09-4609-cv City of Pontiac Gen. Emps. Ret. Sys. v. MBIA, Inc.
1 2 UNITED STATES COURT OF APPEALS 3 4 FOR THE SECOND CIRCUIT 5 6 August Term, 2010 7 8 9 (Argued: November 1, 2010 Decided: February 28, 2011) 10 11 Docket No. 09-4609-cv 12 13 - - - - - - - - - - - - - - - - - - - - -x 14 15 CITY OF PONTIAC GENERAL EMPLOYEES’ 16 RETIREMENT SYSTEM and SOUTHWEST 17 CARPENTERS PENSION TRUST, on behalf of 18 themselves and all others similarly 19 situated, 20 21 Plaintiffs-Appellants, 22 23 ANTHONY CAPONE, individually and on 24 behalf of all others similarly situated, 25 TODD SIMON, individually and on behalf 26 of all others similarly situated, MARISS 27 PARTNERS, LLP, individually and on 28 behalf of all others similarly situated, 29 THOMAS CASSADY, individually and on 30 behalf of all others similarly situated, 31 ALAN D. SADOWSKY, individually and on 32 behalf of all others similarly situated, 33 and BARBARA S. KATZIN, individually and 34 on behalf of all others similarly 35 situated, 36 37 Consolidated-Plaintiffs, 38 39 -v.- 09-4609-cv 40 41 MBIA, INC., JOSEPH W. BROWN, GARY C. 42 DUNTON, NICHOLAS FERRERI, NEIL G. 43 BUDNICK, DOUGLAS C. HAMILTON, and 1 RICHARD WEILL, 2 3 Defendants-Appellees.* 4 5 - - - - - - - - - - - - - - - - - - - -x 6
7 Before: DENNIS JACOBS, Chief Judge, 8 JOSÉ A. CABRANES, 9 JOHN M. WALKER, JR., Circuit Judges. 10 11 12 Appellants, a pair of retirement funds representing a
13 proposed class of individuals who purchased stock in MBIA,
14 Inc., appeal a decision by the United States District Court
15 for the Southern District of New York (Stanton, J.)
16 dismissing their proposed class action as barred by the
17 statute of limitations for security fraud claims. The
18 district court concluded that the proposed class was on
19 inquiry notice of the alleged fraud by December 2002, more
20 than two years before suit was filed in April 2005. We
21 vacate the district court’s dismissal and remand for
22 reconsideration of the statute of limitations analysis in
23 light of the Supreme Court’s decision in Merck & Co. v.
24 Reynolds, 130 S. Ct. 1784 (2010). We also instruct the
25 district court to rule on Defendants-Appellees’ arguments
26 under the statute of repose and Rule 9(b).
* The Clerk of Court is respectfully instructed to amend the official case caption as shown above. 2 1 FOR APPELLANTS: Sanford Svetcov 2 Susan K. Alexander 3 Robbins Geller Rudman & Dowd LLP 4 San Francisco, CA 5 6 Samuel H. Rudman 7 David A. Rosenfeld 8 Mario Alba, Jr. 9 Robbins Geller Rudman & Dowd LLP 10 Melville, NY 11 12 FOR APPELLEES: Steven Klugman 13 Christopher J. Hamilton 14 Emily J. Mathieu 15 David Gopstein 16 Debevoise & Plimpton LLP 17 New York, NY 18 19 Lance J. Gotko 20 John N. Orsini 21 Friedman Kaplan Seiler & Adelman LLP 22 New York, NY
23 24 DENNIS JACOBS, Chief Judge: 25 26 Appellants, a pair of retirement funds representing a
27 proposed class of individuals who purchased stock in MBIA,
28 Inc., appeal a decision by the United States District Court
29 for the Southern District of New York (Stanton, J.)
30 dismissing their proposed class action as barred by the
31 statute of limitations for security fraud claims. The
32 district court concluded that the proposed class was on
33 inquiry notice of the alleged fraud by December 2002, more
34 than two years before suit was filed in April 2005. We
35 vacate the district court’s dismissal and remand for
3 1 reconsideration of the statute of limitations analysis in
2 light of the Supreme Court’s decision in Merck & Co. v.
