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 Francisco, California (Gary

Garrigues and Steven J. Mulligan of Gold Bennett & Cera LLP, San Francisco,

California; and Frances A. Koncilja of Koncilja & Associates, P.C., Denver,

Colorado, with him on the briefs for Plaintiff-Appellant.

Geoffrey F. Aronow of Arnold & Porter, Washington, D.C., and Robert F. Wise,

Jr. of Davis Polk & Wardwell, New York, New York (Tim Atkeson and Robert

Barrett of Arnold & Porter, Denver, Colorado; Marcy G. Glenn of Holland & Hart
*The Honorable James O. Ellison, District Judge, United States District

Court for the Northern District of Oklahoma, sitting by designation.

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LLP, Denver, Colorado; Michael V. Corrigan of Simpson 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, Colorado; Cary B. Lerman

of Munger, Tolles & Olsen, Los Angeles, California; and H. Alan Dill of Dill,

Dill, Carr & Stonbraker, P.C., Denver, Colorado, with 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 District Court of Colorado, Jack

Joseph asserts claims on behalf of himself and others similarly situated pursuant

to section 11 of the Securities Act of 1933 (the 1933 Act), 15 U.S.C. § 77k, and

section 10(b) of the Securities Exchange Act of 1934 (the 1934 Act), 15 U.S.C. §

78j(b). Defendants prevailed on their motions to dismiss 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 going forward. We affirm in part,

and reverse and remand in part.
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I 

The background of this case is complex and involves a prodigious amount

of litigation. We therefore set forth only those facts 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 over $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 financial statements could not be

relied upon. Mr. Joseph sold his debentures at a loss of approximately $17,000 in

June 1989. An Independent Evaluation Committee report issued the following

September disclosed widespread intentional fraud at MiniScribe going back

several years, which had resulted in material overstatements of revenues and

earnings. In late 1989 the Company revealed that it had a negative net worth of

$88 million, and in 1990 it filed for Chapter 11 bankruptcy.

A series of lawsuits was commenced against MiniScribe, 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 first
1

It does not appear from the record that such an amended complaint was

filed with the district court. The record contains no explanation for this failure.

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suit brought by debenture holders was a class action filed in federal district court

in Colorado on April 5, 1989, asserting claims under section 10(b) but not under

section 11. Another action was filed in California state 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 securities purchasers, it contained no

named plaintiffs who had purchased debentures. On November 1, 1989, the

complaint was amended to omit the claims under section 11. 

On October 4, 1989, a Coordinated Amended Complaint was filed in a new

action in federal district court in Colorado on behalf of common stock and

debenture purchasers, asserting claims under both section 10(b) and section 11. 

The plaintiffs in that action moved to certify classes of shareholders and

debenture purchasers. The district court held a hearing 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 the 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 complaint was filed in state
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court in California asserting claims under section 11 on behalf of all purchasers,

with Mr. Joseph as a named plaintiff. It was subsequently removed and

transferred to the federal district court in Colorado. In June 1991, Mr. Joseph

moved to certify the class. On October 24, the district court denied Mr. Joseph’s

motion on the grounds that, as an aftermarket purchaser, he lacked standing to

pursue a section 11 claim, and that his class claims 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 remaining 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 failure to state a claim. See Fed. R.

Civ. P. 12(b)(6). In 1999, the district court granted 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 dismiss a complaint under

Rule 12(b)(6). See Grossman v. Novell, Inc., 120 F.3d 1112, 1118 (10th Cir.

1997).
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II

Mr. Joseph’s arguments on appeal are directed at several 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) motions that Mr. Joseph failed to

allege reliance as required for his section 10(b) claim; and, finally, the timeliness

of his claims. Specifically, Mr. Joseph argues first that the district court erred in

determining he lacked standing as an aftermarket purchaser to assert claims under

section 11. Second, Mr. Joseph contends he is entitled to a presumption of

reliance sufficient to sustain his claim under section 10(b). Finally, he asserts

that his claims were timely filed because he is entitled (1) to a tolling of the

limitations period on his claims while class certification was pending, and (2) to

the relation-back of his 10(b) claims to the August 10, 1990, state court

complaint. We address each issue in turn.

