On October 4, 2007, the Ninth Circuit Court of Appeals confirmed that the statute of limitations for federal securities law claims begins to run as soon as the plaintiff has "inquiry notice" of the facts forming the alleged fraud, not only when the plaintiff has actual notice that the defendants have made a fraudulent misrepresentation. Betz v. Trainer Wortham Company, Inc., 07 C.D.O.S. 11942 (Oct. 4, 2007). The Court held, however, that the question of whether a plaintiff was on inquiry notice will almost always involve a disputed issue of material fact, making it inappropriate for early resolution by summary judgment.
Betz was an inexperienced investor, who had invested $2.2 million with Trainer Wortham after being told by defendants that she could withdraw $15,000 per month from her portfolio while leaving her entire principal intact. Although her account balance dropped precipitously over the next three years, defendants continued to reassure Betz that the shortfall was temporary and that her account balance would rebound to its original state. After her balance declined further, Betz filed her complaint alleging securities fraud under Section 10(b) of the Securities Exchange Act of 1934.
Defendants moved for summary judgment on the grounds that the securities fraud claim was barred by the applicable two-year statute of limitations. The District Court held that Betz had inquiry notice of the defendants' alleged fraud when her account balance had fallen to less than half its original state, which was more than two years before she filed her complaint, and thus her claims were time-barred. The Circuit Court reversed.
Although the Ninth Circuit agreed that inquiry notice could start the limitations period running, the Court established a two-part, "inquiry-plus-reasonable-diligence test" to determine whether securities fraud claims were timely filed. Under this standard, the trial court must first determine whether the plaintiff had inquiry notice of the facts giving rise to the securities fraud claim. In other words, were there sufficient indicia of fraud to alert a reasonable investor that a fraud may have occurred and to cause the investor to investigate the matter further? The Court cautioned, however, that "inquiry notice should not be construed so broadly that the particular plaintiff cannot bring his or her suit within the limitations period."
Once the court determines that a plaintiff was on inquiry notice, the court must then determine when the investor, "in the exercise of reasonable diligence," should have discovered the facts constituting the alleged fraud. In other words, if a reasonable investor in plaintiff's situation exercising diligence would have discovered the facts supporting the claim, the limitations period begins to run.
Notwithstanding the seemingly stricter burden on plaintiffs to file claims promptly under the inquiry notice standard, the Circuit Court held that it was inappropriate for the District Court to rule on summary judgment that the plaintiff's claims were time-barred because the question of what a reasonable investor would have done "is not so certain as to allow a determination as a matter of law." Indeed, under this new standard, the defendant has an extremely difficult burden to show, at the summary judgment stage, that the plaintiff's claim is time barred. This is particularly true where, as in Betz, the plaintiff alleges that the defendants' assurances caused the delay in discovery of the fraud.
The newly-articulated standard will have practical implications for defendants in securities fraud cases. Applying an inquiry notice standard to federal securities claims may compel plaintiffs to file lawsuits prematurely, before they are able to allege sufficient facts to withstand the heightened pleading requirements for Section 10(b) claims. Thus, there may be a greater opportunity for defendants to obtain an early dismissal of frivolous lawsuits. On the other hand, the Court made it clear that it will be difficult for a defendant to obtain an early determination that securities fraud claims are time-barred. Thus, unless a defendant has strong evidence that the plaintiff knew or should have known of the facts, it may require a trial on the merits for resolution of this issue.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
