Court Opinion

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Opinions of the United
2007 Decisions                                                                                                             States Court of Appeals
                                                                                                                              for the Third Circuit

6-18-2007

Debenedictis v. Merrill Lynch & Co
Precedential or Non-Precedential: Precedential

Docket No. 06-1867

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                             PRECEDENTIAL
     UNITED STATES COURT OF APPEALS
          FOR THE THIRD CIRCUIT
               ____________

                    No. 06-1867
                   ____________

         THOMAS J. DEBENEDICTIS,
       ON BEHALF OF HIMSELF AND
     ALL OTHERS SIMILARLY SITUATED,
                                 Appellant
                    v.

        MERRILL LYNCH & CO., INC.;
    MERRILL LYNCH, PIERCE, FENNER &
           SMITH, INCORPORATED;
       MERRILL LYNCH GROUP, INC.;
          FAM DISTRIBUTORS, INC.;
MERRILL LYNCH INVESTMENT MANAGERS, L.P.;
       FUND ASSET MANAGERS, L.P.;
         PRINCETON SERVICES, INC.
                ____________

   On Appeal from the United States District Court
          for the District of New Jersey
        D.C. Civil Action No. 04-cv-00404
           (Honorable Jose L. Linares)
                  ____________
                      Argued April 23, 2007

               Before: SCIRICA, Chief Judge,
           FUENTES, and ALARCÓN,* Circuit Judges.

                      (Filed: June 18, 2007)

JAMES R. MALONE, JR., ESQUIRE (Argued)
JOSEPH G. SAUDER, ESQUIRE
Chimicles & Tikellis LLP
361 West Lancaster Avenue
One Haverford Centre
Haverford, PA 19041
      Counsel for Appellant

LORI A. MARTIN, ESQUIRE (Argued)
SAMUEL J. LIEBERMAN, ESQUIRE
Wilmer Cutler Pickering Hale and Dorr LLP
399 Park Avenue
30th Floor
New York, NY 10022

MARC T.G. DWORSKY, ESQUIRE
Munger, Tolles & Olson
355 South Grand Avenue, 35th Floor

       *
        The Honorable Arthur L. Alarcón, Senior Judge of the United
States Court of Appeals for the Ninth Circuit, sitting by designation.

                                  2
Los Angeles, CA 90071

BRIAN F. AMERY, ESQUIRE
Bressler, Amery & Ross
325 Columbia Turnpike
Florham Park, NJ 07932

JEFFREY J. GREENBAUM, ESQUIRE
Sills, Cummis, Epstein & Gross
One Riverfront Plaza
Newark, NJ 07102
        Counsel for Appellees
                       ____________

                 OPINION OF THE COURT
                      ____________

ALARCÓN, Circuit Judge.

       Thomas DeBenedictis appeals from the order of the
District Court for the District of New Jersey dismissing, as time-
barred, his securities class action claims pursuant to Rule
12(b)(6) of the Federal Rules of Civil Procedure against Merrill
Lynch & Co., Inc.; Merrill Lynch, Pierce, Fenner & Smith, Inc.;
Merrill Lynch Group, Inc.; Fam Distributors, Inc.; Merrill Lynch
Investment Managers, L.P.; Fund Asset Management, L.P.; and
Princeton Services, Inc. (collectively “Merrill”).             Mr.
DeBenedictis’s central claim is that Merrill’s Fund Registration

                                3
Statements (“Registration Statements”), which are comprised of
the Merrill Lynch Global Growth Fund, Inc. Prospectus
(“prospectus”) and a separate Statement of Additional
Information (“SAI”), misled investors by failing to disclose that
Class B shares were never a rational choice of investment for
them and that Merrill brokers received larger commissions on
sales of such shares. Mr. DeBenedictis filed this action on
January 30, 2004.

        Mr. DeBenedictis argues that the District Court erred in
determining that the Registration Statements, certain news
articles, and NASD press releases constituted “storm warnings”
sufficient to trigger inquiry notice to Mr. DeBenedictis of his
claims prior to January 30, 2002. We will affirm the decision of
the District Court because we conclude that each of Mr.
DeBenedictis’s claims is time-barred.

                                I

                               A

       Mr. DeBenedictis filed this action on January 30, 2004.
He alleged in his complaint that he purchased $500,000 Class B
shares through his broker at Merrill in five funds between
February 1999 and August 1, 2001. Between January 30, 1999
and April 2003, Merrill offered four classes of mutual fund
shares: Classes A, B, C, and D (collectively, the “Merrill
Funds”).

