Jackson Nat. Life Ins. Co. v. Merrill Lynch & Co., Inc., 1555

CourtUnited States Courts of Appeals. United States Court of Appeals (2nd Circuit)
Citation32 F.3d 697
Docket NumberNo. 1555,D,1555
Parties, Fed. Sec. L. Rep. P 98,361 JACKSON NATIONAL LIFE INSURANCE COMPANY, Plaintiff-Appellant, v. MERRILL LYNCH & CO., INC., Merrill Lynch Pierce, Fenner & Smith Incorporated, presently doing business as Merrill Lynch & Company, formerly doing business as Merrill Lynch Capital Markets, Defendants-Appellees. ocket 93-9287.
Decision Date12 August 1994

Raymond A. Levites, New York City (Richard Cashman, Diane Britton, Pavelic & Levites P.C., of counsel), for plaintiff-appellant.

Jack C. Auspitz, New York City (Debra Freeman, Claire Silberman, Morrison & Foerster, of counsel), for defendants-appellees.

Before: PRATT and WALKER, Circuit Judges, and MOTLEY, District Judge. *

WALKER, Circuit Judge:

Plaintiff Jackson National Life Insurance Company ("Jackson National") appeals from a judgment of the United States District Court for the Southern District of New York (John F. Keenan, Judge ), that dismissed, pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, Jackson National's claims under Secs. 11 and 12(2) of the Securities Act of 1933 (the " '33 Act"), 15 U.S.C. Secs. 77k, 77l (2), as barred by the statute of limitations, and its claim under Sec. 20A of the Securities Exchange Act of 1934 (the " '34 Act"), 15 U.S.C. Sec. 78t-1, for failure to plead a predicate violation of the '34 Act. For the reasons that follow, we affirm.

BACKGROUND

We review de novo the district court's dismissal under Rule 12(b)(6) of the Federal Rules of Civil Procedure, taking as true the facts alleged in the complaint and drawing all Insilco is a publicly held corporation listed on the New York Stock Exchange. In August 1988 Insilco was purchased by a group of investors in a leveraged buyout (the "LBO") orchestrated by Merrill Lynch & Co., Inc. ("Merrill Lynch"). As a result of the LBO, Insilco took on a substantial amount of debt that included approximately $405 million in "bridge financing" provided by Merrill Lynch to ensure the deal's success. The terms of the bridge loan required Insilco to engage in a public offering of high-yield "junk" bonds and warrants as soon as was practicable, and to use the proceeds, among other purposes, to repay the bridge financing provided by Merrill Lynch.

reasonable inferences in the plaintiff's favor. Allen v. Westpoint-Pepperell, Inc., 945 F.2d 40, 44 (2d Cir.1991). Jackson National's claims arise out of what it contends was a fraudulently induced investment in Insilco Corporation ("Insilco"). The complaint alleges the following facts leading up to this suit.

In January 1989, Insilco undertook the public offering of additional debt securities and stock warrants with Merrill Lynch acting as its underwriter. The terms of the offering, including the proposed use of the proceeds to retire the bridge financing, were disclosed in a prospectus dated January 13, 1989, and a registration statement effective the same date. In response to solicitation by Merrill Lynch, Jackson National purchased nearly $8 million in principal amount of Insilco securities on January 23, 1989.

In May 1990, with the substantial debt burden from the LBO and public offering taking its toll, Insilco proposed a recapitalization to reduce its debt-to-equity ratio. Insilco promoted the recapitalization through a preliminary offering memorandum (the "Offering Memorandum") it filed with the Securities and Exchange Commission that disclosed updated information about the company's financial condition. The recapitalization plan ultimately failed, and in January 1991 Insilco filed for protection under the Bankruptcy Code.

Jackson National brought this suit claiming that Merrill Lynch participated in the distribution of securities through a materially misleading prospectus and registration statement. The complaint alleges three material misstatements or omissions: (1) the prospectus falsely indicated that the January 1989 offering was being conducted on an "all-or-none" basis when Merrill Lynch knew all the securities could not be sold to the public; (2) the prospectus failed to disclose that the "qualified independent underwriter," whose involvement was required by rules of the National Association of Securities Dealers, was not informed that the offering could not be conducted on an all-or-none basis because there was no public market for the entire offering; and (3) the prospectus failed to warn that the LBO had rendered Insilco insolvent before the offering took place.

The parties entered into a tolling agreement which deems all claims to have been filed as of June 28, 1991, the effective date of the agreement. Judge Keenan held that Jackson National's claims under Secs. 11 and 12(2) of the '33 Act were barred by the statute of limitations because even if the initial prospectus was misleading, the warnings in the prospectus and the subsequent Offering Memorandum put Jackson National on "inquiry notice" of the fraud more than one year before the tolling date. The court also held that Jackson National did not state a claim under Sec. 20A of the '34 Act because it did not plead a predicate violation of the '34 Act as Sec. 20A requires. On appeal, Jackson National challenges each of the district court's rulings.

DISCUSSION
I. The '33 Act Claims: Inquiry Notice

The statute of limitations applicable to Secs. 11 and 12(2) is contained in Sec. 13 of the '33 Act, 15 U.S.C. Sec. 77m, which provides in part as follows:

No action shall be maintained to enforce any liability created under section 77k [Sec. 11] or 771(2) [Sec. 12(2) ] of this title unless brought within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence.... (emphasis added).

