Credito Aguado v. Kidder, Peabody & Co

• Court: Court of Appeals for the First Circuit
• Decided: November 13, 1997
• Docket: 96-2282
• Status: Published

Opinion

USCA1 Opinion

UNITED STATES COURT OF APPEALS

                                FOR THE FIRST CIRCUIT

                                 ____________________



        No. 96-2282



                       COOPERATIVA DE AHORRO Y CREDITO AGUADA,



                                Plaintiff, Appellant,



                                          v.



                KIDDER, PEABODY & COMPANY, PAINE WEBBER INCORPORATED,

           RAMON M. ALMONTE, MAYLEEN GRATACOS and the property partnership

        existing between them,



                                Defendants, Appellees.



                                 ____________________



                     APPEAL FROM THE UNITED STATES DISTRICT COURT



                           FOR THE DISTRICT OF PUERTO RICO



                    [Hon. Jose Antonio Fuste, U.S. District Judge]
                                              ___________________



                                 ____________________



                                        Before



                           Selya and Boudin, Circuit Judges,
                                             ______________



                             and Young,* District Judge.
                                         ______________



                                 ____________________



            Enrique Peral with  whom Roberto Boneta and Munoz Boneta  Gonzalez
            _____________            ______________     ______________________

        Arbona Benitez & Peral were on brief for appellant.
        ______________________

            Nestor M. Mendez-Gomez  with whom Pietrantoni Mendez & Alvarez was
            ______________________            ____________________________

        on brief for appellee Kidder, Peabody & Company.

            Maria Bobonis-Zequeira with whom Harry E. Woods and Woods &  Woods
            ______________________           ______________     ______________

        were on brief for appellees Ramon Almonte and Mayleen Gratacos.


____________________



                                  November 12, 1997

                                 ____________________


____________________



        *Of the District of Massachusetts, sitting by designation.



BOUDIN, Circuit Judge.  The present appeal arises out of
                         _____________



            a federal securities lawsuit filed by Cooperativa de Ahorro y



            Credito Aguada ("Cooperativa").  Cooperativa is a small, one-



            branch  savings and  loan  "cooperative" located  in  Aguada,



            Puerto Rico.   Between  June and  December 1986,  Cooperativa



            purchased  $3.5  million  in  Drexel  Burnham  Lambert  "unit



            trusts,"  securities representing  participations in  several



            trusts whose  assets were  corporate bonds.   The  securities



            were  purchased  at  the  recommendation  of  Ramon  Almonte,



            Cooperativa's broker at Kidder, Peabody & Co. ("Kidder").



                 According  to  Cooperativa,  Almonte  told  it  that the



            securities   were   a   low-risk,   safe  and   unspeculative



            investment,  that the  securities  were  not  redeemable  for



            another seven to ten years and that a steady stream of income



            at  favorable  interest   rates  could  be  expected.     The



            securities were in fact backed by low-rated or unrated "junk"



            bonds bearing  high interest rates;  and if the value  of the



            bonds fell drastically,  the trustees had power  to terminate



            the trusts.   Allegedly, Almonte disclosed neither  the risky



            character of the bonds nor the termination provision.



                 In the course of its 1986 purchases of the securities in



            question, Cooperativa received confirmation slips that stated



            that prospectuses were being forwarded  under separate cover.



            No prospectus  covering  these securities  ever  arrived  and



            Cooperativa did  not request copies.   Cooperativa's officers


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were admittedly  unsophisticated in financial matters.   Over



            the  year following the  purchases, the unit  trusts declined



            substantially  in value,  but  their  market  value  was  not



            reported in any public listing.



                 In  June  1987,  Almonte moved  from  Kidder  to another



            brokerage firm, Paine  Webber Inc.  On July  29, 1987, Kidder



            sent  Cooperativa an account summary indicating that the unit



            trusts  had  lost  about ten  percent  of  their  value since



            Cooperativa's  purchases.  Kidder's  letter said that  it was



            prepared "to  analyze these  results in more  detail and  the



            present  situation of your  portfolio."  Cooperativa  did not



            reply  but transferred its account to Paine Webber, following



            Almonte to his new brokerage firm.



                 During    August    1987,    Cooperativa's    investment



            administrator did call Almonte to ask why the unit trusts had



            lost value.    Almonte allegedly  replied that  such ups  and



            downs  were normal,  that the  securities  would soon  regain



            strength  and  that  Cooperativa  would  continue  to receive



            interest payments regardless of market value.  The underlying



            bonds continued to decline in value until July 1989, when the



            trusts were liquidated  by the trustee.   Cooperativa alleges



            that it suffered a  loss of about $780,000 in principal  as a



            result of the purchases.



                 On December 28,  1989, just over  three years after  its



            last  purchase of  the  securities in  question,  Cooperativa


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filed a suit against Almonte,  Kidder, and Paine Webber.  The



            only claims remaining  in this case are  claims under section



            10(b) of the Securities and Exchange Act of 1934, 15 U.S.C.  