       The prospectus described these shares as follows:

                               4
The fund offers four share classes, each with its
own sales charge and expense structure, allowing
you to invest in the way that best suits your needs.
Each share class represents an ownership interest
in the same investment portfolio. When you
choose your class of shares you should consider
the size of your investment and how long you plan
to hold your shares.        Your Merrill Lynch
Financial Consultant can help you determine
which share class is best suited to your personal
financial goals.

For example, if you select Class A or Class D
shares, you generally pay a sales charge at the
time of purchase. If you buy class D shares, you
also pay an ongoing account maintenance fee of
0.25%. You may be eligible for a sales charge
waiver.

If you select Class B or Class C shares, you will
invest the full amount of your purchase price, but
you will be subject to a distribution fee of 0.75%
and an account maintenance fee of 0.25%.
Because these fees are paid out of the Fund’s
assets on an ongoing basis, over time these fees
increase the cost of your investment and may cost
you more than paying an initial sales charge. In
addition, you may be subject to a deferred sales
charge when you sell Class B or Class C shares.

                         5
        The prospectus contained the following description of the
costs involved in purchasing Class B and Class C shares:

       If you select Class B or Class C shares, you do not
       pay an initial sales charge at the time of purchase.
       However, if you redeem your Class B shares
       within four years after purchase or your Class C
       shares within one year after purchase, you may be
       required to pay a deferred sales charge. You will
       also pay distribution fees of 0.75% and account
       maintenance fees of 0.25% each year under
       distribution plans that the Fund has adopted under
       Rule 12b-1. Because these fees are paid out of
       the Fund’s assets on an ongoing basis, over time
       these fees increase the cost of your investment
       and may cost you more than paying an initial sales
       charge. The Distributor uses the money that it
       receives from the deferred sales charges and the
       distribution fees to cover the costs of marketing,
       advertising and compensating the Merrill Lynch
       Financial Consultant or other securities dealer
       who assists you in purchasing Fund shares.

       The SAI also contained a discussion of the fees involved
in acquiring Class B and Class C shares:

       Investors choosing the deferred sales charge
       alternatives should consider Class B shares if they
       intend to hold their shares for an extended period

                                6
      of time and Class C shares if they are uncertain as
      to the length of time they intend to hold their
      assets in Select Pricing Funds.

      Because no initial sales charges are deducted at
      the time of the purchase, Class B and Class C
      shares provide the benefit of putting all of the
      investor’s dollars to work from the time the
      investment is made. The deferred sales charge
      alternatives may be particularly appealing to
      investors that do not qualify for the reduction in
      initial sales charges. Both Class B and Class C
      shares are subject to ongoing account
      maintenance fees and distribution fees; however,
      the ongoing account maintenance and distribution
      fees potentially may be offset to the extent any
      return is realized on the additional funds initially
      invested in Class B or Class C shares. In
      addition, Class B shares will be converted into
      Class D shares of the Fund after a conversion
      period of approximately eight years, and
      thereafter investors will be subject to lower
      ongoing fees.

       The SAI set forth the compensation payable to the
financial consultants as follows:

      Merrill Lynch compensates its Financial
      Consultants for selling Class B and Class C shares

                               7
      at the time of purchase from its own funds.
      Proceeds from the CDSC and the distribution fee
      are paid to the Distributor and are used in whole
      or in part by the Distributor to defray the expenses
      of dealers (including Merrill Lynch) related to
      providing distribution-related services to the Fund
      in connection with the sale of the Class B and
      Class C shares . . . . The combination of the
      CDSC and the ongoing distribution fee facilitates
      the ability of the Fund to sell the Class B and
      Class C shares without a sales charge being
      deducted at the time of purchase.                See
      “Distribution Plans” below. Imposition of the
      CDSC and the distribution fee on Class B and
      Class C shares is limited by the NASD asset-
      based sales charge rule. See “Limitations on the
      Payment of Deferred Sales Charges” below.

