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eligibility and statutes of limitation

Introduction to time issues

Many stockbroker/customer disputes and claims of securities fraud may be dependent upon a question of time. A customer may not wait indefinitely to initiate a legal action against the broker or brokerage firm. There are complex rules for determining how long a customer has in which to act. If a customer waits too long he may find that his claims are barred due to the passage of time.

There are generally two separate issues of timing which must be considered in connection with securities claims:

  1. The question of eligibility for arbitration;
  2. The question of statutes of limitations on the claims.

Eligibility to arbitrate

Eligibility is a procedural rule established by the arbitration forum to determine which claims are accepted by the forum for arbitration. The statutes of limitation are provided by federal or state law for each particular claim and determine the time within which a claim must be filed (anywhere) or be barred as a matter of law.

One must consider both the eligibility rule and the statutes of limitation in determining whether the customer may have waited too long to bring his claim. Some cases may not be eligible for arbitration but are not barred by the applicable statute of limitations and so may be litigated in court. Other cases may still be eligible for arbitration but the statute of limitations on the claims have expired. This is not a simple issue. Eligibility to arbitrate. The arbitration forum rules of procedure include rules for determining which disputes are eligible for arbitration. The Financial Industry Regulatory Authority ("FINRA") eligibility rules provide that in order to be eligible for arbitration the claim must be filed within six years of the events which gave rise to the dispute. This six year rule does not extend any applicable statutes of limitation, and the rule does not apply to cases ordered to arbitration by a court order.

There has been a great deal of disagreement as to what precisely is meant by the eligibility restriction that claims must be filed within six years of the event giving rise to the dispute. Sometimes many years will pass after the initial investment before the customer finally discovers that he has been defrauded. This is especially true if the investment was intended as a long-term investment, the customer did not have a good level of understanding of the investment to start with, the customer remains dependent upon the broker for on-going advice, and the broker continues to misrepresent the investment or conceal the fraud. In some cases the damages may not occur until years after the initial investment, and there may be an ongoing, continuous fraud which prevented the customer from discovering a problem any sooner.

Investors frequently take the position that the six year eligibility period should run from the date of discovery of the fraud. Brokerage firms generally take the position that the six year period runs from the date of the initial investment and that the six year period is not "tolled" (i.e. the clock does not stand still) until discovery.

FINRA has taken the position that the six year period runs from the actual event of fraud. However, preliminary motions to FINRA to dismiss a complaint for lack of eligibility under the six year rule are generally deferred to the arbitrators through an administrative ruling. Typically the administrative ruling states that all claims based upon events within six years prior to the filing are eligible for arbitration and all claims based on events which occurred more than six years prior to the filing are not eligible, but that the parties are free to raise the issue again with the arbitrators. Although courts have not been consistent, there have been recent decisions by judges in response to motions for injunctions to stop arbitrations (based on the six year eligibility rule), which ruled that the eligibility issue is for the arbitrators to determine. Other courts have held that it is an issue for the courts to determine and have ruled that the six year period is not subject to tolling until discovery.

In light of the great degree of confusion surrounding this issue and the tremendous amount of time and expense which may be expended on this through preliminary and collateral motions and hearings, FINRA recently revised its rules to clearly state that any question regarding the eligibility of a claim for arbitration is to be decided by the arbitrators.

Statutes of limitation

Statutes of limitation are different and distinct from the eligibility rule of the arbitration forum. Statutes of limitation are the rules of law governing the period of time during which a claim must be filed. Statutes of limitation are different for each type of complaint or cause of action. Statutes of limitation also differ from state to state for state law and common law claims. Since securities fraud may be very difficult to discover and years may pass after the initial investment before the customer realizes that he has been defrauded, statutes of limitations are often very important in stockbroker/customer disputes.

Many, but not all, statutes of limitation may be subject to equitable "tolling". This "tolling" means that the clock on the limitation time period will not start to tick until the customer discovers or reasonably should have discovered the fraud. Tolling (or not starting the clock) may often be appropriate where the customer has continued to rely upon the broker for a long period after the initial investment and the broker continues to conceal the wrongdoing.

There also may be a series of wrongful acts (such as a series of trades which together constitute churning) which may be viewed as a unified act of continuous fraud, with the limitations time period to start at the time of the final act in the series or after the end of the broker/customer relationship. The nature of the particular broker-customer relationship, level of sophistication of the customer and extent of the reliance of the customer upon the broker are all factors to be considered in equitable tolling of the time limitations period. However, an investor must act prudently and may not wait indefinitely to take action.

It has been held repeatedly by courts that questions of timeliness in connection with statutes of limitation are to be determined by the arbitrators. Frequently these issues may be so entangled with the underlying facts of the case as to be impossible to determine except in the context of the overall arbitration hearing. However, there are instances in which the statute of limitation issue may be considered by the arbitrators as a preliminary matter.

Federal securities law time limitations

Perhaps the most frequently used anti-fraud provision of the federal securities law, Section 10(b) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, has a strict statute of limitations of two years after the fraud is discovered and not more than five years after the fraud occurred. Since the United States Supreme Court ruled on the matter in 1991, the statute of limitations for Rule 10b-5 actions had been one year after discovery and not more than three years after the fraud occurred. However, the Sarbanes-Oxley Act of 2002 expanded the statute of limitations to the current two- and five-year periods. The five year outside limit will cut off any rights under the federal securities laws regardless of the time of actual discovery, as the doctrine of equitable tolling does not apply to extend this time period beyond five years.

There are similar statutes of limitation for rights of action under the Securities Act of 1933 in connection with untrue statements or omissions. These provisions also restrict the time period to two years after discovery (or such time as discovery reasonably should have occurred), but no more than three years from the actual offering of the security or the sale.

State anti-fraud securities law time limitations

Many, although not all, state blue-sky laws provide for a private right of action, and the limitations periods vary from state to state. In general, the state anti-fraud securities laws statutes of limitations are between a range of two to six years. Some state laws measure the period strictly from the date of the transaction with no equitable tolling for discovery. Other states measure the time limitations period from reasonable discovery. In a third category, some states require that the claim be filed within a certain number of years after the fraud was or should have been discovered but not more than an outside period of years from the date of the violation. State consumer protection statutes of limitation. Some state Consumer Protection Acts specifically include securities claims, while other states do not cover securities transactions as a protected class of activity. In some states which include securities transactions under their Unfair and Deceptive Trade Practice Act, there may be a provision for equitable tolling of the time limitations period. For example, under the Massachusetts Unfair and Deceptive Trade Practice Act, which explicitly covers securities transactions, the limitations period is four years from when the investor knew or should have known of the fraud.

Statutes of limitations for common law claims of fraud and misrepresentation

Limitations periods for claims of fraud or misrepresentation vary from state to state. Most states tend to be within the two to six year range, although there is generally equitable tolling for discovery and fraudulent concealment. A claim for fraud must be brought within three years in Massachusetts, but the time period is measured from when the customer knew or should have known of the fraud, and the clock does not start ticking as long as the broker is concealing the fraud. Under New York law, a claim for fraud must be brought by the later of six years from the event or two years from discovery.

Limitations period for breach of contract, negligence and breach of fiduciary duty

Statutes of limitations for other common law causes of action also vary from state to state, and generally are subject to equitable tolling for discovery. Although brokerage firm customer agreements typically provide that the law of a specific state (often New York) will be controlling, one must also consider the law of the state in which the customer is located and the location of the arbitration in order to determine which state law controls the issue of statutes of limitation. The limitations period for breach of contract is six years under both Massachusetts and New York law, five years in Florida and four years in California.