            78j(b)   (1997).    The   defendants  pled  the   statute  of



            limitations and extensive litigation ensued addressed to that



            subject.  



                 When the  complaint was  filed in  1989, federal  courts



            applied  the local  statute of  limitations  to claims  under



            section 10(b),  but thereafter  the Supreme  Court adopted  a



            one-and-three-year  limitations   period  for   such  claims.



            Lampf, Pleva, Lipkind,  Prupis & Petigrow v.  Gilbertson, 501
            _________________________________________     __________



            U.S.  350,  364  (1991).    The  district  court  then  found



            Cooperativa's claims barred under this new rule and dismissed



            them.  See Cooperativa de  Ahorro y Credito Aguada v. Kidder,
                   ___ _______________________________________    _______



            Peabody & Co., 777 F. Supp. 153, 156 (D.P.R. 1991).  Congress
            _____________



            then  passed a new  statute providing that  local statutes of



            limitations  should continue to  govern suits filed  prior to
                                                                 _____



            the  Supreme Court  decision,  and allowing  reinstatement of



            claims  that had already been dismissed under the new Supreme



            Court rule.1


____________________



                 1See Federal  Deposit Insurance  Corporation Improvement
                  ___

            Act of 1991, Pub. L. No. 102-242,   476, 105 Stat. 2236, 2387

            (codified  as    27A of  the Securities  and Exchange  Act of

            1934,  15 U.S.C.    78aa-1 (1997)) (superseding  Lampf).  The
                                                             _____

            Act  was  recently  held   unconstitutional  insofar  as   it

            purported   to  reopen  prior   final  judgments,   Plaut  v.
                                                                _____

            Spendthrift Farm, Inc., 514 U.S. 211 (1995).
            ______________________



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Cooperativa then  moved to  reinstate its  section 10(b)



            claims, but  the district court  held that even if  local law



            were applied  the claims  would be  time-barred under  Puerto



            Rico's two-year  statute of limitations  for blue-sky claims.



            799 F.  Supp. 261,  263 (D.P.R. 1992)  (citing 10  L.P.R.A.  



            890(e)).   On appeal,  we remanded for  further consideration



            because the district court had relied on evidence outside the



            pleadings in  dismissing the claim.   993 F.2d 269  (1st Cir.



            1993), cert.  denied, 514 U.S.  1082 (1995).  On  remand, the
                   _____________



            district  court  reached  the  same  conclusion   on  summary



            judgment, 942 F. Supp. 735 (D.P.R. 1996), and we now affirm.2



                 In  securities cases,  federal case law  permits tolling



            for fraudulent concealment  even where state law  does not do



            so.  The statute does not  begin to run until "the time  when



            plaintiff in the exercise  of reasonable diligence discovered



            or should have discovered the  fraud of which he  complains."



            Cook v. Avien,  Inc., 573 F.2d 685, 694 (1st Cir. 1978).  But
            ____    ____________



            "`storm  warnings'  of  the possibility  of  fraud  trigger a



            plaintiff's  duty  to investigate  in  a reasonably  diligent



            manner .  . . and his cause of  action is deemed to accrue on



            the date  when he should have discovered  the alleged fraud."


____________________



                 2Because we agree that the case  should be dismissed, we

            need  not reach  the question  whether  the reinstatement  of

            Cooperativa's  dismissed  claim  was  unconstitutional  under

            Plaut, an issue  neither side has briefed.  See Tirado-Acosta
            _____                                       ___ _____________

            v. Puerto  Rico National Guard,  118 F.3d 852, 854  (1st Cir.
               ___________________________

            1997).



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Maggio v. Gerard Freezer  & Ice Co.,  824 F.2d 123, 128  (1st
            ______    _________________________



            Cir. 1987) (emphasis omitted).



                 The  district  court  held  that,  by  mid-August  1987,



            Cooperativa had reasonable notice of the possibility of fraud



            by  Almonte and did not thereafter  exercise due diligence in



            pursuing the issue.   In reviewing  this assessment, we  take



            all reasonably disputed facts in the light  most favorable to



            Cooperativa.   See J.  Geils Band  Employee  Benefit Plan  v.
                           ___ ______________________________________



            Smith Barney Shearson, Inc.,  76 F.3d 1245, 1250  (1st Cir.),
            ___________________________



            cert. denied, 117  S. Ct. 81 (1996).   And we review  de novo
            ____________                                          _______



            the district  court's decision  that the  record, so  viewed,



            nevertheless  compelled  a  determination  in  favor  of  the



            defendants.  See Maggio, 824 F.2d at 128.
                         ___ ______



                 The securities acquired by Cooperativa were generating a



            very  generous interest rate--over 12  percent at a time when



            Cooperativa  was paying its  own depositors six  percent; the



            confirmation  slips and  the title  of  the units  themselves



            reflected  this facet  of the  investment,  using the  phrase



            "high yield."  Yet Cooperativa knew that within one year (and



            much less for some of the purchases), the market value of the



            investment had dropped  by about $340,000  or ten percent  of



            the original investment.



