Mathews v. Kidder & Peabody

• Decision Date: 31 July 2001
• Docket Number: No. 00-2566,00-2566
• Parties: (3rd Cir. 2001) JOHN W. MATHEWS; CAROLE ANN NUCKTON; PATRICIA J. LESTER; JORDAN BRODSKY; THOMAS C. CHESTNEY; DEBORAH W. TROEMNER; WILLIAM J. WATERMAN, JR.; VERNON L. SCHATZ; SUSANNE DIANE ANDERSON; LARRY C. ANDERSON; GEORGE P. ARNOLD; ANN M. ARNOLD, APPELLANTS v. KIDDER, PEABODY & CO., INC., A DELAWARE CORPORATION; KP REALTY ADVISERS, INC., A DELAWARE CORPORATION; HSM, INC., A TEXAS CORPORATION; HENRY S. MILLER CO; HENRY S. MILLER MANAGEMENT CORPORATION; HENRY S. MILLER APPRAISAL CORPORATION; HSM REAL ESTATE SECURITIES CORPORATION; MILLER REAL ESTATE SERVICES CORPORATION, A TEXAS CORPORATION
• Court: U.S. Court of Appeals — Third Circuit

Page 239

260 F.3d 239 (3rd Cir. 2001)

JOHN W. MATHEWS; CAROLE ANN NUCKTON; PATRICIA J. LESTER; JORDAN BRODSKY; THOMAS C. CHESTNEY; DEBORAH W. TROEMNER; WILLIAM J. WATERMAN, JR.; VERNON L. SCHATZ; SUSANNE DIANE ANDERSON; LARRY C. ANDERSON; GEORGE P. ARNOLD; ANN M. ARNOLD, APPELLANTS v. KIDDER, PEABODY & CO., INC., A DELAWARE CORPORATION; KP REALTY ADVISERS, INC., A DELAWARE CORPORATION; HSM, INC., A TEXAS CORPORATION; HENRY S. MILLER CO; HENRY S. MILLER MANAGEMENT CORPORATION; HENRY S. MILLER APPRAISAL CORPORATION; HSM REAL ESTATE SECURITIES CORPORATION; MILLER REAL ESTATE SERVICES CORPORATION, A TEXAS CORPORATION

No. 00-2566

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

Argued June 25, 2001

Filed July 31, 2001

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA (D.C. No. 95-CV-00085) District Judge: The Honorable Donetta W. Ambrose

[Copyrighted Material Omitted]

Anthony P. Picadio, Esq. (Argued) Tybe A. Brett, Esq. Picadio, McCall, Kane & Norton 600 Grant Street 4710 Usx Tower Pittsburgh, PA 15219 Attorney for Appellants

David L. McClenahan, Esq. (Argued) Kenneth M. Argentieri, Esq. Michael J. Lynch, Esq. Paul E. Del Vecchio, Esq. Kirkpatrick & Lockhart 535 Smithfield Street Henry W. Oliver Building Pittsburgh, PA 15222 Attorneys for Appellees Kidder, Peabody & Co., Inc and KP Realty Advisers, Inc.

William M. Wycoff, Esq. Thorp, Reed & Armstrong 301 Grant Street One Oxford Centre Pittsburgh, PA 15219 Attorneys for Appellees Hsm, Inc., Henry S. Miller Co, Henry S. Miller Management Corporation, Henry S. Miller Appraisal Corporation, Hsm Real Estate Securities Corporation and Miller Real Estate Services Corporation

Before: Nygaard and Weis, Circuit Judges, and REAVLEY,^* Circuit Judge.

OPINION OF THE COURT

Nygaard, Circuit Judge

The Appellants in this case are a number of self-professed conservative, first-time investors who purchased securities from Kidder Peabody & Co., Inc. and the Henry S. Miller Organization. They claim that Kidder and Miller fraudulently misrepresented the securities as low-risk vehicles similar to municipal bonds. Ultimately, the securities failed and the Appellants brought civil RICO claims. After extensive discovery, the District Court granted summary judgment to Kidder and Miller and held that the Appellants' claims were barred by the applicable four-year statute of limitations. On appeal, the Appellants contend that the court erred in three major respects: It incorrectly concluded that the Appellants were injured at the time they purchased the securities; it erred in holding that the Appellants were on inquiry notice of their injuries no later than early 1990; and, finally, it erred in refusing to equitably toll the statute of limitations. We will affirm.

I. FACTS

This case involves a securities class action brought against Kidder, a retail brokerage house, and Miller, "a multi-faceted real-estate management, appraisal, and investment organization." App. at 35. In the early 1980s, brokerage houses began working with real estate companies, such as Miller, to offer investment opportunities. They often sought to take advantage of the booming construction markets in the south and southwest regions of the United States known as the "Sunbelt." The companies formed limited partnerships, purchased Sunbelt commercial real estate, and sold interests to the general public. They marketed the investments as tax shelters, long-term capital gain opportunities, and income-producing plans.

In 1981, Kidder and Miller created three separate investment funds. The two companies formed wholly owned subsidiaries to serve as general partners for the funds, and then sold limited partnerships to the public. The plan was to acquire commercial real estate properties in the Sunbelt, collect rental income (thus providing a steady, but modest, income stream for investors), and eventually sell the properties six to ten years later and collect substantial capital gains. The bulk of the return for investors was to come from appreciation in the properties.

