Source: https://m.openjurist.org/410/f3d/1275/tello-v-dean-witter-reynolds-inc-dw
Timestamp: 2019-12-13 09:14:27
Document Index: 23061638

Matched Legal Cases: ['§ 78', '§ 1658', '§ 1658', '§ 1658', '§ 1658', '§ 1658', '§ 1658', '§ 1658', '§ 78', '§ 1658']

410 F. 3d 1275 - Tello v. Dean Witter Reynolds Inc Dw
410 F3d 1275 Tello v. Dean Witter Reynolds Inc Dw
410 F.3d 1275
Mark TELLO, on behalf of himself and all others similarly situated, Plaintiff-Appellee,
DEAN WITTER REYNOLDS, INC., n.k.a. Morgan Stanley DW, Inc., Paul Grande, Defendants-Appellants,
Mark Rodgers, Defendant.
There is no dispute that this class action was filed on November 15, 2002, after the effective date of the SOA. What is in dispute is whether the class was sufficiently on inquiry notice before the effective date of the SOA to have been governed by the former, one-year/three-year statutory scheme for filing a securities fraud action, such that this securities class-action is time-barred. See 15 U.S.C. § 78i(e). In our circuit, discovery of facts evidencing securities misconduct "`occurs when a potential plaintiff has inquiry or actual notice of a violation.'" Theoharous, 256 F.3d at 1228 (quoting Kauthar SDN BHD v. Sternberg, 149 F.3d 659, 670 (7th Cir.1998)). "`Inquiry notice is "the term used for knowledge of facts that would lead a reasonable person to begin investigating the possibility that his legal rights had been infringed."'" Id. "`[F]ull exposition of the scam'" is not necessary; "`[i]nquiry notice is triggered by evidence of the possibility of fraud.'" Id. (quoting Sterlin v. Biomune Sys., 154 F.3d 1191, 1203 (10th Cir.1998)); Franze v. Equitable Assurance, 296 F.3d 1250, 1254 (11th Cir.2002).
Significantly, inquiry notice is tantamount to actual notice because "`the bar of the statute does not begin to run until the fraud is discovered, though there be no special circumstances or efforts on the part of the party committing the fraud to conceal it from the knowledge of the other party.'" Lampf, 501 U.S. at 363, 111 S.Ct. at 2782 (quoting Bailey v. Glover, 21 Wall. 342, 348, 22 L.Ed. 636 (1875)). An "objective reasonable person standard" is applied for this determination. Franze, 296 F.3d at 1254. "`Whether a plaintiff had sufficient facts to place him on inquiry notice of a claim for securities fraud ... is a question of fact, and as such is often inappropriate for resolution on a motion to dismiss under Rule 12(b)(6).'" La Grasta v. First Union Secs., Inc., 358 F.3d 840, 848 (11th Cir.2004) (quoting Marks v. CDW Computer Cntrs., Inc., 122 F.3d 363, 367 (7th Cir.1997)).
Circumstances that create a duty of inquiry frequently are referred to as "storm warnings." Levitt v. Bear Stearns & Co., 340 F.3d 94, 101 (2d Cir.2003). Consequently, an investor who receives storm warnings and does not investigate whether a securities fraud has occurred will have this knowledge imputed to him. Id. "[W]hether the securities fraud claim of a plaintiff who receives `storm warnings' is time barred `turns on when, after obtaining inquiry notice,' the plaintiff `in the exercise of reasonable diligence, should have discovered the facts underlying the [defendant's] alleged fraud." Id. (citation omitted) (second alteration in original); see Morton's Market, Inc. v. Gustafson's Dairy, Inc., 198 F.3d 823, 835 (11th Cir.1999) (acknowledging same reasonable diligence standard regarding a plaintiff's duty to investigate as to the possibility of fraud pursuant to receipt of "storm warnings" in an antitrust context), amended on other grounds, 211 F.3d 1224 (11th Cir.2000) (per curiam).