                 The gravamen of Cooperativa's claim in this case is that



            it had  been assured by  Almonte in 1987 that  its investment



            was  low-risk, safe  and  not  of  a  speculative  character.


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Notwithstanding that bond prices commonly fluctuate, the high



            interest rates coupled with the drastic short-term decline in



            value ought to  have suggested to  a reasonable investor  the



            possibility  that Almonte  had  not accurately  described the
            ___________



            investment.   The  possibility  of  fraud  is  buttressed  by



            Almonte's failure to provide the promised prospectuses.



                 Cooperativa   says  that  it  did  ask  Almonte  for  an



            explanation of the decline.  But even an investor of ordinary



            judgment and experience can  discern that there is  some risk



            in limiting inquiry to the very broker who may have misled or



            even defrauded  the investor.   In  this instance,  moreover,



            there  is no indication  that Almonte provided  anything more



            than  bland   generalities  about  market   fluctuations  and



            repeated reassurances  that the  investment was  safe.   This



            does not seem  sufficient to dispel a reasonable suspicion of



            fraud.



                 Therefore,  in  August  1987,  Cooperativa  had   "storm



            warnings" of fraud and, in the exercise of due diligence, was



            obliged  to do  something more  than sit  on its  hands.   It



            might, for example, have pursued Kidder's offer to assess the



            situation,  Almonte no longer being associated with the firm;



            or it might  have sought  an expert  opinion on  this set  of



            investments from a wholly independent party; or it might have



            made  an  effort  through its  own  resources  to investigate


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promptly the nature of the investment it made.  It took  none



            of these steps.3



                 As it happens, by the fall of 1987, adverse  information



            about high-yield junk bonds from Drexel Burnham in particular



            would not have been hard to uncover.  The extraordinary stock



            market  plunge  in  October 1987  focused  considerable press



            attention  on both junk  bonds and Drexel  Burnham, turning a



            small trickle of  earlier newspaper references into  a swell.



            In any case,  an analyst  could quickly  have identified  the



            inaccuracy of Almonte's alleged description, based  merely on



            the  relatively  poor  ratings of  the  bonds  underlying the



            trusts.



                 We  need not decide  whether the statute  of limitations



            begins  to run on  the date the storm  warnings appear or the



            later  date  on  which an  inquiring  investor  would through



            reasonable  diligence  have discovered  the fraud.   Compare,
                                                                 ________



            e.g.,  General Builders,  796  F.2d  at  13  (suggesting  the
            ____   ________________



            former),  with  Maggio,  824  F.2d  at  129  (suggesting  the
                      ____  ______



            latter).  The time between the two dates in most cases is not



            likely to  be long enough  to affect the  outcome.  So  it is



            here:  even  if the statute  did not begin  to run until  the



                                
            ____________________



                 3Despite  Cooperativa's  claim   to  the  contrary,  the

            obligation  of diligent inquiry exists whether or not Almonte

            is labeled  a "fiduciary."   See Salois  v. The  Dime Savings
                                         ___ ______     _________________

            Bank, ___  F.3d ___,  Nos. 97-1049, 97-1050,  slip op.  at 15
            ____

            n.11  (1st Cir.  Nov.  3,  1997); Maggio,  824  F.2d at  129;
                                              ______

            General Builders Supply  Co. v. River Hill  Coal Venture, 796
            ____________________________    ________________________

            F.2d 8, 12 (1st Cir. 1986).



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fall of 1987, more than  two years elapsed between that point
                          ____



            and late December 1989 when the suit was finally brought.



                 In reaching our conclusion, we give little weight to two



            other pieces  of evidence.   The district court  thought that



            Cooperativa's  responsibility to  investigate was  heightened



            because  of letters from its  own auditors, including ones in



            1985 and 1986, warning that its aggressive investment program



            presented  some  level  of risk  and  ought  to  be carefully



            scrutinized.   There is  force in  Cooperativa's answer  that



            these boilerplate warnings  were not in any  way specifically



            directed to the securities at issue in this case.



                 Conversely,  Cooperativa  is  mistaken  in  invoking  an



            opinion  letter  to it  dated  March  3, 1988,  from  another



            auditor.   The  opinion, apparently  commissioned by  Almonte



            himself, deals  only with  how Cooperativa  might report  its



            investments  in  long-term obligations  and opines  that they



            could still be carried at purchase price despite a decline in



            market value.   The  letter does  not comment at  all on  the



            safety  or riskiness  of the  securities  here involved,  and



            obtaining the opinion does not represent due diligence.



                 In sum, Cooperativa was on notice by mid- or late summer



            1987  that Almonte's  alleged description  of the  securities



            might well  have  been  inaccurate  or even  dishonest.    By



            diligent  inquiry, it  could quickly  have  learned that  the



            alleged  statements  were   false.    Thus  the   statute  of


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limitations began to run no later than the fall of the  1987.



            Its suit, brought  in December 1989, was  therefore barred by



            Puerto Rico's two-year statute of limitations.



                 Affirmed.
                 ________


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