A. Standing Under Section 11 for Aftermarket Purchasers

Section 11 provides that where a material fact is misstated or omitted from

a registration statement accompanying a stock filing with the SEC, “any person

acquiring such security” may bring an action for losses caused by the

misstatement or omission. 15 U.S.C. § 77k(a). Defendants argue Mr. Joseph
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lacks standing to pursue his section 11 claim because he purchased his debentures

in the secondary market. The district court agreed in its 1991 opinion denying

Mr. Joseph’s motion for class certification, holding 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 because he would be unable to

represent those members who bought their debentures in the initial distribution. 

We have not previously had occasion to determine whether aftermarket

purchasers have standing to sue under section 11, a question which is vigorously

debated. Both parties cite us to numerous district court 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 purchasers. 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 construing another section
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of the 1933 Act, indicated that the opposite result is correct. See Gustafson v.

Alloyd Co., Inc., 513 U.S. 561 (1995) (construing § 12(2)).

After considering the statutory language, legislative history, analogous

Supreme Court authority, and case law from other circuits, we are convinced that

Mr. Joseph has the better argument. For the reasons set out below, we conclude

that an aftermarket purchaser has standing to pursue 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 first 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 containing 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. According 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
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restricted by the context.” Id. When these two clauses are combined and read

together, the natural reading of “any person acquiring such security” is simply

that the buyer must have purchased a security issued under the registration

statement at issue, rather than some other registration statement. See Hertzberg,

191 F.3d at 1080. There is no language limiting claims to those investors who

purchase their shares in a public offering.

Other portions of section 11 buttress our interpretation of the statute. 

Section 11(a) was amended in 1934 to add the requirement that a person who

acquires the security “after the issuer has made generally available to its security

holders an earning statement covering a period of at least twelve months

beginning after the effective date of the registration statement” must prove

reliance on the registration statement in order to recover. This legislative

provision indicates that aftermarket purchasers may assert claims pursuant to

section 11. To construe section 11 as inapplicable to registered securities

purchased in the secondary market would make this section 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 contemplates that some

buyers will not have purchased their securities in the initial offering. It sets the
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baseline for measuring damages at “the amount paid for the security (not

exceeding the price at which the security was offered to the public).” 15 U.S.C.

77k(e). Section 11(g) further caps the maximum amount 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 in 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 offering price for their securities

are the only people who could have losses which exceed the price at which the

securities were offered to the public. See Bloomenthal, at 704.

As is often the case with legislative history, we can find passages to

support both positions. For example, a legislative report accompanying the bill

states that “the civil remedies accorded by [section 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. No. 73-85, at 22 (1933). 

However, that same report also states: “The bill only affects new offerings of

securities . . . . It does not affect the ordinary redistribution of securities.” Id. at

5. This only demonstrates how “legislative history often cuts both ways and a

researcher can find a bit here and there which supports a desired view.” United

States v. Richards, 583 F.2d 491, 495 (10th Cir. 1978). 
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Defendants urge us to view the statutory scheme broadly and to recognize

the fundamental dichotomy between the purpose and scope of the 1933 Act, which

was meant to regulate the initial distribution of securities, 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 disclosure and fraud in connection

with offerings of securities–primarily . . . initial distributions of newly issued

stock from corporate issuers.”) (citing I L. Loss, Securities Regulation, 130-31

(2d ed. 1961). Recognizing this difference, however, 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 secondary market. Here, Mr. Joseph

may have purchased in the aftermarket, but the alleged 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 may, under certain

circumstances, have remedies in point of law for misrepresentations in a

Registration.”). It does not do violence to the scope 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 section 11 as long as they can
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demonstrate they bought their securities pursuant to the registration statement. 

