Can a dis­hon­est invest­ment firm legally avoid pros­e­cu­tion by not reveal­ing its ille­gal activ­i­ties until after the statute of lim­i­ta­tions has expired? In layman’s lan­guage, that’s the essence of the case to be argued before the Supreme Court today.

Wall Street greed is on trial in America’s streets. The Occupy move­ment reminds us of the inequal­ity and inequity in mod­ern Amer­ica. Manip­u­la­tion of mortgage-​​backed secu­ri­ties led only a few years ago to the worst finan­cial cri­sis the world has seen in eighty years, yet the banks and invest­ment firms con­tinue to make record prof­its and to hand out record bonuses. There seems to be a dif­fer­ent stan­dard — a dif­fer­ent world — that serves the invest­ment élite. The case of Credit Suisse Secu­ri­ties (USA) LLC v. Sim­monds would seem to address whether the idea of the rule of law applies to them at all.

The case arises from fifty-​​four IPOs issued in 1999 and 2000. An IPO is an Ini­tial Pub­lic Offer­ing, in which a com­pany sells its first pub­lic stock to raise money for a busi­ness startup or expan­sion. Typ­i­cally, the cash sup­plied to the com­pany comes from one or more invest­ment firms, in exchange for shares of own­er­ship in the com­pany. The invest­ment firms then sell those shares on the pub­lic stock mar­ket. That sale of shares is an IPO. The invest­ment firms are called “underwriters.”

In this case, Credit Suisse Secu­ri­ties and a num­ber of other invest­ment firms under­wrote 54 IPOs of inter­est. The shares were ini­tially sold in 1999 and 2000. Credit Suisse then arranged for a series of repur­chasers to repeat­edly buy the shares, always at a higher price, thus arti­fi­cially inflat­ing the value of the stock. This man­ner of manip­u­la­tion is known as “lad­der­ing”. This uneth­i­cal behav­ior was dis­cov­ered by a share­holder named Vanessa Sim­monds, who brought Credit Suisse and the other invest­ment firms to court, in an effort to make them dis­gorge the prof­its they had uneth­i­cally obtained.

The suit was brought under Sec­tion 16(b) of the Secu­ri­ties Exchange Act, which relates to insider trad­ing by direc­tors, offi­cers, and prin­ci­pal stock­hold­ers. The Dis­trict Court dis­missed 34 of the 54 cases as insuf­fi­ciently proven. The Court also dis­missed the final 20 cases, as hav­ing been brought beyond the two-​​year statute of lim­i­ta­tions as man­dated by Sec­tion 16(b).

Ms. Sim­monds appealed the case to the Ninth Cir­cuit Court. The three-​​judge Cir­cuit panel upheld the dis­missal of the 34 cases, but over­turned the 20 dis­missed due to being brought beyond the statute of limitations.

There are con­di­tions under which a statute of lim­i­ta­tions may be extended or ignored alto­gether, an action known as tolling. For exam­ple, if the vic­tim of a crime is a minor, or if the vic­tim is in bank­ruptcy or in prison, and so is for a time unable to bring suit, or if the par­ties to the suit had been engaged in good-​​faith nego­ti­a­tions — in all these cases, the statute-​​of-​​limitations-​​clock does not begin to run when the alleged crime occurs, but at some later date related to the spe­cific circumstances.

Sec­tion 16(b) requires cer­tain report­ing regard­ing secu­ri­ties trad­ing done by direc­tors, offi­cers, and prin­ci­pal stock­hold­ers, for the pur­pose of keep­ing these trans­ac­tions trans­par­ent, and prov­ing they are above board. The Ninth Cir­cuit ruled that the statute of lim­i­ta­tions clock should not begin until the required doc­u­ments are filed. In the case of the 20 IPOs in Ms. Simmond’s suit, the under­writ­ers never filed the required reports. The Ninth Cir­cuit ruled, there­fore, it was quite rea­son­able to expect it to take more than two years from the IPO issuance date for any pos­si­ble wrong­do­ing to be discovered.

Credit Suisse and the other invest­ment firms have appealed the Ninth Circuit’s deci­sion to the Supreme Court, which has agreed to hear the case. At issue here is not whether the IPO under­writ­ers lad­dered the stock, to thus arti­fi­cially inflate its price and make unearned (and pos­si­bly ille­gal) prof­its through manip­u­la­tion of the stock mar­ket. At issue is whether the statute of lim­i­ta­tions can be defeated by merely declin­ing to file doc­u­ments required by law.

As I noted in a pre­vi­ous arti­cle, it is com­mon (though by no means uni­ver­sal) that the Supreme Court agrees to hear a case because it intends to over­turn the lower court’s rul­ing. If the Court is nearly cer­tain to agree with the lower court, the Jus­tices usu­ally sim­ply decline to hear the case, and thus the lower court rul­ing stands. This raises the like­li­hood that the con­ser­v­a­tive Jus­tices on the Court are going to tell us that invest­ment firms can legally hide uneth­i­cal or ille­gal acts, merely by wait­ing until after the statute of lim­i­ta­tions expires before they file the required doc­u­men­ta­tion which could be used to prove or to expose their crimes.

In one fur­ther twist, the Court revealed that Chief Jus­tice Roberts did not take part in the dis­cus­sion of whether to hear this case. Such an announce­ment usu­ally (though not always) means that the Jus­tice who didn’t par­tic­i­pate intends to recuse him– or her­self from con­sid­er­a­tion of the actual case. This could nar­row the usual 5–4 deci­sion to a 4–4 tie, and make for inter­est­ing ques­tions dur­ing the oral arguments.