In turn, inquiry notice triggers reasonable diligence in investigating the fraud for which notice has been received in order to obtain sufficient information to file suit. See Rothman v. Gregor, 220 F.3d 81, 97 (2d Cir.2000) ("We must further determine, however, when knowledge of the facts constituting the violation of section 10(b) and Rule 10b-5 will be imputed if, after the duty to inquiry arises, the investor does indeed inquire."); Fujisawa Pharm. Co. v. Kapoor, 115 F.3d 1332, 1334 (7th Cir.1997) ("The one-year statute of limitations applicable to suits under Rule 10b-5 begins to run not when the fraud occurs, and not when the fraud is discovered, but when (often between the date of occurrence and the date of discovery of the fraud) the plaintiff learns, or should have learned through the exercise of ordinary diligence in the protection of one's legal rights, enough facts to enable him by such further investigation as the facts would induce in a reasonable person to sue within a year."). The determination of when inquiry notice occurred and how much investigation is reasonable for filing suit are necessarily fact-specific to each case. Accordingly, we have recognized that "questions of notice and due diligence are particularly suited for a jury's consideration." Kennedy v. Tallant, 710 F.2d 711, 716 (11th Cir.1983).
Allowing time for appropriate investigation for financially injured plaintiffs to obtain the evidence of securities fraud needed to file suit comports with the purpose of the Public Company Accounting Reform and Investor Protection Act of 2002, of which the SOA is a remedial part, because it was enacted by Congress in the wake of Enron to expand the period for unknowing victims of fraudulent conduct violative of the securities laws to seek recourse and remedies in federal court. The Senate committee reviewing this legislation, intended to deter fraudulent securities conduct,9 considered the testimony of Former SEC Chairman Arthur Levitt that "extending the statute of limitations is warranted because many securities frauds are inherently complex, and the law should not reward the perpetrator of a fraud, who successfully conceals its existence for more than three years." S.Rep. No. 107-146, at 17 (2002); 148 Cong. Rec. S7420 (daily ed. July 26, 2002) (statement of Sen. Leahy). In his section-by-section analysis of the extended statute of limitations before the Senate, Senator Leahy discussed and adopted Justice Kennedy's view that the Supreme Court's "`one and three'" year limitations established by Lampf made potential securities fraud cases "`all but a dead letter for injured investors who by no conceivable standard of fairness or practicality can be expected to file suit within three years after the violation occurred.'"10 148 Cong. Rec. S7420 (daily ed. July 26, 2002) (statement of Sen. Leahy) (quoting Lampf, 501 U.S. at 377, 111 S.Ct. at 2790 (Kennedy, J., dissenting)).
The Supreme Court has "repeatedly recognized that securities laws combating fraud should be construed `not technically and restrictively, but flexibly to effectuate [their] remedial purposes.'" Herman & MacLean v. Huddleston, 459 U.S. 375, 386-87, 103 S.Ct. 683, 689, 74 L.Ed.2d 548 (1983) (quoting SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 195, 84 S.Ct. 275, 284, 11 L.Ed.2d 237 (1963)) (alteration in original). The SOA, of which § 1658(b) is an integral part, was enacted to protect investors who unknowingly may be subjected to fraudulent securities schemes and to give them recourse and relief in the federal courts. Given this clear Congressional purpose of the SOA, we want to be cautious and certain before denying the plaintiff class an opportunity to have the facts revealed in discovery and, potentially, a decision following a trial. Importantly, this class action is not a re-filing of a previous suit under the formerly applicable statute of limitations, but the initial filing of this case following the issuance of the SEC Order to Dean Witter, the alleged first knowledge of the plaintiff class of Dean Witter's securities fraud concerning e-Net stock. With considerable financial losses at stake by the plaintiff class members, it seems illogical that they would have neglected to file suit if they had known of Dean Witter's securities fraud, particularly given the alacrity with which suit was filed upon issuance of the SEC Order.
Procedurally, this case presenting a statute-of-limitations challenge is before us on an interlocutory appeal from the denial of a motion to dismiss, limiting our consideration to the complaint and any exhibits thereto.12 Dismissal under Federal Rule of Civil Procedure 12(b)(6) "on statute of limitations grounds is appropriate only if it is `apparent from the face of the complaint' that the claim is time-barred."13 La Grasta, 358 F.3d at 845 (quoting Omar ex rel. Cannon v. Lindsey, 334 F.3d 1246, 1251 (11th Cir.2003) (per curiam)). Attached to the class-action complaint is the October 1, 2002, SEC Order censuring and fining Dean Witter and suspending or barring from association with any broker or dealer the specific Dean Witter brokers implicated. According to the statement of the complaint, this was the nationwide plaintiff class of lay persons' first knowledge of Dean Witter's fraudulent securities conduct that resulted in their significant financial losses from Dean Witter's manipulating the price of e-Net stock through a short squeeze.
