## F I L E D United States Court of Appeals Tenth Circuit 

### AUG 4 2000 

### PATRICK FISHER Clerk 

### PUBLISH UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

JACK JOSEPH, Plaintiff-Appellant,

v. Q.T. WILES; GERALD W. GOODMAN; WILLIAM R. HAMBRECHT; GARY E. KOENIG; RUSSELL E. PLANITZER; PAUL N. RISINGER; PATRICK J. SCHLEIBAUM, JESSE C. PARKER; OWEN TARANTA; HAMBRECHT & QUIST GROUP; HAMBRECHT & QUIST VENTURE PARTNERS; HAMBRECHT & QUIST, INC., named as Hambrecht & Quist Incorporated; MORGAN STANLEY & CO. INCORPORATED; COOPERS & LYBRAND, and Does 1 through 50, Defendants-Appellees, No. 99-1258

Appeal from the United States District Court for the District of Colorado (D.C. No. 91-M-731)

Solomon B. Cera of Gold Bennett & Cera LLP, San Fra ncisco, California (Gary Garrigues and Steven J. Mulligan of Gold Bennett & Cera LLP, San Francisco, California; and Frances A. Koncilja of Koncilja & A ssociates, P.C., Denver, Colorado, with him on the briefs for Plaintiff-Appe llant. Geoffrey F. Aronow of Arnold & Porter, Washington, D.C., and Robert F. Wise, Jr. of Davis Polk & Wardwell, New York, New York (T im Atkeson and Robert Barrett of Arnold & Porter, Denver, Colorado; MarcyG. Glenn of Holland & Hart* The Honorable James O. Ellison, District Judge, Uni ted States District

Court for the Northern District of Oklahoma, sittin g by designation. -2- LLP, Denver, Colorado; Michael V. Corrigan of Simps on Thacher & Bartlett, New York, New York; Gerald L. Bader, Jr. of Bader & Associates, P.C., Denver, Colorado; John Sullivan of Kirkpatrick & Lockhart, New York, New York; Richard Gabriel of Holme, Roberts & Owen, Denver, C olorado; Cary B. Lerman of Munger, Tolles & Olsen, Los Angeles, California; and H. Alan Dill of Dill, Dill, Carr & Stonbraker, P.C., Denver, Colorado, wi th them on the brief) for Defendants-Appellees.

Before SEYMOUR , Chief Judge, LUCERO, Circuit Judge and ELLISON, District Judge. *

SEYMOUR , Chief Judge.

In this securities class action suit in the Distric t Court of Colorado, Jack Joseph asserts claims on behalf of himself and othe rs similarly situated pursuant to section 11 of the Securities Act of 1933 (the 19 33 Act), 15 U.S.C. § 77k, and section 10(b) of the Securities Exchange Act of 193 4 (the 1934 Act), 15 U.S.C. § 78j(b). Defendants prevailed on their motions to d ismiss in the district court. On review, we are asked to determine whether a variety of threshold, procedural, and pleading issues prevent plaintiff’s claims from goi ng forward. We affirm in part, and reverse and remand in part.-3- I The background of this case is complex and involves a prodigious amount of litigation. We therefore set forth only those f acts relevant to the disposition of the matter at hand. On May 21, 1987, MiniScribe Corporation (MiniScribe or the Company), a manufacturer of computer hard disk drives, sold ove r $97 million worth of convertible debentures in a public offering. These debentures were issued pursuant to a registration statement filed with the Securities and Exchange Commission (SEC). Jack Joseph purchased 250 of the debentures later that year. In March of 1989, MiniScribe announced that, due to irregularities in its business and accounting practices, its prior financ ial statements could not be relied upon. Mr. Joseph sold his debentures at a l oss of approximately $17,000 in June 1989. An Independent Evaluation Committee rep ort issued the following September disclosed widespread intentional fraud atMiniScribe going back several years, which had resulted in material overs tatements of revenues and earnings. In late 1989 the Company revealed that i t had a negative net worth of $88 million, and in 1990 it filed for Chapter 11 ba nkruptcy. A series of lawsuits was commenced against MiniScri be, its principal officers and directors, venture capital firms that had major investments in the Company, its outside auditors, and the underwriters of the debentures. The first1 It does not appear from the record that such an ame nded complaint was

filed with the district court. The record contains no explanation for this failure. -4- suit brought by debenture holders was a class actio n filed in federal district court in Colorado on April 5, 1989, asserting claims unde r section 10(b) but not under section 11. Another action was filed in Californiastate court on May 9, 1989, asserting state law claims as well as claims under section 11. Although this action was filed on behalf of all MiniScribe securi ties purchasers, it contained no named plaintiffs who had purchased debentures. On November 1, 1989, the complaint was amended to omit the claims under sect ion 11. On October 4, 1989, a Coordinated Amended Complaintwas filed in a new action in federal district court in Colorado on beh alf of common stock and debenture purchasers, asserting claims under both s ection 10(b) and section 11. The plaintiffs in that action moved to certify clas ses of shareholders and debenture purchasers. The district court held a he aring on those motions on June 15, 1990. During this hearing the court indicated it was not prepared at that time to certify a debenture class, but agreed to allow t he debenture holders thirty days to file a separate amended complaint. 1 In October 1990, pursuant to the June 15 hearing, the district court certified a shareholder -only class in a related action, Gottlieb v. Wiles , No. 89-M-963 (D. Colo. 1990). In the meantime, on August 10, 1990, another compla int was filed in state-5-

