Benak ex rel. Alliance Premier v. Alliance Capital

• Decision Date: 13 January 2006
• Docket Number: No. 05-1070.,05-1070.
• Citation: 435 F.3d 396
• Parties: Patricia BENAK, on behalf of ALLIANCE PREMIER GROWTH FUND, v. ALLIANCE CAPITAL MANAGEMENT L.P.; John D. Carifa; Alfred Harrison; Mark D. Gersten; Ruth Block; David H. Dievler; John H. Dobkin; William H. Foul, Jr.; James M. Hester; Clifford L. Michel; Donald J. Robinson.
• Court: U.S. Court of Appeals — Third Circuit

Page 396

435 F.3d 396

Patricia BENAK, on behalf of ALLIANCE PREMIER GROWTH FUND, v. ALLIANCE CAPITAL MANAGEMENT L.P.; John D. Carifa; Alfred Harrison; Mark D. Gersten; Ruth Block; David H. Dievler; John H. Dobkin; William H. Foul, Jr.; James M. Hester; Clifford L. Michel; Donald J. Robinson.

No. 05-1070.

United States Court of Appeals, Third Circuit.

Submitted Under Third Circuit LAR 34.1(a) November 18, 2005.

Opinion Filed: January 13, 2006.

James Bonner, Shalov, Stone & Bonner, New York, NY, for Appellants Patrick J. Goggins, Laura H. Goggins, and Fred B. Voigt.

Mark A. Kirsch, James F. Moyle, Jason A. D'Angelo, Clifford Chance US, New York, N.Y. and Herbert J. Stern, Stern & Kilcullen, Roseland, NJ, for Appellees Alliance Cap. Mgmt., John D. Carifa, Alfred Harrison, and Mark D. Gersten.

G. Stewart Webb, Jr., Venable, Baltimore, MD and John L. Hardiman, Sullivan & Cromwell, New York, NY, for Appellees Alliance Premier Growth Fund, Ruth Block, David H. Dievler, John H. Dobkin, William H. Foulk, Jr., James M. Hester, Clifford L. Michel, and Donald J. Robinson.

Before BARRY and AMBRO, Circuit Judges, and POLLAK,^* District Judge.

OPINION OF THE COURT

BARRY, Circuit Judge.

Appellees — Alliance Capital Management L.P. ("Alliance Capital"), which was the investment advisor to the Alliance Premier Growth Fund, Inc. (the "Fund"); Alfred Harrison, the premier portfolio manager of the Fund; and a number of former directors and officers of the Fund — and appellants, shareholders in the Fund from October 30, 2000 through November 29, 2001 (the "Class Period"), are before us on appellants' appeal of the District Court's dismissal of their complaint on statute of limitations grounds. We will affirm.

I. Background

During the Class Period, the Fund — a long term capital growth fund — held and continued to purchase shares of Enron stock. As of November 30, 2000, the Fund held $157,536,750 worth of Enron stock, as indicated in the Fund's 2000 annual report to the SEC. (Amended Class Action Compl. ("Am.Compl.") ¶ 73, A89.) Over the course of the next six months, the Fund acquired an additional 4,765,800 shares. Apparently, no Fund report issued between the May 31, 2001 semi-annual report and Enron's bankruptcy. During that time period, however, concerns about Enron's solvency began to be discussed publicly.

In their amended class action complaint of December 8, 2003, appellants referenced numerous news accounts beginning as early as September of 2000 and accelerating in the late summer and early fall of 2001 regarding Enron's financial health and accounting practices.¹ The end of October and beginning of November brought more specific accounts of trouble at Enron.² Concern continued to heighten as November waned,³ particularly focused around a proposed acquisition of Enron by Dynegy that fell through in late November.⁴ Throughout this period, Alliance's internal analysts gave voice to these concerns.⁵

Enron finally collapsed, filing for bankruptcy on December 2, 2001. In the days immediately following that filing, reports of investors surprised by the collapse and the losses they sustained pervaded the media.⁶ Of particular relevance here, Alliance's large stake in Enron was referenced and Fund portfolio manager Harrison was quoted regarding Enron's demise.⁷

Moreover, in the week following Enron's collapse, The New York Times reported a potential conflict of interest of an Alliance insider, Frank Savage, who was on the boards of both Alliance and Enron during the relevant period of time.⁸ The same day that the Times article appeared, Patricia Benak filed a complaint (the "Benak complaint") against Alliance in the U.S. District Court for District of New Jersey, alleging Investment Company Act claims.⁹ The complaint in the litigation now before us was initially filed on December 13, 2002 — more than a year after the Enron bankruptcy and the Benak complaint — in the U.S. District Court for the Southern District of New York by Patrick and Laura Goggins (the "Goggins complaint"), and was transferred to the District of New Jersey on August 13, 2003. The factual basis of the Goggins complaint, as subsequently amended, closely tracks that of the Benak complaint.

