223 F.3d 1155 (10th Cir. 2000), 99-1258, Joseph v Wiles

Docket Nº:99-1258
Citation:223 F.3d 1155
Party Name:JACK JOSEPH, Plaintiff-Appellant, v. Q.T. WILES; GERALD W. GOODMAN; WILLIAM R. HAMBRECHT; GARY E. KOENIG; RUSSELL E. PLANITZER; PAUL N. RISINGER; PATRICK J. SCHLEIBAUM, JESSE C. PARKER; OWEN TARANTA; HAMBRECHT & QUIST GROUP; HAMBRECHT & QUIST VENTURE PARTNERS; HAMBRECHT & QUIST, INC., named as Hambrecht & Quist Incorporated; MORGAN STANLEY & CO. IN
Case Date:August 04, 2000
Court:United States Courts of Appeals, Court of Appeals for the Tenth Circuit
 
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Page 1155

223 F.3d 1155 (10th Cir. 2000)

JACK JOSEPH, Plaintiff-Appellant,

v.

Q.T. WILES; GERALD W. GOODMAN; WILLIAM R. HAMBRECHT; GARY E. KOENIG; RUSSELL E. PLANITZER; PAUL N. RISINGER; PATRICK J. SCHLEIBAUM, JESSE C. PARKER; OWEN TARANTA; HAMBRECHT & QUIST GROUP; HAMBRECHT & QUIST VENTURE PARTNERS; HAMBRECHT & QUIST, INC., named as Hambrecht & Quist Incorporated; MORGAN STANLEY & CO. INCORPORATED; COOPERS & LYBRAND, and Does 1 through 50, Defendants-Appellees,

No. 99-1258

United States Court of Appeals, Tenth Circuit

August 4, 2000

Appeal from the United States District Court for the District of Colorado (D.C. No. 91-M-731)

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Solomon B. Cera of Gold Bennett & Cera LLP, San Francisco, California (Gary Garrigues and Steven J. Mulligan of Gold Bennett & Cera LLP, San Francisco, California; and Frances A. Koncilja of Koncilja & Associates, P.C., Denver, Colorado, with him on the briefs for Plaintiff-Appellant.

Geoffrey F. Aronow of Arnold & Porter, Washington, D.C., and Robert F. Wise, Jr. of Davis Polk & Wardwell, New York, New York (Tim Atkeson and Robert Barrett of Arnold & Porter, Denver, Colorado; Marcy G. Glenn of Holland & Hart LLP, Denver, Colorado; Michael V. Corrigan of Simpson Thacher & Bartlett, New York, New York; Gerald L. Bader, Jr. of Bader & Associates, P.C., Denver, Colorado; John Sullivan of Kirkpatrick & Lockhart, New York, New York; Richard Gabriel of Holme, Roberts & Owen, Denver, Colorado; Cary B. Lerman of Munger, Tolles & Olsen, Los Angeles, California; and H. Alan Dill of Dill, Dill, Carr & Stonbraker, P.C., Denver, Colorado, with them on the brief) for Defendants-Appellees.

Before SEYMOUR, Chief Judge, LUCERO, Circuit Judge and ELLISON, District Judge.[*]

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SEYMOUR, Chief Judge.

In this securities class action suit in the District Court of Colorado, Jack Joseph asserts claims on behalf of himself and others similarly situated pursuant to section 11 of the Securities Act of 1933 (the 1933 Act), 15 U.S.C. § 77k, and section 10(b) of the Securities Exchange Act of 1934 (the 1934 Act), 15 U.S.C. § 78j(b). Defendants prevailed on their motions to dismiss in the district court. On review, we are asked to determine whether a variety of threshold, procedural, and pleading issues prevent plaintiff's claims from going forward. We affirm in part, and reverse and remand in part.

I

The background of this case is complex and involves a prodigious amount of litigation. We therefore set forth only those facts relevant to the disposition of the matter at hand.

On May 21, 1987, MiniScribe Corporation (MiniScribe or the Company), a manufacturer of computer hard disk drives, sold over $97 million worth of convertible debentures in a public offering. These debentures were issued pursuant to a registration statement filed with the Securities and Exchange Commission (SEC). Jack Joseph purchased 250 of the debentures later that year.

In March of 1989, MiniScribe announced that, due to irregularities in its business and accounting practices, its prior financial statements could not be relied upon. Mr. Joseph sold his debentures at a loss of approximately $17,000 in June 1989. An Independent Evaluation Committee report issued the following September disclosed widespread intentional fraud at MiniScribe going back several years, which had resulted in material overstatements of revenues and earnings. In late 1989 the Company revealed that it had a negative net worth of $88 million, and in 1990 it filed for Chapter 11 bankruptcy.

A series of lawsuits was commenced against MiniScribe, its principal officers and directors, venture capital firms that had major investments in the Company, its outside auditors, and the underwriters of the debentures. The first suit brought by debenture holders was a class action filed in federal district court in Colorado on April 5, 1989, asserting claims under section 10(b) but not under section 11. Another action was filed in California state court on May 9, 1989, asserting state law claims as well as claims under section 11. Although this action was filed on behalf of all MiniScribe securities purchasers, it contained no named plaintiffs who had purchased debentures. On November 1, 1989, the complaint was amended to omit the claims under section 11.

