FILED U.S. COURT OF AP PEALS ELEV ENT HC IR C UIT MAY 31 , 2006 THOMAS K. KAHN CLERK

Honora ble Hugh Lawson, United States District Judgefor the Middle D istrict of * Georg ia, sitting by

desig nation. [ P UB L I S H] I N THE UN I TE D STATE S C OU RT OF APPE ALS F O R T H E E L E V E N T H C IR C U IT

________________________ N o. 04- 14894

________________________ D . C . D ocketN o. 00 -031 81 -C V -J O F -1 F I N A N C I A L S E C U R I T Y A S S U R A N C E , I N C ., P la in tif f- A p p e lla n t, v ersu s S T E P H E N S , I N C ., H A Y E S , J A M E S & A S S O C I A T E S , I N C ., D e fe n d a n ts - A p p e lle e s .

________________________ A pp ea l fr om the U ni t ed S t at es D i stri ctC ou rt fo rth e N o r th e r n D is tr ic t o f G e o r g ia

_________________________ ( M ay 31, 2006) B efore T JO F L A T and K R A V IT C H , C i rc ui tJudg es , and L A W S O N , D i stri ct * Judg e.2

K R A V IT C H , C i rc ui tJudg e: T he pri m ary i ss ue pres ent ed i n thi s c as e i s w hether a n i nsurerof m un i ci pal b o n d s th a t b e c o m e s th e o w n e ro f th o s e b o n d s u p o n d e fa u lt h a s s ta n d in g p u r s u a n t to § 1 0 ( b ) o f

th e S e c u r itie s E x c h a n g e A c t o f 1 9 3 4 ( th e “E x c h a n g e A c t” ) , 1 5 U .S .C . § 78j ( b) , a nd R ul e 10b- 5 pr om ul ga t e d the r e unde r , 17 C . F . R . § 240. 10b- 5. T he p lain ti ff , F in an cial S ec u rity A ss u ra n ce , In c. (“F S A ”) , ap p ea ls th e d istrict co u rt’s or de r s di s m i s s i ng i t s R ul e 10b- 5 c l a i m a nd gr a nti ng s um m a r y j udgm e nti n fa vorof defe nd ant s S t ephens, Inc. (“ S t ephens”) and H ay es , Ja m es & A ss oci at es , Inc. ( “ H a y e s J a m e s ” ) on i t s c l a i m s forc om m on l a w f r a ud a nd ne gl i ge nt m i sr epre se nt ati on . A ft ertho roug h revi ew , w e r ever se the di stri ctcourt ’ s di sm i ss al of the R ul e 10b- 5 c l a i m a nd r e m a nd the m a tt e rforf ur the rpr oc e e di ngs c ons i s t e nt w i th thi s opi ni on. W e a f f i r m the di s tr i c tc our t ’ s gr a ntof s um m a r y j udgm e nton the frau d an d n eg l i g en tm i srep resen t at i o n cl ai m s. I. F acts In the earl y 199 0s, C ri sp C ou nt y, G eorgi a app roved p l ans for a r egi on al sol i d w as t e proces si ng fa ci l i ty ( the “ F ac i l i ty” ), w hi ch w ou l d ext end the l i fe of a ne w l y - ope ne d l a ndf

i l l by r e m ovi ng r e c y c l abl e m a t e r i a l f r om w a s t e be for e dum pi ng th e r e m a in d e rin to th e la n d f ill. T h e C o u n ty e s tab lis h e d th e S o lid W a s te M a n a g e m e n t A u th o r ity o f C r is p C o u n ty ( th e “A u th o r ity ” ) to c o n s tr u c t a n d o p e r a te3

the F ac i l i ty. T o fi nance i t s i ni ti al constructi on , the A utho ri ty obt ai ned a ppr oxi m a t e l y $53 m i l l i on i n s hor t - t e r m ba nk l oa ns i n 1996 ( the “ B a nk F in a n c in g ” ) . O nc e c ons tr uc t e d, the A uthor i ty w oul d obt a i n r e ve nue forthe F a c i l i ty by a c c e pt i ng w a s t e f

r om c i ti e s , c ounti e s a nd pr i va t e c om pa ni e s a nd by s e l l i ng m a t e r i a l s of

va l ue ( “ M O V ” ) f

r om the w a s t e i tc ol l e c t e d. A c c or di ngl y , be for e the F ac i l i ty w as bu i l t , the A utho ri ty c on tra ct ed w i th m ore than thi rty of these ent i ti es ( the “ P a r ti c i pa nt s ” ) , e a c h of w hi c h a gr e e d t o m a ke m i ni m um pa y m e nt s t o the A uthor i ty ba s e d on the e xpe c t e d t onna ge of w a s t e the A uthor i ty w oul d c ol l e c tor the nu m ber of hou se ho l ds the A utho ri ty w ou l d ser vi ce i n the ci ty or c ou nt y. T hey e x e c u te d “p u t o rp a y ” c o n tr a c ts . T h e A u th o r ity a ls o c o n tr a c te d w ith T r a n s W a s te S e r v ic e s L L C ( “T r a n s W a s te ” ) , aw a s te h a u le r , to p ic ku p th e P a r tic ip a n ts ’ w a s te a n d d e liv e rit to th e F a c ility , p a y in g atip p in g fe e fo re a c h to n d e liv e r e d . T ra nsW as t e a gree d t o d el i ver e no ug h w as t e for the A utho ri ty t o b re ak even. In tur n, the A uthor i ty a gr e e d tha tT r a ns W a s t e w oul d r e c e i ve ar e ba t e f r om the A u th o r ity ’s r e v e n u e s f

r o m th e s a le o f

r e c y c lab le M O V . T he A uthor i ty c ontr a c t e d w i th de fe nda ntH a y e s J a m e s forc i vi l e ngi ne e r i ng s e r vi c e s , i nc l udi ng the c onduc tof afe a s i bi l i ty s tudy ba s e d on the B a nk F i na nc i ng and the prepara ti on of a r eporton the re sul t s of a n A cc ept ance T es tthatH ay es4

J a m e s h a d d e v e lo p e d fo rth e F a c ility ’s e q u ip m e n t. T he A uthor i ty hi r e d S t e phe ns t o a c ta s unde r w r i t e rforabond f i na nc i ng for the F a c i l i ty . I n e a r l y 1998, S t e phe ns pr e pa r e d aR e que s tforP r opos a l ( “ R F P ” ) for po t ent i al cr edi tenhancers , i ncl ud i ng F S A . T he R F P i ncl ud ed a pro form a f i nanci al r e p r e s e n ta tio n ( th e “P r o F o r m a ” ) . T h e R F P ’s d is c la im e rin s tr u c te d p o te n tia l c r e d it enhancers t o p er form thei r ow n d ue di l i gence. FSA a s s i g n e d o n e o f

i t s e mp l o y e e s , M a r g a r e tG i f fo r d , t o a n a l y z e th e RFP and m ake are com m endat i on as t o w hether F S A shou l d i nsure the bo nd s. G i fford t our e d the F a c i l i ty a nd obt a i ne d i nfor m a ti on aboutthe e qui pm e nt , the qua nti ti e s of w a s t e de l i ve r e d a nd pr oc e s s e d, a nd the a m ountof M O V r e c ove r e d. S he r e c om m e nde d tha tF S A i ns ur e the bonds . G i f for d’ s r e por tnot e d tha tthe A utho ri ty’ s c on tra ct s w er e the ul ti m at e s ec uri ty for the bo nd i ss ue. S he re vi ew ed onl y one s a m pl e c ontr a c tbe t w e e n the A uthor i ty a nd aP a r ti c i pa nt , how e ve r , a nd s h e d id n o t r e q u e s t c o p ie s o f th e c o n tr a c ts w ith T r a n s W a s te o rw ith C r is p C o u n ty . G i fford t es ti fi ed i n h erdepo si ti on thatshe di d n otperform any due di l i gence af t er J ul y 28, 1998. F S A s u b m itte d ab id in la te J u ly 1 9 9 8 , w h ic h w a s la te ra c c e p te d . T h e b id w a s c o n d itio n e d o n f

u ll r e v ie w o f

a ll le g a l d o c u m e n ta tio n p e r ta in in g to th e d e a l. T he R F P i nd i ca t ed thatthe F ac i l i ty w ou l d b e s ubj ec t ed t o an A cc ept ance5

