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Some Fraud Claims Time-Barred

In an action alleging that officers, directors and the board's audit committee misrepresented the company's financial information, a district court (DC NH) found that some investor claims were barred by the statute of repose. Though some of the officers and directors were defendants in earlier litigation, which might have tolled the statute, tolling was not available because the claims in the first litigation and the current litigation did not share the same underlying facts. Moreover, the court did not revive the claims since the claims were time-barred before the effective date of the Sarbanes-Oxley Act.

According to the court, the investors sufficiently alleged that an officer and the audit committee had the scienter to commit fraud and may have been controlling persons. The pleading sufficiently suggested that the officer was in control over the company's operations, involved in its daily management, did not cooperate during SEC's investigation and was aware of the alleged accounting abuses.

The court found that the audit committee may have been at least reckless. The investors successfully pleaded that the committee members had personal financial bases to further the alleged fraud. Moreover, the magnitude and the obviousness of the fraud hinted at their recklessness. The investors also alleged that the committee was offered money to remain silent.

Allegations that the interim CEO made material misrepresentations survived the pleadings phase. The court reasoned that the statements were not cautionary projections protected by the safe harbor. Rather, they may have been made to hide the true financial condition of the company.

The investors did not convince the court that an officer and director had committed insider trading. The court concluded that the investors' trades were contemporaneous with the officer and director's alleged sale of stock. Neither did the investors convince the court that there was a nexus between the alleged false statements in the proxy statement and any alleged damage to investors as a result of the election of directors who allowed the alleged fraud to persist.

In re Tyco International, Ltd. Multidistrict Litigation (DC NH) is reported at ¶94,351.