S. Attorney Geoffrey S. Berman said: “Silk Road was a secret online marketplace for illegal drugs, hacking services, and a whole host of other criminal activity. Roger Thomas Clark allegedly served as a trusted confidante to Silk Road founder and operator Ross Ulbricht, advising him on all aspects of this illegal business, including how to maximize profits and use threats of violence to thwart law enforcement. Thanks to the investigative work of our fellow law enforcement agencies and our international partners, Clark now faces justice in an American court.”

IRS-CI Special Agent-in-Charge James D. Robnett said: “The unsealed indictment again shows that the supposed anonymity of the dark web is not a protective shield from prosecution. Working with our law enforcement partners, IRS-CI used its unique financial and cyber expertise to help shine a bright light on a shadowy black marketplace, and we intend to continue pursuing these kinds of criminals no matter where they hide.”

FBI Assistant Director William F. Sweeney Jr. said: “Whether on the streets or on the Internet, the illegality of selling unlawful goods remains unchanged. Under the operation of Ross Ulbricht, the Silk Road was a criminal hub for illicit goods and services. As Ulbricht’s right-hand man, Roger Clark allegedly advised him of methods to thwart law enforcement during the operation of this illegal ploy, pocketing hundreds of thousands of dollars in the process. Today’s extradition of Roger Clark shows that despite alleged attempts to operate under the radar, he was never out of our reach.”

HSI Special Agent-in-Charge Angel M. Melendez said: “The extradition of this man today should be a reminder to those who think they can hide within the confines of the dark web, that you are never out of reach of the long arm of the law. These investigations are important in combatting the illicit drug market and we will continue to work with our law enforcement partners to fight this fight.”

According to the allegations contained in the Indictment unsealed today in Manhattan federal court, the previously unsealed criminal complaint, and evidence presented at Ulbricht’s trial in January and February 2015[1]:

Ulbricht created Silk Road in approximately January 2011, and owned and operated the underground website until it was shut down by law enforcement authorities in October 2013. Silk Road emerged as the most sophisticated and extensive criminal marketplace on the Internet at the time, serving as a sprawling black-market bazaar where unlawful goods and services, including illegal drugs of virtually all varieties, were bought and sold regularly by the site’s users. While in operation, Silk Road was used by thousands of drug dealers and other unlawful vendors to distribute hundreds of kilograms of illegal drugs and other unlawful goods and services to well over 100,000 buyers, and to launder hundreds of millions of dollars deriving from these unlawful transactions.

Silk Road enabled its users to buy and sell drugs and other illegal goods and services anonymously and outside the reach of law enforcement. Silk Road was operated on what is known as “The Onion Router,” or “Tor” network, a special network of computers on the Internet, distributed around the world, designed to conceal the true IP addresses of the computers on the network and thereby the identities of the network’s users. Silk Road also included a Bitcoin-based payment system that served to facilitate the illegal commerce conducted on the site, including by concealing the identities and locations of the users transmitting and receiving funds through the site.

CLARK – who went by the online nicknames “Variety Jones,” “VJ,” “Cimon,” and “Plural of Mongoose” – was described by Ulbricht as a “real mentor” who advised Ulbricht about, among other things, security vulnerabilities in the Silk Road site, technical infrastructure, management of the Silk Road users, and operating in a manner to attempt to thwart law enforcement. CLARK provided advice to Ulbricht on developing a “cover story” to make it appear as though Ulbricht had sold Silk Road, and also assisted with hiring programmers to help improve the infrastructure of, and maintain, Silk Road. CLARK also communicated at length with Ulbricht regarding the rules that governed Silk Road vendors and users, and regarding the promotion of sales on Silk Road, including the sales of narcotics. CLARK also was responsible for gathering information on law enforcement’s efforts to investigate Silk Road.

CLARK was paid at least hundreds of thousands of dollars for his assistance in operating Silk Road.

CLARK, 56, a citizen of Canada, is charged with narcotics trafficking conspiracy; narcotics trafficking; distributing narcotics by means of the internet; conspiracy to commit, and aid and abet, a computer hacking conspiracy; conspiracy to traffic in fraudulent identification documents; and money laundering conspiracy. If convicted, he faces, among other penalties, a mandatory minimum sentence of 10 years in prison and a maximum sentence of life in prison. The maximum potential sentences in this case are prescribed by Congress and are provided here for informational purposes only, as any sentencing of the defendant will be determined by the judge.

* * *

Mr. Berman praised the outstanding joint efforts of the FBI and its New York Special Operations and Cyber Division, HSI Chicago-O’Hare, the DEA’s New York Field Division, and IRS-CI’s New York Field Office. Mr. Berman also thanked the HSI Attache Bangkok, Thailand, for its assistance and support. Mr. Berman also thanked the Royal Thai Police and the U.S. Department of Justice’s Office of International Affairs for their support and assistance.

This case is being prosecuted by the Office’s Complex Frauds and Cybercrime Unit. Assistant United States Attorneys Michael D. Neff, Richard Cooper, and Timothy T. Howard are in charge of the prosecution.

The charges contained in the Complaint and the Indictment are merely accusations and the defendant is presumed innocent unless and until proven guilty.[/vc_column_text][/vc_column][/vc_row]

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