Blawgletter wrote a couple of years ago that the tougher test for pleading securities fraud under the Private Securities Litigation Reform Act and Tellabs, Inc. v. Makor & Rights, Ltd., 551 U.S. 308 (2007), "would logically mean that the reasonable person wouldn't conclude he, she, or it had a claim until he-she-it learned facts suggesting a strong inference of fraud, right? Which would have the effect of making a statute of limitations defense harder to prove and easier to whip, correct?" The Relevance of Scienter to Securities Fraud Limitations Analysis, Jan. 9, 2009 (discussing Alaska Elec. Pension Fund v. Pharmacia Corp., 554 F.3d 342 (3d Cir. 2009)).
As we predicted, see Merck Lawyer Takes Nicks on Question of Timely Securities Complaint in Supreme Court, the Supreme Court in 2010 agreed with us in Merck & Co. v. Reynolds, 130 S. Ct. 1784 (2010).
Today, the Second Circuit chimed in. It held that the district court erred in tossing a complaint on the ground that news stories put buyers of MBIA stock on "inquiry notice" of the bond insurer's possible fraud more than two years before plaintiffs sued. Citing Merck, which post-dated the district court's dismissal order, the panel ruled that a securities fraud plaintiff doesn't "discover" that he-she-it has a claim for purposes of the two-year limitations statute until he-she-it "can adequately plead" scienter as well as the other elements of the claim. City of Pontiac Gen'l Employees' Retirement Sys. v. MBIA, Inc., No. 09-4609-cv (2d CIr. Feb. 28, 2011).
The Second Circuit didn't mention Pharmacia (or Blawgletter). Neither did it note the absurd delay in getting to the merits. What we said about Merck goes double for MBIA:
What does an obvious bludgeoning in Supreme Court oral argument do to the value of a case like the one against Merck?
If you said "increases it", you get a silver star.
You'd receive a gold one if you added "but not that much".
Why? BECAUSE THE DISTRICT COURT STILL HASN'T RULED ON WHETHER THE CLASS ACTION COMPLAINT STATES A CLAIM — MORE THAN SIX YEARS AFTER PLAINTIFFS BROUGHT THE CASE!!!
The district court in MBIA likewise has not yet ruled on a motion to dismiss — and the Second Circuit didn't resolve the limitations issue or a statute of repose one. In a case that started in 2005, the plaintiffs have taken barely a step forward.
And to think that courts simply assume class actions involve no risk and put huge pressure on defendants to settle for outlandish sums. Bah.