Franze, an interlocutory appeal from a grant of class certification, concerned whether class certification appropriately was granted for all individuals who had purchased variable life insurance policies between September 30, 1991, and January 3, 1996, from Equitable. 296 F.3d at 1251. With the then applicable one-year limitations period from discovery, the issue before our court was when the class representatives were put on inquiry notice of the securities fraud to determine whether the complaint was filed timely. We determined that the class representatives "could have discovered the alleged misrepresentations simply by reading" the policy and prospectus provided to them by Equitable. Id. at 1254; see Dodds v. Cigna Sec., Inc., 12 F.3d 346, 352 (2d Cir.1993) (determining that plaintiff-appellant was "on inquiry notice when she made the investments in question" because of disclosures of the risks involved in the prospectuses, which made her complaint, filed "more than a year after her claim accrued" untimely). The class representatives even testified that, if they had read these documents, then they would not have purchased the variable life insurance policies. Franze, 296 F.3d at 1255. "Because inquiry notice is an objective standard, we conclude[d] that the prospectus and policy provided sufficient information to put a reasonable person on inquiry notice." Id.
While public announcement of corporate bankruptcy was sufficient for inquiry notice in Theoharous, the public, SEC Order in this case is stronger because it gave actual notice of the fraudulent securities conduct by Dean Witter with specific findings and imposing remedial sanctions. If this is the district court's determination on remand, then the complaint in this case was timely under the two-year, SOA statute of limitations from discovery of facts of the securities violation. Because the district court previously analyzed this case under retroactive application of the SOA, five-year limitations period from the securities fraud, § 1658(b)(2), there was no analysis in the order on appeal of the limitations period from discovery of the facts of the securities fraud, § 1658(b)(1), although this issue was briefed to the district court.
Regarding articles in local Florida newspapers, available solely online to non-local residents, or an online chat-room posting by an unidentified person, we want the district judge on remand for the development of facts to determine whether these sources of information could reasonably have reached the class members, who were geographically dispersed throughout the United States. See Great Rivers Coop. of Southeastern Iowa v. Farmland Indus., Inc., 120 F.3d 893, 897 (8th Cir.1997) ("[Defendant] would have us automatically impute to [plaintiff] constructive knowledge of any information available to the public, including all articles published on, and the public records available in, the [related] case, regardless of [plaintiff's] actual awareness. We cannot adopt this analysis .... A victim must be aware of some suspicious circumstances, some `storm warnings,' to trigger a duty to investigate."). Even if this were the case, the district judge on remand must determine if sufficient information was provided by these sources to cause the class members to realize that Dean Witter had committed securities fraud that negatively affected their investments to enable them to file a lawsuit, bearing in mind that many, if not most, of the class members are likely lay persons unknowing about the intricacies of the securities laws as to what constitutes securities fraud as opposed to simply losing money because of a market decline.16 A similar analysis would be required to determine whether the arbitration cases cited by Dean Witter provided sufficient inquiry notice for the class members.17
Dean Witter has not asserted that prospectuses, publicly filed SEC documents, company press releases, or account statements contained meaningful disclosures that would have provided notice to the class members of the alleged fraud sufficient for inquiry notice. "It is beyond dispute that the defendants have the burden of proof in establishing the elements of the affirmative defense of the statute of limitations." Smith v. Duff & Phelps, Inc., 5 F.3d 488, 492 n. 9 (11th Cir.1993). The applicable SOA statute of limitations does not commence until Roberts and the class members "discovered, or, in the exercise of reasonable diligence, should have discovered, the alleged fraud," and Dean Witter "bear[s] the burdens of production and persuasion on that question." Id.
Significantly, general skepticism expressed in a press article about corporate conduct is insufficient "to excite inquiry into the specific possibility of fraud." Berry v. Valence Tech., Inc., 175 F.3d 699, 705 (9th Cir.1999). Instead, "for a press article to put shareholders on inquiry notice, there must be some reasonable nexus between the allegations made in the article and the nature of the action subsequently brought." Id. (emphasis added). In addition to determination of what established inquiry notice and when that occurred, the district judge on remand must determine the point in time that Roberts, on behalf of the class members, had sufficient specific factual information of Dean Witter's violation of the securities laws to file the class-action complaint. If that did not occur until the October 1, 2002, SEC Order, then this securities fraud, class action was timely filed on November 15, 2002, under the applicable SOA statute of limitations, when the plaintiff class learned that their investment losses were the result of Dean Witter's fraudulent conduct rather than a downturn in the stock market.