See Barnes, 373 F.2d 269. Several circuit and district courts 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 persuaded by the weight of

reasoned authority to endorse it. Because MiniScribe 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 offering, plaintiff would have no

difficulty tracing his stock to the offering).

Defendants believe that their interpretation of section 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 Act, which gives

buyers a cause of action for recission against sellers who make material

misstatements or omissions “by means of prospectus.” 15 U.S.C. § 77l(a)(2). In

that case individuals who were the sole shareholders of a privately held

corporation entered into a contract to sell their shares to another party. When the

company’s actual earnings turned out to be lower than its estimated earnings, the
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buyer sued for recission, arguing that the contract of sale was a “prospectus” and

therefore any misstatements contained in it gave rise to liability under section

12(2). The Court held that a private contract is not an offering document within

the meaning of that section, and indicated in dicta that only purchasers in the

initial public offering could bring suit pursuant to 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 wording 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 liable “to the person purchasing such

security from him.” 15 U.S.C. 77l(a) (emphasis added). This is an express privity

requirement, giving a cause of action only to individuals 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 “any person

acquiring such security.” 15 U.S.C. 77k(a) (emphasis added); see also Loss &

Seligman, at 4267 (“It is in its assault on the citadel of privity that 11 marks its

greatest departure from precedent. . . . [Section 11] gives the same right of action

even to a buyer in the open market.”). We must assume that Congress intended

the two sections to be interpreted differently. “[W]here Congress includes
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particular language in one section of a statute but omits it in another section of

the same Act, it is generally presumed that Congress 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 construction 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 purchasers standing to sue

under section 11. Such decisions are not only consistent with both the

explicit statutory language of section 11 . . . but, are also truer to the

legislative spirit behind the Securities Act in providing the broadest

possible protection to purchasers of initial public offerings. 

Brian Murray, Aftermarket Purchaser Standing Under 11 of the Securities 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 market.”); 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 offered.”); Vincent R. Cappucci,

Misreading Gustafson Could Eliminate Liability Under Section 11, 218 N.Y. L.J.

1 (Sept. 22, 1997). 

For all of these reasons, we hold that Mr. Joseph has standing to bring suit
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under section 11.

B. Presumption of Reliance Under Section 10(b)

In order to state a claim under section 10(b), a plaintiff must establish that,

“in connection with the purchase or sale of a security, ‘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 a defendant’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 complaint fails to sufficiently

allege reliance. This need not prove fatal to his claim, however, if the

circumstances of his debenture purchase bring him within any of the recognized

exceptions to the reliance requirement entitling him 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
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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 of facts, i.e., how he would have

behaved if omitted material information had been disclosed, places an unrealistic

evidentiary burden on the 10(b) plaintiff. Consequently, 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 agent for a tribal corporation that

managed and distributed assets to members of the Ute Native American Tribe. 

The bank officers induced tribal members to sell their stock at below-market

rates. Unbeknownst to the Utes, the officers purchased 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 to gain financially from sales of

the stock and that the stock was selling at a higher price in the market the officers

had developed. The duty to disclose and the withholding 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 affirmative

misrepresentations. Defendants correctly point out that Mr. Joseph’s complaint

alleges at most a combination of misrepresentations and omissions. In such
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“mixed” cases, “[a] strict application of the omissions-misrepresentations

dichotomy would require the trial judge to instruct the jury to presume reliance

with regard to the omitted facts, [but] not to presume 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 confounding exercise, “a unitary

burden of proof on the reliance issue should be set according to a context-specific

determination of where that burden more appropriately 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 offenses 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 out because every

misstatement both advances false information and omits truthful information. 

Statements which are technically true may be so incomplete 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 recharacterize as an omission

conduct which more closely resembles a misrepresentation. “The labels by

themselves, therefore, are of little help.” Wilson v. Comtech Telecomm. Corp.,
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648 F.2d 88, 93 (2d Cir. 1981).