On October 4, 1989, a Coordinated Amended Complaint was filed in a new action in federal district court in Colorado on behalf of common stock and debenture purchasers, asserting claims under both section 10(b) and section 11. The plaintiffs in that action moved to certify classes of shareholders and debenture purchasers. The district court held a hearing on those motions on June 15, 1990. During this hearing the court indicated it was not prepared at that time to certify a debenture class, but agreed to allow the debenture holders thirty days to file a separate amended complaint.1 In October 1990, pursuant to the June 15 hearing, the district court certified a shareholder-only class in a related action, Gottlieb v. Wiles, No. 89-M-963 (D. Colo. 1990).

In the meantime, on August 10, 1990, another complaint was filed in state court in California asserting claims under section 11 on behalf of all purchasers, with Mr. Joseph as a named plaintiff. It was subsequently removed and transferred to the federal district court in Colorado. In June 1991, Mr. Joseph moved to certify the class. On October 24, the district court denied Mr. Joseph's motion on the

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grounds that, as an aftermarket purchaser, he lacked standing to pursue a section 11 claim, and that his class claims were barred in any event by the statute of repose.

The shareholder action settled in 1993, and on June 3, 1994, the district court held a hearing in which he ordered any remaining debenture purchasers to file their claims in the MiniScribe litigation. On July 5, 1994, Mr. Joseph filed an amended complaint in the present action, asserting claims under section 10(b) and section 11. Defendants moved to dismiss for failure to state a claim. See Fed. R. Civ. P. 12(b)(6). In 1999, the district court granted the motions in a brief order, summarily concluding that the claims were untimely and that the allegations in Mr. Joseph's complaint would not be sufficient for class certification in any event. Mr. Joseph appeals.

We review de novo a district court's decision to dismiss a complaint under Rule 12(b)(6). See Grossman v. Novell, Inc., 120 F.3d 1112, 1118 (10th Cir. 1997).

II

Mr. Joseph's arguments on appeal are directed at several different points: the district court's conclusion in its October 24, 1991 order that Mr. Joseph lacked standing under section 11 because he was an aftermarket purchaser; defendants' contention in their Rule 12(b)(6) motions that Mr. Joseph failed to allege reliance as required for his section 10(b) claim; and, finally, the timeliness of his claims. Specifically, Mr. Joseph argues first that the district court erred in determining he lacked standing as an aftermarket purchaser to assert claims under section 11. Second, Mr. Joseph contends he is entitled to a presumption of reliance sufficient to sustain his claim under section 10(b). Finally, he asserts that his claims were timely filed because he is entitled (1) to a tolling of the limitations period on his claims while class certification was pending, and (2) to the relation-back of his 10(b) claims to the August 10, 1990, state court complaint. We address each issue in turn.

A. Standing Under Section 11 for Aftermarket Purchasers

Section 11 provides that where a material fact is misstated or omitted from a registration statement accompanying a stock filing with the SEC, "any person acquiring such security" may bring an action for losses caused by the misstatement or omission. 15 U.S.C. § 77k(a). Defendants argue Mr. Joseph lacks standing to pursue his section 11 claim because he purchased his debentures in the secondary market. The district court agreed in its 1991 opinion denying Mr. Joseph's motion for class certification, holding that "[s]ection 11 is limited to the initial distribution of securities." Rec., vol. II at 608. The court concluded that Mr. Joseph's class could not be certified because he would be unable to represent those members who bought their debentures in the initial distribution.

We have not previously had occasion to determine whether aftermarket purchasers have standing to sue under section 11, a question which is vigorously debated. Both parties cite us to numerous district court opinions which have come down on both sides of the controversy. Compare In re Summit Med. Sys., Inc., 10 F.Supp.2d 1068, 1070 (D. Minn. 1998) (holding aftermarket purchasers lacked standing under section 11) and Gannon v. Continental Ins. Co., 920 F.Supp. 566, 575 (D.N.J. 1996) (same) with Adair v. Bristol Tech. Sys., Inc., 179 F.R.D. 126, 130-33 (S.D.N.Y. 1998) (holding aftermarket purchasers had standing under section 11) and Schwartz v. Celestial Seasonings, Inc., 178 F.R.D. 545, 555-57 (D. Colo. 1998) (same). The federal courts of appeal addressing this issue have agreed that section 11 covers aftermarket purchasers. See Hertzberg v. Dignity Partners, Inc., 191 F.3d 1076 (9th Cir. 1999); Versyss, Inc. v. Coopers & Lybrand, 982 F.2d 653, 654

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(1st Cir. 1992); Barnes v. Osofsky, 373 F.2d 269 (2d Cir. 1967). Defendants contend the Supreme Court, in construing another section of the 1933 Act, indicated that the opposite result is correct. See Gustafson v. Alloyd Co., Inc., 513 U.S. 561 (1995) (construing § 12(2)).

After considering the statutory language, legislative history, analogous Supreme Court authority, and case law from other circuits, we are convinced that Mr. Joseph has the better argument. For the reasons set out below, we conclude that an...

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