Dusek v. JP Morgan Chase & Co.

A class of investors appealed the dismissal of their lawsuit alleging that JP Morgan Chase and two of its employees were “control persons” under the Securities Exchange Act, in regards to JP Morgan Chase’s banking relationship with now-infamous Ponzi-schemer Bernie Madoff and his investment advisory firm, Bernard L. Madoff Investment Securities LLC (“BLM”). In addition, Plaintiffs alleged JP Morgan was liable for RICO violations, specifically mail and wire fraud, due to its investments in BLM’s feeder funds and its failure to report to the SEC what Plaintiffs alleged were suspicious banking activities on the part of BLM. Despite the securities nature of the pleadings, the dismissal order issued by the U.S. District Court for the Middle District of Florida cited to (i) the Securities Exchange Act’s statute of repose and (ii) the securities fraud preclusion of the Private Securities Litigation Reform Act (“PSLRA”).

Civil actions based on the Securities Exchange Act have a 2-year statute of limitation and a 5-year statute of repose, respectively. Plaintiffs filed their lawsuit on March 28, 2014. Madoff was arrested and BLM closed on December 11, 2008. Plaintiffs argued that the statutes of limitation and/or repose had been tolled during the pendency of an initial class action brought against JP Morgan in the Southern District of New York. That matter settled on January 6, 2014. The initial class included only those investors who could show an actual net loss of funds after taking into account their withdrawals from the initial principal invested with BLM. The proposed Florida class included all other investors.

In the District Court and in the Eleventh Circuit, Plaintiffs cited to the U.S. Supreme Court’s decision in American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), and the Tenth Circuit’s interpretation of same in Joseph v. Wiles, 223 F.3d 1155 (10th Cir. 2000), to argue that the earlier class action had tolled the statutes of limitations and/or repose for purposes of Plaintiffs’ new claims. JP Morgan cited to Police and Fire Retirement System of the City of Detroit v. Indy Mac MBS, Inc., 721 F.3d 95 (2d Cir. 2013), for the proposition that American Pipe-style tolling cannot be applied to a statute of repose. In ruling for JP Morgan, the Eleventh Circuit noted the different policy issues addressed by the statutes of limitation and repose, stating that the policy underlying the former is “to require plaintiffs to pursue ‘diligent prosecution of known claims’ by limiting the time to bring suit based on the date when the cause of action accrued.” Citing CTS Corp. v. Waldburger, 134 S.Ct. 2175, 2182 (2014). The policy underlying a statute of repose is to put “’an outer limit on the right to bring a civil action’ based on the ‘date of the last culpable act or omission of the defendant,’ whether or not an injury even occurred or was discovered.” Citing Id. The Eleventh Circuit further stated, “[t]he repose provision is therefore equivalent to a cutoff, in essence an absolute bar on a defendant’s temporal liability” and that a statute of repose is not subject to equitable tolling. Citing Id. at 2183.

Thus, Plaintiffs were left to argue that the tolling dictated by American Pipe was of a legal nature, and not equitable. The Tenth Circuit in Joseph found such a legal basis, noting the policy of judicial economy and efficiency underlying FRCP Rule 23. However, the Eleventh Circuit found more support in its own earlier rulings, as well as those of the Supreme Court and the Second, Fourth, and Sixth Circuits, holding that the tolling authority provided in American Pipe was of an equitable nature. Indeed, the Supreme Court stated in American Pipe that the tolling under discussion was a “judicial power.” Given these authorities, the Eleventh Circuit upheld the District Court’s dismissal of the Securities Exchange Act claims.

Finally, in a far less encompassing analysis, the Eleventh Circuit upheld the District Court’s dismissal of the plaintiffs’ RICO claims, based wholly on the fraud claim preclusion language of the PLSRA. That preclusion generally states that “no person may rely upon any conduct that would have been actionable as fraud in the purchase or sale of securities to establish a violation of section 1962 [of the federal RICO Act].” The Eleventh Circuit held that Plaintiffs’ claims of mail and wire fraud were “clearly based upon the fraudulent conduct of Madoff and BLM relating to securities investments.”