Instead we look to the nature of the allegations contained 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 essentially alleges

that MiniScribe engaged in a pattern of deception which involved manipulating

financial data, disseminating false information about the company, concealing the

truth about the company’s true financial outlook, and hiding the existence of the

fraudulent scheme itself. The claims are pled in such 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 shareholders’

equity had been artificially inflated. Defendants concealed the existence of

the unlawful scheme and the acts of manipulation committed 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 misleading 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 definition of “omission,” indicate

that what Mr. Joseph really protests are the affirmative misrepresentations
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allegedly made by defendants. 

Any fraudulent scheme requires some degree of concealment, both of the

truth and of the scheme itself. We cannot allow the mere fact of this concealment

to transform the alleged malfeasance into an omission 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 where reliance would

be difficult to prove because it was based on a negative. 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 distortion 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 entitled to a presumption of

reliance under the “fraud-created-the-market” doctrine, which permits a plaintiff

to maintain an action under section 10(b) by proving the defendant’s fraud

allowed securities that otherwise would have been unmarketable to come into and
2This presumption of reliance is not to be confused with its more

established cousin, the “fraud-on-the-market” presumption. The latter doctrine,

endorsed by the Supreme Court in Basic v. Levinson, 485 U.S. 224 (1988),

recognizes that in an open, efficient, and developed 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 plaintiffs on

the integrity of a price in such a market, and implicitly 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. 

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exist in the market.2

 In other words, investors can be presumed to rely on the

integrity of the market to contain only genuine securities. 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 elaborate scheme to create a bond

issue so lacking in basic requirements it would never have been approved absent

the massive fraud. See id. at 464 n.2. The Fifth Circuit stated that the plaintiff

would be entitled to a presumption of reliance if he could establish that “the

defendants knowingly conspired to bring securities onto the market which were

not entitled to be marketed, intending to defraud purchasers.” Id. at 469. The

court made clear that the plaintiff could not recover if he “proves no more than

that the bonds would have been offered at a lower price or a higher rate, rather

than that they would never have been issued or marketed.” 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
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Cir. 1983). The defendant in T.J. Raney issued bonds for the construction of a

gas distribution facility. The offering circular was 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 plaintiff had “reasonably relied on the

availability of the bonds as indicating their lawful issuance.” Id. We also made

clear the limitations of the doctrine: 

This holding does not imply in any way that the regulatory body considers

the worth of the security or the veracity of the representations made in the

offering circular . . . . It merely extends the protection of Rule 10b-5 to

those cases in which the securities were not qualified legally to be issued. 

Id. Thus, we require the securities to be unmarketable in order to invoke the

presumption of reliance based on fraud creating the market.

 Cases discussing the issue define “unmarketable” strictly. The Sixth

Circuit breaks the term into two categories: (1) “economic unmarketability,”

which occurs when a security is patently worthless, and (2) “legal

unmarketability,” which occurs when a regulatory or municipal 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 of
3There is more than one definition of “economic unmarketability” being

used by the federal courts. Because we conclude that Mr. Joseph’s debentures do

not meet either definition of economic unmarketablity, we need not determine

which of these definitions is preferable.

-22-

their presence on the market.”).

Mr. Joseph does not argue that his debentures lacked all economic value. 

Although he suffered a substantial loss, the record indicates 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 not be entitled to a presumption

of reliance. See Rosenthal, 945 F. Supp. at 1418-19 (refusing to apply doctrine

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 definition of economic

unmarketability advanced in Abell, 858 F.2d at 1122, Mr. Joseph remains

unsuccessful.3

 Abell recognized that “saleable assets may bless even the most

worthless enterprise,” and allowed investors a presumption of reliance if “the

enterprise itself was patently worthless,” illegitimate, or a sham. Id. In this case,

Mr. Joseph alleges that MiniScribe engaged in fraudulent business and accounting

practices, eventually declaring bankruptcy, and that several of the defendants pled
4

Indeed, by this logic every securities offering involving fraud would

qualify for the presumption because “[w]ho would knowingly 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 all of these charges indicate that

MiniScribe was a seriously troubled enterprise, they do not lead to the conclusion

that MiniScribe was an illegitimate or sham business.

