COOPERATIVA DE AHORRO Y CREDITO v. KIDDER, PEABODY

• Decision Date: 04 September 1992
• Docket Number: Civ. No. 89-1706 (JAF).
• Citation: 799 F. Supp. 261
• Court: U.S. District Court — District of Puerto Rico
• Parties: COOPERATIVA de AHORRO Y CREDITO AGUADA, Plaintiff, v. KIDDER, PEABODY & CO.; Paine Webber Incorporated; Ramon M. Almonte, Jane Doe, and the property partnership existing between them, Defendants.

799 F. Supp. 261

COOPERATIVA de AHORRO Y CREDITO AGUADA, Plaintiff, v. KIDDER, PEABODY & CO.; Paine Webber Incorporated; Ramon M. Almonte, Jane Doe, and the property partnership existing between them, Defendants.

Civ. No. 89-1706 (JAF).

United States District Court, D. Puerto Rico.

September 4, 1992.

Roberto Boneta, Munoz Boneta Gonzalez Arbona Benitez & Peral, San Juan, P.R., for plaintiff.

Richard Graffam, Nestor Mendez-Gomez, McConnell Valdes Kelley Sifre Griggs & Ruiz-Suria, San Juan, P.R., for Kidder Peabody.

Harry E. Woods, Woods & Woods, San Juan, P.R., for Almonte and wife.

Guillermo J. Bobonis, Bobonis Bobonis & Rodriguez Poventud, San Juan, P.R., for Paine Webber.

OPINION AND ORDER

FUSTE, District Judge.

We have before us plaintiff's Fed. R.Civ.P. 60(b)(6) motion for reconsideration of this court's decision of October 31, 1991. See Cooperativa de Ahorro v. Kidder Peabody & Co., 777 F.Supp. 153 (D.P.R.1991). There, we found plaintiff's securities law claims time-barred.

The motion for reconsideration makes reference to the recent passage of the Federal Deposit Insurance Corporation Improvement Act of 1991 ("the Act"). Pub.L. No. 102-242, 105 Stat. 2236 (1991). Section 476 of the Act, 105 Stat. at 2387, amends section 27A of the Securities Exchange Act of 1934, 15 U.S.C. § 78aa-1, and overturns the retroactive effect of the Supreme Court's decision in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, ___ U.S. ___, 111 S.Ct. 2773, 115 L.Ed.2d 321 (1991).¹ Plaintiff claims that if we apply section 476 of the Act and Puerto Rico law, the securities claims are not time-barred. Defendants claim that section 476 is unconstitutional and, therefore, the court should follow its original decision under Lampf.

We now decide that under section 476 of the Act and Puerto Rico law, the securities claims are time-barred. We do not reach the constitutional argument.²

Section 476

In section 476, Congress established that:

any private civil action implied under section 10(b) of this Act that was commenced on or before June 19, 1991—

(1) which was dismissed as time barred subsequent to June 19, 1991, and

(2) which would have been timely filed under the limitation period provided by the laws applicable in the jurisdiction, including principles of retroactivity, as such laws existed on June 19, 1991, shall be reinstated on motion by the plaintiff not later than 60 days after the date of enactment of this section.

We first consider if plaintiff's action satisfies the requirements of section 476. Plaintiff's action must fulfill four criteria: (1) it must have been filed before June 19, 1991; (2) it must have been dismissed after June 19, 1991; (3) it would have been timely filed under the pre-Lampf statute of limitations period; and (4) the plaintiff's motion for reconsideration must have been filed within sixty days of December 19, 1992. The plaintiff's action fulfills three of the requirements: it was filed on December 28, 1989, dismissed on October 31, 1991, and the motion for reconsideration was brought within sixty days on December 27, 1991. The determination that follows is whether the action "would have been timely filed under the limitation period provided by the laws applicable in the jurisdiction."

Timely Filing

This court first stayed the progress of the instant case in anticipation of the imminent resolution by the Supreme Court of the split which had developed between circuits which had adopted an analogous federal statute of limitations and those retaining the traditional practice of adopting a state statute of limitations for section 10(b) actions. Cooperativa de Ahorro y Crédito Aguada v. Kidder, Peabody & Co., 758 F.Supp. 64, 70-71 (D.P.R.1991). Through the enactment of section 476, Congress required courts to apply "the laws applicable in the jurisdiction" where the court sits to cases arising before the decision in Lampf was handed down on June 19, 1991. We find that the law applicable in our jurisdiction before June 19, 1991 was the two-year statute of limitations contained in the Puerto Rico Securities Act, 10 L.P.R.A. § 890(e).³ Therefore, because the last sale of securities occurred on December 16, 1986, Cooperativa de Ahorro y Crédito Aguada v. Kidder, Peabody & Co., 758 F.Supp. 64, 72 (D.P.R.1991), plaintiff's suit, which was filed on December 28, 1989, is time-barred unless the statute of limitations was tolled.⁴