Review of the facts stated in the class-action complaint, the statutory language, and applicable securities fraud cases indicates that this case could have been filed timely under the SOA statute of limitations. From the factual allegations of the complaint and the attached SEC Order, a reasonable inference is that the plaintiff class did not know the facts of the fraudulent conduct by Dean Witter that caused their losses relative to their e-Net stock sufficient to file their complaint until the SEC Order issued. If the district judge on remand determines that this is true, then the class-action complaint was filed timely within approximately a month and a half after this knowledge, and the case should proceed with discovery and, potentially, trial in district court. See Kennedy, 710 F.2d at 716 (recognizing in a securities fraud case involving statute of limitations that issues of notice and due diligence are the province of the jury); see also Marks, 122 F.3d at 367 ("Whether a plaintiff had sufficient facts to place him on inquiry notice of a claim for securities fraud ... is a question of fact, and as such is often inappropriate for resolution on a motion to dismiss under Rule 12(b)(6).").
Regarding the definiteness of a statute of repose, the Supreme Court recognized that the purpose of the limitations period "is clearly to serve as a cutoff" and held "that tolling principles do not apply."Lampf, 501 U.S. at 363, 111 S.Ct. at 2782.
Chase Secs. Corp. v. Donaldson, 325 U.S. 304, 314, 65 S.Ct. 1137, 1142, 89 L.Ed. 1628 (1945) (footnote omitted).
Section 1658(b) contains innate retroactive application, evidenced by the "commenced on or after the date of enactment" designation for filing suit. 28 U.S.C. § 1658(b) (Historical & Statutory Notes). Consequently, there is no need to progress toLandgraf's judicial presumption against retroactivity. Because of the explanatory notes, § 1658(b) is not silent as to retroactivity and, hence, there is no reason to utilize a judicial presumption against retroactivity, which actually overrides an explicit legislative statement to the contrary. Therefore, appellate cases involving statutory provisions in which Congress was silent on the temporal reach, such as Resolution Trust Corp. v. Artley, 28 F.3d 1099, 1102-03 n. 6 (11th Cir. 1994), are inapplicable. See also In re Apex Express Corp., 190 F.3d 624, 642-43 (4th Cir.1999); Million v. Frank, 47 F.3d 385, 390 (10th Cir.1994); Chenault v. United States Postal Serv., 37 F.3d 535, 537 (9th Cir.1994); Resolution Trust Corp. v. Seale, 13 F.3d 850, 853 (5th Cir.1994); Village of Bellwood v. Dwivedi, 895 F.2d 1521, 1527 (7th Cir. 1990).
First, we must expect that corporations present an honest portrait of the companies['] economic health and wellbeing. Corporate executives who cook[ ] the books are no different than used car salesmen who roll back the car odometers, both are engaged in a fraud. They must be held accountable for their actions and severely punished.
"When considering a motion to dismiss, all facts set forth in the plaintiff's complaint `are to be accepted as true and the court limits its consideration to the pleadings and exhibits attached thereto.'"Grossman v. Nationsbank, N.A., 225 F.3d 1228, 1231 (11th Cir.2000) (per curiam) (citation omitted). For review under Rule 12(b)(6), federal courts "`view the allegations of the complaint in the light most favorable to the plaintiff[s], consider the allegations of the complaint as true, and accept all reasonable inferences therefrom.'" La Grasta, 358 F.3d at 845 (quoting Omar ex rel. Cannon v. Lindsey, 334 F.3d 1246, 1247 (11th Cir.2003) (per curiam)) (alteration in original).
At the motion-to-dismiss stage, a complaint may be dismissed on the basis of a statute-of-limitations defense "only if it appears beyond a doubt that Plaintiffs can prove no set of facts that toll the statute."Knight v. E.F. Hutton & Co., 750 F.Supp. 1109, 1112 (M.D.Fla.1990); see Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957); Summer v. Land & Leisure, Inc., 664 F.2d 965, 969 (5th Cir. Unit B 1981).
The SOA statute of limitations regarding discovery of facts is misstated in this footnote as three rather than two years under § 1658(b)(1), but this is a difference without a distinction, given the filing date of the complaint following issuance of the SEC Order in this case. R1-31 at 5 n.6. This statement occurs in the district judge's discussion of retroactive application of the SOA, which was the analysis, complete with legislative history, used by the district judge to conclude "that Congress intended for the extended statute of limitations to apply retroactively."Id. at 8.
The filing date of this class action also fits the second part of the SOA statute of limitations: five years after the securities violation, because the violative conduct allegedly existed from January 1 through August 19, 1998. Plaintiffs, however, had no reason to file their class action until theyknew that they had been injured financially by Dean Witter's securities fraud.