court in California asserting claims under section 11 on behalf of all purchasers, with Mr. Joseph as a named plaintiff. It was subse quently removed and transferred to the federal district court in Colora do. In June 1991, Mr. Joseph moved to certify the class. On October 24, the dis trict court denied Mr. Joseph’s motion on the grounds that, as an aftermarket purch aser, he lacked standing to pursue a section 11 claim, and that his class claim s were barred in any event by the statute of repose. The shareholder action settled in 1993, and on June 3, 1994, the district court held a hearing in which he ordered any remain ing debenture purchasers to file their claims in the MiniScribe litigation. On July 5, 1994, Mr. Joseph filed an amended complaint in the present action, asserting claims under section 10(b) and section 11. Defendants moved to dismiss for failur e to state a claim. See Fed. R. Civ. P. 12(b)(6). In 1999, the district court gran ted the motions in a brief order, summarily concluding that the claims were untimely and that the allegations in Mr. Joseph’s complaint would not be sufficient for class certification in any event. Mr. Joseph appeals. We review de novo a district court’s decision to di smiss a complaint under Rule 12(b)(6). See Grossman v. Novell, Inc. , 120 F.3d 1112, 1118 (10th Cir. 1997).-6- II Mr. Joseph’s arguments on appeal are directed at se veral different points: the district court’s conclusion in its October 24, 1991 order that Mr. Joseph lacked standing under section 11 because he was an aftermarket purchaser; defendants’ contention in their Rule 12(b)(6) motio ns that Mr. Joseph failed to allege reliance as required for his section 10(b) c laim; and, finally, the timeliness of his claims. Specifically, Mr. Joseph argues fir st that the district court erred in determining he lacked standing as an aftermarket pu rchaser to assert claims under section 11. Second, Mr. Joseph contends he is enti tled to a presumption of reliance sufficient to sustain his claim under sect ion 10(b). Finally, he asserts that his claims were timely filed because he is ent itled (1) to a tolling of the limitations period on his claims while class certif ication was pending, and (2) to the relation-back of his 10(b) claims to the August10, 1990, state court complaint. We address each issue in turn.

A. Standing Under Section 11 for Aftermarket Purch asers Section 11 provides that where a material fact is m isstated or omitted from a registration statement accompanying a stock filin g with the SEC, “any person acquiring such security” may bring an action for lo sses caused by the misstatement or omission. 15 U.S.C. § 77k(a). Def endants argue Mr. Joseph-7-

lacks standing to pursue his section 11 claim becau se he purchased his debentures in the secondary market. The district court agreed in its 1991 opinion denying Mr. Joseph’s motion for class certification, holdin g that “[s]ection 11 is limited to the initial distribution of securities.” Rec., vol . II at 608. The court concluded that Mr. Joseph’s class could not be certified beca use he would be unable to represent those members who bought their debentures in the initial distribution. We have not previously had occasion to determine wh ether aftermarket purchasers have standing to sue under section 11, aquestion which is vigorously debated. Both parties cite us to numerous districtcourt opinions which have come down on both sides of the controversy. Compare In re Summit Med. Sys.,
Inc. , 10 F. Supp. 2d 1068, 1070 (D. Minn. 1998) (holding aftermarket purchasers lacked standing under section 11) and Gannon v. Continental Ins. Co. , 920 F. Supp. 566, 575 (D.N.J. 1996) (same) with Adair v. Bristol Tech. Sys., Inc. , 179 F.R.D. 126, 130-33 (S.D.N.Y. 1998) (holding aftermarket purchasers had standing under section 11) and Schwartz v. Celestial Seasonings, Inc. , 178 F.R.D. 545, 555-57 (D. Colo. 1998) (same). The federal courts of appeal addressing this issue have agreed that section 11 covers aftermarket purc hasers. See Hertzberg v. Dignity Partners, Inc. , 191 F.3d 1076 (9th Cir. 1999); Versyss, Inc. v. Coopers & Lybrand, 982 F.2d 653, 654 (1st Cir. 1992); Barnes v. Osofsky , 373 F.2d 269 (2d Cir. 1967). Defendants contend the Supreme Court, in construin g another section-8-

of the 1933 Act, indicated that the opposite resultis correct. See Gustafson v. Alloyd Co., Inc. , 513 U.S. 561 (1995) (construing § 12(2)). After considering the statutory language, legislati ve history, analogous Supreme Court authority, and case law from other ci rcuits, we are convinced that Mr. Joseph has the better argument. For the reason s set out below, we conclude that an aftermarket purchaser has standing to pursu e a claim under section 11 so long as he can prove the securities he bought were those sold in an offering covered by the false registration statement. In determining the meaning of a statute, we look fi rst to its text. See O’Connor v. United States Dept. of Energy , 942 F.2d 771, 773 (10th Cir. 1991) (citing United States v. Turkette , 452 U.S. 576, 580 (1981)). Section 11(a) provides that where a registration statement contai ning material misstatements or omissions accompanies a stock filing with the SEC, “any person acquiring such security” may bring an action for losses caused by the defect. 15 U.S.C. § 77k(a). The problem, as Judge Friendly pointed out, “is that ‘such’ has no referent.”
Barnes , 373 F.2d at 271. Nothing indicates whether “such security” must be one sold in the initial offering or whether it could have been sold in the aftermarket. The term “any person,” however, is quite broad. Ac cording to Black’s Law Dictionary, “any” means “some; one out of many; an indefinite number.” Black’s Law Dictionary 94 (6th ed. 1990). “Its generality, ” Black’s points out, “may be-9-

restricted by the context.” Id. When these two clauses are combined and read together, the natural reading of “any person acquir ing such security” is simply that the buyer must have purchased a security issue d under the registration statement at issue, rather than some other registration statement. See Hertzberg , 191 F.3d at 1080. There is no language limiting cl aims to those investors who purchase their shares in a public offering. Other portions of section 11 buttress our interpret ation of the statute. Section 11(a) was amended in 1934 to add the requir ement that a person who acquires the security “after the issuer has made ge nerally available to its security holders an earning statement covering a period of at least twelve months beginning after the effective date of the registrat ion statement” must prove reliance on the registration statement in order to recover. This legislative provision indicates that aftermarket purchasers mayassert claims pursuant to section 11. To construe section 11 as inapplicable to registered securities purchased in the secondary market would make this s ection applicable only to continuous offerings that extend beyond twelve months, which are (and were in 1933) the exception rather than the rule. See Harold S. Bloomenthal, Securities Law Handbook