T es tt o ensure thatthe F ac i l i ty m eti t s des i gn spec i fi ca ti on s. H ay es Ja m es supp l i ed the A c c e pt a nc e T e s t ’ s de s i gn s pe c i f i c a ti ons fori nc l us i on i n the R F P , ba s e d on the ori gi nal contra ctcr ea t ed i n con necti on w i th the B ank F i nanci ng . H ay es Ja m es m a d e afe w m in o rc h a n g e s to th e s e s p e c if ic a tio n s a n d th e n p r o v id e d th e m to S t ephens for i ncl usi on i n the R F P . T he A cc ept ance T es tw as adm i ni st er ed af t er F S A ag reed t o i n su re th e b o n d s. F S A n ev er req u est ed a co p y o f th e t estresu l t s, nordi d i ti nqui r e a s t o how the F a c i l i ty pe r for m e d. A f t e rS t e phe ns a c c e pt e d F S A ’ s bi d, S t e phe ns ’ s c ouns e l pr e pa r e d a P re l i m i nary O ff

i ci al S t at em ent(the “ P O S ”) for the A utho ri ty. T ho ug h h erdu ti es w e r e of f i c i a l l y f i ni s he d by tha tpoi nt , G i f for d t e s ti f

i e d tha ts he di d “ gl a nc e a t ” the P O S w h en i tw as p ro v i d ed t o F S A . R o n M i l l et , i n -h o u se co u n sel fo r F S A , al so t e s ti f i e d th a th e r e a d a n d ma d e s u g g e s ti o n s r e g a r d i n g a tl e a s to n e d r a f to f th e PO S. I n O c t obe r1998, a tthe r e que s tof T r a ns W a s t e , the A uthor i ty a nd T ra nsW as t e e xecut ed an am endm entt o thei r c on tra ct . T he am endm entext ended th e p e r io d fo rw h ic h T r a n s W a s te w a s e lig ib le fo rits r e b a te b a s e d o n M O V r e c e ip ts a n d d e la y e d e n fo r c e m e n t o f th e b r e a k - e v e n g u a r a n te e r e q u ir e m e n t. S te p h e n s d id n o t n o tif y F S A o f th is a m e n d m e n t o rth e c o n v e r s a tio n s th a t le d to it. A ls o in O c t obe r , S t e phe ns , H a y e s J a m e s a nd the A uthor i ty pr e pa r e d af i r s t - y e a rbudge tfor the A utho ri ty, w hi ch w as se ntt o F S A . H ay es Ja m es al so prov i ded a bu dg et6

ce rti fi ca ti on l ett er(the “ B C L ”) , ce rti fy i ng thatthe bu dg etw as re as on abl e. T h e b o n d tr a n s a c tio n c lo s e d o n N o v e m b e r1 2 , 1 9 9 8 ( th e “B o n d C lo s in g ” ) . T h e fi n al v ersi o n o f th e O ffi ci al S t at em en t(th e “ O S ”) w as d el i v ered t o F S A j u st p r io rto th e c lo s in g . W ith in tw o m o n th s o f th e B o n d C lo s in g , th e A u th o r ity i n fo r me d FSA th a ti tw a s r e v i s i n g i t s b u d g e ta n d c a s h f l o w a n a l y s i s . FSA t er m i nat ed G i fford’ s e m pl oym entshort l y there af t er , base d i n p ar ton her perform ance i n thi s tra nsac ti on . T he A utho ri ty a nd T ra nsW as t e then further a m e n d e d th e irc o n tr a c t b y r e d u c in g th e tip p in g fe e a n d r e lie v in g T r a n s W a s te o f its t onna ge gua r a nt e e . E ve ntua l l y , the A uthor i ty e xha us t e d i t s de bts e r vi c e r e s e r ve fu n d an d w as u n ab l e t o co n ti n u e m ak e p aym en t s o n th e b o n d s. I n a nt i c i pa ti on of

l i ti ga ti on, the pa r ti e s t o thi s a c ti on e nt e r e d i nt o at ol l i ng a gr e e m e nton M a r c h 29, 2000. O n D e c e m be r1, 2000, F S A br oughtthe pr e s e nt ac ti on i n the U ni t ed S t at es D i stri ctC ou rtfor the N orthern D i stri ctof G eorgi a, al l egi ng fe dera l se curi ti es fr aud u nd erR ul e 10b -5 agai nstS t ephens, and st at e l aw cl ai m s for fr aud and negl i gentm i sr epre se nt ati on agai nstbo th S t ephens and H ay es Jam es. T h e d i stri ctco u rtl at er g ran t ed S t ep h en s’ s R u l e 1 2 (b )(6 ) m o ti o n t o d i sm i ss the fe de r a l s e c ur i ti e s c l a i m . A f t e rape r i od of

di s c ove r y , the de fe nda nt s m ove d for sum m ar y j ud gm enton the st at e l aw cl ai m s, w hi ch the di stri ctcourtgrant ed, base d p r im a r ily o n F S A ’s fa ilu r e to m e e t th e d u e d ilig e n c e r e q u ir e m e n ts fo rju s tif iab le7

r e lia n c e u n d e rG e o r g iala w . F S A th e n f ile d th e in s ta n t a p p e a l. I I . D i s c u s s i on A . 10b- 5 S t a ndi ng Th e d i s tr i c tc o u r td i s mi s s e d FSA ’ s Ru l e 1 0 b - 5 c l a i m o n th e g r o u n d th a tFSA w a s notapur c ha s e rors e l l e rof s e c ur i ti e s a s r e qui r e d by the R ul e ’ s a uthor i z i ng s t a tut e , § 10( b) of

the E xc ha nge A c t , 15 U . S . C . § 78j ( b) , a nd thus l a c ke d s t a ndi ng t o br i ng the c l a i m . I n B l ue C hi p S t a m ps v. M a norD r ug S t or e s , 421 U . S . 723 ( 1975) , the S upr e m e C our te ndor s e d the s t a ndi ng r ul e c r e a t e d by B i r nba um v. N e w p o r t S te e l C o rp ., 1 9 3 F .2 d 4 6 1 , 4 6 4 ( 2 d C ir . 1 9 5 2 ) , w h ic h p e r m its o n ly p u r c h a s e r s a n d s e lle r s o f s e c u r itie s , a n d th o s e w ith c o n tr a c ts to p u r c h a s e a n d s e ll se curi ti es , t o b ri ng sui tun der R ul e 10b -5. T he B l ue C hi p S t am ps C ou rtno t ed that three pri nci pal ca t egori es of pl ai nt i ffs are excl ud ed fr om st andi ng : (1) “ po t ent i al pu rc hase rs of shar es . . . w ho al l ege thatthey dec i ded n ott o p urchas e bec ause of” the al l eged vi ol ati on s; (2) “ ac tual shar ehol ders i n the i ss uer w ho al l ege thatthey de c i de d nott o s e l l the i rs ha r e s be c a us e of” the a l l e ge d vi ol a ti ons ; a nd ( 3)

“ sh areh o l d ers, cred i t o rs, an d p erh ap s o th ers rel at ed t o an i ssu er w h o su ffered l o ss i n the va l ue of

the i ri nve s tm e ntdue t o c orpor a t e ori ns i de ra c ti vi ti e s i n c onne c ti on w ith th e p u r c h a s e o rs a le o f s e c u r itie s w h ic h v io la te R u le 1 0 b - 5 .” B lu e C h ip S t a m ps , 421 U . S . a t737- 38. S t e phe ns c ont e nds tha tF S A i s thus e xc l ude d.8

W e r e v ie w d e n o v o ad is tr ic t c o u r t’s d is m is s a l o f ac o m p la in t fo rfa ilu r e to s t a t e ac l a i m upon w hi c h r e l i e f c oul d be gr a nt e d, a c c e pti ng the a l l e ga ti ons i n the com pl ai ntas true a nd construi ng them i n the l i gh tm ostfa vo rabl e t o the pl ai nt i ff . R o b e r ts v . F la . P o w e r& L ig h t C o ., 1 4 6 F .3 d 1 3 0 5 , 1 3 0 7 ( 1 1 th C ir . 1 9 9 8 ) . F u r th e r m o r e , “ac o m p la in t s h o u ld n o t b e d is m is s e d fo rfa ilu r e to s ta te ac la im un l es s i tappears beyond do ub tthatthe pl ai nt i ff ca n p rove no se tof fa ct s i n sup po rt of hi s c l a i m w hi c h w oul d e nt i t l e hi m t o r e l i e f . ” C onl e y v. G i bs on, 355 U . S . 41, 45- 46 (195 7). “ T he thres ho l d o f s uffi ci ency thata c om pl ai ntm ustm ee tt o survi ve a m o ti o n t o d i sm i ss fo r fai l u re t o st at e a cl ai m i s, as w e h av e st at ed p rev i o u sl y, ‘e x c e e d in g ly lo w .’” A n c a tav . P r is o n H e a lth S e r v s ., I n c ., 7 6 9 F .2 d 7 0 0 , 7 0 3 ( 1 1 th C i r. 1 9 8 5 ) (ci ti n g Q u al i ty F o o d s d e C en tro A m . , S . A . v . L at i n A m . A g ri b u si n ess D ev. , 71 1 F . 2d 98 9, 99 5 (11 th C i r. 19 83 )) . T hatsa i d, “ w hi l e not i ce pl ea di ng m ay notr e qui r e tha tthe pl e a de ra l l e ge a‘ s pe c i f i c fa c t ’ t o c ove re ve r y e l e m e ntora l l e ge