      The SAI contained the following information concerning
the compensation of Merrill’s sales personnel:

      Investors should understand that the purpose and
      function of the initial sales charges with respect to
      the Class A and Class D shares are the same as
      those of the CDSCs and distribution fees with
      respect to the Class B and Class C shares in that
      the sales charges and distribution fees applicable
      to each class provide for the financing of the
      distribution of the shares of the Fund. The

                               8
      distribution related revenues paid with respect to
      a class will not be used to finance the distribution
      expenditures of another class. Sales personnel
      may receive different compensation for selling
      different classes of shares.

      The prospectus contained a table setting forth the fees
and expenses for the different classes of shares:

      This table shows the different fees and expenses
      that you may pay if you buy and hold the different
      classes of shares of the Fund. Future expenses
      may be greater or less than those indicated below.

      Shareholder Fees (fees paid directly from your
      investment):

          Class A    Class B(a)    Class C    Class D

      Maximum Deferred Sales Charge (Load)
      (as a percentage of original purchase price or
      redemption proceeds, whichever is lower)

          None(c)    4.0%(b)       1.0%(b)    None(c)

      Redemption Fee

          None       None          None       None

      Maximum Account Fee

          None       None          None       None

                               9
Management Fee(d)

   0.75%       0.75%         0.75%      0.75%

Other Expenses (including transfer agency
fees)(f)

   0.23%       0.24%         0.24%      0.22%

(a) Class B shares automatically convert to Class
D shares about eight years after you buy them and
will no longer be subject to distribution fees.
(b) Some investors may qualify for reductions in
the sales charge (load).
(c) You may pay a deferred sales charge if you
purchase $1 million or more and you redeem
within one year.
(d) The Fund pays the Manager a fee at the annual
rate of 0.75% of the average daily net assets of the
Fund not exceeding $1.5 billion and 0.725% of
the average daily net assets in excess of $1.5
billion.    For the period October 31, 1997
(commencement of operations) to August 31,
1998, the Manager received a fee equal to 0.75%
of the Fund’s average daily net assets.
(e) The Fund calls the “Service Fee” an “Account
Maintenance Fee.” Account Maintenance Fee is
the term used in this Prospectus and all other
Fund materials. If you hold Class B or Class C
shares for a long time, it may cost you more in

                        10
distribution (12b-1) fees than the maximum sales
charge that you would have paid if you had
bought one of the other classes.
(f) The Fund pays the Transfer Agent $11.00 for
each Class A and Class D shareholder account
and $14.00 for each Class B and Class C
shareholder account and reimburses the Transfer
Agent’s out-of-pocket expenses. The Fund pays
a 0.10% fee for certain accounts that participate in
the Merrill Lynch Mutual Fund Advisor program.
The Fund also pays a 50.20 monthly closed
account charge, which is assessed upon all
accounts that close during the year. This fee
begins the month following the month the account
is closed and ends at the end of the calendar year.
For the period October 31, 1997 (commencement
of operations) to August 31, 1998, the Fund paid
the Transfer Agent fees totaling $1,426,209. The
Manager provides accounting services to the Fund
at its cost. For the period October 31, 1997
(commencement of operations) to August 31,
1998, the Fund reimbursed the Manager $161,450
for these services.
(g) In addition, Merrill Lynch may charge clients
a processing fee (currently $5.35) when a client
buys or sells shares.

The prospectus also contained the following chart

                        11
illustrating the cost of Class B and Class D shares for varying
periods of time:

       These examples are intended to help you compare
       the cost of investing in the Fund with the cost of
       investing in other mutual funds.

       These examples assume that you invest $10,000
       in the Fund for the time periods indicated, that
       your investment has a 5% return each year, that
       you pay the sales charges, if any, that apply to the
       particular class and that the Fund’s operating
       expenses remain the same. This assumption is not
       meant to indicate you will receive a 5% annual
       rate of return. Your annual return may be more or
       less than the 5% used in this example. Although
       your actual costs may be higher or lower, based
       on these assumptions your cost would be:

       EXPENSES IF YOU DID REDEEM YOUR
       SHARES:

                  1 Year    3 Years    5 Years     10 Years

       Class B    $602      $824       $1,073      $2,123*

       Class D    $643      $892       $1,160      $1,925

       EXPENSES IF YOU DID NOT REDEEM
       YOUR SHARES:

                               12
                   1 Year    3 Years     5 Years     10 Years

       Class B     $202      $624        $1,073        $2,123*

       Class D     $643      $892        $1,160      $1,925

       * Assumes conversion to Class D shares
       approximately eight years after purchase. See
       note (a) to the Fees and Expenses table above.