§ 14.08[1] at 704 (2000 ed.). The damages provision, section 11(e), clearly conte mplates that some buyers will not have purchased their securities in the initial offering. It sets the-10-

baseline for measuring damages at “the amount paid for the security (not exceeding the price at which the security was offer ed to the public).” 15 U.S.C. 77k(e). Section 11(g) further caps the maximum amo unt recoverable at “the price at which the security was offered to the public.” Id. at 77k(g). Such provisions “would be unnecessary if only a person who bought i n the actual offering could recover, since, by definition, such a person would have paid ‘the price at which the security was offered to the public.’” Hertzberg , 191 F.3d at 1080. Indeed, aftermarket purchasers who pay more than the offeri ng price for their securities are the only people who could have losses which exc eed the price at which the securities were offered to the public. See Bloomenthal, at 704. As is often the case with legislative history, we c an find passages to support both positions. For example, a legislative report accompanying the bill states that “the civil remedies accorded by [sectio n 11] . . . are given to all purchasers . . . regardless of whether they bought their securities at the time of the original offer or at some later date.” H.R. Rep. N o. 73-85, at 22 (1933). However, that same report also states: “The bill on ly affects new offerings of securities . . . . It does not affect the ordinary redistribution of securities.” Id. at 5. This only demonstrates how “legislative historyoften cuts both ways and a researcher can find a bit here and there which supp orts a desired view.” United States v. Richards , 583 F.2d 491, 495 (10th Cir. 1978).-11-

Defendants urge us to view the statutory scheme bro adly and to recognize the fundamental dichotomy between the purpose and s cope of the 1933 Act, which was meant to regulate the initial distribution of s ecurities, and the 1934 Act, which regulates trading in the open market. See , e.g. , Blue Chip Stamps v. Manor Drug Stores , 421 U.S. 723, 752 (1975) (“The 1933 Act is a far narrower statute [than the 1934 Act,] chiefly concerned with disclos ure and fraud in connection with offerings of securities–primarily . . . initia l distributions of newly issued stock from corporate issuers.”) (citing I L. Loss, Securities Regulation , 130-31 (2d ed. 1961). Recognizing this difference, howeve r, does not lead us to change our conclusion. This distinction centers on where the misstatement or omission takes place, in the public offering or in the secon dary market. Here, Mr. Joseph may have purchased in the aftermarket, but the alle ged deception took place in the initial offering. See Columbia Gen. Inv. Corp. v. SEC , 265 F.2d 559, 562 (5th Cir. 1959) (“Persons other than those who purchase new stock under the Registration may be affected in point of fact and m ay, under certain circumstances, have remedies in point of law for mi srepresentations in a Registration.”). It does not do violence to the sc ope and purpose of the 1933 Act to allow Mr. Joseph, under these circumstances, to bring a claim under section 11. This is the logic underlying the “tracing” theory, which recognizes aftermarket purchasers’ standing to sue under secti on 11 as long as they can-12-

demonstrate they bought their securities pursuant t o the registration statement.
See Barnes , 373 F.2d 269. Several circuit and district court s have endorsed this theory, see Hertzberg , 191 F.3d at 1080 n.4; Shapiro v. UJB Fin. Corp ., 964 F.2d 272, 286 (3d Cir. 1992); Adair , 179 F.R.D. at 130; Schwartz , 178 F.R.D. at 556. See also IX Louis Loss & Joel Seligman, Securities Regulation 4267 n.180 (3d ed. 1995); Bloomenthal, at 700-01, and we are persu aded by the weight of reasoned authority to endorse it. Because MiniScri be made only one debenture offering, the debentures Mr. Joseph purchased are directly traceable to the May offering and registration statement. See Hertzberg , 191 F.3d at 1082 (noting that, because all stock issued was sold in a single offer ing, plaintiff would have no difficulty tracing his stock to the offering). Defendants believe that their interpretation of sec tion 11 is supported by the Supreme Court’s ruling in Gustafson . We do not agree. Gustafson involved neither a public offering nor the issue of standing of an aftermarket purchaser. Rather, the Court was interpreting section 12(2) of the 1933 Ac t, which gives buyers a cause of action for recission against sell ers who make material misstatements or omissions “by means of prospectus. ” 15 U.S.C. § 77 l(a)(2). In that case individuals who were the sole shareholder s of a privately held corporation entered into a contract to sell their s hares to another party. When the company’s actual earnings turned out to be lower th an its estimated earnings, the-13-

buyer sued for recission, arguing that the contractof sale was a “prospectus” and therefore any misstatements contained in it gave ri se to liability under section 12(2). The Court held that a private contract is n ot an offering document within the meaning of that section, and indicated in dictathat only purchasers in the initial public offering could bring suit pursuant t o section 12(2). See Gustafson , 513 U.S. at 571-72. Defendants contend this dicta implies the Court would also interpret section 11 to apply only to purchasers in the initial offering. This argument is unavailing, however, because the w ording of the two provisions is distinctly different. Section 12(2) provides that any person who offers or sells a security by means of a prospectus which contains an untrue material statement or omits a material fact is liab le “to the person purchasing such security from him .” 15 U.S.C. 77 l(a) (emphasis added). This is an express privity requirement, giving a cause of action only to indiv iduals who purchase securities directly from a person who sells the securities by means of a prospectus. Section 11, in contrast, has no such requirement. It gives a cause of action to “ anyperson acquiring such security.” 15 U.S.C. 77k(a) (emphas is added); see also Loss & Seligman, at 4267 (“It is in its assault on the cit adel of privity that 11 marks its greatest departure from precedent. . . . [Section 1 1] gives the same right of action even to a buyer in the open market.”). We must ass ume that Congress intended the two sections to be interpreted differently. “[ W]here Congress includes-14-