The First Circuit has adopted the federal doctrine of fraudulent concealment, which acts to toll a statute of limitations where there has been fraud. Cook v. Avien, Inc., 573 F.2d 685, 695 (1st Cir. 1978). The last sale in this case occurred more than three years prior to the filing of the action. This exceeds the two-year statute of limitations discussed above. Under the doctrine of fraudulent concealment, the statute of limitations begins to run when "an investor, in the exercise of reasonable diligence, discovered or should have discovered the alleged fraud." General Builders Supply Co. v. River Hill Coal Venture, 796 F.2d 8, 11 (1st Cir.1986). "The doctrine of fraudulent concealment operates to toll the statute of limitations `where the party injured by the fraud remains in ignorance of it without any fault or want of diligence or care on his part ... until the fraud is discovered, though there be no special circumstances or efforts on the part of the party committing the fraud to conceal it from the knowledge of the other party.'" Cook v. Avien, Inc., 573 F.2d at 694. The requirement of diligence was defined by the First Circuit in General Builders Supply Co. as demanding that "an investor must also `apply his common sense to the facts that are given him' to determining whether further investigation is needed." General Builders Supply Co. v. River Hill Coal Venture, 796 F.2d at 13 (quoting Cook v. Avien, Inc., 573 F.2d at 696 n. 24). Within this framework, a complaint is timely filed if it is filed within two years of the date on which a reasonable investor has sufficient hints of fraud to prompt him to make a reasonably diligent inquiry.

To properly discuss the application of the doctrine of fraudulent concealment to the facts of this case we must first sketch out a short history of the junk bond market and highlight the role of plaintiff, Cooperativa de Ahorro y Crédito Aguada ("the Cooperativa"), in the purchase of the bonds. "Junk bond" is the term used to describe high yield debt securities with a credit rating that is lower than investment grade. In its 1980's manifestation, this investment instrument was developed by Drexel Burnham Lambert ("Drexel") in the person of Michael Milken.⁵ As noted in our earlier opinion, the Cooperativa was a single branch savings and loan institution, operated by a Board of Directors and an Administrator. The Cooperativa's assistant manager was the individual who negotiated the purchase of the bonds from defendant Almonte. There is no claim that the assistant manager failed to follow the institution's procedures for investment decisions. The Cooperativa is a sophisticated institutional investor, not an ignorant investor. The Cooperativa claims that it sought unspeculative investments that provided a safe, moderate rate of return. Its claim in this case is that defendant Almonte led these sophisticated investors to believe that the Drexel Burnham Lambert Unit Trusts were safe and unspeculative. Looking at the facts in the light most favorable to plaintiff, and taking them as true, Fed.R.Civ.P. 12(b)(6), we find that in light of the massive public information that was available concerning the sponsoring by Drexel Burnham Lambert of these investment instruments called "junk bonds", the plaintiff, as a normally sophisticated institutional investor, had ample warning which would trigger a common-sense investigation and assessment of its investment.

At the time during which plaintiff bought its Drexel bonds, it was public common knowledge within institutional investment circles that, although gaining in respectability, the high yield bonds sold by Drexel were accompanied by an equally high risk, and were growing riskier as the volume of bonds issued grew.⁶ Knowledge of the risks was generally advised before investment: Mr. Dow, of the Dow Jones Stock Exchange, advised "`First, do your homework.'" Scott, Junk Bonds have more Flavor than the Vanilla Kind, CHRISTIAN SCIENCE MONITOR, May 17, 1985 at B8. Before the market crash of 1987, there were various congressional attempts to legislate and regulate limits on the investment in and use of junk bonds.⁷ Although there were different schools of thought concerning the advisability of investing in junk bonds all were in agreement that it was an investment accompanied by a high degree of risk.⁸ Supporters of junk bond investment argued that sophisticated investors should be allowed the option of assuming a higher risk for the reward of a comparably higher yield.⁹ Trouble in this risky junk bond market culminated with the market crash of October 19, 1987, which sent investors running to unload their junk bond investments.¹⁰ The view that junk bonds were a questionable investment and a bad overall financial strategy appeared to have been amply confirmed well before the market crash. Then came the implication of the involvement of Drexel in insider trading scandals.¹¹ All this caused the market for junk bonds to become very unstable. After this the market for junk bonds stabilized once more only to once again collapse in late 1988 when the value of all junk bond investments, including plaintiff's, began to drop rapidly. This culminated in the forced sale of plaintiff's investment in July of 1989 at a significant loss.

Clearly the junk bond market was designed for only the most sophisticated investors, although one of the concerns that developed was that so many relatively unsophisticated investors bought junk bonds. Plaintiff, as an institutional investor belonged to that group of...