Ceres Partners v. GEL Associates

• Decision Date: 09 June 1989
• Docket Number: No. 89 Civ. 1092 (MP).,89 Civ. 1092 (MP).
• Parties: CERES PARTNERS, Plaintiff, v. GEL ASSOCIATES, Gollust, Tierney and Oliver, Coniston Partners, Gollust & Tierney, Inc., Keith R. Gollust, Paul E. Tierney, Jr. and Augustus K. Oliver, Defendants.
• Court: U.S. District Court — Southern District of New York

714 F. Supp. 679

CERES PARTNERS, Plaintiff, v. GEL ASSOCIATES, Gollust, Tierney and Oliver, Coniston Partners, Gollust & Tierney, Inc., Keith R. Gollust, Paul E. Tierney, Jr. and Augustus K. Oliver, Defendants.

No. 89 Civ. 1092 (MP).

United States District Court, S.D. New York.

June 9, 1989.

Bangser & Weiss by Evan L. Gordon, New York City, for plaintiff.

Cleary, Gottlieb, Steen & Hamilton by Richard F. Ziegler, Michael S. Sommer, New York City, for defendants.

OPINION AND ORDER

MILTON POLLACK, Senior District Judge.

This is a motion to dismiss as stale or insufficient a suit for damages based on claims asserted under §§ 14(d), 14(e) and 10(b) of the Securities Exchange Act of 1934 (the 1934 Act). Section 14(d) is a regulatory statute that requires a tender offeror to disclose certain information before going forward with a tender offer. Section 14(e) proscribes making false and misleading statements or omissions in connection with a tender offer; for tender offers it is analogous to the proscription of fraud in § 10(b) and Rule 10b-5 promulgated thereunder. These claims are under the 1934 Act and as such can be brought only in the federal court. 15 U.S.C. § 78aa.

For the reasons appearing hereafter the suit will be dismissed on the ground that the applicable statute of limitations expired before the claims were brought. The Court, therefore, need not consider defendants' contention that the Complaint fails to state a claim on which relief can be granted.

The Parties

Plaintiff Ceres Partners ("Ceres") is an investment general partnership with its principal office and place of business in New Jersey, that acts as a broker-dealer and also engages in risk arbitrage investments for its own account. In the course of its risk arbitrage business it bought 102,100 shares of Gelco Corporation ("Gelco") common stock. Gelco had commenced a restructuring plan in August, 1986 under which the company announced a "self-tender" offer to buy back up to 3,000,000 of its shares. Ceres bought its Gelco stock "in anticipation" of the announced self-tender offer. Defendant Gollust, Tierney and Oliver ("GTO") is also a New Jersey partnership engaged in investment activities and is affiliated with all the other defendants named in the complaint.

On September 25, 1986, Ceres sold its Gelco stock to a broker acting for GTO's affiliate GEL Associates ("GEL") at $18.50 a share—50 cents a share more than the market price. On the same day, Ceres went short 29,700 shares for its own account to take advantage of the price.

After the close of the market on September 25, 1986, defendants announced a plan to acquire control of Gelco. GTO publicly reported that GEL had acquired 17.6% of Gelco stock, and that GTO was proposing a merger transaction to Gelco in which other stockholders would receive $22.50 per share for their stock. Gelco stock rose to over $22 a share the next day. The facts alleged to give rise to plaintiff's claims were publicly known, and known by plaintiff, as of September 25, 1986. Defendants duly filed a Schedule 13D with the SEC within the required 10-day period, describing their plans to acquire Gelco and disclosing their ownership of more than 5% of Gelco stock.

Plaintiff waited from September 25, 1986, and from the filing of the Schedule 13D, ten days later, until January, 1989 before commencing this suit on claims it patently "discovered" in September or October, 1986—more than two years previously. Ceres seeks to recover: 1) the difference between the price of the Gelco shares it sold to GEL and the price Ceres would have received had the plan to seek control of Gelco been made known to the plaintiff, and 2) losses incurred in its short sales to GEL.

Ceres claims that GTO's purchases of Gelco stock on September 25 from Ceres and other stockholders constituted a de facto tender offer and were therefore subject to SEC rules governing tender offers, viz §§ 14(d) and 14(e). The Complaint's First Claim alleges that GTO was obligated to file, before the stock purchase from Ceres, a Schedule 14D-1 announcing its tender offer and the failure to do so violated Sections 14(d) and 14(e) of the 1934 Act. In its next claim, the Complaint asserts that defendants violated Rule 10b-5 by failing to disclose their intention to make a merger proposal to Gelco.

As a New Jersey resident, plaintiff's claims are untimely in this forum if they would be time barred had plaintiff sued in the District of New Jersey, plaintiff's home forum. Plaintiff may not "forum shop" for a longer New York limitary period, even if we were to assume there is a longer limitary period in this District.