For example, one of the local newspaper articles that Dean Witter gleaned from its Internet search, a May 16, 1999, article from theSt. Petersburg Times, South Pinellas Edition, merely states that "[t]he Florida Division of Securities said that it is investigating a complaint regarding Rodgers' activities." R1-17, Ex. 6 at 195. It further states: "The SEC said it can neither confirm nor deny the existence of an investigation." Id. This does not appear to be sufficient inquiry notification to enable the class representative to be able to file a complaint stating the specific fraudulent securities conduct by Dean Witter on behalf of the class members. See In re Physician Corp. of Am. Secs. Litig., 50 F.Supp.2d 1304, 1319 (S.D.Fla.1999) (concluding that defendant's press release and Form 10-Q filing were insufficient to provide inquiry notice to plaintiffs); Lilley v. Charren, 936 F.Supp. 708, 715 (N.D.Cal.1996) (deciding that a newspaper article and analysts' reports of "a decline in the price of ... stock, standing alone, is not evidence of fraud").
"While the ... press release and the subsequent filing of 19 related lawsuits may have created suspicious circumstances as to the Defendant's conduct, the Court cannot conclude as a matter of law that they provided inquiry notice of Defendant's reckless or intentional misconduct."Carley Capital Group v. Deloitte & Touche, L.L.P., 27 F.Supp.2d 1324, 1341 (N.D.Ga.1998). In Carley, 19 publicly filed lawsuits were insufficient for inquiry notice, yet Dean Witter contends that complaints and counterclaims filed in arbitration matters, which were not even on court dockets and thus publicly available, provided inquiry notice to Roberts and the class members. Moreover, on a motion to dismiss and "to show that the [former] limitations period applies," Dean Witter "improperly relies upon evidence not referenced in the pleadings," which more appropriately should be considered on a summary-judgment motion. Id. Indeed, the district judge on remand may decide that he is unable to determine the date that we seek as to when Roberts had sufficient notice of Dean Witter's conduct with respect to e-Net stock to file a complaint on behalf of the class members without full discovery.
Two other circuits have used a similar analysis to decide whether articles in magazines of national distribution provided sufficient inquiry notice. InSterlin, the Tenth Circuit concluded that a Barron's article that "questioned whether Biomune's purpose was to create a viable product, Immuno-C, or whether it was in business simply to `sell shares,'" plus Biomune's representation in its SEC filings that a particular investor owned no stock when he "actually owned more than 35% of Biomune's stock through a `byzantine array of entities,'" evidenced a fraudulent representation to the SEC to obtain Biomune's NASDAQ listing, which was sufficient information of fraud to put plaintiffs in a securities fraud class on inquiry notice. 154 F.3d at 1204. In comparing the Barron's article in Sterlin with a Forbes article concerning Valence Technology, Inc., the Ninth Circuit came to the opposite conclusion in considering whether the Forbes article provided inquiry notice in a securities fraud, class action by stock holders: "While the article noted the checkered past of Carl Berg, one of Valence's principal investors, it did not state any facts from which it could be inferred that Valence was trying to mislead market regulators or defraud investors by hiding Berg's involvement in the company." Berry v. Valence Tech., Inc., 175 F.3d 699, 705 n. 8 (9th Cir.1999). That court held that "the Forbes article was insufficient to induce a reasonable investor to investigate the possibility of fraud" and "that the district court erred in dismissing Plaintiffs' suit on statute of limitations grounds." Id. at 707.
We recognize that other circuits have decided that § 1658(b) cannot be applied retroactively to revive securities fraud cases, when the claims were time-barred under the former statute of limitationsSee, e.g., Foss v. Bear, Stearns & Co., 394 F.3d 540 (7th Cir.2005); In re Enterprise Mortgage Acceptance Co., 391 F.3d 401 (2d Cir.2004). On the undeveloped record in this case, however, it is premature for us to make that legal determination. Under the inquiry-notice law of our circuit, we first must know the point in time when inquiry notice was applicable on the facts of this case. Once the district court has provided us with that factfinding, we can proceed to make the legal determination of the applicable statute of limitations. If the district judge determines that the plaintiff class was on inquiry notice prior to the effective date of the SOA statute of limitations, then this case is time-barred under the formerly applicable statute of limitations, 15 U.S.C. § 78i(e). In contrast, if the district judge determines that the SEC Order constitutes inquiry notice, then this class action for securities fraud is viable under § 1658(b). At this juncture, we do not yet know which statute of limitations applies to this case, necessitating our remand so that the district judge can make the factual determinations that we have directed, that relate to the essential fact of when inquiry notice occurred.