Opinion ID: 77735
Heading Depth: 2
Heading Rank: 2

Heading: Proceedings on Limited Remand

Text: The district judge conducted a status conference and requested that the parties provide him with a joint stipulation of the time that they would need for the limited discovery required to answer our inquiry-notice questions. The parties stipulated that they would need ninety days to conduct limited discovery necessary to answer our questions and that this limited discovery would consist of an exchange of document requests and Tello's deposition. Thereafter, the district judge entered an order scheduling limited discovery and briefs on the inquiry-notice issues to be addressed on limited remand to be followed by an evidentiary hearing and oral argument. In the brief for the class with accompanying exhibits on remand, Tello's position is that there was no inquiry notice of Dean Witter's far-ranging scheme regarding e-Net stock until it was exposed and delineated in the SEC Order on October 1, 2002. He asserts that the class complaint was filed promptly within six weeks after the SEC Order issued. In contrast, Dean Witter's view, supported by its brief and exhibits, is that the precipitous drop in e-Net stock, combined with numerous articles in nationally and regionally distributed publications, discussing the abrupt decline in the price of e-Net stock, put the putative class on inquiry notice of the allegations in the complaint no later than August 14, 2000, the date that the last such nationally significant article was published. Consequently, the class was on notice well before the new SOA statute of limitations became effective on July 30, 2002, the former statute of limitations controls, and this case was time-barred under the prior, three-year repose statute. As we explain hereinafter, neither side is correct in stating the cause of inquiry notice from which to calculate the time required to file the class-action complaint. The evidentiary hearing purportedly sought to resolve the two questions that we had posed to the district judge on limited remand. Accepting the time period for the alleged securities fraud conduct by Dean Witter as stated in the complaint, January 1, 1998, through August 19, 1998, the parties agree that the alleged fraud ended on August 19, 1998. Dean Witter presented evidence that three events established inquiry notice for the plaintiff class. First was the 80 percent drop in e-Net stock that occurred from August 18, 1998, to September 11, 1998, during which time e-Net's CEO was issuing public statements saying nothing ha[d] changed about the company. Second Supp. R. at 17. Tello purchased 1,500 shares of e-Net stock on July 13, 1998, at $17 1/16 per share, and he purchased 1,000 shares of e-Net stock on July 15, 1998, at the same price. Tello Dep. at 42-44. As of July 1998, he had invested over $40,000 in e-Net stock, a substantial investment that Tello testified caused him to check the price regularly. Id. at 44. Second was the Washington Post article, A `Doonesbury' Imitation That's No Laughing Matter, which was published on September 14, 1998. Tello testified that [t]his is the only article that I ever read about e-Net. Id. at 132. In conjunction with the dramatic drop in the price of e-Net stock, he asserted that this Washington Post article made me think that the stock price took a nose dive. I read this, and in my opinion, the whole world had read it and were running to sell their e-Net. Id. at 133. Recognizing that the signs of the collapse of e-Net stock were on the Internet from numerous postings and articles following the drastic drop in e-Net stock value, the Washington Post article explains that, while e-Net revenue rose 32 percent to $723,000, expenses rose 300 percent to $4,200,000. Only in cyberspace and satiric cartoons did anyone argue that a start-up company could be worth 200 times its annual revenue. Jerry Knight, A `Doonesbury' Imitation That's No Laughing Matter, The Washington Post, Sept. 14, 1998. The company never made a profit. The price of e-Net stock plummeted from a high of $19 a share to $2.78 and 1/8 a share, which caused 85 percent of the investment of e-Net shareholders to evaporate and made e-Net a repetitive source of commentary on Internet investment bulletin boards. Such commentary, noted in the Washington Post article, included TheStreet.com, [2] which had warned that, with the stock value down to $9, E-Net stock might tank when those freshly registered shares were unloaded. Id. Since e-Net stock was sold privately and not registered with the Securities and Exchange Commission, it could not be traded and did not dilute the holdings of current investors. Id. But on Aug. 25 E-Net disclosed in filings available on the Internet that it had registered those shares and two other batches, dumping an additional 1.125 million shares on the market. . . . . In fact, according