Kidder prepared and distributed to its brokers a prospectus, sales information, a videotape, and other reference materials describing the first investment fund.¹ In May 1992, Kidder began selling limited partnership units in that fund. By May 1986, it had sold units in all three funds to more than six thousand investors and raised approximately eighty-four million dollars. The funds purchased properties in Texas, Florida, Georgia, New Mexico, Arizona, Arkansas, and Illinois.

The crux of the Appellants' claims is that Kidder fraudulently suggested that the funds were low-risk, conservative investments suitable for low net-worth individuals. The Appellants believe that Kidder specifically targeted unsophisticated investors, intentionally misled them about the nature of the funds, and charged excessive fees and commissions. These acts allegedly constituted violations of the federal securities laws,² wire fraud, 18 U.S.C. S 1343, mail fraud, 18 U.S.C. S 1341, and RICO violations.

Furthermore, the Appellants claim that Kidder conducted inadequate due diligence in choosing commercial real estate investments. As a result, at least in part, fund properties lost many of their key tenants, and quarterly distributions (to limited partners) fell to only a few dollars per unit. Additional economic factors also weakened the Sunbelt real estate market as a whole,³ and the value of the funds' investments plunged. Nonetheless, the Appellants claim that Kidder intentionally "lulled [them] into a false sense of security that `things would probably work out and substantial losses would be avoided.' " App. at 39.

Economic conditions did not improve. By August 1991, Funds I and II had stopped paying quarterly distributions. In April 1992, Kidder informed investors that conditions were unlikely to rebound, and therefore it was initiating an "exit strategy." App. at 40. By 1994, all three funds had announced their intention to liquidate, which they accomplished between February and November of 1997.

II. PROCEDURAL HISTORY

John W. Mathews invested $20,000 in Fund II in 1984. He allegedly relied primarily upon oral representations by a Kidder broker. As the fund's value deteriorated, Mathews became understandably frustrated and disappointed. On January 23, 1995, he filed a class action complaint contending that Kidder had intentionally misrepresented the inherent risks associated with the funds and therefore had fraudulently induced him and others to invest. He claimed that Kidder had engaged in a pattern of racketeering activity prohibited by the federal RICO statute, 18 U.S.C. SS 1961 et seq.. Specifically, he claimed that Kidder had committed the predicate acts of securities fraud, mail fraud, and wire fraud.⁴

In response, Kidder filed a motion to dismiss. It claimed that: (1) Mathews lacked standing to assert claims involving Funds I and III because he had only invested in Fund II, (2) Mathews had failed to allege the necessary RICO elements, and (3) his claims were barred by RICO's four-year statute of limitations. The District Court denied the motion without prejudice. The court agreed that Mathews lacked standing concerning Funds I and III, but held that he could pursue his claims relating to Fund II. As to Kidder's remaining objections, the court allowed the case to move forward to develop a more complete record.

Both parties quickly filed additional motions. Mathews sought to amend his complaint to include plaintiffs who had invested in Funds I and III. Ultimately, he moved for class certification, including investors in all three funds. Kidder opposed Mathews' requests on procedural grounds, and in addition, argued that the Private Securities Litigation Reform Act of 1995 ("PSLRA") barred Mathews' RICO action. The PSLRA, which Congress enacted on December 22, 1995, amended the federal RICO statute and explicitly eliminated securities fraud as a predicate act. See Pub. L. No. 104-67, S 107, 109 Stat. 737, 758 (1995), amending 18 U.S.C. S 1964(c) (1994).

The District Court held that the PSLRA did not bar Mathews' RICO claim. See Mathews v. Kidder Peabody & Co., Inc., 947 F.Supp. 180 (W.D. Pa. 1996). In addition, the court allowed Mathews to amend his complaint to include investors in Funds I and III, and it certified his requested class. Kidder filed an interlocutory appeal to this Court arguing that the PSLRA should apply retroactively to suits pending when the Act was passed. We rejected that claim. See Mathews v. Kidder Peabody & Co., Inc., 161 F.3d 156, 170-71 (3d Cir. 1998) ("[W]e are extremely reluctant to create causes of action that did not previously exist, or --as in this case -- to destroy causes of action and remedies that clearly did exist before Congress acted.").

Discovery continued until November 1999. Kidder then moved for summary judgment, or alternatively to decertify the plaintiff class. Mathews opposed these motions, and once again, sought to amend the complaint. In particular, he wanted to add a new allegation claiming that the Kidder prospectus itself was fraudulent, because it misrepresented the inherent risks of the investment. The District Court denied Mathews' motion to amend. The court cited "undue prejudice to Defendants, undue delay on the part of the Movant, the Movant's repeated failure to cure deficiencies by previous amendments and futility of amendment." App. at 29. It held that amending the complaint would unduly prejudice the defendants because it "would necessitate the taking of significant additional discovery and the difficulties that would entail is persuasive." App. at 29. Mathews filed a motion for reconsideration, which was denied.

On August 18, 2000, the District Court issued a thoughtful and thorough seventy-four page opinion and order granting Kidder's motion for summary judgment. See App. at 33-106. The court held that Mathews' claims were barred by the applicable...