Opinion ID: 769627
Heading Depth: 3
Heading Rank: 1

Heading: Time-Bar

Text: 65 The Appellants challenge the District Court's finding that the claim against Andersen is time-barred. To be timely, Andersen's claim under section 10(b) and Rule 10b-5 must have been brought within one year after the discovery of the facts constituting the violation and within three years after such violation, 15 U.S.C. 78i(e). See Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 364 & n.9, 115 L. Ed. 2d 321, 111 S. Ct. 2773 (1991); Ceres Partners v. GEL Associates, 918 F.2d 349 (2d Cir. 1990). The 1-year period, by its terms, begins after discovery of the facts constituting the violation, making [equitable] tolling unnecessary. Lampf, 501 U.S. at 363. Discovery of facts for the purposes of this statute of limitations includes constructive or inquiry notice, as well as actual notice. Menowitz v. Brown, 991 F.2d 36, 41-42 (2d Cir. 1993); see Dodds v. Cigna Securities, Inc., 12 F.3d 346, 353 (2d Cir. 1993). 66 When a plaintiff seeks to add a new defendant in an existing action, the date of the filing of the motion to amend constitutes the date the action was commenced for statute of limitations purposes. Northwestern National Insurance Co. v. Alberts, 769 F. Supp. 498, 510 (S.D.N.Y. 1991) (citing Derdiarian v. Futterman Corp., 36 F.R.D. 192, 194 (S.D.N.Y. 1964)). The Appellants contend that they sought leave to amend the complaint to add Andersen as a defendant on January 22, 1999. See Brief for Appellants at 57. 67 The District Court, however, found that by December 12, 1997, the Appellants were already on notice . . . of all the key facts on which they ultimately based their claim against Defendant Andersen in the Second Amended Complaint, more than a year later. Herzog, 1999 WL 1072500, at . Since the Appellants obviously had actual notice of the facts they alleged in the Original Complaint, the Court reasoned, to the extent that Plaintiffs properly filed the original complaint against Defendant GT, Plaintiffs could have, based on the same information known to them at the time, brought an action against Defendant Andersen. Id. 68 We disagree. Missing from the Original Complaint are two subsequently pled allegations important to the Appellants' claim against GT: (1) the PC Data reports on GT's sales, and (2) the allegation that most of GT's sales of a given software product were realized during the first year of that product's commercial release. The Appellants argue that they could not sufficiently plead Andersen's scienter until they uncovered these alleged facts in December 1998, because an auditor has more limited access to information than a company has, and because Andersen reviewed GT's finances only annually, not quarterly. Without these alleged facts, we would not have found that the Appellants alleged sufficient facts to plead GT's scienter, let alone Andersen's scienter. Therefore, the facts in the Original Complaint could not have constituted actual notice of Andersen's alleged fraud. 69 However, we must consider whether the Appellants' claim against Andersen is time-barred because they had inquiry notice of Andersen's fraud over a year before they sought to name Andersen as a defendant. In Dodds, we explained, When the circumstances would suggest to an investor of ordinary intelligence the probability that she has been defrauded, a duty of inquiry arises, and knowledge will be imputed to the investor who does not make such an inquiry. 12 F.3d at 350. Although the facts alleged in the Original Complaint did not put the Appellants on actual notice as to the facts constituting Andersen's alleged fraud, they certainly obliged the Appellants to inquire into Andersen's role in the accounting improprieties that the Appellants began to suspect in December 1997. 70 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. The Appellants argue that because they actually inquired further after December 1997, we cannot deem them to have discovered Andersen's fraud until December 1998, when their further investigation uncovered facts of Andersen's scienter, such as the PC Data reports on GT's sales. The Appellants primarily rely on case law from the Seventh Circuit that inquiry notice does not exist unless and until the investor is able, with the exercise of reasonable diligence (whether or not reasonably exercised), to ascertain the information to file suit, Marks v. CDW Computer Centers, Inc., 122 F.3d 363, 368 (7th Cir. 1997). 71 In a variation on this standard, the Tenth Circuit has held that inquiry notice triggers an investor's duty to exercise reasonable diligence, but the limitations period does not begin to run until the investor, in the exercise of reasonable diligence, should have discovered the facts underlying the alleged fraud. Sterlin v. Biomune Systems, 154 F.3d 1191, 1201 (10th Cir. 1998); see also Howard v. Haddad, 962 F.2d 328, 330 (4th Cir. 1992) (The one year discovery limitations period thus began running either when [plaintiff] had notice of these facts or when, exercising reasonable diligence, he would have discovered them.); cf. Berry v. Valence Technology, Inc., 175 F.3d 699, 705 (9th Cir. 1999) (If we were to adopt inquiry notice, we would agree with the Tenth Circuit's formulation of the standard [in Sterlin].). The Tenth Circuit reasoned that the applicable statute of limitations should not precipitate groundless or premature suits by requiring plaintiffs to file suit before they can discover with the exercise of reasonable diligence the necessary facts to support their claims. Sterlin, 154 F.3d at 1202. 72 Our precedent points in this direction. In discussing Ceres, our precursor to Lampf, we stated that Ceres announced a uniform limitations period of the earlier of one year from the date the fraud was or reasonably should have been discovered or three years from the date of the transaction. Henley v. Slone, 961 F.2d 23, 24 (2d Cir. 1992) (emphasis added). In Dodds, we explained, A plaintiff in a federal securities case will be deemed to have discovered fraud for the purposes of triggering the statute of limitations when a reasonable investor of ordinary intelligence would have discovered the existence of the fraud. 12 F.3d at 350 (emphasis added). 73 In accordance with Sterlin and our own precedent, we conclude that whether the Appellants' claim against Andersen is time-barred turns on when, after obtaining inquiry notice in December 1997, the Appellants, in the exercise of reasonable diligence, should have discovered the facts underlying the alleged fraud by Andersen. 1 Andersen faults the Appellants for taking a year to obtain the PC Data sales reports, arguing that the information in those reports was publicly available. Indeed, the Appellants alleged in the Complaint that PC Data publishes a comprehensive, monthly report that tracks the sales of video game hardware and software of top retailers in the United States. The Appellants counter that the PC Data report on which they rely contains information that was customized for them, costly to obtain, and not readily accessible to the public. Brief for Appellants at 56 n.27. 74 Because we are, on a motion to dismiss, limited to the facts contained in, or incorporated into, the complaint, we cannot rule as a matter of law that the Appellants had constructive notice of the sales figures in the PC Data Report before December 1998. See Dodds, 12 F.3d at 352 n.3. For the same reason, we cannot determine, as a matter of law, the point in time after December 1997 that the Appellants, in the exercise of reasonable diligence, should have discovered the facts underlying their fraud claim against Andersen. Therefore, if the claim against Andersen otherwise survives this motion to dismiss, we would remand this issue to the District Court for appropriate fact-finding.