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Statute of Limitations in Securities Cases

By Michael A. Collora
Published: Massachusetts Lawyers Weekly, March 16, 2009

Investors often wake up late to their stock losses resulting from a bad investment in a company or in a brokerage account, and unfortunately their securities claims, even if meritorious, may go by the wayside, subject to the defense of statute of limitations.

A recent split decision by the Appeals Court in Cohen v. State Street Bank & Trust Co., 72 Mass. App. Ct. 627 (2008), highlighted this problem; in the case, the loss occurred in 2000 but the claim was not brought until early 2004.

The Appeals Court affirmed summary judgment of a breach of fiduciary duty claim, holding it was time-barred by the three-year statute of limitations in G.L.c. 260, §2A, and it dismissed a claim for breach of contract, holding that the defendant was not shown to have breached any agreement with the plaintiff.

When there is investor loss, as surely there is in this current economic climate, the issue of what claim to bring and what statute of limitations will apply will be ever-present. The various possibilities are examined here.

State law claims

An investor commonly will blame a stockbroker for his loss. Whether the claim is brought in arbitration, as is typically required by the account agreements, or in state court (or federal, if diversity), the causes of action are likely to be similar to those asserted in Cohen, i.e., the common law claims of breach of fiduciary duty negligence and/or fraud, and the statutory ones of G.L.c. 93A consumer fraud or violation of the Massachusetts Uniform Securities statute, G.L.c. 110A, §410.

While each has different elements of proof, the common law claims are bound by the aforementioned three-year statute of limitations, while Chapter 93A has a four-year statute (see G.L.c. 260, §5A), as does the uniform securities statute (see G.L.c. 110A, §410(e)).

On the other hand, claims for breach of contract or breach of the implied contract of good faith and fair dealing have six-year statutes of limitation (see G.L.c. 260, §2).

Often the issue is whether the plaintiff can properly allege "fraudulent concealment" so as to prolong the tort statute until time of discovery. In Cohen, that did not work because the appellate court concluded the plaintiff was aware of the losses due to receipt of monthly statements.

The Cohen majority, unlike the dissent, did not feel the broker's written opinion, to the effect that if a certain course of action were taken "long term results should be fine," was fraudulent or prolonged the discovery date of the fraud. 

The Cohen court distinguished the facts in Patsos v. First Albany, 433 Mass. 323 (2001). There, the broker was embezzling the customer's money, and the customer had, like Cohen, received monthly statements with the entry "ck" and a dollar amount opposite. The broker told him "not to worry about it."

The Supreme Judicial Court stated that normally a stockbroker and customer relationship is not fiduciary in nature, and thus any breach of fiduciary duty claim alleging broker misconduct will likely founder.

However, in Patsos the broker had formed a "full relationship" with the customer, one of trust and confidence creating a fiduciary relationship, and thus the statute of limitations was tolled until the investor had "actual" knowledge of his losses. Id. at 321-322.

The Patsos court went on to say that mere receipt of the monthly statements may not be enough disclosure to trigger the statute of limitations. Id. at 337-338.

The court also noted that the time limits for a tort claim can be extended if a plaintiff can allege and prove (1) a fact was essentially unknowable or (2) the defendant breached a duty of disclosure arising from the relationship or (3) there was fraudulent concealment of an essential fact or claim. (See Patsos, 433 Mass. at 328; see also G.L.c. 260, §12 (fraudulent concealment tolls the statute of limitations).)

Statutory claims

Absent those special facts, once beyond the three-year limit a plaintiff is left with potential statutory claims under G.L.c. 110A, §410, or Chapter 93A, each of which allows four years from discovery of the facts but imposes other requirements.

Chapter 110A's civil remedies for misrepresentation and omissions in connection with the sale of a security were closely examined in Marram v. Kobrick Offshore Fund Ltd., 442 Mass. 43 (2004).

In that case, a mutual fund had sold an interest in a hedge fund to a profit-sharing plan. The investment went down sharply in value shortly after the sale, and the plaintiff lost about $1.4 million. Management nonetheless made reassuring statements about the investment, even after the disclosed loss.

According to Marram, once a misstatement is alleged and proved, there is a heavy burden on the seller to show it did not mislead the buyer. Id. at p. 52. Neither reliance nor scienter are necessary elements. But the statute of limitations starts upon "inquiry notice" and the defendant must be a seller. Id.

In Cohen, the court concluded that State Street was not a seller because it was acting as an agent rather than as a principal, and in any event there was insufficient evidence of a misstatement. (See Cohen at 635.)

