Opinion ID: 618229
Heading Depth: 3
Heading Rank: 1

Heading: Limitations Period on Securities Claims

Text: [1] Federal securities fraud claims “may be brought not later than the earlier of (1) 2 years after the discovery of the STRATEGIC DIVERSITY v. ALCHEMIX CORP. 20625 facts constituting the violation; or (2) 5 years after such violation.” 28 U.S.C. § 1658. With regard to the state claims, the relevant provision of Arizona law provides that “no civil action shall be brought . . . unless brought within two years after discovery of the fraudulent practice on which the liability is based, or after the discovery should have been made by the exercise of reasonable diligence.” Ariz. Rev. Stat. § 442004(B). [2] The transaction that forms the basis of the complaint occurred on July 8, 2002. Weiss claims that he did not actually discover the facts underlying his cause of action until December 2005, when he spoke with Horton, who told him that the Alchemix Board had quit and that the sizable Western investment never materialized. With respect to the alleged omission regarding the Glenn litigation, Weiss claims that it was not until “years after” his tenure on the Alchemix Board that he learned that Horton was a defendant in a state fraud suit. Weiss filed his complaint on May 7, 2007. The parties agree that the suit was filed within the five-year limitation. However, they disagree as to whether Weiss should have known of the claims more than two years prior to filing his complaint. If the facts conclusively demonstrate that Weiss should have discovered the facts of his claim prior to May 7, 2005, the claims are time-barred. [3] In Merck & Co., Inc. v. Reynolds, the Court held that “ ‘discovery’ as used in [28 U.S.C. § 1658] encompasses not only those facts the plaintiff actually knew, but also those facts a reasonably diligent plaintiff would have known.” 130 S.Ct. 1784, 1796 (2010). However, the “ ‘discovery’ of facts that put a plaintiff on ‘inquiry notice’ does not automatically begin the running of the limitations period.” Id. at 1798. “[T]erms such as ‘inquiry notice’ and ‘storm warnings’ may be useful to the extent that they identify a time when the facts would have prompted a reasonably diligent plaintiff to begin investigating.” Id. (emphasis added). The Court rejected Merck’s argument that the limitations period should run when 20626 STRATEGIC DIVERSITY v. ALCHEMIX CORP. the plaintiff fails to exercise diligence and undertake an investigation once on inquiry notice. Id. at 1797-98. The Court held that the ultimate burden is on the defendant to demonstrate that a reasonably diligent plaintiff would have discovered the facts constituting the violation. See id. at 1799. Here, operating without the benefit of the Supreme Court’s ruling in Merck & Co., the district court found that the Western Memo put Weiss on “inquiry notice,” and it marked the time of the commencement of the statute of limitations at the time of inquiry notice, i.e., June 2002. Accordingly, the district court found Weiss’s federal and state securities claims time-barred. [4] However, under Merck & Co., Horton has not met his burden of showing that the claims are time barred. Even assuming that Weiss was on inquiry notice in 2002, Horton does not demonstrate how a reasonably diligent plaintiff from that point forward would have discovered the violations. The limitations period does not begin to run until discovery, “irrespective of whether the actual plaintiff undertook a reasonably diligent investigation.” Id. at 1798. [5] Because the district court did not have the benefit of recent Supreme Court authority, we vacate the ruling on these grounds and remand. See Betz v. Trainer Wortham & Co., Inc., 610 F.3d 1169, 1171 (9th Cir. 2010) (noting the prudence of remand in light of recent Supreme Court authority).