       The SAI set forth information regarding how the fee
structure for each class affects its long term desirability.

       Investors not qualifying for reduced initial sales
       charges who expect to maintain their investment
       for an extended period of time also may elect to
       purchase Class A or Class D shares, because over
       time the accumulated ongoing account
       maintenance and distribution fees on Class B or
       Class C shares may exceed the initial sales
       charges and, in the case of Class D shares, the
       account maintenance fee.

                                 B

       On January 30, 2004, Mr. DeBenedictis filed his initial
complaint individually and on behalf of class members similarly
situated. His theory of liability is two fold: First, he alleged that
Merrill made materially misleading statements in its Registration
Statements in order to induce him and members of the class to
purchase Class B shares that had higher expenses and lower

                                 13
yields than available alternative shares.         Second, Mr.
DeBenedictis alleged that Merrill failed to disclose that its
brokers had a conflict of interest in connection with the sale of
Class B shares because they received a higher rate of
compensation from the sale of Class B Shares than Class A or
Class D shares. Mr. DeBenedictis filed an amended complaint
on July 9, 2004.

                               C

        On November 19, 2004, Merrill filed a motion to dismiss
Mr. DeBenedictis’s amended class action complaint pursuant to
Rule 12(b)(6). Merrill argued that through the Registration
Statements, news articles, and National Association of Securities
Dealers (“NASD”) press releases, Mr. DeBenedictis was on
inquiry notice of the claims arising from the purchase of Class
B shares more than two years before this action was initially
filed. Merrill attached to its motion articles from USA Today
and Time Magazine that were not cited in the amended
complaint. The District Court took judicial notice of these
articles.

        The record before the trial court shows that USA Today
published an article on December 28, 1998, which reported that
“[b]rokers can get bigger commissions selling B shares for large
purchases -- even though the funds’ higher annual fees hurt the
investor’s returns in the long run.” The article further informed
its readers that “B shares also typically mean lower performance
in the long run.”

                               14
        On January 18, 1999, Time Magazine published an article
entitled “B Shares Get Bad Grades.” It warned investors that
“[i]f a broker tries to persuade you to buy class-B mutual-fund
shares instead of class A, make sure it’s in your best interest, not
just his. The sec [sic] is investigating whether certain brokers
favor B shares because of fatter commissions.” The article also
stated that Class B shares “normally carry high early-redemption
and annual fees and generate lower long-term returns than class-
A shares.”

        On July 17, 2001, the Wall Street Journal published an
article which stated: “‘In most cases, . . . it’s better for the client
economically,’ to buy A-class shares when investing more than
$100,000[.]”

       On April 18, 2001, the NASD published a news release
announcing that it had censured and fined Stifel, Nicolaus & Co.
for making unsuitable recommendations in selling B shares to
customers in amounts over $100,000 when it would have been
cost effective for these customers to purchase Class A shares.

        On October 18, 2002, the NASD issued a news release in
which it reported that it had charged the owner of Park South
Securities, LLC with multiple violations of securities laws by
purchasing large volumes of Class B mutual fund shares. It
stated this conduct “kept his customers from taking advantage
of the lower sales charges available through different classes of
funds.”

       In March 2002, the NASD published a report that it had

                                  15
censured and fined Dain Rauscher, Inc. and Gary Franklin
Hayden, a registered representative, based on findings that Mr.
Hayden had

       recommended the purchase of Class B shares of
       growth funds to public customers and omitted to
       inform the customers that they would have
       benefited [sic] from investing in Class A shares
       because of the ability to receive discounts on sales
       charges of large purchases and the lower ongoing
       fees and expenses of the Class A shares.

       Merrill also presented evidence that on August 13, 2002,
NASD announced that it had disciplined a broker because he
had made an unsuitable recommendation because the purchase
of Class B shares, instead of Class A shares, resulted in
significantly higher commissions.

                                D

       The District Court granted Merrill’s motion to dismiss
the amended complaint as untimely. It stated that it was
“persuaded that the registration statements, coupled with the
news articles and NASD press releases, sufficed to trigger
inquiry notice.” The District Court also determined that Mr.
DeBenedictis failed to exercise the due diligence expected of
reasonable investors of ordinary intelligence. It did not reach
the merits of any of Mr. DeBenedictis’s claims.