Nor does Mr. Joseph claim the debentures were issued without lawful

authority and therefore legally unmarketable. Instead, 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 the fraud-created-the-market

doctrine in this situation would require us to ignore the limitations we placed on it

in T.J. Raney.

4

 There is a significant difference between securities which should

not be marketed because they involve fraud, and securities which cannot be

marketed because the issuers lack legal authority to offer them. Mr. Joseph’s

allegations only encompass the former scenario. Because he has not alleged that

his debentures were economically or legally unmarketable, Mr. Joseph is not
5Defendants also argue that, as an aftermarket purchaser, Mr. Joseph is not

entitled to the fraud-created-the-market presumption of reliance. Because we

dispose of the matter on other grounds, we need not address this issue.

6This language raises the question of whether this presumption of reliance

can apply to someone who purchased in the aftermarket. 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 proposition that he was entitled to

rely on the integrity of the regulatory process. In that case, the Ninth Circuit

held: 

Just as the open market purchaser relies on the integrity of the market and

the price of the security traded on the open market to reflect the true value

of securities in which he invests, so the purchaser of an original issue

security relies, at least indirectly, on the integrity of the regulatory process

and the truth of any representations made to the appropriate 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 documents filed in connection

with the offering, to ensure the legitimacy of an offering price.

Defendants correctly point out that while our opinion in T.J. Raney

mentioned Arthur Young, it did not adopt or apply its reasoning because it

decided the issue based on the fraud-created-the-market doctrine. There are no
-25-

other cases in the Tenth Circuit that even mention Arthur Young or 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 doctrine does not appear to have

been overruled, and this Court is bound to follow it where applicable.”); In re

Fortune Sys. Sec. Litig., 680 F. Supp. 1360, 1372 (N.D. Cal. 1987) (“Although

Arthur Young has 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 doctrine where a series of

misrepresentations to federal and state regulators enabled bond sales to proceed).

The problem with this presumption of reliance is that it appears to create a

form of investor’s insurance, expanding the SEC’s role 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 when Mr. Joseph purchased his

debentures, require offerors of stock under a Securities 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 credibility or veracity to the

document than if they had simply given the document to 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 regulation 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 this process. We decline to adopt

the reasoning of Arthur Young and its sweeping presumption of reliance.

In sum, we hold that Mr. Joseph has not sufficiently alleged reliance to

make out a section 10(b) claim and he is not entitled to any presumption of

reliance. The district court therefore did not err in dismissing Mr. Joseph’s

section 10(b) claim.

C. Timeliness

Given our conclusion in Part A, supra, that Mr. Joseph has standing to
7Having determined that Mr. Joseph’s section 10(b) claims fail due to a

lack of reliance or presumption of reliance, we need 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 structure to

claims under section 10(b). See 501 U.S. at 363.

-27-

pursue his section 11 claim, we turn to the issue of timeliness.7

 Section 13 of the

1933 Act requires a section 11 claim to be filed within 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 the public. See 15 U.S.C. § 77m. 

As such, it is a statute of limitations framed by a statute 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 was filed on August 10, 1990,

almost three months after the repose period ran out on 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 May 9, 1989 class action

complaint in California state court, or the October 4, 1989 filing of the

Coordinated Amended Complaint in federal district court 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 and Anixter 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 tolling does

not apply to statutes of repose.
9Mr. Joseph correctly points out there was not a definitive determination

with regard to class certification for the debenture 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 court did 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 still pending when the district court

dismissed this action.