particular language in one section of a statute butomits it in another section of the same Act, it is generally presumed that Congres s acts intentionally and purposely in the disparate inclusion or exclusion.” United States v. Burch , 202 F.3d 1274, 1277 (10th Cir. 2000) (quoting Russello v. United States , 464 U.S. 16, 23 (1983)). The available scholarly literature supports our con struction of section 11. The author of a recent article states: Following an initial flurry of decisions after Gustafson which limited standing under section 11 to purchasers on an IPO, the more recent and more well-reasoned decisions allow aftermarket purc hasers standing to sue under section 11. Such decisions are not only cons istent with both the explicit statutory language of section 11 . . . but , are also truer to the legislative spirit behind the Securities Act in pro viding the broadest possible protection to purchasers of initial public offerings. Brian Murray, Aftermarket Purchaser Standing Under 11 of the Secu rities Act of
1933 , 73 St. John’s L. Rev. 633, 650 (1999). See also Loss & Seligman, at 4249 (“Suit may be brought by any person who acquired a registered security, whether in the process of distribution or in the open marke t.”); Bloomenthal, at 700 (“Anyone who purchased the registered security can assert a claim. S/he does not have to purchase the security at the time it was of fered.”); Vincent R. Cappucci, Misreading Gustafson Could Eliminate Liability Unde r Section 11 , 218 N.Y. L.J. 1 (Sept. 22, 1997). For all of these reasons, we hold that Mr. Joseph h as standing to bring suit-15-

under section 11.

B. Presumption of Reliance Under Section 10(b) In order to state a claim under section 10(b), a pl aintiff must establish that, “in connection with the purchase or sale of a secur ity, ‘the defendant, with scienter, made a false representation of a material fact upon which the plaintiff justifiably relied to his or her detriment.’” Grubb v. FDIC , 868 F.2d 1151, 1162 (10th Cir. 1989) (quoting Zobrist v. Coal-X, Inc. , 708 F.2d 1511, 1516 (10th Cir. 1983)). Reliance is an element of the section 10(b ) cause of action because it “provides the requisite causal connection between adefendant’s misrepresentation and a plaintiff’s injury.” Basic, Inc. v. Levinson , 485 U.S. 224, 243 (1988). Defendants correctly point out that Mr. Joseph’s co mplaint fails to sufficiently allege reliance. This need not prove fatal to his claim, however, if the circumstances of his debenture purchase bring him w ithin any of the recognized exceptions to the reliance requirement entitling hi m to a rebuttable presumption of reliance. Mr. Joseph contends he is entitled to a presumption of reliance under several theories.

1. Affiliated Ute Presumption Mr. Joseph first asserts he is entitled to a presumption of reliance under-16-

Affiliated Ute Citizens of Utah v. United States , 406 U.S. 128 (1972), based on allegations in the complaint that defendants failed to disclose material facts. Requiring a plaintiff to show a speculative state o f facts, i.e., how he would have behaved if omitted material information had been di sclosed, places an unrealistic evidentiary burden on the 10(b) plaintiff. Consequ ently, the Supreme Court has allowed the trier of fact to presume reliance where the defendant fails to disclose material information. See id. at 153-54. The defendants in Affiliated Ute were two officers of the bank which was the transfer age nt for a tribal corporation that managed and distributed assets to members of the Ut e Native American Tribe. The bank officers induced tribal members to sell th eir stock at below-market rates. Unbeknownst to the Utes, the officers purch ased a significant number of shares themselves and arranged sales to non-Native American investors, for which they received gratuities and commissions. The Court found the Utes had the right to know that the bank officers were in a position t o gain financially from sales of the stock and that the stock was selling at a highe r price in the market the officers had developed. The duty to disclose and the withho lding of these material facts established the requisite element of causation. See id. at 154. Affiliated Ute’s holding is limited to omissions as opposed to affi rmative misrepresentations. Defendants correctly point outthat Mr. Joseph’s complaint alleges at most a combination of misrepresentations and omissions. In such-17-

“mixed” cases, “[a] strict application of the omiss ions-misrepresentations dichotomy would require the trial judge to instructthe jury to presume reliance with regard to the omitted facts, [but] not to pres ume reliance with regard to the misrepresented facts.” Sharp v. Coopers & Lybrand, 649 F.2d 175, 188 (3d Cir. 1981). Rather than subject the jury to such a conf ounding exercise, “a unitary burden of proof on the reliance issue should be setaccording to a context-specific determination of where that burden more appropriate ly lies.” Hoxworth v. Blinder, Robinson & Co., Inc. , 903 F.2d 186, 202 (3d Cir. 1990). See also Binder v. Gillespie , 184 F.3d 1059, 1064 (9th Cir. 1999); Austin v. Loftsgaarden , 675 F.2d 168, 178 n.21 (8th Cir. 1982); Sharp , 649 F.2d at 188. We must therefore analyze the complaint to determine whether the offe nses it alleges can be characterized primarily as omissions or misrepresentations in order to determine whether the Affiliated Ute presumption should apply. This analysis is easier to describe than to carry o ut because every misstatement both advances false information and om its truthful information. Statements which are technically true may be so inc omplete as to be misleading (e.g., half-truths or distortions). In an attempt to take advantage of the Affiliated
Ute presumption, an artfully-pleaded complaint can rec haracterize as an omission conduct which more closely resembles a misrepresent ation. “The labels by themselves, therefore, are of little help.” Wilson v. Comtech Telecomm. Corp. ,-18-