Applicable Limitary Period

The issues raised here require the Court to enter upon the morass of law surrounding the appropriate limitary period for implied causes of action under the Federal Securities Laws. Before addressing the merits of the arguments raised by the parties in this case, a brief survey of the morass and recent changes in it, is appropriate.

Claims under the Federal Securities Laws can be divided into two general categories: those based on provisions which expressly create liability and establish a time frame in which to bring a private right of enforcement; and those based on statutes and rules or regulations promulgated thereunder, where courts have implied a private right of action. Plaintiff's claims under §§ 10(b), 14(d) and 14(e) of the 1934 Act are based on an implied¹, rather than on an express right of action.

Because these implied rights of action were created by the courts and not Congress, by definition, there is no statute of limitations. "When Congress has not established a time limitation for a federal cause of action, the settled practice has been to adopt a local time limitation as federal law if it is not inconsistent with federal law or policy to do so." Wilson v. Garcia, 471 U.S. 261, 266-67, 105 S.Ct. 1938, 1942, 85 L.Ed.2d 254 (1985).

With 50 states, each having different statutes of limitations, the time for a plaintiff to bring suit based on an implied cause of action under the Federal Securities Laws may vary from state to state. The confusion and forum shopping created by looking to state law for the applicable limitary period has long been noted. See, 3 Loss, Securities Regulation, 1771-78 (2d ed. 1961), Report of the Task Force on Statute of Limitations for Implied Actions, 41 Bus. Law. 645 (1986), Loss, Fundamentals of Securities Regulation, 992-1003 (1988).

A proposed remedy for this problem was suggested by the American Law Institute in their proposed Federal Securities Code. Section 1727(b) thereof included a proposed express limitation on implied actions. The final proposal would have permitted actions brought within one year of constructive discovery of the fraud, with an absolute cut-off at 5 years. The first draft of the ALI Code borrowed the limitary period found in §§ 11 and 12 of the Securities Act of 1933 (1933 Act), 15 U.S.C. §§ 77k(a), 77l and §§ 9(e) and 18 of the 1934 Act, 15 U.S.C. §§ 78i(e), 78r(a)—one year from discovery, but no greater than 3 years from the transaction. Congress has not yet, however, adopted any time limit.

The confusion that arises from using state laws to supply the limitary period for federal securities law claims, led Professor Loss to ask:

Meanwhile, with the 1933 and 1934 Acts so closely related, why not look to their statutes of limitations by way of analogy rather than to a variant state law? Would it not be eminently more consistent with the overall statutory scheme to look to what Congress itself did when it was thinking specifically of private actions in securities cases rather than to a grab-bag of more or less analogous state statutes?

Loss, Fundamentals of Securities Regulation, p. 1168-69 (1983).

Against this background, the Court of Appeals for the Third Circuit, en banc, decided In re Data Access Systems Securities Litigation, 843 F.2d 1537 (3d Cir.1988). With Data Access, the Third Circuit became the first federal appellate court to use analogous federal law, rather than state law, to determine the limitary period for § 10(b) actions. In doing so, it announced that it would apply the one year from discovery, but no greater than 3 years from the transaction rule, found in 15 U.S. C. §§ 77k(a), 77l and 15 U.S.C. §§ 78i(e), 78r(a), to § 10(b) and Rule 10b-5 actions.

Determining whether the limitary period has run on plaintiff Ceres' action, depends on whether the rule announced in Data Access applies to Ceres' claim.

a. Second Circuit law on the applicable limitary period.

The Second Circuit, to date, follows the traditional analysis for statutes of limitation applicable to violations of implied liability under the Federal Securities Laws. A Federal Court sitting in this district must look to the New York statutes, including the State borrowing statute, § 202 of the CPLR, for the limitary period. Arneil v. Ramsey, 550 F.2d 774, 779 (2d Cir.1977). Section 202, provides:

An action based upon a cause of action accruing without the state cannot be commenced after the expiration of the time limited by the laws of either the state or the place without the state where the cause of action accrued, except that where the cause of action accrued in favor of a resident of the state the time limited by the laws of the state shall apply.

Accordingly, it is incumbent on a federal court in this District to look to the law that would be applicable to these claims as if they were brought in federal court in New Jersey. That is not disputed herein.

In this case, we are dealing with federal causes of action that can be litigated only in a federal court² and perforce we must apply the rule of limitations as a federal court in New Jersey would apply it. The Third Circuit has spoken definitively on the limitary period for implied claims under the Federal Securities Laws in In re Data Access Systems Securities Litigation, 843 F.2d 1537 (3d Cir.1988).

Ceres...