to sources familiar with trading in the stock report, investors who held the newly issued stock already had cashed in their investment before the shares were even registered, when the stock was still trading in the high teens. Selling unregistered stock is illegal, but what some investors are believed to have done was to get out in advance by short-selling  that is, borrowing stock from someone else and then selling it. Usually, short-sellers cover their positions and repay the stock loans by purchasing the stock later at a lower price. But in this case, they simply used the newly registered shares to repay the stock loans. Sale of the new shares was the third strike for E-Net stockholders, who already had been whacked by the overall stock market decline and the severe tech stock correction. Id. (emphasis added). Tello admitted that it would not be unreasonable for investors with considerable shares of e-Net stock to ascertain the meaning of a short squeeze through various articles and Internet postings referencing this term. [3] Id. at 146. While he did not consult any Internet articles or postings, Tello testified that he did not think it would be unreasonable after reading the Washington Post article for interested investors to locate articles on the Internet regarding e-Net. Id. at 136. The Washington Post article on e-Net stock was referred to Tello by his stepfather, E. Paul Roberts, whom Tello succeeded as class representative and who told Tello: You should read that article. You need to read that article. Id. at 39. After reading the article, Tello testified as to his reaction: It was not good about the company. It talked about how the company's valuation was  it was way overhauled and how they weren't making any money. It just wasn't a very good article. Id. Importantly, Tello testified that the Washington Post article alerted him, as well as everybody else, of the catastrophic problems with e-Net stock and Dean Witter's involvement: Q. Is it also your understanding of the complaint that one of the ways in which Dean Witter and its employees allegedly manipulated the stock price of e-Net was by creating and promoting a plan to withhold from the short sellers a certain amount of stock to affect a short squeeze? Is that your understanding of the complaint? . . . . A. Yes. Q. And is it your understanding that the short squeeze somehow manipulated the price of the e-Net stock? A. Yes. Q. And do you have any evidence to believe that there was a short squeeze put in place with respect to e-Net? A. That's what the SEC order detailed. Q. Have you seen anything else at any time that referenced a short squeeze in connection with e-Net? A. No. I read the Washington Post article in September of . . . 1998. And that was the only article that I read about the company until I then was presented with the case and the SEC order in 2003. And it was my understanding that it was due to that one Washington Post article that the whole stock just plummeted. Q. What did you base that understanding on? Is that something you came to on your own conclusion or something that someone told you? A. No, something that I came to on my own, you know, justification. My stepfather told me about the article, I read it, and it just seemed like everybody else had read it and had sold their shares because the article scared them so much. And the dot-com industry was just going gangbusters, and it was, I guess, right around that time that the bubble started bursting. . . . . Q. Would [a June 21, 2000, St. Petersburg Times article concerning a similar experience with e-Net stock to that of Tello] have caused you to do any further fact-finding to look into why e-Net fell as much as it did while you owned it? A. No. Because I had already formed my opinion that it was because of the Washington Post news article. Tello Dep. at 55-56, 99 (emphasis added). Waiting for the inevitable bounce, id. at 133, however, Tello did not sell his e-Net stock until April 1999 for less than $4 a share, id. at 131. The third source of inquiry notice proffered by Dean Witter is the article, Borrower, Beware, published in Fortune magazine on August 14, 2000. At the evidentiary hearing, counsel for Dean Witter explained that this article was important because it specifically discusses Dean Witter and Mark Rodgers as well as the allegations of unauthorized trading in e-Net stock, breach of fiduciary duty, and Dean Witter's settlement of the claim for $531,000. [4] Dean Witter's counsel specified the significance of the Fortune article this class action and as the third factor constituting inquiry notice: Why that reference to unauthorized trading is important is because, as alleged in the lawsuit here, unauthorized trading doesn't just hurt the person in whose account it supposedly took place. As the Plaintiff[ ]s allege here, unauthorized trading[,] especially in a thinly traded