       Mr. DeBenedictis has filed a timely appeal. We have

                               16
jurisdiction under 28 U.S.C. § 1291.

                              II

                               A

     In his brief before this Court, Mr. DeBenedictis
summarized his contentions as follows:

      In holding the Plaintiff’s claims were untimely as
      a matter of law, the district court erred by
      construing the concept of inquiry notice too
      broadly, as the registration statements and news
      items cited by the defendants were not sufficient
      to put a reasonable investor on inquiry notice
      outside the relevant limitations period.

      First, the registration statements were insufficient
      to put a reasonable investor on inquiry notice
      because they did not disclose the conflict of
      interest that the commission structure for Class B
      Shares created. The registration statements also
      did not disclose the magnitude of the risk that
      investors such as Plaintiff would pay excessive
      sales charges.

      Second, with the exception of a single article that
      cast the defendants in a positive light, the news
      items relied upon by defendants to support their
      limitations defense involved other brokerage
      firms and fund companies and were therefore

                              17
       insufficient to put Plaintiff on notice of culpable
       conduct by the defendants in connection with
       their sale of the Funds.

       This Court’s review of a District Court’s decision to
grant a motion to dismiss is plenary. Gallo v. City of
Philadelphia, 161 F.3d 217, 221 (3d Cir. 1998). We must
“accept as true all allegations in the complaint and all reasonable
inferences that can be drawn therefrom, and view them in the
light most favorable to the non-moving party.” Rocks v. City of
Philadelphia, 868 F.2d 644, 645 (3d Cir 1989). The dismissal
must be upheld “if it appears to a certainty that no relief could
be granted under any set of facts which could be proved.” D.P.
Enter., Inc. v. Bucks County Cmty. Coll., 725 F.2d 943, 944 (3d
Cir 1984). Nevertheless, “a court need not credit either ‘bald
assertions’ or ‘legal conclusions’ in a complaint when deciding
a motion to dismiss.” Evancho v. Fisher, 423 F.3d 347, 351 (3d
Cir 2005) (quoting In re Burlington Coat Factory Sec. Litig.,
114 F.3d 1410, 1429-30 (3d Cir. 1997)).

       [A] private right of action that involves a claim of
       fraud, deceit, manipulation, or contrivance in
       contravention of a regulatory requirement
       concerning the securities laws, as defined in
       section 3(a)(47) of the Securities Exchange Act of
       1934 (15 U.S.C. 78c(a)(47)), may be brought not
       later than the earlier of --

       (1) 2 years after the discovery of the facts

                                18
       constituting the violation[.]

28 U.S.C. § 1658(b). In addition,

       [n]o action shall be maintained to enforce any
       liability created under section . . . 77k or
       §77l(a)(2) [] [of [the Securities Act of 1933]
       unless brought within one year after the discovery
       of the untrue statement or the omission, or after
       such discovery should have been made by the
       exercise of reasonable diligence[.]

15 U.S.C. §77m. Thus, if Mr. DeBenedictis was placed on
inquiry notice of the basis of his claims prior to January 30,
2002, he is precluded from bringing his claims under Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and
Sections 11, 12(a)(2), and 15 of the Securities Act of 1933.

        A plaintiff in a securities fraud action is put on inquiry
notice when a ‘“reasonable investor of ordinary intelligence
would have discovered the information and recognized it as a
storm warning.”’ Benak ex rel. Alliance Premier Growth Fund
v. Alliance Capital Mgmt. L.P., 435 F.3d 396, 400 (3d Cir 2006)
(citing In re NAHC, Inc. Sec. Litig., 306 F.3d 1314, 1325 (3d Cir
2002)). “Plaintiffs cannot avoid the time bar simply by claiming
they lacked knowledge of the details for narrow aspects of the
alleged fraud. Rather, the clock starts when they should have
discovered the general fraudulent scheme.” Benak, 435 F.3d at
400 (internal quotation marks and citations omitted). For
purposes of this determination, “‘investors are presumed to have

                               19
read prospectuses, quarterly reports, and other information
related to their investments.’” Id. (quoting Mathews v. Kidder,
Peabody & Co., Inc., 260 F.3d 239, 252 (3d Cir 2001).
Information that may be deemed to constitute inquiry notice
includes:

       substantial conflicts between oral representations
       of the brokers and the text of the prospectus, . . .
       the accumulation of information over a period of
       time that conflicts with representations that were
       made when the securities were originally
       purchased, or any financial, legal or other data
       that would alert a reasonable person to the
       probability that misleading statements or
       significant omissions had been made.

