New York City is home to the world's largest stock exchange, the New York Stock Exchange, and is host to financial service providers. This concentration of wealth and financial expertise has enticed many out-of-state investors to place their money in securities with New York-based financial institutions in the prospect of riches; however, coupled with the influx of these out-of-state investments is the potential for legal action by each dissatisfied or defrauded investor. New York developed the “borrowing statute” to protect its residents and deter actions by nonresidents including out-of-state investors in securities and commodities. Despite the plaintiff-friendly pleading standards for securities fraud outlined by the Supreme Court in Merck & Co. v. Reynolds, 130 S. Ct. 1784 (2010), out-of-state investors need to be particularly vigilant in pursuing fraud-related common law claims in New York, being careful not to become blocked by the borrowing statute.

Background

As with any pleading, the timeliness of a complaint is critical, yet the nature of fraud can make a timely filing within the applicable statute of limitations challenging. A plaintiff must consider how a court will calculate when the statute of limitations period began. In situations where the plaintiff immediately realizes that they have been injured, this process is fairly straightforward —generally, the plaintiff is barred from bringing a claim after the allotted limitations period is over. In instances where the plaintiff discovers the fraud outside of the time allotted in the statute of limitations, however, establishing the applicable time period for a timely filing becomes particularly fact-intensive, and it is a plaintiff's responsibility to establish that their claims are timely under the applicable discovery rule.

Out-of-state investors may have the option of pursuing private actions under federal or state law, and the type of action dictates the applicable statute of limitations. For out-of-state investors who pursue securities fraud claims, the statute of limitations is either five years from the violation (statute of repose) or two years from discovery of the facts constituting the violation (statute of limitation). As these claims are governed by federal law, the statute of limitations remains the same despite the jurisdiction. But, 28 U.S.C. Section 1658(b) does not cover “fraud-related” common law claims, such as aiding and abetting securities fraud. It is in the pursuit of claims outside of securities violations established by the Securities Act of 1933 or the Securities Exchange Act of 1934 where the borrowing statute can hurt out-of-state investors.

The 'Merck' Standard

The Supreme Court's decision in Merck changed the discovery rule for securities fraud claims concerning the onset of the applicable two-year statute of limitations. Before Merck, most courts (including the District Court of New Jersey in Merck) deemed that a plaintiff was on “inquiry notice” (also referred to as “storm warnings”) when public information was made available that would lead a reasonable investor to investigate the possibility of fraud. The onset of inquiry notice began the running of the statute of limitations as the plaintiff should have begun their investigation on that date. The Merck court, agreeing with the U.S. Court of Appeals for the Third Circuit, overruled this analysis, holding instead that the limitations period begins to run only after “a reasonably diligent plaintiff would have discovered the facts constituting the violation, including scienter—irrespective of whether the actual plaintiff undertook a reasonably diligent investigation.” Stated plainly, post-Merck, the limitations period begins when a reasonable investor conducting a timely investigation would have found the facts constituting a securities violation, including scienter.

The favorable impact of Merck to grant a potential plaintiff more time to bring a securities claim is intuitively recognizable. In the wake of Merck, class action securities filings have grown in frequency. Federal class action securities fraud filings hit a record pace in the first half of 2017. In the first six months of 2017, plaintiffs filed 226 new federal class action securities fraud cases. This number reflects a 135-percent increase compared to the 1997–2016 historical semiannual average of 96 filings. During the 18-month period before June 2017, more securities fraud class actions were initiated in federal court than initiated in any equivalent period since the enactment of the Private Securities Litigation Reform Act (PSLRA) of 1995.