According to the Goggins complaint, in October and November 2001, as the reports of Enron's worsening financial state increased, appellees continued to invest in the company.¹⁰ As already noted, media coverage around and after Enron's fall included reference to Alliance's holdings in Enron, and either explicitly or implicitly referenced Alliance's losses.¹¹ Alliance's continued investment up until Enron's bitter end, despite the negative news accounts and communications to and by analysts at Alliance manifesting concern about Enron's solvency,¹² was the basis for appellants' §§ 11 and 12 claims.¹³ Appellants argue that the Fund's publicized claims regarding the type of investment strategies employed and companies invested in were materially misleading in light of the Fund's continued and increasing stake in Enron in the autumn of 2001.

Appellees pointed to the same reports of Enron's financial state to assert their affirmative defense that appellants were on inquiry notice prior to December 13, 2001 — one year before the December 13, 2002 filing of the initial Goggins complaint. They also point to the December 7, 2001 filing of the Benak complaint. In response, appellants argue that information critical to their complaint was not available until after December 13, 2001, in particular, that they had no way of knowing what Alliance's Enron holdings were until they received the Fund's report early in 2002. They also cite a Senate report published in the summer of 2002 that revealed important information about potential relevant conflicts at Alliance, although they did not reference that report in their initial complaint.

The District Court dismissed the Goggins complaint on December 10, 2004. Its opinion reviewed the newspaper accounts and public information cited in the complaint, as well as additional newspaper articles submitted by appellees, and concluded that this information, along with knowledge that the Fund held Enron shares prior to the bankruptcy filing, was more than sufficient to place appellants on inquiry notice prior to December 13, 2001. The Court also referenced the Benak complaint, noting that its early filing was somewhat probative of the information that was available to reasonable investors at the time.

II. Jurisdiction and Standard of Review

We have jurisdiction under 28 U.S.C. § 1291. The District Court dismissed the complaint under Rule 12(b)(6) of the Federal Rules of Civil Procedure. Our review of that dismissal, therefore, is plenary. See Gallo v. City of Philadelphia, 161 F.3d 217, 221 (3d Cir. 1998). We must accept as true all allegations in the complaint and draw all reasonable inferences from those facts in the light most favorable to plaintiffs — here, appellants. Rocks v. City of Philadelphia, 868 F.2d 644, 645 (3d Cir. 1989). The dismissal must be upheld "if it appears to a certainty that no relief could be granted under any set of facts which could be proved." D.P. Enters., Inc. v. Bucks County Community College, 725 F.2d 943, 944 (3d Cir. 1984). We need not, however, credit "bald assertions" or "legal conclusions." Evancho v. Fisher, 423 F.3d 347, 351 (3d Cir. 2005).

III. Analysis

There is no dispute that the relevant statute of limitations for appellants' claims is "one year after discovery of the facts constituting the violation and within three years after such violation." 15 U.S.C. § 78i(e).¹⁴ Appellants filed the initial Goggins complaint on December 13, 2002. The relevant date, therefore, for evaluating appellants' notice of their claims is December 13, 2001.

In dismissing the amended class action complaint, the District Court applied an inquiry notice standard. In In re NAHC, Inc. Sec. Litig., 306 F.3d 1314 (3d Cir. 2002), we made it clear that "[t]o the extent a securities fraud plaintiff was on inquiry notice of the basis for claims more than one year prior to bringing the action, his or her claim is subsequently time-barred by the requisite statute of limitations." Id. at 1325. "[T]he one-year period begins to run when the plaintiffs `discovered or in the exercise of reasonable diligence should have discovered the basis for their claim' against the defendant." Id. (quoting Gruber v. Price Waterhouse, 697 F. Supp. 859, 863 (E.D. Pa. 1988)).

Whether the plaintiffs, in the exercise of reasonable diligence, should have known of the basis for their claims depends on whether they had "sufficient information of possible wrongdoing to place them on `inquiry notice' or to excite `storm warnings' of culpable activity."

Id. (adding that the "test for `storm warnings is an objective one, based on whether a `reasonable investor of ordinary intelligence would have discovered the information and recognized it as a storm warning'") (citations omitted); see In re Daimlerchrysler AG Sec. Litig., 269 F. Supp. 2d 508, 513 (D. Del. 2003). Plaintiffs cannot avoid the time bar simply by claiming they lacked knowledge "of the details or `narrow aspects' of the alleged fraud." NAHC, 306 F.3d at 1326 (quoting In re Prudential Ins. Co. of Am. Sales Practices Litig., 975 F. Supp. 584, 599 (D.N.J. 1997)). Rather, the clock starts when they "`should have discovered the general fraudulent scheme.'" Id. (quoting Prudential, 975 F. Supp. at 599); see Mathews v. Kidder, Peabody & Co., Inc., 260 F.3d 239, 252 (3d Cir. 2001) ("[I]nvestors are presumed to have read prospectuses, quarterly reports, and other information related to their investments."); In re Initial Public Offering Sec. Litig., 341 F. Supp. 2d 328, 345 (S.D.N.Y. 2004) ("A plaintiff in a securities fraud case `is charged with knowledge of publicly available news articles and analyst's reports to the extent that they constitute storm warnings sufficient to trigger inquiry notice."...