NAHC, 306 F.3d at 1326-27 n.5 (quoting Mathews, 260 F.3d at
252). If “the existence of storm warnings [is] adequately
established ‘the burden shifts to the plaintiffs to show that they
exercised reasonable due diligence and yet were unable to
discover their injuries.”’ NAHC, 306 F.3d at 1327 (quoting
Mathews, 260 F.3d at 252).

       The Registration Statements provided Mr. DeBenedictis
with information regarding his claims, which he should have
recognized as storm warnings. It is undisputed that the
Registration Statements disclosed the fee structure for Class A,
B, C, and D shares. Therefore, investors could calculate on their
own whether one class of shares is more economically attractive

                               20
than another. In addition, the prospectus included an illustration
of the costs associated with each share class for varying holding
periods based on a hypothetical investment of $10,000. The SAI
noted the initial sales charge alternatives as follows:

       Investors not qualifying for reduced initial sales
       charges who expect to maintain their investment
       for an extended period of time also may elect to
       purchase Class A or Class D shares, because over
       time the accumulated ongoing account
       maintenance and distribution fees on Class B or
       Class C shares may exceed the initial sales
       charges and, in the case of Class D shares, the
       account maintenance fee.

Moreover, it pointed out that “[i]nvestors qualifying for
significantly reduced initial sales charges may find the initial
sales charge particularly attractive because similar sales charge
reductions are not available with respect to the deferred sales
charges imposed in connection with purchases of Class B or
Class C shares.” Finally, the SAI disclosed that “[s]ales
personnel may receive different compensation for selling
different classes of shares.” Thus, the Registration Statements
placed investors on notice of the relative costs and benefits of
the different shares, and the possibility that Appellees’s sales
personnel may receive different commissions in relation to the
type of shares they sold.

                                B

                               21
        Mr. DeBenedictis argues that the public documents
addressing Class B shares did not put him on inquiry notice of
his claims because they failed to mention Merrill and, in one
case, painted Merrill in a positive light. “News reports are not
given weight by courts in a vacuum, but rather have significance
in cases where ‘investors are presumed to have read
prospectuses, quarterly reports, and other information related to
their investments.’” Benak, 435 F.3d at 402 (quoting Mathews,
260 F.3d at 252).

        More than two years before this action was filed, the
articles in USA Today, Time Magazine, the Wall Street Journal,
and NASD press releases were sufficient to place a reasonable
investor of ordinary intelligence on inquiry notice that the
purchase of more than $100,000 of Class B shares was not a
suitable investment because brokers received a higher
commission for selling Class B shares instead of Class A shares
in spite of the fact that Class A shares are sometimes a more
suitable investment because of lower annual costs. USA Today
warned its readers that brokers get higher commissions for
selling Class B shares in large amounts. Time Magazine noted
that Class B shares “generate lower long-term returns than Class
A shares.” The Wall Street Journal reported that the NASD had
disciplined a brokerage firm for selling Class B shares in
amounts over $100,000, notwithstanding the fact that Class A
shares “are a good idea for long-term investors since they
usually have the lowest annual expenses[.]” The four NASD
press releases considered by the District Court revealed that

                               22
brokers from several firms had been disciplined for
recommending the purchase of large amounts of Class B shares
over Class A shares because they received significantly higher
commissions than they would have if they advised the
acquisition of Class A shares.

        Mr. DeBenedictis maintains that the news releases were
not sufficient to serve as storm warnings, or to place him on
inquiry notice, because the articles were not company-specific.
He relies on the Second Circuit’s decision in Lentell v. Merrill
Lynch & Co., Inc., 396 F.3d 161 (2d Cir. 2005). In Lentell, the
Court concluded that the District Court erred in determining that
“numerous generic articles” had placed plaintiffs on inquiry
notice of the frauds alleged against the defendants. Id. at 170.
The articles cited by the District Court contained statements that
“[a]nalysts routinely play up good news and sugarcoat the bad,”
and “[t]he analyst today is an investment banker in sheep’s
clothing[.]” Id. at 171 (internal quotation marks and citations
omitted). The Court noted that these news releases say nothing
about the defendants’ conduct since none is “mentioned in any
article relied upon by the district court.” Id. The Second Circuit
explained its rejection of the District Court’s decision that the
articles were sufficient to serve as storm warnings as follows:

       We do not mean to suggest that inquiry notice
       could never be established on the basis of non-
       specific public-pronouncements, but the level of
       particularity in pleading required by the PSLRA
       is such that inquiry notice can be established only

                               23
       where the triggering data “relates directly to the
       misrepresentations and omissions” alleged.