One can also sue under Chapter 93A for damages relating to unfair or deceptive practices in the sale of securities. (See Marram, Id. at p. 61.) The statute of limitations is four years, but could be longer since the discovery rule can apply to these claims. (See Szymanski v. Boston Mutual Life Ins. Co., 56 Mass. App. Ct. 367 (2002); see also Loguidice v. Metropolitan Life Insur. Co., 336 F.3d 1 (1st Cir., 2002).) However, again there must be some fraud or deception, and not mere negligence or simple breach of contract.

Breach of contract

If the three years has passed (or four if a statutory claim), one is left with a breach of contract claim - with a six-year statute of limitations. The Superior Court judge in Cohen felt that this claim was merely a disguised negligence claim and dismissed it. On appeal, the Cohen majority analyzed it somewhat differently, concluding the contract claim evidence was too weak to withstand a motion for summary judgment.

Typically, contract claims in securities cases, absent a written agreement, are based on an oral representation, such as "we will invest the money conservatively" or "we will buy only income-producing stocks." Ordinarily such a claim begins to run from date of breach.

Still, the doctrine of equitable estoppel may also toll running of the six-year limitation if the plaintiff can argue the breach was unknowable or concealed by the defendant's fraudulent acts. (See analysis in Springfield Library & Museum Ass'n. Inc. v. Knoedler Archium Inc., 341 F.Supp. 2d 32 (D.Ma., 2004).)

Further, a contract cause of action does not accrue in Massachusetts until the plaintiff knows or should have known of it. (See Foisy v. Royal Maccabees Life Ins. Co., 356 F.3d 141, 146 (1st Cir., 2004) citing Riley v. Presnell, 409 Mass. 239 (1991).)

Thus, in some instances, a well-founded breach-of-contract case can be brought beyond the six-year statute.

Federal claims

A plaintiff could also claim a fraud under Section 10(b) and Rule 10b-5 of the 1934 Securities Exchange Act, either in arbitration or in federal court. Since July 30, 2002, the statute of limitations for a private federal action is two years from the discovery of the facts constituting the violation, or five years from the violation itself. See 28 U.S.C. 1658(b).

An action brought by the SEC is subject to a five-year limitation for penalties (see 28 U.S.C. 2462), which in turn is subject to equitable tolling if the SEC can establish it was not on inquiry notice and it exercised due diligence in uncovering the factual basis for the fraudulent conduct. (See SEC v. Tambone, 550 F.3d 106 (1st Cir., 2008).)

In any event, no statutory limitation applies to SEC remedies such as injunctions, disgorgement or officer bars; these are all viewed as equitable in nature. (See, generally, Scholes, "Time Waits for No One - Except the SEC," 40 BNA Sec. Reg. & L. Rptr. 593 (April 12, 2008); SEC v. Koenig ___ F.3d ___, 2009 WL 465594 (7th Cir., 2009) (applied equitable tolling to SEC allegations).)

Still, in one case, a District Court judge dismissed a claim by the SEC for an injunction and civil penalties as time barred, finding no fraudulent concealment so as to toll the statute and no justification for disgorgement. (See SEC v. Jones, 476 F.Supp. 2nd 374 (S.D.NY, 2007).)

Important for private plaintiffs who are beyond the two-year rule is whether their claims can withstand a defense that they were on inquiry notice. In a recent 2nd Circuit case, a panel found that although there was widespread publicity about a practice of kickbacks and bid-rigging in the insurance industry, that publicity did not focus on this defendant's practices, and a state lawsuit to the same effect filed in California against the defendant, but with no publicity, was not enough to create "storm warnings" putting an investor on notice. It reversed a District Court decision granting summary judgment for a defendant. (See Staehr v. Hartford Fin'l Serv. Group Inc., 547 F.3d 406 (2nd Cir., 2008).)

In the 1st Circuit, the rule is whether there were sufficient "storm warnings" to put an investor on notice that fraud was afoot. (See Young v. LePone, 305 F.2d 1 (1st Cir., 2002).)

However, according to LePone, the statute does not actually begin to run until an investor, once on notice and exercising reasonable diligence, would have discovered the fraud. That investigation may take only a few days, or possibly years, and a lawsuit can even await an investigation by another party. (Id., at 10.)


A practitioner reviewing a potential claim beyond the normal three-year statute must decide if his plaintiff can allege sufficient facts to bring a statutory or contract claim with his longer statute of limitations, or alternatively, claim tolling due to a fiduciary relationship with, or fraudulent concealment of a necessary fact by, the defendant.