3 Reynolds, 130 S. Ct. 1784 (2010). We also instruct the
4 district court to rule on Defendants-Appellees’ arguments
5 under the statute of repose and Rule 9(b).
6 7 BACKGROUND 8 The facts of this case have been set out in all
9 relevant detail by the district court in its first decision
10 in this case. See In re MBIA Inc. Sec. Litig., 05 Civ.
11 03514, 2007 U.S. Dist. LEXIS 10416 (S.D.N.Y. Feb. 13, 2007).
12 We recount only the brief summary needed to understand our
13 decision.
14 MBIA sells insurance policies guaranteeing the
15 principal and interest on bonds, thereby allowing its bond-
16 issuing clients to pay lower interest rates. In 1998, one
17 of MBIA’s major policyholders defaulted on a bond-issue
18 insured by MBIA, leaving MBIA with a $170 million debt that
19 threatened its liquidity and credit rating. To avoid this
20 impairment of its credit rating, MBIA made a deal with three
21 European reinsurance companies whereby they reinsured MBIA
22 on the defaulted bonds nunc pro tunc, which resulted in
23 their paying the $170 million loss incurred by the bond
4 1 default. In exchange, MBIA paid $3.85 million “upfront” as
2 a premium and committed to purchasing additional reinsurance
3 from the European companies over a six-year period at a
4 premium of $297 million. The bonds that would be reinsured
5 over the following six years were among MBIA’s highest rated
6 bonds. MBIA initially booked this odd transaction (“1998
7 transaction”) as income, and it continued to do so in its
8 SEC Form 10-Ks from 1998 through 2003.
9 Several times in later years, the 1998 transaction
10 became the subject of comment in the financial trade press,
11 most of it either positive or ambivalent; but some of it
12 suggested that the transaction was more a loan than a
13 reinsurance contract. In early 2005, after the SEC and the
14 New York Attorney General both launched investigations into
15 its accounting practices, MBIA publicly restated its
16 financials for 1998-2003 to treat the 1998 transaction as a
17 loan rather than as income.
18 The original class action complaint in this case, filed
19 in April 2005, proposed a class of all individuals who
20 purchased stock in MBIA between August 5, 2003 and March 30,
21 2005. The complaint alleged that MBIA committed securities
22 fraud in violation of section 10b of the Securities and
23 Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-
5 1 5, 17 C.F.R. § 240.10b-5, when it accounted for the 1998
2 transaction as income rather than as a loan in its 10-Ks
3 from 1998 through 2003. The City of Pontiac General
4 Employees’ Retirement System and the Southwest Carpenters
5 Pension Trust (“Pension Funds”) were appointed to represent
6 the proposed class.
7 MBIA moved to dismiss the complaint for failure to
8 adequately plead causation, material misrepresentation, and
9 scienter under Federal Rule of Civil Procedure 9(b). MBIA
10 also moved to dismiss the complaint as time-barred by the
11 applicable two-year statute of limitations and five-year
12 statute of repose under The Sarbanes-Oxley Act of 2002
13 (“Sarbanes-Oxley”). Pub. L. No. 107-204, § 804, 116 Stat.
14 745, 802 (2002) (codified at 28 U.S.C. § 1658(b)). The
15 district court ruled that the trade press discussions of the
16 1998 transaction put the proposed class on inquiry notice by
17 December 2002. It accordingly granted MBIA’s motion and
18 dismissed the complaint on the statute of limitations
19 ground, expressly declining to reach MBIA’s alternative
20 defenses involving Rule 9(b) and the statute of repose.
21 On a prior appeal, we concluded that the district
22 court’s dismissal had been without prejudice, and we granted
23 leave for the Pension Funds to amend the record with
6 1 additional trade press reports and refile the complaint.
2 The Pension Funds refiled after amending the record with
3 four additional trade press reports. After considering the
4 four new documents, the district court again found that the
5 class had been on inquiry notice by December 2002 and again
6 dismissed the complaint as barred by the statute of
7 limitations without reaching MBIA’s statute of repose and
8 Rule 9(b) defenses. The Pension Funds again appeal this
9 dismissal.
11 DISCUSSION
12 We review de novo a district court’s grant of a
13 defendant’s motion to dismiss, “accepting all factual
14 allegations in the complaint as true, and drawing all
15 reasonable inferences in the plaintiff’s favor.” Shomo v.
