Opinion ID: 485239
Heading Depth: 1
Heading Rank: 2

Heading: Statute of Limitations on Section 12(2) of the Securities Act of 1933

Text: 15 Appellants contend that appellee's misrepresentations and omissions violated section 12(2) of the Securities Act of 1933, 15 U.S.C. Sec. 77l (2). Section 13 of the 1933 Act provides a clear statute of limitations for section 12(2): within one year after the discovery of the untrue statement or omission, or after such discovery should have been made by the exercise of reasonable diligence. 15 U.S.C. Sec. 77m. If appellants are to escape the limitation on this action, they must show that the statute was tolled between the sale of the partnership units in December 1979 and at least December 28, 1980, one year before the suit was filed. 16 Fraudulent concealment tolls the statute of limitations 17 where the party injured by the fraud remains in ignorance of it without any fault or want of diligence or care on his part ... 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. 18 Bailey v. Glover, 88 U.S. (21 Wall.) 342, 348, 22 L.Ed. 636 (1875) (footnote omitted). The statute will be tolled even without affirmative acts on the part of the defendant unless the plaintiff, through reasonable diligence, discovered or should have discovered the fraud. Cook v. Avien, Inc., 573 F.2d 685, 695 (1st Cir.1978). Appellants claim that appellee's fraudulent concealment so tolled the statute, in that appellants could not have discovered the fraud because of appellee's continuing fraudulent misrepresentations and omissions. 19 Appellants need not, however, have fully discovered the nature and extent of the fraud before they were on notice that something may have been amiss. Inquiry notice is triggered by evidence of the possibility of fraud, not full exposition of the scam itself. Sleeper v. Kidder, Peabody & Co., 480 F.Supp. 1264, 1267 (D.Mass.1979), aff'd, 627 F.2d 1088 (1st Cir.1980); see also Cook, 573 F.2d at 696; Klein v. Bower, 421 F.2d 338, 343 (2d Cir.1970). This circuit has characterized the facts that trigger inquiry notice as sufficient storm warnings to alert a reasonable person to the possibility that there were either misleading statements or significant omissions involved in the sale. Cook, 573 F.2d at 697. 20 We are faced here with the great glowering clouds of the offering memorandum and the quite different forecast of Sinclair. For example, the offering memorandum, after warning that only the general partner is authorized to give any information concerning the partnership, went on to note that the operation would not be profitable at the prevailing price of coal. Sinclair, not a general partner, apparently announced the opposite. A reasonable investor would have at least enquired as to this glaring difference but instead appellants, according to their own version, relied on the more favorable assessment. A misleading statement or significant omission, however, is the most logical explanation for the disparity between the written representations of the prospectus and the oral representations of Sinclair. Appellants were, therefore, on inquiry notice from the time they received the prospectus and spoke with Sinclair prior to the December 1979 closing. 21 The notice appellants were on triggered the duty to exercise reasonable diligence. Cook, 573 F.2d at 696. The exercise of reasonable diligence is determined by examining the nature of the misleading statements alleged, the opportunity to discover the misleading nature of the statements, and the subsequent actions of the parties. Id. at 696-97. 22 Appellants allege that the single most misleading statement was the assertion that the partnership intended to mine and sell coal, and that nothing in the difference between the offering memorandum and Sinclair's opposite representations pointed to the possibility that the partnership's intentions were not as they seemed. While this was quintessentially the fraud, this single, concise statement of fraud glosses over the mechanisms of fraud: duping and beguiling the victim through reassurances and dissembling. This was accomplished here not by the bald assertion that the partnership intended to mine and sell coal when it did not, but rather by saying that this was a safe investment, that the partnership was ready to start producing coal, that this venture would be profitable even at the prevailing price of coal. It was these words that fooled, if indeed they did fool, the appellants into putting cash on the barrelhead. 23 The opportunity to discover the misleading nature of the statements could not have presented itself more readily than it did. For each oral representation that Sinclair made and upon which appellants claim they relied, there was a direct refutation by the plain language of the offering memorandum. Both Sinclair's statements and the offering memorandum's assertions could not be true at the same time. Logically, one statement or the other must have been false. Any attempt to resolve these contradictions should have uncovered the fraud or, at a minimum, dissuaded appellants from this folly. The appellants not only had, but were handed with the offering memorandum, ample opportunity to discover that there were misleading statements or omissions being made. 24 The subsequent actions of the parties cannot help appellants' case. Instead of resolving the contradictions, the appellants merely chose which sets of statements they wished to believe and acted upon those beliefs. That appellee may have continued to perpetrate the fraud does not negate the fact that it was appellants' conduct, in accepting the fraudulent representations and omissions as true, that allowed the fraud. Normally, the exercise of reasonable diligence would be a question of fact and not amenable to summary disposition. Cf. Cook, 573 F.2d at 697 & n. 27 (question of reasonable diligence factually based but gives rise to mixed question of law and fact). Here, however, it can be said that as a matter of law, the exercise of reasonable diligence would require more of appellants than merely viewing two sets of statements, one of which logically cannot be true, and chosing one of those sets. We believe no reasonable fact finder could determine that appellants exercised reasonable diligence. The district court was correct in ruling that appellants did not exercise reasonable diligence. 25 Having been placed on inquiry notice but not having exercised reasonable diligence in investigating the fraud, appellants cannot now claim that the doctrine of fraudulent concealment tolled the section 13 statute of limitations. Appellants were placed on inquiry notice at the time they had the opportunity to examine the offering memorandum in light of Sinclair's representations, i.e., in December 1979. In order to file their claim within the one-year statute of limitations, appellants would have had to start this suit in December 1980. The action was not commenced until December 1981 and is therefore barred. 26