648 F.2d 88, 93 (2d Cir. 1981). Instead we look to the nature of the allegations co ntained in the complaint, bearing in mind that the Affiliated Ute presumption of reliance exists in the first place to aid plaintiffs when reliance on a negative would be practically impossible to prove. See Wilson , 648 F.2d at 93. Mr. Joseph’s complaint essential ly alleges that MiniScribe engaged in a pattern of deception w hich involved manipulating financial data, disseminating false information abo ut the company, concealing the truth about the company’s true financial outlook, a nd hiding the existence of the fraudulent scheme itself. The claims are pled in s uch a manner as to intertwine affirmative acts with omissions in a strained attempt to recharacterize the alleged wrongdoing. The following allegations, typical of those contained in Mr. Joseph’s complaint, are illustrative: [MiniScribe] consistently omitted to disclose that its financial statements had been falsified

and that its sales, revenues, assets and sharehold ers’ equity had been artificially inflated. Defendants concealed the existence of the unlawful scheme and the acts of manipulation co mmitted pursuant thereto . In furtherance of this campaign of concealment, [MiniScribe] continually reported in its public statements that it had achieved, and would continue to achieve, substantial growth in revenue and profits. These statements . . . were materially false and misleadi ng in that they failed to disclose the existence of the fraudulent scheme

. . . . Rec., vol. II at 692 (emphasis added). Statements such as these, while struggling valiantly to bring the alleged conduct within the d efinition of “omission,” indicate that what Mr. Joseph really protests are the affirm ative misrepresentations-19-

allegedly made by defendants. Any fraudulent scheme requires some degree of conce alment, both of the truth and of the scheme itself. We cannot allow th e mere fact of this concealment to transform the alleged malfeasance into an omissi on rather than an affirmative act. To do otherwise would permit the Affiliated Ute presumption to swallow the reliance requirement almost completely. Moreover, it would fail to serve the Affiliated Ute presumption’s purpose since this is not a case whe re reliance would be difficult to prove because it was based on a neg ative. We therefore hold the Affiliated Ute presumption of reliance inapplicable here. See Abell v. Potomic
Ins. Co. , 858 F.2d 1104, 1119 (5th Cir. 1988) (applying the presumption in nondisclosure cases, but not in falsehood or distortio n cases), judgment vacated on other grounds , 492 U.S. 914 (1989).

2. Fraud-Created-the-Market Presumption Mr. Joseph contends that in any event he is entitle d to a presumption of reliance under the “fraud-created-the-market” doctr ine, which permits a plaintiff to maintain an action under section 10(b) by provin g the defendant’s fraud allowed securities that otherwise would have been u nmarketable to come into and2 This presumption of reliance is not to be confused with its more

established cousin, the “fraud-on-the-market” presu mption. The latter doctrine, endorsed by the Supreme Court in Basic v. Levinson , 485 U.S. 224 (1988), recognizes that in an open, efficient, and develope d market, where millions of shares are traded daily, the investor must rely on the market to perform a valuation process which incorporates all publicly available information, including misinformation. See id. at 241-47. Thus, the reliance of individual plain tiffs on the integrity of a price in such a market, and impl icitly the misinformation that contributed to that price, may be presumed. See id. at 247. The fraud-createdthe-market presumption, by contrast, applies where there is no preexisting, wellestablished market. -20- exist in the market. 2 In other words, investors can be presumed to relyon the integrity of the market to contain only genuine sec urities. The first case to articulate this doctrine was Shores v. Sklar , 647 F.2d 462 (5th Cir. 1981) (en banc). The defendants there had engaged in an elab orate scheme to create a bond issue so lacking in basic requirements it would nev er have been approved absent the massive fraud. See id. at 464 n.2. The Fifth Circuit stated that the pla intiff would be entitled to a presumption of reliance if h e could establish that “the defendants knowingly conspired to bring securities onto the market which were not entitled to be marketed, intending to defraud p urchasers.” Id. at 469. The court made clear that the plaintiff could not recov er if he “proves no more than that the bonds would have been offered at a lower p rice or a higher rate, rather than that they would never have been issued or mark eted.” Id. at 470. This court explicitly adopted the reasoning of Shores in T.J. Raney & Sons, Inc. v. Fort Cobb, Oklahoma Irrigation Fuel Auth. , 717 F.2d 1330, 1333 (10th-21-

Cir. 1983). The defendant in T.J. Raneyissued bonds for the construction of a gas distribution facility. The offering circular w as deceptive, the bond proceeds were mishandled, and the bonds went into default. The trial court found that the defendant was not a valid public trust and, as such , was actually prohibited from issuing bonds under state law. We noted that “the securities could not have been issued” but for the fraud, and held that the plaint iff had “reasonably relied on the availability of the bonds as indicating their lawfu l issuance.” Id. We also made clear the limitations of the doctrine: This holding does not imply in any way that the reg ulatory body considers the worth of the security or the veracity of the re presentations made in the offering circular . . . . It merely extends the pr otection of Rule 10b-5 to those cases in which the securities were not qualif ied legally to be issued. Id. Thus, we require the securities to be unmarketabl e in order to invoke the presumption of reliance based on fraud creating the market. Cases discussing the issue define “unmarketable” s trictly. The Sixth Circuit breaks the term into two categories: (1) “e conomic unmarketability,” which occurs when a security is patently worthless, and (2) “legal unmarketability,” which occurs when a regulatory ormunicipal agency would have been required by law to prevent or forbid the issuance of the security. Ockerman v. May Zima & Co. , 27 F.3d 1151, 1160 (6th Cir. 1994). Cf. Ross v. Bank South , 885 F.2d 723, 729 (11th Cir. 1989) (en banc) (“[T ]he fraud must be so pervasive that it goes to the very existence of the bonds and the validity of3 There is more than one definition of “economic unm arketability” being