16 City of New York, 579 F.3d 176, 183 (2d Cir. 2009) (internal
17 quotation marks omitted). A district court’s legal
18 conclusions, including its interpretation and application of
19 a statute of limitations, are likewise reviewed de novo.
20 Somoza v. N.Y.C. Dep’t of Educ., 538 F.3d 106, 112 (2d Cir.
21 2008).
7 1 I
2 When a case has already been heard by this Court, our
3 previous disposition ordinarily becomes “law of the case,”
4 foreclosing relitigation of issues expressly or impliedly
5 decided previously by this Court. United States v. Frias,
6 521 F.3d 229, 234 (2d Cir. 2008). When we last heard this
7 case, we affirmed the district court’s ruling that the
8 original unamended record put the class on inquiry notice by
9 December 2002, thereby rendering the fraud claim time-barred
10 under the applicable two-year statute of limitations. City
11 of Pontiac Gen. Emps.’ Ret. Sys. v. MBIA, Inc., 300 F. App’x
12 33 (2008). This prior determination would ordinarily be
13 binding as the “law of the case,” so that the district court
14 could not revisit whether the unamended record sufficed to
15 put the class on inquiry notice.
16 However, the law of the case does not withstand “an
17 intervening change of controlling law.” Frias, 521 F.3d at
18 235 n.6. After the district court’s latest decision in this
19 case and prior to oral argument in this appeal, the Supreme
20 Court decided Merck & Co. v. Reynolds, 130 S. Ct. 1784
21 (2010), which changed the securities fraud law of this
22 Circuit with respect to the onset of the applicable two-year
23 statute of limitations. The law of the case is thus
8 1 inapplicable here to the extent Merck changed the
2 controlling law on securities fraud. As a result, when
3 reconsidering whether the statute of limitations bars the
4 class’s securities fraud claim in light of Merck, the
5 district court should consider the full record, not just the
6 four documents added by the parties after our previous
7 remand.
9 II
10 Prior to Merck, the law of our Circuit had provided
11 that a plaintiff was on “inquiry notice” when public
12 information would lead a reasonable investor to investigate
13 the possibility of fraud. Shah v. Meeker, 435 F.3d 244, 249
14 (2d Cir. 2006); Levitt v. Bear Stearns & Co., 340 F.3d 94,
15 101 (2d Cir. 2003). If at that point, the plaintiff fails
16 to initiate such an investigation, our Circuit deemed the
17 statute of limitations to start running on the day the
18 plaintiff should have begun investigating. Shah, 435 F.3d
19 at 249; Levitt, 340 F.3d at 101.
20 Merck overruled this analysis: “[T]he discovery of
21 facts that put a plaintiff on inquiry notice does not
22 automatically begin the running of the limitations period.”
23 130 S. Ct. at 1798 (internal quotation marks omitted).
9 1 Instead, Merck held that the limitations period begins to
2 run only after “a reasonably diligent plaintiff would have
3 discovered the facts constituting the violation, including
4 scienter--irrespective of whether the actual plaintiff
5 undertook a reasonably diligent investigation.” Id.
6 (internal quotation marks omitted). In other words, the
7 limitations period commences not when a reasonable investor
8 would have begun investigating, but when such a reasonable
9 investor conducting such a timely investigation would have
10 uncovered the facts constituting a violation.
11 In light of Merck, two questions remain unresolved.
12 A. What are the facts that together constitute a 13 securities fraud violation for purposes of 14 commencing the statute of limitations? 15 16 B. With regard to any particular one of these facts, 17 how much information does the reasonable investor 18 need to have about it before it is deemed 19 “discovered” for purposes of commencing the 20 statute of limitations? 21
22 A.
23 The Merck Court expressly declined to prescribe a full
24 list of the facts needed to constitute a securities law
25 violation for purposes of the statute of limitations.
26 Merck, 130 S. Ct. at 1796 (“We consequently hold that facts
27 showing scienter are among those that ‘constitut[e] the
10 1 violation.’ In so holding, we say nothing about other facts
2 necessary to support a private § 10(b) action.”). We need
3 not attempt to prescribe such a list here. It is sufficient
4 for our purposes to note only that the facts establishing
5 “scienter” are among those “that constitute the violation”
6 and may require inquiry. Id. It follows that a securities
7 fraud statute of limitations cannot begin to run until the
8 plaintiff discovers--or a reasonably diligent plaintiff
9 would have discovered--the facts constituting scienter,
10 defined as “a mental state embracing intent to deceive,
11 manipulate, or defraud.” Id.