-28-

Lampf and Anixter are not relevant in the present context because the

tolling that Mr. Joseph seeks is legal rather than equitable in nature. Equitable

tolling is appropriate where, for example, the claimant 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 deadline 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 ruled 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 context of a statute

of limitation that “the commencement of the original class suit tolls the running

of the statute for all purported members of the class who make timely motions to
-29-

intervene after the court has found the suit inappropriate 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 members who later seek to file

independent actions. See id. at 353-54 (statute of limitations remains tolled for

all members of putative class until class certification is denied). Lampf did not

overrule or even mention these cases, and we are not persuaded the three are

incompatible. In fact, Lampf states that the “litigation . . . must be commenced

within one year after the discovery of the facts constituting the violation and

within three years after such violation,” indicating 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 while class certification is

pending serves the purposes of Rule 23 of the Federal Rules of Civil Procedure

governing class actions. Rule 23 encourages judicial 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 without tolling because the
-30-

limitations period for absent class members would most 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 period tolled for all class members,

requiring relation back to date of initiation of suit 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 who 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 neglect their rights until after a

negative ruling on this question – by which time it may be too late for the filing

of independent actions. . . . [T]he possibility of unfairness is obvious.”).

Tolling the limitations period while class certification is pending does not

compromise the purposes of statutes of limitation and repose. Statutes of

limitation are intended to protect defendants from being unfairly surprised by the

appearance of stale claims, and to prevent plaintiffs from sleeping on their rights. 

See Crown, Cork, 462 U.S. at 352. “[T]hese ends are met when a class action is

commenced.” Id. In this case, because a class action complaint was filed,

defendants were on notice of the substantive claim as well as the number and
-31-

generic identities of potential plaintiffs. Defendants cannot assert Mr. Joseph’s

claim was stale or that he slept on his rights.

Statutes of repose are intended to demarcate a period 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 behalf of a class of which Mr.

Joseph was a member. Indeed, in a sense, application of the American Pipe

tolling doctrine to cases such as this one does not involve “tolling” at all. Rather,

Mr. Joseph has effectively been a party to an action against these defendants since

a class action covering him was requested but never denied. See, e.g., In re

Discovery Zone Sec. Litig., 181 F.R.D. 582, 600 n.11 (N.D. Ill. 1998) (finding

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 left the 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 members 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 date 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 asserted claims under section

11, but contained no named plaintiffs who had purchased debentures. Moreover,

the complaint was amended on November 1 of that year 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 statute. As a result, Mr. Joseph’s

section 11 claim was timely filed.

D. Certification of Class

Mr. Joseph also requests that we direct certification of a debenture class

pursuant to Rule 23. He argues that the district court’s order denying class

certification in his case was based on its erroneous conclusions regarding the

statute of limitations and his standing to bring suit as an aftermarket purchaser. 

His brief also sets forth arguments as to why his class meets the requirements of

Rule 23. Although we are reversing the dismissal of Mr. Joseph’s section 11

claim and remanding for further proceedings, we are not persuaded we should

address the class certification issue. The district court’s denial of certification
10When the district court dismissed the action in 1999 it again concluded

that the allegations contained in Mr. Joseph’s 1994 complaint were not sufficient

for class certification. The court indicated it was unwilling to certify a debenture

class because it believed that Mr. Joseph was the only 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 requiring 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 June 4 order was not a

proper class notice under Rule 23(c)(2). Specifically, the order was not a notice

to the class of debenture purchasers to come forward 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.

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was based on purely procedural grounds. The substance of whether the proposed

class satisfied Rule 23’s requirements was never ruled 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 certification of a class is

normally within the discretion of the trial court and 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 standing as an aftermarket

purchaser to pursue his section 11 claim; he has not sufficiently alleged reliance

to make out a section 10(b) claim, and he is not entitled to a presumption of
-34-

reliance; and his section 11 claims were timely filed because the limitations

period was tolled when the Coordinated Amended Complaint was filed on

October 4, 1989 in federal district court. Finally, we will not direct the

certification of a debenture purchasers’ class because 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.