Id. (quoting Newman v. Warnaco Group, Inc., 335 F.3d 187,
193 (2d Cir. 2003)).

       Here, the news articles referred specifically to the
practice of many mutual fund brokerages of selling Class B
shares in amounts in excess of $100,000 at a higher commission
than that paid to brokers for the sale of Class A shares, which
required a lower annual cost to the purchaser. This warning to
investors was directly applicable to the representations or
omissions made by Merrill in its Registration Statements.

        Citing LC Capital Partners, LP v. Frontier Ins. Group,
Inc., 318 F.3d 148, 155 (2d Cir. 2003), Mr. DeBenedictis argues
that the Wall Street Journal article published on July 17, 2001,
cannot serve as a storm warning because it painted the
Appellees in a positive light. The Wall Street Journal states:

       Most brokerage firms, including Merrill Lynch &
       Co., Morgan Stanley & Co. and Edward D. Jones
       & Co., don’t specifically cap sales of B-share
       mutual funds. Merrill, the nation’s largest
       brokerage firm in terms of registered
       representatives, handles such issues through
       broker training and education. “We continue to
       take suitability issues very seriously,” said a
       spokesman for the New York company. “They’re
       a prime concern in terms of the distribution of

                              24
       different classes of mutual funds shares.”

The District Court concluded that this report is not directly
related to Mr. DeBenedictis’s claims and fails to contradict the
storm warnings provided by this and the other news articles. We
agree.

       The Second Circuit held in LC Capital that

       [t]here are occasions when, despite the presence
       of some ominous indicators, investors may not be
       considered to have been placed on inquiry notice
       because the warning signs are accompanied by
       reliable words of comfort from management. . . .
       However, reassuring statements will prevent the
       emergence of a duty to inquire or dissipate such a
       duty only if an investor of ordinary intelligence
       would reasonably rely on the statements to allay
       the investor's concern. . . . Whether reassuring
       statements justify reasonable reliance that
       apparent storm warnings have dissipated will
       depend in large part on how significant the
       company's disclosed problems are, how likely
       they are of a recurring nature, and how substantial
       are the “reassuring” steps announced to avoid
       their recurrence.

318 F.3d at 155 (internal citations omitted).

       It is clear that the statements in The Wall Street Journal

                               25
article are not directly related to Mr. DeBenedictis’s claim
regarding the alleged conflict of interest Merrill’s brokers had
in selling Class B shares. In contrast, these statements do seem
to relate to Mr. DeBenedictis’s claims regarding the profitability
of Class B shares for investors of $100,000 or more. In light of
the other news articles and the concerns expressed in The Wall
Street Journal article, The Wall Street Journal’s reference to
Merrill’s suitability training was not enough to dissipate a
reasonable investor’s concerns about the fees and costs
associated with Class B shares.

                           Conclusion

        The information provided in the Registration Statements,
the news articles, and the NASD press releases were sufficient
storm warnings to trigger inquiry notice. A reasonable investor
of ordinary intelligence, with the exercise of reasonable
diligence, would have discovered the basis of the claims
asserted in this matter prior to January 2002. In the face of such
inquiry notice, however, Mr. DeBenedictis failed to exercise the
due diligence expected of a reasonable investor of ordinary
intelligence. Even if a mutual fund investor failed to read the
Registration Statements when they were initially received and
failed to run any independent calculations of the fees that would
be incurred on Class B shares, the news articles questioning the
profitability of such shares and highlighting the possible conflict
of interest would urge the reasonable investor to return to the
Registration Statements in order to evaluate the profitability of
his or her own investments and investigate their broker’s

                                26
conflict of interest. In contrast, Mr. DeBenedictis failed to
allege any facts that he “‘exercised reasonable due diligence and
yet [was] unable to discover [his] injuries.’” NAHC, 306 F.3d
at 1327 (quoting Mathews, 260 F.3d at 252). Accordingly, we
will affirm the dismissal of this action as time-barred.

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