Hertzberg v. Dignity Partners

• Decision Date: 27 August 1999
• Docket Number: No. 98-16394,98-16394
• Citation: 191 F.3d 1076
• Parties: (9th Cir. 1999) HOWARD HERTZBERG; JOHN DEROSA; JEFFREY FEINMAN, on behalf of themselves and others similarly situated, Plaintiffs-Appellants, v. DIGNITY PARTNERS, INC.; BRADLEY N. ROTTER; ALAN B. PERPER; JOHN WARD ROTTER; STEPHEN T. BOW; PAUL A. VOLBERDING, Defendants-Appellees
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1076

191 F.3d 1076 (9th Cir. 1999)

HOWARD HERTZBERG; JOHN DEROSA; JEFFREY FEINMAN, on behalf of themselves and others similarly situated, Plaintiffs-Appellants, v. DIGNITY PARTNERS, INC.; BRADLEY N. ROTTER; ALAN B. PERPER; JOHN WARD ROTTER; STEPHEN T. BOW; PAUL A. VOLBERDING, Defendants-Appellees.

No. 98-16394

UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

Argued and Submitted June 18, 1999

Filed August 27, 1999

Patrick J. Coughlin and Eric A. Issacson, Milberg Weiss Bershad Hynes & Lerach, San Diego, California; Alison M. Tattersall, San Francisco, California; Nadeem Faruqi, Faruqi & Faruqi, New York, New York; Stephen Rodd, Abbey, Gardy & Squitieri, New York, New York, for the plaintiffs appellants.

Gerald W. Palmer, Jones, Day, Reavis & Pogue, Los Angeles, California, for the defendants-appellees. Mark Pennington, Securities & Exchange Commission, Washington, D.C., for the amicus.

Appeal from the United States District Court for the Northern District of California. Charles A. Legge, District Judge, Presiding, D.C. No. CV-96-04558-CAL.

Before: David R. Thompson and William A. Fletcher, Circuit Judges, and Robert S. Lasnik,¹ District Judge Opinion by Judge William A. Fletcher

W. FLETCHER, Circuit Judge:

This case arises out of alleged misstatements and omissions contained in Appellee Dignity Partners, Inc.'s ("Dignity's") registration statement filed with the Securities and Exchange Commission for an initial public offering of Dignity common stock. Dignity was in the business of buying the rights to life insurance proceeds from people with AIDS, paying a lump sum up front and taking over the responsibility for paying the premiums. Shortly after the offering, the fact that AIDS patients were living longer than expected because of new AIDS treatments became public knowledge. As a result of the longer lives of the insured, Dignity posted huge losses, and the stock plummeted.

Plaintiffs/appellants Hertzberg, Derosa, and Feinman ("Hertzberg") are investors who purchased Dignity stock on the open market more than 25 days after the initial offering but before the news of the longer life expectancy or large losses became public knowledge. They brought a class action for several violations of the securities laws by Dignity, including violation of Section 11 of the Securities Act of 1933 ("Securities Act"), 15 U.S.C. S 77k ("Section 11"). Hertzberg claims that Dignity knew of the longer life expectancy but failed to disclose it in the registration statement. The district court dismissed the Section 11 causes of action on the ground that, because appellants had not bought their stock in the initial public offering, or within 25 days thereof, they did not have standing to bring the claim. The district court later found that a proposed new class representative, who had bought Dignity stock within 25 days of the initial offering, was barred by the statute of limitations.

We reverse the district court's holding that the original named plaintiffs lacked standing under Section 11. Because of that holding, we do not reach the statute of limitations issue.

BACKGROUND

On February 14, 1996, Dignity filed a registration statement for an initial public offering of approximately 2.7 million shares of common stock. Hertzberg asserts, on behalf of a class of persons who purchased Dignity stock between February 14, 1996, and July 16, 1996, that the registration statement contained materially false and misleading statements and omitted material facts. He seeks damages under Section 11 as well as under other provisions of the federal securities laws.

Dignity was in the business of making "viatical settlements." It purchased the rights to the proceeds of life insurance policies from individuals with terminal illnesses, and in exchange paid lump sums to the individuals and assumed responsibility for payment of premiums. The amounts Dignity paid to the individuals were based on their estimated life expectancies, and the profits Dignity received depended on the accuracy of those estimates. Nearly all of the individuals from whom Dignity purchased its rights had AIDS.

