The 10b-5 Daily

In Bond Opportunity Fund v. Unilab Corp., 2003 WL 21058251 (S.D.N.Y. May 9, 2003), the court addressed the issue of inquiry notice and the statute of limitations. The statute of limitations for Section 14(a) claims (misleading statements in proxies) is one year from discovery or three years from the occurrence that gives rise to the action, whichever is less (Sarbanes-Oxley arguably has not changed this standard because Section 14(a) does not �sound in fraud�). The Second Circuit has stated that discovery of the claim occurs when the plaintiff �obtains actual knowledge of the facts giving rise to the action or notice of the facts, which in the exercise of reasonable diligence, would have led to actual knowledge.� In other words, inquiry notice is sufficient to trigger the statue of limitations.
If the court determines that inquiry notice existed and the plaintiffs concede they engaged in no investigation, dismissing the claim based on the statute of limitations is straightforward. More difficult is the case where the plaintiffs claim that they did engage in an investigation after being put on inquiry notice, but were unable to obtain sufficient facts to bring the claim until more than a year later.
In Unilab, plaintiffs claimed that BT Alex.Brown aided and abetted in the alleged Section 14(a) violation committed by the company. Plaintiffs argued �that because they began to make inquiry immediately upon issuance of the proxy, in late October/early November 1999, knowledge of BT Alex.Brown�s role should not be imputed until they actually learned all the facts in November 2000 [less than a year before BT Alex Brown was added to the case in September 2001].� The court disagreed. Noting that BT Alex.Brown�s role as a key player in the transaction was disclosed in the proxy statement, the court found it �incomprehensible how Plaintiffs can claim that they were not sufficiently aware of BT Alex.Brown�s involvement in this transaction to name it as a defendant in this action prior to its deposition in November 2000.�
Holding: Securities claims against BT Alex.Brown dismissed as time-barred. The opinion also addressed other claims not discussed in this summary.
Quote of note: �A minimal or lackadaisical investigation will not serve to extend the statute of limitations until the plaintiff actually learns facts that could have been discovered much earlier had a diligent investigation taken place.�

Let no one say that The 10b-5 Daily avoids hot topics in favor of long dissertations on statutory construction (see post below). The Southern District of New York has denied the motion to dismiss in the securities class action against Martha Stewart Living Omnimedia Inc.

In Alkow v. TXU Corp., 2003 WL 21056750 (N.D. Tex. May 8, 2003), the court addressed a conflict in the provisions of the ’33 Act. Stay with me, because this gets a little tricky. Private actions under the ’33 Act may be brought in federal or state court. The Securities Litigation Uniform Standards Act of 1998 (“SLUSA”), however, was designed to prohibit the bringing of securities class actions in state court and provides for their removal to federal court. In doing so, however, SLUSA specifically limits itself to class actions “based upon the statutory or common law of any State.” The drafters were focused on plaintiffs who wanted to avoid the heightened pleading standards of the PSLRA by bringing the equivalent of Rule 10b-5 claims (for which federal courts have exclusive jurisdiction) in state court under state law. All of which leaves the question addressed in Alkow: can plaintiffs bring a class action pursuant to the ’33 Act in state court?

The N.D. of Texas doesn’t think so. The court noted that the jurisdiction section of the ’33 Act “prohibits removal of cases ‘arising under’ the 1933 Act, ‘[e]xcept as provided in section 77p(c).'” Section 77p is the SLUSA section. As a result, the court held, it is clear that Congress intended to prevent the filing of class actions pursuant to the ’33 Act in state court, despite the specific reference to state law in SLUSA. Moreover, any other result would create a loophole in SLUSA. Still there? Hello?

Holding: Motions to remand denied.

Quote of note: “In short, Congress intended SLUSA to prevent the exact maneuver used by the Alkows here. If sec. 77p(c) does not permit removal of claims arising under the 1933 Act, then SLUSA did not counteract the shift in cases to state courts that Congress determined had frustrated the intent of PSLRA.”