Out In Left Field

Will the next U.S. Supreme Court securities case be about the statute of limitations? It is a strong possibility, given that the Court has asked the Solicitor General to weigh in on the cert petition filed in a Ninth Circuit case.

At issue in Betz v. Trainer Wortham & Co., Inc., 519 F.3d 863 (9th Cir. 2008) is when the two-year statute of limitations for a securities fraud begins to run. It is well-settled that if an investor has sufficient knowledge concerning the possibility or probability of fraud (courts have differed on the exact wording), he is deemed to have “inquiry notice” and must begin an investigation into the underlying facts. There is a conflict between the circuits, however, on whether the statute of limitations begins to run when the investor is put on inquiry notice, or later when a reasonably diligent investigation would have revealed the fraud.

The Ninth Circuit went even further then the existing case law and held that inquiry notice is triggered not by mere evidence of a misrepresentation (as in other circuits), but only by evidence of the defendant’s fraudulent intent. It also adopted the more rigorous notice-plus-reasonable-diligence standard and found that even fairly mild reassurances from the defendant in response to a plaintiff’s inquiries may require a jury determination as to whether a reasonably diligent investigation would have revealed the fraud. In a vigorous dissent from the denial of en banc review, Judge Kozinski described the court as being “out in left field again” and argued that “the panel effectively writes the statute of limitations off the books.”

Stay tuned for whether the Court takes the case. In the interim, the amicus brief filed by the Organization for International Investment and the Chamber of Commerce of the United States of America in support of a cert grant can be found here. Thanks to LawyerLinks for noting the Court’s invitation to the Solicitor General’s office to express the government’s views.

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