One of the changes made by SOX was an increase in the statute of limitations for fraud actions.  Congress extended the period to two years from the date of discovery and not more than five years after the fraud occurred.  See Sec. 1658(b).  The previous period had been one year/three years.  Litigation has arisen, however, over the type of claims subject to the extension. 

In evaluating the time period for plaintiffs bringing an action under §14(a) of the Securities Exchange Act, the court In re Exxon Mobil Corp. Sec. Litig., No. 05-4571, 2007 U.S. App. LEXIS 20460 (3d Cir. 2007), held that the SOX extension did  not apply.  Instead, actions under the proxy rules were subject to the one year/ three year period.  

In this case, a group of Mobil shareholders brought suit against Exxon and Mobil for allegedly submitting false and misleading misrepresentations during the merger of the two companies.  The plaintiffs claimed that Exxon failed to report that some of its oil reserves were “impaired assets”.  This failure allegedly resulted in an overstatement of the value of the Exxon shares.  Had the values been accurately reported, plaintiffs asserted that Mobile would have sought a higher share exchange rate in the merger. 

On appeal, the plaintiffs argued that the extended statute of limitations in SOX applied to their §14(a) claim.  In resolving the issue, the court had to decide whether the statute applied to behavior that occurred before the adoption of the Act (the merger was in 1999) but where the limitations period had not yet expired at the time Congress adopted Sarbanes Oxley.  The court concluded that it did.

• The plain meaning of these words directs that claims filed after July 30, 2002, receive the benefit of the extended limitations periods, even if the shorter periods had already begun (but had not expired) on the underlying causes of action. Hence, the types of claims . . . raised in suits with timing like this one--filed in 2004 but complaining of events in 1999--get the benefit of Sarbanes-Oxley's two-year statute of limitations and five-year statute of repose.

The court, however, noted that SOX extended the statute of limitations only for claims involving "fraud, deceit, [or] manipulation . . .”  Because claims under Section 14(a) did not require scienter, they did not sound in fraud.  "Given this material distinction, we conclude that Congress did not intend to include Sec. 14(a) claims within the scope of Sec. 1658(b), but rather intended that provision to apply to Sec. 10(b) claims and other claims requiring proof of fraudulent intent."  

Plaintiffs argued that the court should use a fairness analysis, recognizing that the facts in their case supported a fraud claim.  The court, however, rejected the argument, concluding that it was limited to the edicts of Congress in interpreting the statute of limitations.  As the court recognized, this effectively imposed different statutes of limitation on proxy and fraud claims, a change in the law of the circuit.

• In ruling that Sec. 14(a) claims do not fall within the scope of Sec. 1658(b) [the extended statute of limitations in SOX], we recognize that this severs the tie between the limitations periods applicable to Sec. 10(b) claims and Sect. 14(a) claims that we recognized in Westinghouse. See 993 F.2d at 352-54 (holding that the same statute of limitations periods that applied to claims under Sec. 10(b) also apply to those under Sec. 14(a)). Plaintiffs make much of this link in their filings before us. But the law has materially changed since our decision in Westinghouse, and to use its policy arguments to claim otherwise ignores what has happened since.

The court, therefore, declined to allow for a longer statute of limitations in the case of proxy suits.  At the same time, other courts have extended the onerous pleading requirements of the PSLRA to actions under Section 14(a).  See Knollenberg v. Harmonic, Inc., 152 Fed. Appx. 674  (9th Cir. February 17, 2005)(Moreover, the PSLRA pleading requirements apply to claims brought under Section 14(a) and Rule 14a-9.").   In other words, courts are willing to extend the burdens of the PSLRA to proxy suits but not the benefits.