used by the federal courts. Because we conclude th at Mr. Joseph’s debentures do not meet either definition of economic unmarketabli ty, we need not determine which of these definitions is preferable. -22- their presence on the market.”). Mr. Joseph does not argue that his debentures lacke d all economic value. Although he suffered a substantial loss, the recordindicates Mr. Joseph was able to sell the debentures for $8,147. See Rec., vol. II at 725. If we adhere to a strict definition of economic unmarketability, he should n ot be entitled to a presumption of reliance. See Rosenthal , 945 F. Supp. at 1418-19 (refusing to apply doctri ne where plaintiff’s bonds “had some economic worth”); Bank of Denver v. Southeastern Capital Group, Inc. , 763 F. Supp. 1552, 1558 (D. Colo. 1991) (plaintiff must prove that securities “would not have been offered on the market at any price”). Even if we look to the slightly different definitio n of economic unmarketability advanced in Abell , 858 F.2d at 1122, Mr. Joseph remains unsuccessful. 3 Abellrecognized that “saleable assets may bless even th e most worthless enterprise,” and allowed investors a pres umption of reliance if “the enterprise itself was patently worthless,” illegiti mate, or a sham. Id. In this case, Mr. Joseph alleges that MiniScribe engaged in fraud ulent business and accounting practices, eventually declaring bankruptcy, and that several of the defendants pled4 Indeed, by this logic every securities offering inv olving fraud would

qualify for the presumption because “[w]ho would kn owingly roll the dice in a crooked crap game?” Schlanger v. Four-Phase Sys., Inc. , 555 F. Supp. 535, 538 (S.D.N.Y. 1982). -23- guilty to criminal securities violations. While al l of these charges indicate that MiniScribe was a seriously troubled enterprise, the y do not lead to the conclusion that MiniScribe was an illegitimate or sham busines s. Nor does Mr. Joseph claim the debentures were issue d without lawful authority and therefore legally unmarketable. Inst ead, he alleges that, “[h]ad the adverse facts defendants concealed been disclosed, the public offering of MiniScribe’s debentures in May 1987 would not have been possible.” Rec., vol. II at 708. Mr. Joseph merely seems to be advancing the unremarkable proposition that the investors would not have bought MiniScribe securities if they had known about the Company’s economic problems. Applying th e fraud-created-the-market doctrine in this situation would require us to igno re the limitations we placed on it in T.J. Raney

. 4 There is a significant difference between securit ies which should not be marketed because they involve fraud, and sec urities which cannot be marketed because the issuers lack legal authority t o offer them. Mr. Joseph’s allegations only encompass the former scenario. Be cause he has not alleged that his debentures were economically or legally unmarke table, Mr. Joseph is not5 Defendants also argue that, as an aftermarket purch aser, Mr. Joseph is not

entitled to the fraud-created-the-market presumptio n of reliance. Because we dispose of the matter on other grounds, we need notaddress this issue.

6 This language raises the question of whether this p resumption of reliance can apply to someone who purchased in the aftermark et. Because we decline to recognize the presumption, we need not explore its contours. -24- entitled to this presumption of reliance. 5

3. Reliance on the Regulatory Process Mr. Joseph next cites to Arthur Young & Co. v. United States District
Court , 549 F.2d 686 (9th Cir. 1977), for the propositionthat he was entitled to rely on the integrity of the regulatory process. I n that case, the Ninth Circuit held: Just as the open market purchaser relies on the int egrity of the market and the price of the security traded on the open marketto reflect the true value of securities in which he invests, so the purchaserof an original issue security relies, at least indirectly, on the integr ity of the regulatory process and the truth of any representations made to the ap propriate agencies and the investors at the time of the original issue. Id. at 695. 6 Thus, this doctrine suggests that an investor is justified in relying on the regulatory process, and the accuracy of any doc uments filed in connection with the offering, to ensure the legitimacy of an o ffering price. Defendants correctly point out that while our opini on in T.J. Raney mentioned Arthur Young , it did not adopt or apply its reasoning because i t decided the issue based on the fraud-created-the-ma rket doctrine. There are no-25-

other cases in the Tenth Circuit that even mention Arthur Youngor its doctrine of reliance on the regulatory process. In fact, only a few cases, all either in the Ninth Circuit or its district courts, have applied the doctrine, and many of those courts apply it reluctantly. See In re Jenny Craig Sec. Litig. , No. 92-0845-IEG, 1992 WL 456819 at *5, Fed. Sec. L. Rep. (CCH) P 97, 337 (S.D. Cal. 1992) (“[A]lthough it has been widely criticized, the doc trine does not appear to have been overruled, and this Court is bound to follow i t where applicable.”); In re Fortune Sys. Sec. Litig. , 680 F. Supp. 1360, 1372 (N.D. Cal. 1987) (“Althou gh Arthur Younghas been criticized . . . it is still binding law upon this Court until expressly vacated or reversed.”). But see American Continental Corp. v. Keating , 140 F.R.D. 425, 434 (D. Ariz. 1992) (applying the d octrine where a series of misrepresentations to federal and state regulators enabled bond sales to proceed). The problem with this presumption of reliance is th at it appears to create a form of investor’s insurance, expanding the SEC’s r ole beyond its intended or realistic scope. The SEC does not read all of the publicly available information about an offering and then determine the legitimate price for the security. See Eckstein v. Balcor Film Investors , 740 F. Supp. 572, 582 (E.D. Wis. 1990). Nor does the SEC endorse any of the documents involved in the issuance of securities. In fact, regulations in force today, and in 1987 wh en Mr. Joseph purchased his debentures, require offerors of stock under a Secur ities Act prospectus to state “in-26-