‘ w i th pr e c i s i on’ e a c h e l e m e ntof ac l a i m , i ti s s ti l l ne c e s s a r y tha tac om pl a i nt ‘c o n ta in e ith e rd ir e c t o rin fe r e n tia l a lle g a tio n s r e s p e c tin g a ll th e m a te r ia l e le m e n ts nece ss ar y t o sust ai n a re covery un der s om e vi abl e l egal theory. ’ ” R oe v. A w ar e W om an C tr. for C ho i ce , Inc. , 25 3 F . 3d 67 8, 68 3 (11 th C i r. 20 01 ) ( qu ot i ng In re P l yw oo d A nt i trustL i ti g. , 65 5 F . 2d 62 7, 64 1 (5th C i r. U ni tA S ept . 8, 19 81 )) . F S A cont ends thati thas s t andi ng on four grou nd s: (1) a s the true party a t9

r is kin th is tr a n s a c tio n , it w a s e f fe c tiv e ly th e p u r c h a s e ro f th e b o n d s ; ( 2 ) it is e nti t l e d t o s t a ndi ng a s agua r a nt orof the bonds ; ( 3) i ta c tua l l y pur c ha s e d the s e c u r itie s p u r s u a n t to th e te r m s o f th e in s u r a n c e p o lic y ; a n d ( 4 ) it is f u lly s u b r o g a te d to th e r ig h ts o f th e in d iv id u a l b o n d h o ld e r s a n d th e r e fo r e e n title d to b ri n g su i tb ased o n th ei r p u rch ases.

i . P arty A tR i sk F S A s u g g e s ts th a t a s th e tr u e “p a r ty a t r is k ” in th e b o n d tr a n s a c tio n , it s h o u ld h a v e s ta n d in g to a s s e r t ac la im u n d e rR u le 1 0 b - 5 . T h a t is , F S A a r g u e s th a t it s a ti s f i e s the pur c ha s e r - s e l l e rr e qui r e m e nts e tfor th i n B i r nba um a nd e ndor s e d by th e S u p r e m e C o u r t in B lu e C h ip S ta m p s , b e c a u s e , a s th e in s u r e ro f th e b o n d s , it b o r e th e r is kth a t ap u r c h a s e rw o u ld o r d in a r ily b e a r . F S A is m is ta k e n , h o w e v e r , in in te rp r e tin g th e p u r c h a s e r - s e lle rr e q u ir e m e n t to e n ta il af u n c tio n a l, a n d n o t a for m a l , i nqui r y . A l though the S upr e m e C our tdi s c us s e d the f unc ti ona l a s pe c t s of th e r u le in its r e a s o n in g , th e C o u r t d e lib e r a te ly e n d o r s e d as ta n d in g r u le th a t w o u ld no tbe subj ec tt o “ endl es s c as e- by-c as e e rosi on ” by c ou rt s e m pl oyi ng a f un cti on al a n a l y s i s t o e v e r y n e w g r o u p o f p o t e n ti a l p l a i n ti f

fs . Se e Bl u e Ch i p St a mp s , 4 2 1 U . S. a t755. A c c or di ngl y , F S A ’ s a s s um pti on of r i s k i n the bond tr a ns a c ti on doe s not pr ovi de i tw i th R ul e 10b- 5 s t a ndi ng.

i i . G ua r a nt orS t a ndi ng10

F S A arg u es th ati tal so h as st an d i n g as a g u aran t o r o f th e b o n d s. F S A fi rst arg u es th ati th as st an d i n g as a g u aran t o r b ecau se a g u aran t o r q u al i fi es as a p u rch aser o f secu ri ti es. T h i s i s n o tso . G ran ti n g st an d i n g t o a g u aran t o r as a pur c ha s e rw oul d c ontr a ve ne the r ul e tha tthi s c our ta nnounc e d i n P e l l e ti e rv. S tua r t - J a m e s C o. , I nc . , 863 F . 2d 1550 ( 11th C i r . 1989) , tha t , c ons i s t e ntw i th B l ue C hi p S t am ps, a pl ai nt i ff m usthave actual l y purchas ed or sol d, or ent er ed i nt o an e n fo r c e ab le c o n tr a c t to p u r c h a s e o rs e ll, s e c u r itie s to h a v e s ta n d in g u n d e rR u le 1 0 b - 5 . I d . a t 1 5 5 4 - 5 5 . F S A ne xta dva nc e s the nove l the or y tha t , i n i ns ur i ng the bonds , i ts ol d a se curi ty, i . e. , a guaranty. T hi s argum entfa i l s bec ause a guaranty does notqu al i fy as a s ec uri ty for R ul e 10b -5 pu rposes . S ec ti on 3(a) (10) of the E xchang e A ct d efi n es a “ secu ri ty” as fo l l o w s: T he t e r m “ s e c ur i ty ” m e a ns a ny not e , s t oc k, tr e a s ur y s t oc k, bond, de be ntur e , c e r ti f

i c a t e of i nt e r e s torpa r ti c i pa ti on i n a ny pr of i t - s ha r i ng a gr e e m e ntori n a ny oi l , ga s , orothe rm i ne r a l r oy a l ty orl e a s e , a ny c ol l a t e r a l - tr us tc e r ti f

i c a t e , pr e or ga ni z a ti on c e r ti f i c a t e ors ubs c r i pti on, tra nsfe rabl e s hare , i nv es tm entcontra ct , vo ti ng -trustce rti fi ca t e, c e r t i f i c a t e of de pos i tforas e c ur i ty , ori n ge ne r a l , a ny i ns tr um e nt c om m onl y know n a s a“ s e c ur i ty ” ; ora ny c e r ti f i c a t e of i nt e r e s tor pa r t i c i pa ti on i n, t e m por a r y ori nt e r i m c e r ti f i c a t e for , r e c e i ptof , or w a rr a n t o rr ig h t to s u b s c r ib e to o rp u r c h a s e , a n y o f th e fo r e g o in g ... 1 5 U .S .C .A . § 7 8 c ( a ) ( 1 0 ) . A s th e fo r e g o in g d e f in itio n d o e s n o t in c lu d e ag u a r a n ty , F S A l ack s st an d i n g as a g u aran t o r o f th e b o n d s.11 i i i . C ontr a c tt o O the r w i s e A c qui r e the B onds F S A a r gue s tha ti t s i ns ur a nc e pol i c y c ons ti tut e s ac ontr a c tt o pur c ha s e the B o n d s , q u a lif

y in g F S A a s ap u r c h a s e rp u r s u a n t to B lu e C h ip S ta m p s . N o tab ly , § 3(a) (13) of the E xchang e A ctdefi nes the t er m “ pu rc hase ” t o i ncl ud e “ any c on tra ct t o buy , pur c ha s e , orothe r w i s e a c qui r e ” s e c ur i ti e s . S e e 15 U . S . C . § 78c ( a ) ( 13) ( e m p h a s is a d d e d ) . T h e p o lic y p r o v id e s th a t [ u] pon di s bur s e m e nti n r e s pe c tof aB ond, [ F S A ] s ha l l be c om e the o w n e ro f th e B o n d , a n y a p p u r te n a n t c o u p o n to th e B o n d o rr ig h t to r e c e i ptof

pa y m e ntof

pr i nc i pa l of

ori nt e r e s ton the bond a nd s ha l l be fu ll y s u b ro g ated to th e r ig h ts o f th e O w n er , i n clu d in g th e O w n er ’s r i ghtt o r e c e i ve pa y m e nt s unde rthe B ond, t o the e xt e ntof a ny paym entby [F S A ] here un der. A c c or di ngl y , F S A c ont e nds tha ti ta c qui r e d ac ont i nge nti nt e r e s ti n the bonds be c a us e the pol i c y c ons ti tut e s ac ontr a c tt o othe r w i s e a c qui r e the m upon the o c c u rr e n c e o f

as p e c if ie d c o n tin g e n t e v e n t, i.e ., d e fa u lt. S te p h e n s a r g u e s f

ir s t th a t F S A fa ile d to a lle g e ac r u c ia l e le m e n t o f aR u le 1 0 b - 5 a c ti o n i n i t s c o m p l a i n t– th a ti th a d p u r c h a s e d o rs o l d as e c u r i ty . As S te p h e n s n o te s , F S A d id n o t s p e c if ic a lly a lle g e th a t it h a d e n te r e d in to ac o n tr a c t to a c q u i r e th e b o n d s . N o rd i d FSA a tt a c h th e i n s u r a n c e p o l i c y o rq u o t e r e l e v a n tt e r ms o f th e p o li cy in it s c o m p lain t. In d ee d , o n re ad in g th e a ll eg atio n s in F S A ’s com pl ai nt , on e c ou l d u nd er st and F S A t o b e a dv anci ng a theory of s t andi ng base d so lely o n th e fac t th at itsu ffer ed ec o n o m ic h ar m as a r es u lto f th e d efen d an t’ s12

a lle g e d f r a u d , ab a s is th a t w a s r e je c te d in B lu e C h ip S ta m p s . O r di na r i l y , w e do notc ons i de ra ny thi ng be y ond the fa c e of the c om pl a i nt a nd doc um e nt s a tt a c he d the r e t o w he n a na l y z i ng am oti on t o di s m i s s . B r ooks v. B l ue C ross & B l ue S hi el d o f F l a. , Inc. , 11 6 F . 3d 13 64 , 13 68 (11th C i r. 19 97 ). T h is c o u r t r e c o g n iz e s a n e x c e p tio n , h o w e v e r , in c a s e s in w h ic h ap la in tif f r e fe r s to a docum enti n i t s c om pl ai nt , the do cum enti s c entra l t o i t s c l ai m , i t s c on t ent s are n o ti n d i sp u t e, an d th e d efen d an tatt ach es th e d o cu m en tt o i t s m o ti o n t o d i sm i ss. H arri s v. Ivax C orp. , 18 2 F . 3d 79 9, 80 2 n . 2 (11 th C i r. 19 99 ); B rook s, 11 6 F . 3d at 1368- 69. H e r e , F S A r e f e r s t o the e xi s t e nc e of

the i ns ur a nc e pol i c y a nd r e l i e s on the e f fe c tof the pol i c y – tha tF S A i s the r e by r e qui r e d t o m a ke pa y m e nt s t o the b o n d h o ld e r s – th o u g h it d o e s n o t q u o te f r o m th e p o lic y o rd is c u s s its s p e c if ic p r o v is io n s . T h e q u e s tio n , th e n , is w h e th e rth e p o lic y is n e v e r th e le s s “c e n tr a l” to F S A ’s fe d e r a l s e c u r itie s c la im . I n c ons i de r i ng thi s que s ti on, the F i r s tC i r c ui tha s he l d, w i th r e s pe c tt o a c o m p la in t a lle g in g lib e l a n d o th e rr e la te d c la im s , th a t am a g a z in e a r tic le r e fe rr e d to in th e c o m p la in t a n d a tta c h e d to th e d e fe n d a n t’s m o tio n to d is m is s w a s c e n tr a l to the pl ai nt i ffs’ cl ai m beca use “ P l ai nt i ffs unq uesti on abl y w ou l d h ave had t o o ff era c o p y o f th e a r tic le in o r d e rto p r o v e th e irc a s e .” F u d g e v . P e n th o u s e I n t’l, L td ., 840 F . 2d 1012, 1015 ( 1s tC i r . 1988) . A c c or di ng t o tha ts t a nda r d – w he the rthe13

pl a i nti f f w oul d ha ve ha d t o of

fe rthe doc um e nti n or de rt o pr ove i t s c a s e – the pol i c y w oul d a ppe a rt o be c e ntr a l t o F S A ’ s c l a i m , forF S A w oul d ul ti m a t e l y ha ve to o f fe rac o p y o f

th e p o lic y to p r e v a il u n d e ra n y c o n c e iv ab le th e o r y o f its c a s e . T hi s c a s e pr e s e nt s ac l os e rque s ti on tha n m os tc a s e s i n w hi c h thi s i s s ue ar i se s, ho w ever . A l tho ug h the pu rpose of thi s e xcept i on i s t o p re venta pl ai nt i ff f r o m s u r v iv in g am o tio n to d is m is s b y fa ilin g to a p p e n d r e le v a n t d o c u m e n ts to its com pl ai nt , se e, e. g. , 18 8 L L C v. T ri ni ty I nd us. Inc. , 30 0 F . 3d 73 0, 73 5 (7th C i r. 2 0 0 2 ), h ere th e ex cep ti o n w o u l d i n u re t o th e b en efi to f th e p l ai n ti ff. N ev erth el ess, the po t ent i al harm thatcourt s are m i nd ful of i n these si tuat i on s i s the l ac k o f not i ce tha tthe a tt a c he d doc um e ntm a y be c ons i de r e d by the c our t . S e e , e . g. , C ha m be r s v. T i m e W a r ne r , I nc . , 282 F . 3d 147, 153 ( 2d C i r . 2002) ( “ [ G ] e ne r a l l y , the ha r m t o the pl a i nti f f w he n ac our tc ons i de r s m a t e r i a l e xtr a ne ous t o ac om pl a i nti s the l a c k of noti c e tha tthe m a t e r i a l m a y be c ons i de r e d. ” ) . B e c a us e S t e phe ns a tt a c he d the pol i c y t o i t s m ot i on t o di s m i s s , w e c a nnotf i nd tha tS t e phe ns l a c ke d not i c e tha tthe d is tr ic t c o u r t o rth is c o u r t m ig h t c o n s id e rth e d o c u m e n t. A c c o r d in g ly , w e w ill c ons i de rthe pol i c y a ppe nde d t o S t e phe ns ’ s m oti on t o di s m i s s a s pa r tof the pl ea di ng s bec ause i ti s r ef erre d t o i n the com pl ai nt , i ti s c entra l t o F S A ’ s f eder al se curi ti es cl ai m , i t s c on si dera ti on com po rt s w i th the re qu i re m ent s of not i ce p l ead i n g , an d n ei th er p arty ch al l en g es i t s au th en ti ci ty.14

B ecau se th e i n su ran ce p o l i cy i s th e m o d e b y w h i ch F S A arg u ab l y “ o th erw i se a c q u ir e d ” th e b o n d s , w e f in d th a t th e c o m p la in t, v a g u e a s it is , n e v e r th e le s s m e e ts th e lib e r a l n o tic e p le a d in g s ta n d a r d s e m b o d ie d in th e F e d e r a l R u le s o f C iv il P ro ce d u re . B ec au se F S A alleg es th at itissu ed th e p o li cy as a r es u lto f S tep h en s’s fr aud and thatS t ephens i s there fore subj ec tt o R ul e 10b -5 l i abi l i ty, w e c an i nfer th atF S A p u rch ased o r so l d secu ri ti es b y i ssu i n g th e p o l i cy. G i v en th ese a l l e g a ti o n s a n d th e p r o v i s i o n o f th e p o l i c y v e s ti n g o w n e r s h i p o f th e b o n d s i n FSA upon di s bur s e m e nt , w e c a nnotc onc l ude tha tF S A ’ s c om pl a i ntfa i l s t o m e e tthe “e x c e e d in g ly lo w ” th r e s h o ld n e c e s s a r y to s u r v iv e am o tio n to d is m is s . Q u a lity F oo ds de C entro A m . , S . A . , 71 1 F . 2d at99 5. A s F S A coul d con ce i vabl y prove a s e t o f fa c ts , c o n s is te n t w ith th e a lle g a tio n s in its c o m p la in t, th a t w o u ld e n title it to r e l i e f , the di s tr i c tc our te rr e d i n di s m i s s i ng i t s R ul e 10b- 5 c l a i m . S e e C onl e y , 355 U . S . a t45- 46. I n a ddi ti on t o a s s e r ti ng the above pl e a di ng de fe c t , S t e phe ns c ont e nds tha tthe i n su ran ce p o l i cy d o es n o tco n sti tu t e an “ en fo rceab l e co n tract ” t o p u rch ase s e c ur i ti e s . S t e phe ns c l a i m s tha tthe ow ne r s hi p c l a us e i n the pol i c y i s not e nfor c e abl e be c a us e the r e i s ( 1) no pur c ha s e pr i c e , ( 2) no pr ovi s i on forde l i ve r y of th e b o n d s to F S A , a n d ( 3 ) u n c e r ta in ty r e g a r d in g F S A ’s p o s t- d is b u r s e m e n t r ig h ts . T hi s a r gum e nti s w i thoutm e r i t . F i r s t , unde rF S A ’ s c ont i nge nti nt e r e s tthe or y , no15

pu rc hase pri ce w ou l d app ear i n the i nsurance contra ctbeca use the “ pu rc hase pri ce ” w o u l d effecti v el y b e th e ri skassu m ed b y F S A i n ch o o si n g t o i n su re th e b o n d s, l ess the va l ue of

the pr e m i um s c ha r ge d. S e c ond, the l a c k of pr ovi s i on forde l i ve r y of th e b o n d s w o u ld n o t r e n d e rth e c o n tr a c t u n e n fo r c e ab le . A c o u r t c o u ld f ill in th is m i s s i ng t e r m i f

F S A w e r e t o s ue on the pol i c y . F i na l l y , as e ns i bl e r e a di ng of the r e le v a n t p r o v is io n in th e in s u r a n c e p o lic y r e v e a ls n o u n c e r ta in ty a s to F S A ’s p o s tdi s bur s e m e ntr i ght s . A l though S t e phe ns i nt e rpr e t s the w or d “ or ” i n the r e l e va nt c la u s e – “[ F S A ] s h a ll b e c o m e th e o w n e ro f th e B o n d , a n y a p p u r te n a n t c o u p o n to th e B o n d o rr ig h t to r e c e ip t o f p a y m e n t o f

p r in c ip a l o f

o rin te r e s t o n th e b o n d ” – to b e d is ju n c tiv e , c r e a tin g u n c e r ta in ty a s to F S A ’s r ig h ts , am o r e r e a s o n ab le i nt erpret ati on i s thatbo th app eara nces of the w ord “ or” are i n the conj un cti ve. T h u s , th e m o s t r e a s o n ab le in te rp r e ta tio n o f th is c la u s e in d ic a te s th a t F S A s h a ll be c om e the ow ne rof

the B ond, a ny a ppur t e na ntc oupon a nd r i ghtt o r e c e i ptof pa y m e ntof

pr i nc i pa l of

a nd i nt e r e s ton the bond. S t a tut or y i nt e rpr e t a ti on conv ent i on s i nd i ca t e thatcourt s nee d n otm ec hani ca l l y i nt erpretever y “ or” a s d is ju n c tiv e , b u t r a th e rth a t c o u r ts s h o u ld in te rp r e t th e w o r d “o r ” a c c o r d in g to c ont e xt . S e e , e . g. , U ni on I ns . C o. v. U ni t e d S t a t e s , 73 U . S . ( 6 W a l l . ) 759, 764 ( 1867) ( “ [ W ] he n w e l ook be y ond the m e r e w or ds t o the obvi ous i nt e ntw e c a nnot he l p s e e i ng tha tthe w or d ‘ or ’ m us tbe t a ke n c onj unc ti ve l y . ” ) ; U ni t e d S t a t e s v.16

H odge , 321 F . 3d 429, 436 ( 3d C i r . 2003) ; W i l l i s v. U ni t e d S t a t e s , 719 F . 2d 608, 612- 13 ( 2d C i r . 1983) ( “ I ti s s e tt l e d tha t‘ or ’ m a y be r e a d t o m e a n ‘ a nd’ w he n the c ont e xts o i ndi c a t e s . ” ) . T he s a m e i s tr ue of c ontr a c ti nt e rpr e t a ti on. S e e N oe l l v. A m . D e s ig n , I n c ., P r o f

it S h a r in g P la n , 7 6 4 F .2 d 8 2 7 , 8 3 3 ( 1 1 th C ir . 1 9 8 5 ) ( “I t is a n e s tab lis h e d p r in c ip a l th a t ‘[ t]h e w o r d ‘o r ’ is f r e q u e n tly c o n s tr u e d to m e a n ‘a n d ,’ a nd vi c e ve r s a , i n or de rt o c a rr y outthe e vi de nti nt e ntof the pa r ti e s . ’ ” ) ( quoti ng D um on tv. U ni t ed S t at es , 98 U . S . 14 2, 14 3 (18 78 )) . S t e phe ns a l s o a r gue s tha tF S A c a nnotc ons ti tut e apur c ha s e rof the bonds be c a us e , a s afa c tua l m a tt e r , F S A ha s nota c tua l l y a c qui r e d the bonds ( i . e . , the bonds a r e s ti l l i n the phy s i c a l pos s e s s i on of the or i gi na l bondhol de r s ) . T o the ex t en tth atF S A h as an en fo rceab l e co n tractt o o th erw i se acq u i re th e b o n d s, ho w ever , i thas a n o w ners hi p i nt er es ti n the bo nd s r egar dl es s of w hether i thas p h ysi cal p o ssessi o n o f th em . M o reo v er, p u rsu an tt o th e t erm s o f th e p o l i cy, ow ners hi p aut om ati ca l l y ves t ed i n F S A up on di sburse m ent . A cc ordi ng l y, the fa ct th a t th e b o n d s c o n tin u e to b e “h e ld b y ” th e b o n d h o ld e r s is o f n o m o m e n t. T he B ond M a rke tA s s oc i a ti on f i l e d a n a m i c us c ur i a e br i e f i n s uppor tof S t e phe ns , a r gui ng tha ta n i ns ur a nc e pol i c y i s af unda m e nt a l l y di f

fe r e nti ns tr um e nt than con tra ct s t o p urchas e s ec uri t i es and thati tthere fore fa l l s out si de the pu rvi ew of § 10( b) of

the E xc ha nge A c t . A c c or di ng t o the B ond M a rke tA s s oc i a ti on,The petitioner in Rubin v. Unit ed States, 449 U.S. 424 (1989), had been c onvicted of 1 makingfalse repre sentations to a bank c oncerning sha res of stock that were pledg ed as c ollateral fo r l o an s . Id . at4 2 5 -2 7 . Inup h o l di n g th e c o n v i cti o n , th e S up re me C o urth el dth at“o b t ai ni n g a loan s e c ure d b y

a ple dg eof sh are s o f s tock unmi sta

ka bly inv olv e s a

‘disp os iti onof

[an ] intere st in a security , for value’” and therefore qualifie s as a sale under the Securities Act. Id. at 429. Although thedefinition of “of fer or sale”under theSecurities Ac t differ s from that under the Ex chang e Ac t (the Securities Act definition includes the disposition of “an interest in a se c urity” ), Ma

ri neB ank v. Weaver, 45 5 U .S. 55 1 ( 19 82 ), indic ate s th at there a so nin gof Rub in also applies to suits brought under § 10(b) of the Exchang e Ac t. Id. at 554 n.2. 17 w h e r e a s ac o n d itio n a l r ig h t to p u r c h a s e as e c u r ity ( e .g ., a n o p tio n s c o n tr a c t) rep resen t s an “ i n v est m en td eci si o n , ” an i n su ran ce p o l i cy rep resen t s o n l y a “ ri sk de c i s i on. ” I n othe rw or ds , a n i ns ur e rde c i de s w ha tpr e m i um t o c ha r ge ba s e d on the r i s k of

de fa ul tr a the rtha n i t s be l i e fs r e ga r di ng the f utur e va l ue of

the i nve s tm e nt . T hus , the i nc l us i on i n F S A ’ s pol i c y of apr ovi s i on m a ki ng F S A the o w n e ro f th e b o n d s u p o n d e fa u lt m a y s u g g e s t th a t F S A c a lc u la te d th e p r e m iu m it char ged b as ed no ton l y on the ri sk of defa ul t , bu tal so on the expect ed re covery v a lu e o f th e b o n d s u p o n d e fa u lt. A n anal og ou s s i tuat i on ar i se s w here a bank acce pt s ase curi ty a s c ol l at er al foral oa n. T he ba nk r e a l i z e s a ny a ppr e c i a ti on orde pr e c i a ti on i n the va l ue of the col l at er al on l y i n the eventof defa ul t . N ever thel es s, the S up re m e C ou rthas i nd i ca t ed thatsuch pl edges of s ec uri ti es fa l l w i thi n the pu rvi ew of the se curi ti es l aw s. S ee R ub i n v . U ni t ed S t at es , 44 9 U . S . 42 4, 42 9-31 (198 1) (hol di ng that pl edgi ng se curi ti es as col l at er al for al oan con sti tut es an “ offe r or s al e” un der § 1 7 ( a ) o f th e S e c u r itie s A c t) ; M a r in e B a n kv . W e a v e r , 4 5 5 U .S . 5 5 1 , 5 5 4 n .2 118

(198 2) (i nd i ca ti ng , i n a R ul e 10b -5 ca se , thatR ub i n res ol ved the ci rc ui tspl i tov er w he the r“ apl e dge of

s t oc k i s e qui va l e ntt o as a l e forthe purpos e s of the a nti f r a ud pr ovi s i ons of

the fe de r a l s e c ur i ti e s l a w s ” a nd m a ki ng no di s ti nc ti on be t w e e n the S ec uri ti es A ctand the E xchang e A ctfor these pu rposes ). In so ho l di ng , the C ou rt e x p la in e d th a t “[ t]h e e c o n o m ic c o n s id e r a tio n s a n d r e a litie s p r e s e n t ... a r e s im ila rin im p o r ta n t r e s p e c t[ s ] to th e r is ka n in v e s to ru n d e r ta k e s w h e n p u r c h a s in g s h a r e s . B o th a r e r e ly in g o n th e v a lu e o f th e s e c u r itie s th e m s e lv e s , a n d b o th m u s t b e ab le to de pe nd on the r e pr e s e nt a ti ons m a de by the tr a ns fe r orof the s e c ur i ti e s . . . . ” R ubi n, 44 9 U . S . at43 1. Justas a bank rel i es on the val ue of the se curi ti es pl edged as c o lla te r a l w h e n d e c id in g w h e th e rto is s u e alo a n a n d , if s o , w h a t in te r e s t r a te to c h a r g e , ab o n d in s u r e rm a y w e ll c o n s id e rth e e x p e c te d r e c o v e r y v a lu e o f b o n d s in d e c id in g w h e th e rto in s u r e th e m a n d , if s o , w h a t p r e m iu m to c h a r g e . N ordoe s F S A ’ s s t a tus a s as ophi s ti c a t e d i ns ti tuti on de pr i ve i tof pr ot e c ti on u n d e r§ 1 0 ( b ) , fo rb a n k s a r e a ls o s o p h is tic a te d p a r tie s a n d n e v e r th e le s s b e n e f it f r o m s u c h p r o t e c ti o n . Th e Bo n d M a rk e tA s s o c i a ti o n , h o w e v e r , a r g u e s th a tFSA di f fe r s f r om othe ri nve s t or s i n a nothe rr e l e va ntr e s pe c t : A bond i ns ur e ri s on the de a l t e a m a nd i s the r e for e i n as upe r i orpos i ti on w i th r e s pe c tt o the i nve s t or s the E xc ha nge A c tw a s i nt e nde d t o pr ot e c tboth i n t e r m s of i t s abi l i ty t o pe r for m due d ilig e n c e a n d its ab ility to n e g o tia te c h a n g e s in th e s tr u c tu r e o f atr a n s a c tio n . T h is19

ar gu m enti s unp er suas i ve. N o cas e l aw exi st s s ug gesti ng thatm em bers of a deal t e a m a r e note nt i t l e d t o r e l y on r e pr e s e nt a ti ons m a de i n of fe r i ng doc um e nt s r e l a ti ng t o p ub l i c off

er i ng s of s ec uri ti es . W e s ee no re as on t o excl ud e m em bers of a deal te a m f r o m th e u n iv e r s e o f

p a r tie s th a t h a v e s ta n d in g u n d e r§ 1 0 ( b ) a n d R u le 1 0 b - 5 . A cco rd i n g l y, w e h o l d th atF S A h as st an d i n g as a p u rch aser o f a co n ti n g en ti n t erest i n th e b o n d s. i v. S ubr oga ti on F i na l l y , F S A a r gue s tha ti tha s s t a ndi ng ba s e d on s ubr oga ti on. “ S ubr oga ti on i s ‘ [ t ] he s ubs ti tut i on of

one pe r s on i n the pl a c e of a nothe rw i th r e fe r e nc e t o a la w f u l c la im , d e m a n d o rr ig h t, s o th a t h e w h o is s u b s titu te d s u c c e e d s to th e r ig h ts of the other i n rel ati on t o the debtor cl ai m , and i t s r i gh t s, re m edi es , or se curi ti es . ’ ” Jones M ot or C o. v. A nd er son, 60 2 S . E . 2d 22 8, 23 0 (20 04 ) ( qu ot i ng B l ac k’ s L aw D i c ti o n a r y 1 4 2 7 ( 6 th e d . 1 9 9 0 ) ) . Se e a l s o Pe a r l ma n v . Re l i a n c e I n s . Co . , 3 7 1 U . S. 13 2, 13 6-37 (196 2). S ub rogat i on i s e i ther “ l egal ” or “ conv ent i on al . ” L egal s ubr oga ti on i s a n e qui t abl e doc tr i ne a nd a r i s e s by ope r a ti on of the l a w w i thouta ny a gr e e m e ntt o tha te f

fe c tbe t w e e n the pa r ti e s ; c onve nti ona l s ubr oga ti on r e s t s on c o n tr a c t, a r is in g w h e r e “a n a g r e e m e n t is m a d e th a t th e p e r s o n p a y in g th e d e b t s h a ll b e s u b r o g a te d to th e r ig h ts a n d r e m e d ie s o f th e o r ig in a l c r e d ito r .” G ilb e r t v . D u n n , 128 S . E . 2d 739, 740 ( G a . 1962) ; S t a t e F a r m M ut . A ut o. I ns . C o. v. C ox, 515TheB on d M a rket A sso c iatio n a ssert s th at thereis n o auto maticsubrog atio n toRul e 2 10b-5 rights. However, the Assoc iation fails to cite any controllingauthority

to that effect. Instead, the A ssociation cites threedistrict court opinions, two of which a re unpublished, f

rom outsi deof thi s c irc uit . 20 S . E . 2 d 8 3 2 , 8 3 3 (G a. 1 9 9 9 ) (ci t at i o n o m i tt ed ). F S A arg u es th ati th as st an d i n g as a s ubr oge e unde rboth va r i e ti e s of s ubr oga ti on be c a us e : ( 1) I tw a s obl i ga t e d by c o n tr a c t to m a k e in te r e s t a n d p r in c ip a l p a y m e n ts o n th e b o n d s , a n d it a lle g e d th a t it is d o in g s o ; a n d ( 2 ) th e in s u r a n c e p o lic y e x p r e s s ly s ta te s th a t u p o n d is b u r s e m e n t, F S A b e c o m e s “f

u lly s u b r o g a te d to th e r ig h ts o f th e [ b o n d h o ld e r ].” S t e phe ns doe s notdi s put e tha t , ha d F S A pr ope r l y pl e a de d as ubr oga ti on c l a i m , i tm i ghtbe e nt i tl e d t o s t a ndi ng. S t e phe ns a r gue s , how e ve r , tha tF S A c a nnot 2 reco v er b ecau se i tfai l ed t o al l eg e ev ery el em en to f a b o n d h o l d er cl ai m , as i tm u st a c c or di ng t o G e or gi al a w . S e e , e . g. , S . N i tr oge n C o. v. S t e ve ns S hi ppi ng C o. , 151 S . E . 2d 916, 921 ( G a . 1966) ( hol di ng tha t , w he n pr oc e e di ng upon the the or y of c onve nti ona l s ubr oga ti on, i ti s e s s e nti a l tha tapl a i nti f f “ a l l e ge fa c t s s how i ng the e x is te n c e o f

ac a u s e o f

a c tio n o n th e p a r t o f

[ th e s u b r o g o r ] a g a in s t th e d e fe n d a n t” ) . B ec ause w e have hel d thatF S A has s t andi ng t o b ri ng a R ul e 10b -5 cl ai m as apur c ha s e rof

the bonds , w e ne e d notc ons i de rw he the rF S A a de qua t e l y pl e d a subrog ati on cl ai m and, i f s o, w hether i thas s t andi ng as a s ub rogee. B . S t atut e of L i m i t ati on s a nd D ue D i l i gence S te p h e n s a r g u e s th a t, r e g a r d le s s o f w h e th e rF S A h a s s ta n d in g , F S A ’s R u le21

10 b-5 cl ai m i s ti m e- barr ed. R ul e 10b -5 sui t s “ m ustbe com m ence d w i thi n o ne ye ar af t erthe di sc ov er y of the fa ct s c on sti tut i ng the vi ol ati on and w i thi n three ye ar s a f t e rs uc h vi ol a ti on. ” L a m pf , P l e va , L i pki nd, P r upi s & P e ti gr ow v. G i l be r t s on, 501 U . S . 35 0, 36 4 (19 91 ). T he l i m i t ati on s per i od begi ns t o run w hen the pl ai nt i ff has in q u ir y o ra c tu a l n o tic e o f th e a lle g e d f

r a u d . T e llo v . D e a n W itte rR e y n o ld s , I n c ., 410 F . 3d 1275, 1283 ( 11th C i r . 2005) ( c i t a ti on om i tt e d) . F S A a s s e r t s tha tthe p a r tie s e n te r e d in to ato llin g a g r e e m e n t o n M a r c h 2 9 , 2 0 0 0 , w h ic h e x p r e s s ly p r o v id e d th a t a lr e a d y e x p ir e d c la im s w e r e n o t r e v iv e d . A c c o r d in g ly , F S A ’s R u le 10b- 5 a c ti on i s t i m e l y unl e s s S t e phe ns c a n e s t abl i s h tha tF S A ha d i nqui r y noti c e of the fr aud p ri or t o M ar ch 29 , 19 99 . S ee C ar l ey C api t al G roup v. D el oi tt e & T ouc he , L . L . P . , 27 F . S upp. 2d 1324, 1341 ( N . D . G a . 1998) ( de fe nda ntbe a r s the bu rdens of produ cti on and p er suas i on on a s t atut e of l i m i t ati on s def ense ). In T el l o, a R ul e 10b -5 ca se , thi s c ou rtadop t ed the po si ti on thatt o p rovi de a po t ent i al pl ai nt i ff

w i th i nq ui ry no ti ce , the fa ct s kno w n b y thatparty m ustbe s uf f i c i e nt l y pr oba ti ve of

f r a ud- - s uf f i c i e nt l y e s t abl i s he d be y ond the s t a ge of m e r e s us pi c i on, s uf

f i c i e nt l y c onf

i r m e d ors ubs t a nti a t e d- - not onl y t o i nc i t e the vi c ti m t o i nve s ti ga t e buta l s o e nabl e hi m t o ti e up a n y lo o s e e n d s a n d c o m p le te th e in v e s tig a tio n in tim e to f ile atim e ly s u it. I d. a t1284- 88 ( F uj i s a w aP ha r m a c e uti c a l C o. , L t d. v. K a poor , 115 F . 3d 1332, 1335 (7th C i r. 19 97 )) . F urtherm ore, “ [t ] he det er m i nati on of w hen i nq ui ry no ti ce22

o c c u rr e d a n d h o w m u c h in v e s tig a tio n is r e a s o n ab le fo rf ilin g s u it a r e n e c e s s a r ily fa c t - s pe c i f

i c t o e a c h c a s e , [ a nd] a c c or di ngl y . . . que s ti ons of noti c e a nd due di l i ge nc e a r e pa r ti c ul a r l y s ui t e d t o aj ur y ’ s c ons i de r a ti on. ” I d. a t1284 ( c i t a ti ons om i tt e d; e m pha s i s i n or i gi na l ) . C ons e que nt l y , “ [ d] i s m i s s a l unde rF e de r a l R ul e of C iv il P r o c e d u r e 1 2 ( b ) ( 6 ) ‘o n s ta tu te o f lim ita tio n s g r o u n d s is a p p r o p r ia te o n ly if it is ‘a p p a r e n t f

r o m th e fa c e o f

th e c o m p la in t’ th a t th e c la im is tim e - b a rr e d .’” T e llo , 41 0 F . 3d at12 88 (c i t ati on s om i tt ed). T hi s i s par ti cul ar l y the ca se w here , as here , the pl ai nt i ff

m ustpl ea d w i th p ar ti cul ar i ty pursuantt o R ul e 9(b) of the F eder al R ul e s of C i vi l P r oc e dur e . S e e , e . g. , M a rks v. C D W C om put e rC tr s . , I nc . , 122 F . 3d 36 3, 36 9 (7th C i r. 19 97 ). B ec ause w e a gree w i th the di stri ctcourtthati ss ues of m at er i al fa ctexi stas t o p re ci se l y w hati nform ati on w as kn ow n t o F S A on M ar ch 29 , 19 99 and w hether tha ti nfor m a ti on w a s s uf f i c i e ntt o pr ovi de F S A w i th i nqui r y noti c e , w e c a nnot concl ud e a tthi s s t age of the proceedi ng s thatF S A ’ s R ul e 10b -5 cl ai m i s ti m eba rr e d. F i nal l y, S t ephens cont ends thatF S A ’ s fai l ure t o p er form du e di l i gence bars i tfr om bri ng i ng a R ul e 10b -5 ac ti on . In thi s c i rc ui t , pl ai nt i ffs bri ng i ng 10 b-5 c la im s m u s t e s tab lis h “th e ju s tif iab ility o f

[ th e ir ] r e lia n c e , f

r e q u e n tly tr a n s la te d in to ar e qui r e m e ntof

due di l i ge nc e by the pl a i nti f f . ” D upuy v. D upuy , 551 F . 2d 1005,In Bonner v. Prichard, 661 F.2d 1206, 1207 ( 11th Cir. 1981) (en banc), w e adopte d as 3 binding prece dent all dec isions of the former Fifth Circuit rendere d prior to October 1, 1981. 23 1014 ( 5th C i r . 1972) . T he due di l i ge nc e bur de n tha ta ppl i e s i n R ul e 10b- 5 a c ti ons 3 i s noti de nti c a l t o the bur de n i m pos e d by G e or gi al a w i n f r a ud a nd ne gl i ge nt m is r e p r e s e n ta tio n c a s e s , a n d w h e th e rF S A p e r fo r m e d s u f f ic ie n t d u e d ilig e n c e to s a ti s f y thi s bur de n c a nnotbe r e s ol ve d on am oti on t o di s m i s s . W e the r e for e l e a ve th is is s u e fo rth e d is tr ic t c o u r t. C. St a t e La w Fr a u d a n d N e g l i g e n tM i s r e p r e s e n t a ti o n Cl a i ms T he di s tr i c tc our tgr a nt e d s um m a r y j udgm e nti n fa vorof S t e phe ns a nd H ayes Jam es o n F S A ’ s co m m o n l aw frau d an d n eg l i g en tm i srep resen t at i o n cl ai m s, ho l di ng that : (1) S t ephens and H ay es Ja m es di d n otow e F S A a dut y t o d i sc l ose, ( 2) the a l l e ge d m i s r e pr e s e nt a ti ons w e r e nota c ti onabl e , a nd ( 3) F S A di d not j us ti f i abl y r e l y on a ny a l l e ge d m i s r e pr e s e nt a ti ons be c a us e i tfa i l e d t o e xe r c i s e due d i l i g e n c e a s am a tt e ro f

l a w. W e r e vi e w the di s tr i c tc our t ’ s gr a ntof s um m a r y j udgm e ntde novo, dr a w i ng a l l i nfe r e nc e s i n fa vorof the non- m ovi ng pa r ty . K or m a n v. H B C F l a . , I nc . , 182 F . 3d 12 91 , 12 93 (11th C i r. 19 99 ). U n d er G eo rg i a l aw , a p l ai n ti ff al l eg i n g frau d m u std em o n strat e: (1 ) a fal se r e pr e s e nt a ti on by the de fe nda nt , ( 2) the de fe nda nt ’ s know l e dge tha tthe24

in fo r m a tio n is fa ls e ( s c ie n te r ) , ( 3 ) in te n tio n to in d u c e th e p la in tif f to a c t o rto r e f r a i n f r om a c ti ng, ( 4) j us ti f

i abl e r e l i a nc e by the pl a i nti f f, a nd ( 5) da m a ge t o the p la in tif f . S e e , e .g ., A v e r y v . C h r y s le rM o to r s C o rp ., 4 4 8 S .E .2 d 7 3 7 , 7 3 9 ( G a . C t. A pp. 1994) . T o pr ove ne gl i ge ntm i s r e pr e s e nt a ti on, apl a i nti f f m us te s t abl i s h: “ ( 1) th e d efen d an t ’ s n eg l i g en tsu p p l y o f fal se i n fo rm at i o n t o fo reseeab l e p erso n s, k n o w n o r u n k n o w n ; (2 ) su ch p erso n s’ reaso n ab l e rel i an ce u p o n th atfal se i nform ati on ; and (3) econom i c i nj ury proxi m at el y r es ul ti ng fr om such re l i ance . ” S e e H a r da w a y C o. v. P a r s ons , B r i nc ke r hof f , Q ua de & D ougl a s , I nc . , 479 S . E . 2d 7 2 7 , 7 2 9 (G a. 1 9 9 7 ). In ad v an ci n g ei th er cl ai m , th erefo re, a p l ai n ti ff m u st es t abl i sh thatthe defendantm ade fal se re pres ent ati on s, on w hi ch the pl ai nt i ff ju s tif iab ly r e lie d . i . C l ai m s A gai nstH ay es Ja m es F S A a r gue s tha ti tj us ti f i abl y r e l i e d on both H a y e s J a m e s ’ s B C L a nd the d escri p ti o n o f H ayes Jam es’ s A ccep t an ce T estco n t ai n ed i n th e R F P . T o est ab l i sh r e a s onabl e r e l i a nc e unde rG e or gi al a w a s t o e i the rf r a ud orne gl i ge nt m i s r e pr e s e nt a ti on, apl a i nt i f f m us ts how tha ti te xe r c i s e d due di l i ge nc e . W hi t e v. B D O S e i dm a n, L L P , 549 S . E . 2d 490, 494 ( G a . C t . A pp. 2001) ( ne gl i ge nt m i s r e pr e s e nt a ti on) ; B ogl e v. B r a gg, , 548 S . E . 2d 396, 400- 01 ( G a . C t . A pp. 2001) (f ra ud ). G eorgi a l aw pl ac es a s i gn i fi ca ntdu e di l i gence burden o n sop hi sti ca t edR o nM i l l et , F S A ’ s i n - h o u s ec o u n s e l , s t ate di nanaf f i d av i tth ath e“re l i e do n[ th eB C L] 4 to the extent that [ he] knew F SA require d its receipt prior to the bond closing .” That statement do e s n ot he lp F SA, ho wever. B e c aus eMil let di d n ot re ly onthec ontents of

theB CL , hec ou ld not have relied on any

alleg ed misrepresentations contained therein. 25 pa r ti e s e nga ge d i n a r m s - l e ngth tr a ns a c ti ons , s uc h a s the bond tr a ns a c ti on a ti s s ue h e r e . S e e , e .g ., W illia m G o ld b e r g & C o . v . C o h e n ,, 4 6 6 S .E .2 d 8 7 2 , 8 7 7 ( G a . C t. A pp . 19 95 ). A lth o u g h q u e s tio n s o f d u e d ilig e n c e a r e g e n e r a lly fo rth e ju r y to deci de, a c ou rtca n fi nd thata par ty has fa i l ed t o exerci se du e di l i gence as a m att er of l aw w here du e di l i gence fa i l ures ar e par ti cul ar l y e gregi ou s. S ee , e. g. , W ender & R ob er t s, Inc. v. W ender, 51 8 S . E . 2d 15 4, 15 9 (G a. C t . A pp . 19 99 ). B ec ause F S A fa i l ed t o p utforth any evi dence thatany of i t s e m pl oyee s had a c tu a l l y r e a d th e H a y e s J a me s BCL, w e a g r e e w i th th e d i s tr i c tc o u r tth a tFSA 4 c a nnotpr ove tha ti tj us ti f i abl y r e l i e d on a ny a l l e ge d m i s r e pr e s e nt a ti on orom i s s i on in th a t d o c u m e n t. L i kew i se , w e f

i nd thatF S A di d n otj usti fi abl y r el y on any al l eged m i s r e pr e s e nt a ti on c ont a i ne d i n the de s c r i pti on of the A c c e pt a nc e T e s tfound i n the R F P . F S A fa ile d to p e r fo r m a n y d u e d ilig e n c e w ith r e s p e c t to th e A c c e p ta n c e T e s t. F S A di d n otas k H ay es Ja m es or S t ephens any questi on s r egar di ng the A cc ept ance T e s t a n d d id n o t e v e n in q u ir e a s to w h e th e rth e F a c ility p a s s e d th e te s t. N o rd id F S A r e q u e s t ac o p y o f

th e r e p o r t p r e p a r e d in c o n n e c tio n w ith th e A c c e p ta n c e T e s t. A cc ordi ng l y, w e hol d as am att erof l aw thatF S A fa i l ed t o m ee ti t s due di l i genceThe district court ruled that F SA failed to introducecompetent evidencethat anyone at 5 F SA re ad theOS. Ho wever, in light o f F SA’ s a rgument that inreviewi ngdraft s o f thePOS , Millet effe ctively

reviewed the O S (which is dated a s of the closingdate) , we will assume f or purp os e s o f this app e al th at Mi llet re viewe d b oththePOS andtheOS. 26 b u rd en , b o th w i th resp ectt o th e B C L an d th e d escri p ti o n o f th e A ccep t an ce T est cont ai ned i n the R F P . B ec ause w e hol d thatF S A fa i l ed t o exerci se du e di l i gence w i th res pectt o ei ther of the abov e docum ent s, w e nee d n otconsi der w hether H ay es Ja m es ow ed F S A a dut y t o d i sc l ose or w hether H ay es Ja m es ’ s a l l eged m i sr epre se nt ati on s w er e a cti on abl e.

i i . C l a i m s A ga i ns tS t e phe ns F S A c l a i m s tha tS t e phe ns c om m i tt e d f r a ud a nd m a de ne gl i ge nt m i s r e pr e s e nt a ti ons unde rG e or gi al a w i n fourdoc um e nt s : the R F P , the P O S , the O S , a n d th e B C L . B e c a u s e w e h a v e a lr e a d y h e ld th a t F S A d id n o t ju s tif iab ly r e ly o n th e B C L , w e w ill a d d r e s s o n ly th e a lle g e d m is r e p r e s e n ta tio n s a n d o m is s io n s in th e rem ai n i n g th ree d o cu m en t s. 5 A s a n i ni ti al m att er , w e not e thatthe di stri ctcourtexcl ud ed the evi dence o f fe r e d b y F S A r e g a r d in g d u e d ilig e n c e s ta n d a r d s in th e b o n d in s u r a n c e in d u s tr y . A s F S A h as n o t ap p ea led th at ru li n g , w e d o n o t co n sid erth e tes ti m o n y o f F S A ’s ex p ert s reg ard i n g th o se st an d ard s. R egar dl es s of w hether the R F P , the P O S and the O S cont ai ned m at er i al m i s r e pr e s e nt a ti ons , F S A c a nnotpr e va i l on i t s f r a ud a nd ne gl i ge ntFSA argues that the que stion of whether a party justifiably

relied on alleg ed 6 misrepre sentations “should not be dec ided on summary judgment if there is any

evidenc e showingthe per son exercised duediligenc e.” Potts v. UAP-GA AGCHEM, Inc., 567 S.E.2d 316, 320 (Ga . Ct. App. 2002) (citations omitted; emphasis added) . However, Potts did not involve sophisticated parties eng ag ed in an a rms-length transac tion. See id. Georgia law imposes a much heavier duediligenc e burden on parties like F SA. See, e.g ., Wil liam Goldberg & Co. v. Cohen, 466 S.E.2d 872, 877 (Ga . Ct. App. 1995). 27 m i sr epre se nt ati on cl ai m s due t o i t s abj ec tfa i l ure t o sati sf y i t s due di l i gence b u r d e n . F S A fa ile d to p e r fo r m a n y d u e d ilig e n c e r e g a r d in g th e to n n a g e f ig u r e s in 6 th e R F P , th e P O S an d th e O S , i n stea d re lyin g en ti re ly o n S tep h en s’s re pres ent ati on s. F S A coul d h ave di sc ov er ed the di sc re panci es i n t on nage fi gu re s tha ti tnow c i t e s ha d i tr e que s t e d t onna ge r e por t s forthe m onths pr e c e di ng the B o n d C l o si n g . In ad d i ti o n , G i ffo rd co u l d h av e co n t act ed th e A u th o ri ty, T ra nsW as t e or the P ar ti ci pant s t o con fi rm the ac tual t on nage fi gu re s. F urtherm ore, S t e phe ns not e s tha ts om e of the i nfor m a ti on tha tF S A r e c e i ve d, i nc l udi ng q u o ta tio n s in a r tic le s a c c o m p a n y in g th e R F P to th e e f fe c t th a t th e F a c ility w o u ld r e q u ir e 1 ,2 5 0 to n s o f

w a s te p e rd a y to b r e a ke v e n , s h o u ld h a v e p r o m p te d F S A to i nve s ti ga t e f

ur the r . I n fa c t , F S A fa i l e d t o s e e k a ny i nfor m a ti on r e ga r di ng the F a c i l i ty ’ s pe r for m a nc e i n the m onths l e a di ng up t o the B ond C l os i ng. H a d i tdone so , i t co u ld h av e d isco v er ed th e a ll eg ed m isre p re se n tati o n s r elatin g to th e F ac il ity’s M O V reco v ery rat es an d i t s o p erat i o n al p ro b l em s. M os ti m por t a nt l y , pe r ha ps , F S A fa i l e d t o pe r for m a ny due di l i ge nc e r e l a ti ng t o T r a ns W a s t e . G i f

for d i de nt i f

i e d the P ar ti c i pa nt s ’ putorpa y c ontr a c t s a s the28

ul ti m a t e s e c ur i ty forthe bonds , buts he fa i l e d t o r e c ogni z e the i m por t a nc e of T ra nsW as t e’ s c on tri bu ti on t o the succ es s of the F ac i l i ty. T ra nsW as t e w as r e s p o n s ib le fo ras ig n if

ic a n t p o r tio n o f

th e F a c ility ’s r e v e n u e , y e t G if fo r d fa ile d to di sc uss the F ac i l i ty w i th T ra nsW as t e, i nq ui re i nt o T ra nsW as t e’ s f i nanci al w here w i thal (t o ass es s i t s abi l i ty t o m ee ti t s per form ance gu ar anty) or, for that m att er, rev i ew i t s co n tract . W e h o l d th atth i s d u e d i l i g en ce fai l u re w as so e gr e gi ous tha tF S A c oul d notha ve r e a s onabl y r e l i e d on a ny r e pr e s e nt a ti on r e l a ti ng t o T ra nsW as t e. W e the r e for e a gr e e w i th the di s tr i c tc our ttha tthe fa c t s r e ga r di ng F S A ’ s due di l i gence ef

fort s, t aken t og ether, fa i l ed t o cre at e atri abl e i ss ue of fa ctas t o w hether FSA j u s ti f

i ab l y r e l i e d o n St e p h e n s ’ s r e p r e s e n t a ti o n s . Be c a u s e w e h o l d th a tFSA di d notr e a s onabl y r e l y on a ny of the a l l e ge d m i s s t a t e m e nt s orom i s s i ons m a de by S t e p h e n s , we n e e d n o tc o n s i d e rwh e th e r , a n d t o wh a te x t e n t , S t e p h e n s o we d F S A a du ty of di sc l osure or w hether i t s a l l eged m i sr epre se nt ati on s w er e a cti on abl e. I I I . C on c l u s i on F or the foregoi ng re as on s, w e A F F IR M the di stri ctcourt ’ s gra ntof sum m ar y ju d g m en t o n F S A ’s state law claim s, b u t w e R E V E R S E th e d ism issa l o f F S A ’s fe dera l se curi ti es cl ai m . W e R E M A N D thi s c as e t o the di stri ctcourtfor f urther pr oc e e di ngs c ons i s t e ntw i th thi s opi ni on.