Opinion ID: 160012
Heading Depth: 3
Heading Rank: 3

Heading: Reliance on the Regulatory Process

Text: 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 Defendants also argue that, as an aftermarket purchaser, Mr. Joseph is not 5 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. This language raises the question of whether this presumption of reliance 6 can apply to someone who purchased in the aftermarket. Because we decline to recognize the presumption, we need not explore its contours. -24- 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 , 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 -25- 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 -26- 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. 7 Having 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- 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 9 Mr. 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- 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 -29- 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 -30- 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 -31- 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 -32- 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.