capital letters printed in bold-face” that:
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. 17 C.F.R. § 229.501(c)(5) (1987). That defendants filed a misleading document with a regulatory agency does not lend any more cre dibility or veracity to the document than if they had simply given the documentto investors. See Note, The Fraud-on-the-Market Theory , 95 Harv. L. Rev. 1143, 1158 (Mar. 1982) (“[A]ny argument about an expectation fostered by SEC regul ation is severely undermined by the fact that the SEC does not vouch for either the substantive value of any issue or the veracity of the representations by any issuer.”). It is therefore not sufficient for an individual to claim reliance on t his process. We decline to adopt the reasoning of Arthur Youngand its sweeping presumption of reliance. In sum, we hold that Mr. Joseph has not sufficientl y alleged reliance to make out a section 10(b) claim and he is not entitl ed to any presumption of reliance. The district court therefore did not errin dismissing Mr. Joseph’s section 10(b) claim.

C. Timeliness Given our conclusion in Part A, supra , that Mr. Joseph has standing to7 Having determined that Mr. Joseph’s section 10(b) c laims fail due to a

lack of reliance or presumption of reliance, we nee d not address his arguments for avoiding the statute of limitations governing those claims.

8 In Lampf

, the Supreme Court applied the one year/three year s tructure to claims under section 10(b). See 501 U.S. at 363. -27- pursue his section 11 claim, we turn to the issue o f timeliness. 7Section 13 of the 1933 Act requires a section 11 claim to be filed wi thin one year from the time the violations are or should have been discovered, but in no event more than three years after the security was initially offered to t he public. See 15 U.S.C. § 77m. As such, it is a statute of limitations framed by astatute of repose. See Sterlin v. Biomune Sys. , 154 F.3d 1191, 1196 (10th Cir. 1998). Defendants argue that Mr. Joseph’s section 11 claim is untimely because it wa s filed on August 10, 1990, almost three months after the repose period ran outon May 21, 1990. Mr. Joseph’s action was timely filed only if the repose period was tolled. Mr. Joseph contends that either the filing of the M ay 9, 1989 class action complaint in California state court, or the October4, 1989 filing of the Coordinated Amended Complaint in federal district c ourt in Colorado, tolled the repose period for his section 11 claim. Defendants disagree, relying heavily on Lampf v. Gilbertson , 501 U.S. 350, 363 (1991), 8 andAnixter v. Home-Stake Prod.
Co. , 939 F.2d 1420, 1434-35 (10th Cir. 1991), vacated on other grounds sub nom. Dennler v. Trippet , 503 U.S. 978 (1992), which hold that equitable to lling does not apply to statutes of repose.9 Mr. Joseph correctly points out there was not a def initive determination with regard to class certification for the debentur e purchasers on the section 11 claim before he filed this action. In the June 15, 1990 hearing at which the stock purchasers’ class was certified, the district courtdid not officially rule on whether to certify the debenture class. After initially expressing reluctance to certify a debenture class, the court later indicated a desire to leave the question open. See Rec., vol. I at 218-19, 229, 232-33. It appears to us that the question of class certification for the debenture purchasers was stil l pending when the district court dismissed this action. -28- Lampf and Anixterare not relevant in the present context because th e tolling that Mr. Joseph seeks is legal rather than equitable in nature. Equitable tolling is appropriate where, for example, the clai mant has filed a defective pleading during the statutory period, see Burnett v. New York Cent. R.R. Co. , 380 U.S. 424, 434-36 (1965), or where the plaintiff has been induced or tricked by his adversary’s misconduct into allowing the filing dea dline to pass, see Glus v. Brooklyn E. Dist. Terminal , 359 U.S. 231 (1959). In contrast, the tolling Mr

. Joseph claims is the legal tolling that occurs any time an action is commenced and class certification is pending. 9 Cf. Korwek v. Hunt , 827 F.2d 874, 879 (2d Cir. 1987) (tolling no longer appropriate after court ru led definitively to deny class certification). The Supreme Court addressed this type of tolling in American Pipe & Const. Co. v. Utah , 414 U.S. 538 (1974), where it held in the contextof a statute of limitation that “the commencement of the origina l class suit tolls the running of the statute for all purported members of the cla ss who make timely motions to-29-

intervene after the court has found the suit inappr opriate for class action status.” Id. at 553. The Court expanded this rule in Crown, Cork & Seal Co. v. Parker , 462 U.S. 345 (1983), to include putative class memb ers who later seek to file independent actions. See id. at 353-54 (statute of limitations remains tolled fo r all members of putative class until class certification is denied). Lampf did not overrule or even mention these cases, and we are no t persuaded the three are incompatible. In fact, Lampf states that the “litigation . . . must be commenced within one year after the discovery of the facts co nstituting the violation and within three years after such violation,” indicatin g that the commencement of the action is the event which triggers tolling. Lampf , 501 U.S. at 364 (emphasis added). Tolling the limitations period for class members wh ile class certification is pending serves the purposes of Rule 23 of the Feder al Rules of Civil Procedure governing class actions. Rule 23 encourages judici al economy by eliminating the need for potential class members to file individual claims. If all class members were required to file claims in order to insure the limitations period would be tolled, the point of Rule 23 would be defeated. See , e.g. , American Pipe , 414 U.S. at 551; Crown, Cork, 462 U.S. at 351; Realmonte v. Reeves , 169 F.3d 1280, 1284 (10th Cir. 1999). We noted in Realmonte that the notice and opt-out provision of Rule 23(c)(2) would be irrelevant with out tolling because the-30-

limitations period for absent class members would m ost likely expire, “making the right to pursue individual claims meaningless.” Id. See also Esplin v. Hirschi , 402 F.2d 94, 101 (10th Cir. 1968) (limitations peri od tolled for all class members, requiring relation back to date of initiation of su it where district court erroneously denied class certification); 7B Charles Alan Wright , Arthur R. Miller & Mary Kay Kane, Federal Practice and Procedure § 1800, at 455 (2d ed. 1986) (“The only logical rule under the present [version of Rule 23] is that the commencement of the class suit tolls the statute for all persons wh o might be bound by the judgment.”) (citing Esplin , 402 F.2d 94); id. § 1795, at 325 (“If the [class certification] determination is delayed, members of a putative plaintiff class may be led by the very existence of the lawsuit to negl ect their rights until after a negative ruling on this question – by which time itmay be too late for the filing of independent actions. . . . [T]he possibility of unfairness is obvious.”). Tolling the limitations period while class certific ation is pending does not compromise the purposes of statutes of limitation a nd repose. Statutes of limitation are intended to protect defendants from being unfairly surprised by the appearance of stale claims, and to prevent plaintif fs from sleeping on their rights.
See Crown, Cork, 462 U.S. at 352. “[T]hese ends are met when a cl ass action is commenced.” Id. In this case, because a class action complaint wa s filed, defendants were on notice of the substantive claim as well as the number and-31-

generic identities of potential plaintiffs. Defend ants cannot assert Mr. Joseph’s claim was stale or that he slept on his rights. Statutes of repose are intended to demarcate a peri od of time within which a plaintiff must bring claims or else the defendant ’s liability is extinguished. Here, the claim was brought within this period on b ehalf of a class of which Mr. Joseph was a member. Indeed, in a sense, applicati on of the American Pipe tolling doctrine to cases such as this one does notinvolve “tolling” at all. Rather, Mr. Joseph has effectively been a party to an actio n against these defendants since a class action covering him was requested but neverdenied. See , e.g. , In re Discovery Zone Sec. Litig. , 181 F.R.D. 582, 600 n.11 (N.D. Ill. 1998) (findin g statute of repose “legally tolled” while party was a putative class member) (citing Crown, Cork, and American Pipe ). Defendants’ potential liability should not be extinguished simply because the district court leftthe class certification issue unresolved. Consequently, we conclude that American Pipe tolling applies to the statute of repose governing Mr. Joseph’s action. See also Ballen v. Prudential Bache Sec., Inc. , 23 F.3d 335, 337 (10th Cir. 1994) (post- Lampf case holding statutory limitations tolled for putative class mem bers upon the filing of the class action) (citing Crown, Cork, 462 U.S. at 354). We are not convinced May 9, 1989 is the correct dat e to toll the repose period for Mr. Joseph’s section 11 claim, however, because it does not appear that-32-

the action filed on that date actually represented a class of which Mr. Joseph was a member. The May 9, 1989 class action complaint a sserted claims under section 11, but contained no named plaintiffs who had purch ased debentures. Moreover, the complaint was amended on November 1 of that yea r to omit the section 11 claims. We conclude instead that the repose period for Mr. Joseph’s section 11 claims was tolled on October 4, 1989, the date the federal Combined Amended Complaint was filed on behalf of both common stock and debenture purchasers, asserting claims under both section 11 and section 10(b). Because this was within the limitations period, this complaint tolled the s tatute. As a result, Mr. Joseph’s section 11 claim was timely filed.

D. Certification of Class Mr. Joseph also requests that we direct certificati on of a debenture class pursuant to Rule 23. He argues that the district c ourt’s order denying class certification in his case was based on its erroneou s conclusions regarding the statute of limitations and his standing to bring su it as an aftermarket purchaser. His brief also sets forth arguments as to why his c lass meets the requirements of Rule 23. Although we are reversing the dismissal o f Mr. Joseph’s section 11 claim and remanding for further proceedings, we are not persuaded we should address the class certification issue. The distric t court’s denial of certification10 When the district court dismissed the action in 199 9 it again concluded

that the allegations contained in Mr. Joseph’s 1994 complaint were not sufficient for class certification. The court indicated it wa s unwilling to certify a debenture class because it believed that Mr. Joseph was the o nly potential class member interested in pursuing his claims. The court based this conclusion on the lack of response to its June 4, 1994, interlocutory order r equiring remaining debenture purchasers to file a consolidated amended complaint . Apparently, Mr. Joseph was the only plaintiff to do so. See Rec., vol. II at 768, 772. Mr. Joseph correctly points out that the court’s Ju ne 4 order was not a proper class notice under Rule 23(c)(2). Specifica lly, the order was not a notice to the class of debenture purchasers to come forwar d and identify themselves if they were interested in pursuing a claim. Rather, it merely directed existing litigants to file their unresolved claims. It was therefore error for the district court to base its decision not to certify the class on the response to its interlocutory order. -33- was based on purely procedural grounds. The substance of whether the proposed class satisfied Rule 23’s requirements was never ru led upon on the merits and therefore is not properly before us on review. 10 Cf. J.B. v. Valdez , 186 F.3d 1280, 1287 (10th Cir. 1999) (decision whether to grant ce rtification of a class is normally within the discretion of the trial court a nd appellate courts should not interfere unless that discretion has been abused). This is a determination for the district court to make on remand.

III To summarize, we conclude that Mr. Joseph has stand ing as an aftermarket purchaser to pursue his section 11 claim; he has no t sufficiently alleged reliance to make out a section 10(b) claim, and he is not en titled to a presumption of-34-

reliance; and his section 11 claims were timely fil ed because the limitations period was tolled when the Coordinated Amended Comp laint was filed on October 4, 1989 in federal district court. Finally , we will not direct the certification of a debenture purchasers’ class beca use the district court has not ruled on the merits of Mr. Joseph’s Rule 23 motion.
We AFFIRM in part, REVERSE in part, and REMAND to the district court for further proceedings consistent with this opinion.