Securities Damage Actions: When Does The Statute Of Limitations Begin?
The Supreme Court may soon determine how long or short a time period securities fraud plaintiffs have to file a damage suit. In Trainer Wortham & Co. Inc, v. Heide Betz, No. 07-1489 (S. Ct. Docketed May 29, 2008), petitioners have asked the Court to review a decision of the Ninth Circuit Court of Appeals regarding when the statute of limitations under Section 804(a) of Sarbanes Oxley begins to run. That Section provides in part for a two year statue of limitations “after the discovery of the facts constituting the violation.” When the two year period begins can have a significant impact on private damage actions. The case has been briefed. An amicus brief has been filed by The Organization For International Investment and The Chamber of Commerce in support of petitioners. The Court recently asked the Solicitor General to file a brief regarding the position of the United States.
The case is based on a suit filed by Heide Betz, the Respondent-Plaintiff, against Trainer Wortham & Co., Inc., First Republic Bank, and registered representative David Como. The complaint, which claims violations of Section 10(b), alleges that in 1999 plaintiff invested $2.2 million based on the representation of Mr. Como that the principal would not be touched and a good rate of return would be paid. Over the next four years, the principal declined, as reflected on the account statements sent to plaintiff. In addition, plaintiff had several conversations with Mr. Como regarding the decline in the principal investment. During those conversations, he blamed the market and assured plaintiff that the value would go up. Although plaintiff threatened suit during at least some of these discussions, the complaint was not filed until four years after the investment and initial representation were made.
The district court granted summary judgment, concluding that the action was time barred under the two year provision of SOX Section 804(a). The court applied an inquiry notice standard, concluding that the account statements showing a declining investment put plaintiff on notice that the oral representations of the registered representative might not be correct. Accordingly, plaintiff had a duty to investigate and failed the action in a timely manner.
The Ninth Circuit, which issued three opinions, reversed. The Circuit Court stated that it was adopting the “inquiry plus reasonable diligence test” followed most circuits to determine when the two year period begins. Applying this test, the Court concluded that plaintiff was not on notice from the account statements. Rather, those statements only suggested a possible broken promise. Alternatively, even if the plaintiff had notice, the Court found that it could not state as a matter of law that the statute had begin to run in view of the registered representative’s reassurances that the value would go up because a jury might find that plaintiff could not have discovered facts constituting the alleged fraud.
Petitioner has requested the Supreme Court to consider the case, arguing that there is a conflict among the circuits regarding the proper test to be used in assessing when the two year statute commences. Essentially there are four approaches: (1) the “pure notice” test used by the Eleventh Circuit, under which the statute begins when plaintiff is put on notice that a representation may be false; 2) the majority rule followed by the Fifth, Sixth, Eighth and Tenth Circuits, under which the limitation period does not commence until plaintiff is on notice and, in the reasonable exercise of due diligence, should have discovered the underlying fraud; (3) the rule in the Seventh Circuit, which varies the second approach by requiring that the plaintiff discover facts which are sufficiently probative of the fraud to cause the plaintiff to investigate and complete that inquiry before filing suit; and 4) an alternate approach used by the Second and Third Circuits, which holds that the statute begins to run either when the plaintiff has notice and does nothing or if an inquiry begins after a reasonably diligent investor would have completed the investigation.
In this case, Petitioner argues that the approach of the Ninth Circuit is contrary to that of every circuit because the Court held that direct evidence that the representations may have been false did not constitute inquiry notice. Petitioner also contends that the Ninth Circuit decision created a split in the circuits by concluding that an investor can reasonably rely on assurances from the suspected fraudster even when those representations contradict other known facts. This issue is of “profound national importance,” according to Petitioner because it has a significant impact on when the statute of limitations commences.
Respondents argue that the Ninth Circuit’s decision follows the majority of the circuits in adopting its inquiry notice plus reasonable diligence test. Essentially, Respondents contend that Petitioner’s have mischaracterized the holding of the Ninth Circuit. In this regard, they contend that the Circuit Court properly applied the second prong of the test in considering defendants’ specific assurances. Indeed, the jury is better suited to determine what a reasonable investor should have known rather than the court on a motion for summary judgment according to Respondents.
The views of the United States, and perhaps those of the SEC, should be set forth in a brief which will be filed shortly.
This case, if accepted by the High Court for review, could have a significant impact on private damage actions. The test selected for the commencement of the two year limitation period, and the manner of its application, can significantly expand or contract the time in which a plaintiff can file suit and thus the potential liability of a defendant.