By 1995, new drugs and treatments for AIDS became available, and many of the individuals with whom Dignity had contracted began to live longer than expected. Hertzberg alleges that, as a consequence, the value of Dignity's business was in jeopardy because it could not collect the life insurance proceeds as rapidly as expected, it had to pay premiums for longer periods than expected, and it could no longer estimate with accuracy the life expectancy of the persons with whom it contracted.

Hertzberg alleges that the owners of this privately held company saw the prospect of their entire investment disappearing and decided to liquidate much of their holding by taking the company public. According to Hertzberg, the financial statements in Dignity's registration statement were misleading because they misrepresented the true worth of the business. Hertzberg alleges that shortly before the offering Dignity adopted the accrual method of accounting, under which Dignity counted the potential proceeds from a particular policy as income as soon as it purchased the rights, rather than when it actually received the proceeds. Hertzberg further alleges that this new accounting method was misleading because it hid the facts that Dignity was taking longer to collect on those policies and that Dignity could no longer accurately estimate when individuals would die. Finally, Hertzberg alleges that Dignity violated Section 11 by failing to disclose its inability to make accurate estimations of life expectancies, the "adverse trends" experienced in 1995, and the fact that its accrual Dignity's accounting method did not comport with Generally Accepted Accounting Principles.

After the facts concerning the lengthened life expectancies for AIDS patients became public knowledge, Dignity's stock fell from the initial offering price of $12 a share to about $6. In June of 1995, less that five months after the beginning of the initial public offering, Dignity announced an anticipated quarterly loss of $10 million, and a month later announced that it would abandon the viatical settlement business. As a result of these announcements, the stock fell to $1 a share before settling at about $2 at the time the action was filed.

Dignity moved to dismiss Hertzberg's Section 11 claims because the named plaintiffs had not purchased their shares "in" the registered offering. The district court, ruling from the bench, held that because the named plaintiffs purchased their stock more than 25 days after the registration statement was filed, they did not have standing to bring an action under Section 11. It therefore dismissed their Section 11 claims.

Nineteen days after the district court's ruling but more than a year after the action had been commenced, unnamed class member Charles Steinberg, who had filed a state court action against the same defendants on February 13, 1997, ² filed a motion to intervene as a named plaintiff in the federal case in order to prosecute the class's Section 11 claim. Steinberg had bought Dignity's registered shares within eight days of the registration statement's effective date, thus coming within the district court's 25-day window.

The district court granted Steinberg's motion to intervene on February 20, 1998, and appellants amended their complaint to include Steinberg as a named plaintiff. Dignity again moved to dismiss, now arguing that the statute of limitations barred the entire class's Section 11 claims. The district court ruled that the class's Section 11 claims were time-barred. It concluded that because the original named plaintiffs had not had standing to bring individual Section 11 claims, their suit could not toll the statute of limitations for unnamed members of the class they had sought to represent.

Observing that the scope of Section 11 had not been resolved by this circuit, the district court invited the parties to submit briefs on whether an immediate appeal should be taken. The parties agreed that final judgment on the dismissed Section 11 claims should be entered under Rule 54(b), and the district court entered an order on June 29, 1998 expressly finding "no just reason for delay" and directing entry of final judgment on those claims. We have jurisdiction under 28 U.S.C. S 1291, and we reverse.

DISCUSSION

We review the district court's interpretation of Section 11 de novo. See In re Stac Elecs. Sec. Litig., 89 F.3d 1399, 1403 (9th Cir. 1996). In determining the meaning of a statute, we look first to its text. In re: Kelly, 841 F.2d 908, 912 (9th Cir. 1988). Section 11(a) provides that where a material fact is misstated or omitted from a registration statement accompanying a stock filing with the Securities and Exchange Commission, "any person acquiring such security" may bring an action for losses caused by the misstatement or omission. 15 U.S.C. S77k(a). The district court read this phrase as if it had been written, "any person acquiring such security on the first day of an initial public offering or in the twenty-five day period thereafter."³ This reading adds a significant limitation not found in the original text.

The term "any person" is quite broad, and we give words their ordinary meaning. United States v. Alvarez-Sanchez, 511 U.S. 350, 357 (1994). According to Webster's Third New Int'l Dictionary (3d ed. 1986), "any" means "one, no matter what one"; "ALL"; "one or more discriminately from all those of a kind." This broad meaning of "any" has been recognized by this circuit. Madrid v. Gomez, 150 F.3d 1030, 1036 (9th Cir. 1998) (the court must accept "the plain meaning of the word `any.' In its conventional usage, `any' means `ALL--used to indicate a maximum or whole.' It certainly does not mean `some.' ") (citations omitted).

The limitation on "any person " is that he or she must have purchased "such security." Clearly, this...