13 B.
14 To apply Merck with consistency, a standard is needed
15 to assess how much information a reasonably diligent
16 investor must have about the facts constituting a securities
17 fraud violation before those facts are deemed “discovered”
18 and the statute of limitations begins to run. Are the facts
19 “discovered” when a reasonable investor would suspect a
20 violation? When the reasonable investor would become
21 absolutely convinced that the violation occurred? When the
22 reasonable investor could prove in a courtroom that the
23 violation occurred?
11 1 The Merck decision provides some guidance. In
2 discussing the limitations trigger, Merck specifically
3 considered scienter, casting discovery of scienter in terms
4 of what information and evidence a plaintiff would need to
5 survive a motion to dismiss. Merck, 130 S. Ct. at 1796 (“As
6 a result, unless a § 10(b) plaintiff can set forth facts in
7 the complaint showing that it is ‘at least as likely as’ not
8 that the defendant acted with the relevant knowledge or
9 intent, the claim will fail.”). The fact that Merck
10 specifically referenced pleading requirements when
11 discussing the limitations trigger indicates to us that the
12 Merck Court thought about the requirements for “discovering”
13 a fact in terms of what was required to adequately plead
14 that fact and survive a motion to dismiss. Id.
15 Further guidance on this question can be inferred from
16 the basic purpose of a statute of limitations. In contrast
17 to a statute of repose, a statute of limitations is intended
18 to prevent plaintiffs from unfairly surprising defendants by
19 resurrecting stale claims. In re Worldcom Sec. Litig., 496
20 F.3d 245, 253 (2d Cir. 2007). A statute of limitations
21 prevents such surprises by extinguishing a plaintiff’s
22 remedy after he has slept on his claim for a prolonged
23 period of time, failing “to bring suit within a specified
12 1 period of time after his cause of action accrued.” Ma v.
2 Merrill Lynch, Pierce, Fenner & Smith, Inc., 597 F.3d 84, 88
3 n.4 (2d Cir. 2010). Since the purpose is to prevent stale
4 claims, it would make no sense for a statute of limitations
5 to begin to run before the plaintiff even has a claim: A
6 claim that has not yet accrued could never be considered
7 stale. Thus, in the limitations context, it makes sense to
8 link the standard for “discovering” the facts of a violation
9 to the plaintiff’s ability to make out or plead that
10 violation. Only after a plaintiff can adequately plead his
11 claim can that claim be said to have accrued, and only after
12 a claim has accrued can the statute of limitations on that
13 claim begin to run.
14 Based on this analysis, we hold that a fact is not
15 deemed “discovered” until a reasonably diligent plaintiff
16 would have sufficient information about that fact to
17 adequately plead it in a complaint. In other words, the
18 reasonably diligent plaintiff has not “discovered” one of
19 the facts constituting a securities fraud violation until he
20 can plead that fact with sufficient detail and particularity
21 to survive a 12(b)(6) motion to dismiss.
22 Under this standard, the amount of particularity and
23 detail a plaintiff must know before having “discovered” the
13 1 fact will depend on the nature of the fact. For example, a
2 sufficient allegation of scienter requires the pleader to
3 “state with particularity facts giving rise to a strong
4 inference that the defendant acted with the required state
5 of mind” such that “it is at least as likely as not that the
6 defendant acted with the relevant knowledge or intent.”
7 Merck, 130 S. Ct. at 1796 (internal quotation marks
8 omitted). Until the plaintiff has uncovered--or a
9 reasonably diligent plaintiff would have uncovered--enough
10 information about the defendant’s knowledge or intent to
11 satisfy this pleading standard, he has not “discovered” the
12 fact of scienter, and the statute of limitations cannot
13 begin to run.
14 For this reason, we remand to the district court to
15 reconsider, based on the entire record and in light of Merck
16 and this opinion, when the Pension Funds had enough
17 information about MBIA’s scienter to plead it with
18 sufficient particularity to survive a motion to dismiss
19 under the heightened pleading requirements for scienter
20 under 15 U.S.C. § 78u-4(b)(2). The two-year statute of
21 limitations cannot commence before that point.