stock like e-Net[,] can be a tool that is used to create demand for a stock, and manipulate the price of the stock. So it is our position that these three events taken together, the dramatic decline in price [of e-Net stock], the Washington Post article, and the Fortune article, that is what established inquiry notice. That is what gave a reasonably objective investor enough notice to at least begin investigating the possibility that his rights ha[d] been infringed. Second Supp. R. at 19-20 (emphasis added). Significantly, Tello knew Edward Ratkovich, a longtime friend of Tello's stepfather, Roberts, the original plaintiff and class representative in this case. Ratkovich was the second largest stockholder of e-Net stock, and he asked Tello to replace his stepfather as the class representative in March 2003. The same counsel who represents Tello in this case represented Ratkovich in a complaint filed in May 1999 against Dean Witter and Mark Rodgers, the details of which are discussed in a May 16, 1999, article in the St. Petersburg Times. [5] Ratkovich and others, who pursued arbitration proceedings, had the same allegations of securities fraud against Dean Witter that Tello makes for the class in this case. These legal proceedings against Dean Witter plus the various articles not only in national publications, like the Washington Post and Fortune, but also in regional Florida newspapers, led Dean Witter's counsel to argue at the evidentiary hearing: [W]hether Mr. Tello chose to read all of these sources or not, I submit, is immaterial. Once you are on a reasonable duty of inquiry, you are charged with knowledge of these. If you don't look at them, they are going to be imputed to you. The reasonable investigation on that date also would have led an investor to no fewer than seven articles referencing the price decline, and no fewer than five articles referencing the short squeeze and misstatements designed to discourage people from selling. All of that is part of the Complaint. . . . [W]e believe the answer to the Eleventh Circuit's second question should be that the putative class upon a reasonably diligent investigation could have had access to sufficient information to file a suit no later than August 14, 2000. Second Supp. R. at 31 (emphasis added). In contrast, Tello's counsel maintained that the SEC order was the operative date of inquiry notice, the defining moment in history when a reasonable investor should have been on both inquiry notice, and had facts sufficient to bring a claim. Id. at 51. Following the evidentiary hearing, the district judge issued a five-page order, a copy of which is attached as the Appendix to this opinion. The judge states that, in compliance with his discovery order on our limited remand, the parties submitted memoranda accompanied by thirty-two exhibits comprising hundreds of pages of deposition, newspaper and magazine stories, business journal articles, online message-board postings, newspaper and magazine circulation data, annual corporate reports, and pertinent stock transactions  all of which the parties supplemented at the [evidentiary] hearing by two hours of vigorous oral argument. Neither party elected to present testimony at the hearing. 1 First Supp. R. 65 at 2 n. 1. With the substantial evidence produced on limited remand, the district judge failed to delineate in his order any process that he used to analyze when inquiry notice occurred for the class and when there was sufficient information to file the class-action complaint, the two questions that we remanded the case for him to answer. Instead, he conclusively stated: After affording the parties a full hearing on the inquiry notice question, the district court finds no such moment [when the plaintiff class was on inquiry notice of the alleged securities fraud by Dean Witter relative to e-Net stock]. Unsurprisingly, the plaintiffs' theory places inquiry notice on October 1, 2002, after the effective date of Sarbanes-Oxley (Doc. 60). Equally unsurprisingly, the defendants' theory places inquiry notice on or before August 14, 2000 (Doc. 58). (Of course, the statute of repose barred the plaintiffs' action on August 20, 2001, irrespective of inquiry notice). The parties' irreconcilable versions of the pertinent history present genuine issues of material fact resolvable only by a jury. Id. at 3-4 (footnote omitted)(emphasis added). Then, irrespective of inquiry notice, the judge proceeded to analyze the legal question before us on interlocutory appeal concerning whether the SOA revives time-barred cases. Id. at 4. Therefore, we must decide if the testimony and evidence produced by the parties on limited remand in the district court resolve the inquiry-notice issues that we needed answered before deciding the question presented to us on interlocutory appeal, which involves determining which statute of limitations governs in this case.