With three lawsuits now pending in federal court to exempt certain professions from the reach of the Red Flags Rule and two bills pending in the Congress to do the same, the FTC determined that it was best to once again further delay enforcement of the identity theft prevention regulation past the current enforcement deadline of June 1.

In a press release and enforcement policy statement, the FTC announced today that it is delaying its enforcement of the Red Flags Rule through December 31, 2010. The Red Flags Rule requires covered businesses to establish and implement Identity Theft Prevention Programs in order to detect, prevent, and mitigate identity theft.

The FTC asserts that several members of Congress have again asked the Commission to delay enforcement in order to give Congress time to work through its pending legislation regarding the scope of businesses that should be covered by the Rule. H.R. 3763 (pdf) passed 400-0 last year and has received no Senate action. Meanwhile, a companion S. 3416 (pdf) was introduced in the Senate just before the Memorial Day holiday.

Notably, the FTC made no mention of the three federal cases now pending against it. As reported earlier on this blog, on May 21, the American Medical Association joined the American Bar Association and the American Institute of Certified Public Accountants in filing suit against the FTC to exempt its members from the reach of the Red Flags Rule.

The FTC urged Congress to act quickly on its pending legislation. The Commission stated that, if Congress passes legislation limiting the scope of the Red Flags Rule with an effective date earlier than December 31, 2010, then the Commission will begin enforcement as of that effective date.

This further delay of the enforcement deadline gives non-bank businesses the extra time they need to determine whether they are subject to the Red Flags Rule and, if so, to perform a suitable risk assessment that will assist in the establishment of an appropriate Identity Theft Prevention Program. Banks and other financial institutions that are subject to supervision by a federal bank regulatory agency should already have such a program in place.

Voters in the UK produced an unlikely result by failing to deliver a clear majority to any one party in the May 6, 2010 general elections.  The resulting “hung Parliament” —the first since 1974—has resulted in the creation of a coalition government between the Conservative Party and the Liberal Democrats, with the Conservative Party’s David Cameron serving as the UK’s new Prime Minister.  This change of power from the Labour party has any number of political implications in the UK and beyond, including the opportunity for a new government to determine key aspects of when and how the new UK Bribery Act 2010 will be implemented.  

The Act received Royal Assent on April 8, 2010, but two critical steps must be completed before the Act can take effect.  First, the Act’s commencement date must be determined by a new Ministry of Justice, which will be appointed by the new government.  Second, the Ministry of Justice must provide guidance as to what constitutes adequate anticorruption procedures, pursuant to the mandate of Section 9 of the Act.  The government committed to providing this guidance before the new offenses under the Act take effect to give commercial organizations adequate time to address any potential shortcomings in their internal compliance functions. 

At the February 2, 2010 third reading of the Bill before the House of Lords, Lord Tunnicliffe indicated that the Ministry of Justice had already begun working closely with business groups and non-governmental organizations to develop a set of principles to serve as the basis of the guidance document.  However, the guidance consultation and development process was stayed during the election.  If Labour had won a majority, it was anticipated that the Act would take effect in October 2010, following a July 2010 release of the guidance required by Section 9.  The Conservative/coalition victory may result in commencement being delayed until 2011 as the new Ministry of Justice prepares the guidance required by Section 9.  This could include a new round of consultations with businesses and other relevant entities.  

While awaiting news regarding the commencement of the Act, UK businesses and U.S. businesses operating in the UK have the opportunity to begin assessing their compliance programs and identifying the changes necessary to ensure compliance with the Act and the ability to take full advantage of its “adequate procedures” defense. 

More information about the Act, including its new offenses and how it compares to the U.S.’s Foreign Corrupt Practices Act, can be found in McGuireWoods’ white paper Understanding the UK Bribery Act. 

In 2002, Congress codified the statute of limitations for securities fraud actions for the first time.  As part of the Sarbanes-Oxley reforms, Congress declared that securities fraud claims “may be brought not later than the earlier of – (1) 2 years after the discovery of the facts constituting the violation; or (2) 5 years after such violation.” 

After nearly eight years of litigants fighting over the meaning of these words, the Supreme Court, on April 27, 2010, weighed in on the meaning of the phrase “after discovery of the facts constituting the violation” in Merck & Co. v. Reynolds.  The Court’s interpretation of the statutory language will have immediate practical implications for securities litigators.  Most notably, the common law concepts of “inquiry notice” and “storm warnings” are rendered obsolete for purposes of the statute of limitations analysis.  The cause of action accrues only “(1) when the plaintiff did in fact discover, or (2) when a reasonably diligent plaintiff would have discovered, ‘the facts constituting the violation’ – whichever comes first.”  Significantly, the Court also held that the “facts constituting the violation” include the fact of scienter. 

The Court’s opinion includes a number of key holdings for litigants in securities fraud actions:

• The Court rejected Merck’s argument that Sarbanes-Oxley does not require “discovery” of scienter-related facts, holding that scienter is “assuredly a ‘fact,’” and that scienter is an important and necessary element of a Section 10(b) claim.  This is arguably a game-changer: notice (actual or constructive) of facts showing a mere misstatement or omission will not start the running of the statute of limitations.
• The Court rejected Merck’s argument that facts that tend to show a materially false or misleading statement (or omission) are ordinarily sufficient to show scienter.  The Court held that facts constituting a misstatement or omission and facts constituting scienter will often be different.  Thus, the statute of limitations will not start running until actual or constructive knowledge of both is established.
• The Court held that “inquiry notice,” the concept that a statute of limitations begins to run when a reasonably diligent plaintiff learns of facts that would cause him or her to investigate further, finds no support in the statutory text.

Though only time will tell how the lower federal courts will interpret Merck, going forward, in securities fraud cases, it will no longer be sufficient for defense counsel to simply argue for the existence of “storm warnings” or to make common law-like “inquiry notice” arguments.  Instead, defense counsel will need to prove at what point a reasonably diligent plaintiff would have discovered “the facts constituting the violation” – including scienter.  In a Section 10(b) case, constructive knowledge of facts constituting a misstatement or omission, without more, may not be sufficient to begin the running of the statute.

What could this mean?  In many cases, the accrual date of the statute of limitations could be pushed out.  The days of merely arguing that a plaintiff could see the storm approaching and had a duty to investigate further are over.  On the other hand, the objective constructive fraud analysis could, in certain circumstances, be used by the defense bar to its advantage.  One thing is certain, when millions and sometimes billions of dollars are at stake, whether a plaintiff missed the deadline for filing will continue to be an important issue.