14 1 III
2 The district court’s initial decision and its decision
3 on remand both concluded that the statute of limitations for
4 the proposed class commenced in December 2002. See In re
5 MBIA Inc. Sec. Litig., 05 Civ. 03514, 2007 U.S. Dist. LEXIS
6 10416, at *3, *27 (S.D.N.Y. Feb. 13, 2007). However, the
7 class period for the proposed class does not begin until
8 August 2003, the date on which the first class members
9 purchased their shares of MBIA stock. This means (under the
10 district court’s analysis) that the statute of limitations
11 period began to run more than six months before the first
12 stock purchase giving rise to the class’s claims. That
13 cannot be.
14 As we have already pointed out, the statute of
15 limitations for securities fraud cannot begin to run before
16 a reasonably diligent plaintiff would have uncovered enough
17 information about the defendant’s intent to satisfy the
18 heightened pleading standard for fraud. That by itself is
19 not enough to trigger the statute of limitations, however.
20 Unlike a statute of repose, which begins to run from the
21 defendant’s violation, a statute of limitations cannot begin
22 to run until the plaintiff’s claim has accrued. Ma, 597
23 F.3d at 88 n.4 (noting that statute of limitations begins
15 1 when the cause of action accrues); Stuart v. Am. Cyanamid
2 Co., 158 F.3d 622, 627 (2d Cir. 1998) (same); see also P.
3 Stolz Family P’ship v. Daum, 355 F.3d 92, 102-03 (2d Cir.
4 2004) (contrasting statute of limitations and statute of
5 repose). A securities fraud claim does not accrue until
6 after the plaintiff actually purchases (or sells) the
7 relevant security. Blue Chip Stamps v. Manor Drug Stores,
8 421 U.S. 723, 734-35 (1975). Thus, if the statute of
9 limitations cannot begin to run until a claim has accrued,
10 and a securities fraud claim does not accrue until the
11 plaintiff has bought or sold the relevant security, then the
12 statute of limitations cannot begin to run until after the
13 plaintiff’s transaction. The district court’s conclusion
14 that the statute of limitations began to run prior to the
15 beginning of the class period--which was defined by when the
16 class members first transacted MBIA’s stock--violates this
17 principle.
18 However, when a class is composed of persons who
19 purchased a security after facts came to light that exposed
20 fraud related to that security, the case also lends itself
21 to analysis in terms of whether there was reliance by the
22 plaintiffs, or, similarly, whether there was transactional
23 causation. See Lattanzio v. Deloitte & Touche LLP, 476 F.3d
16 1 147, 156-57 (2d Cir. 2007) (discussing the concepts of
2 reliance and transactional causation, i.e., the notion that
3 “but for the claimed misrepresentations or omissions, the
4 plaintiff would not have entered into the detrimental
5 securities transaction,” in the context of securities
6 fraud). Therefore, we also remand for the district court to
7 reconsider whether MBIA’s inquiry notice defense should be
8 analyzed as, for example, an alleged defect in causation.
10 IV
11 On remand, the district court should rule on two other
12 arguments MBIA made in its motion to dismiss: (1) that the
13 class’s claims are time-barred by the applicable statute of
14 repose; and (2) that the class failed to plead its fraud
15 claim with particularity sufficient to satisfy the
16 heightened requirements of Federal Rule of Civil Procedure
17 9(b) and 15 U.S.C. § 78u-4(b)(2). Specifically, the
18 district court should consider whether the applicable
19 statute of repose commences at the time of the defendant’s
20 misrepresentation or at the time the relevant securities
21 were purchased. The district court should also consider
22 whether the applicable statute of repose is reset each time
23 the defendant repeats or incorporates its original
17 1 fraudulent statement. The district court should, of course,
2 also consider any other issues related to these two defenses
3 that it thinks are relevant.
4 5 CONCLUSION
6 We hereby VACATE the district court’s decision and
7 REMAND for reconsideration of the application of the statute
8 of limitations in light of Merck and this opinion. We also
9 instruct the district court to rule on Defendants-Appellees’
10 statute of repose and Rule 9(b) arguments.