Section 13 imposes a duty of inquiry on would-be plaintiffs which requires the plaintiff to bring suit within one year after "the plaintiff obtains actual knowledge of the facts giving rise to the action or notice of the facts, which in the exercise of reasonable diligence, would have led to actual knowledge." Kahn v. Kohlberg, Kravis, Roberts & Co., 970 F.2d 1030, 1042 (2d Cir.), cert. denied, --- U.S. ----, 113 S.Ct. 494, 121 L.Ed.2d 432 (1992). A person is said to be on inquiry notice where "the circumstances are such as to suggest to a person of ordinary intelligence the probability that he has been defrauded." Armstrong v. McAlpin, 699 F.2d 79, 88 (2d Cir.1983) (internal quotations omitted). Applying these precepts to this case, we agree with the district court that Jackson National had at its disposal facts from which it could have discovered the misstatements it alleges more than one year before the tolling date.

A. The "All or None" Claims

Jackson National contends that the prospectus falsely stated that the January 1989 public offering would be conducted on an "all-or-none" basis--that is, Merrill Lynch would not close the offering unless all the securities were sold to the public, and if the offering did not close, subscribing investors would have their money returned. Jackson National also claims it was misled because Merrill Lynch did not inform the qualified independent underwriter that the offering could not be closed on an all-or-none basis. In fact, Merrill Lynch never fully distributed the securities to the public and still retains a sizable percentage of the offering. Jackson National bases this claim on language on the first page of the prospectus stating: "None of the Securities will be sold unless all are sold, but the Debt Securities and the Warrants are not being sold as units."

We pause to note that the phrase in question is ambiguous since it is not clear whether the required sale of "all" the securities refers to a sale from the issuer to the underwriter, as Merrill Lynch contends, or to a sale from the underwriter to the public, as Jackson National contends. However, even if the language clearly conveyed the meaning Jackson National ascribes to it, the question in this case remains whether Jackson National possessed sufficient facts which would have led it, through the exercise of reasonable diligence, to discover the falsity of this "all-or-none" representation more than one year prior to the June 28, 1991 tolling date. We think there were sufficient early storm warnings to put Jackson National on inquiry notice that this was not an all-or-none offering.

First and foremost, the prospectus contained no provisions for escrow accounts and refund arrangements. Escrow provisions are required by law in all-or-none underwritings because funds received must be held in escrow, and, if the target number of securities cannot be sold by the closing date, returned to those who subscribed previously. See Exchange Act Rule 15c2-4(b), 17 C.F.R. Sec. 240.15c2-4(b) (deeming it a "fraudulent, deceptive, or manipulative act or practice" to accept funds in all-or-none offering unless written escrow arrangement is in place); SEC v. Coven, 581 F.2d 1020, 1022 (2d Cir.1978), cert. denied, 440 U.S. 950, 99 S.Ct. 1432, 59 L.Ed.2d 640 (1979). The absence of any provision for a written escrow agreement is virtually conclusive evidence that this was not an all-or-none offering.

Additionally, the 1989 Insilco offering was conducted by Merrill Lynch on a "firm commitment" basis. In a firm commitment underwriting, the underwriter agrees to purchase an agreed upon percentage of the offering irrespective of whether the securities can be sold in the public market; therefore, the underwriter bears the risk if the offering is undersubscribed. See SEC v. Coven, 581 F.2d at 1022 n. 2. As the able district judge noted, "it would make little business sense for Merrill Lynch to" agree to buy all the securities from Insilco, and then commit "not to retail a single item unless it could sell the entire inventory." Jackson National Life Ins. Co. v. Merrill Lynch & Co., No. 93 Civ. 0739 (JFK...

To continue reading

Request your trial
184 cases
  • In re Aegean Marine Petroleum Network, Inc. Sec. Litig.
    • United States
    • U.S. District Court — Southern District of New York
    • March 29, 2021
    ...that the defendant traded the security at issue contemporaneously with the plaintiff." Id.; see also Jackson Nat. Life Ins. Co. v. Merrill Lynch & Co., 32 F.3d 697, 703 (2d Cir. 1994) ("to state a claim under § 20A, a plaintiff must plead a predicate violation of the ‘34 Act or its rules an......
  • Edward J. Goodman Life Income v. Jabil Circuit
    • United States
    • U.S. District Court — Middle District of Florida
    • January 26, 2009
    ...a plaintiff must plead a predicate violation of the Act or an implementing rule or regulation. See Jackson Nat'l Life Ins. Co. v. Merrill Lynch & Co., Inc., 32 F.3d 697, 703 (2d Cir.1994). The plaintiff must also allege that the defendant, while in the possession of "material, non-public in......
  • Olcott v. Delaware Flood Co., s. 92-5242
    • United States
    • U.S. Court of Appeals — Tenth Circuit
    • February 26, 1996
    ...to accrue. See, e.g., Whirlpool Fin. Corp. v. GN Holdings, Inc., 67 F.3d 605, 609-10 (7th Cir.1995); Jackson Nat'l Life Ins. Co. v. Merrill Lynch & Co., 32 F.3d 697, 700-01 (2d Cir.1994); Anixter v. Home-Stake Prod. Co., 947 F.2d 897, 898-99 (10th Cir.1991).13 As noted above, we have adopte......
  • Picard Chemical Inc. Profit Sharing Plan v. Perrigo
    • United States
    • U.S. District Court — Western District of Michigan
    • July 25, 1996
    ...violation under one of the other provisions of the Exchange Act or the rules promulgated thereunder. Jackson Nat'l Life Ins. Co. v. Merrill Lynch & Co., Inc., 32 F.3d 697, 703 (2d Cir.1994). Section 20A claims also sound in fraud and must therefore be pled with particularity under Fed.R.Civ......
  • Request a trial to view additional results

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT