Dodds v. Cigna Securities, Inc.

• Decision Date: 14 December 1993
• Docket Number: No. 299,D,299
• Parties: , Fed. Sec. L. Rep. P 98,025 Mary E. DODDS, Plaintiff-Appellant, v. CIGNA SECURITIES, INCORPORATED, Cigna Individual Financial Services Company, Incorporated, Connecticut General Life Insurance Co., Cigna Corporation; and Martin F. Palumbos, Defendants-Appellees. ocket 93-7064.
• Court: U.S. Court of Appeals — Second Circuit

Page 346

12 F.3d 346

62 USLW 2420, Fed. Sec. L. Rep. P 98,025

Mary E. DODDS, Plaintiff-Appellant, v. CIGNA SECURITIES, INCORPORATED, Cigna Individual Financial Services Company, Incorporated, Connecticut General Life Insurance Co., Cigna Corporation; and Martin F. Palumbos Defendants-Appellees.

No. 299, Docket 93-7064.

United States Court of Appeals Second Circuit.

Argued Sept. 20, 1993.

Decided Dec. 14, 1993.

Cathy J. Bardenstein, Rochester, NY (Gallo & Iacovangelo, of counsel), for plaintiff-appellant.

Glenn T. Marrow, Rochester, NY (Carolyn G. Nussbaum, Nixon, Hargrave, Devans & Doyle, of counsel), for defendants-appellees.

Before: KEARSE and WINTER, Circuit Judges, and POLLACK, Senior District Judge. ^*

WINTER, Circuit Judge:

Mary E. Dodds appeals from Judge Larimer's dismissal of her amended complaint, holding as a matter of law that Dodds' federal securities claims were time-barred: Dodds v. Cigna Securities, Inc., 841 F.Supp. 89 (W.D.N.Y.1992). The district court also dismissed Dodds' pendent state law claims. We hold that when an investor is provided prospectuses that disclose that certain investments are risky and illiquid, she is on notice for purposes of triggering the statute of limitations that several such investments might be inappropriate in a conservative portfolio. We therefore affirm.

BACKGROUND

The amended complaint alleged as follows. On February 20, 1990, Dodds, a forty-five-year-old woman with a tenth-grade education and four school-aged daughters, was widowed. She learned that her husband had left her their home, a few personal assets, and approximately $445,000 in death and retirement benefits from his employer, including the proceeds of a savings and investment plan account, an individual retirement account, a life insurance policy, and checking and savings accounts. Before her husband's death, Dodds had no involvement in the family's financial affairs or investment decisions Dodds first met with defendant-appellee Martin F. Palumbos, an employee and/or agent of the appellee corporations, in March 1990. During March and April of 1990, Palumbos met with Dodds at her home on six occasions. During these meetings Dodds told Palumbos that she was wary of financial risk and sought to pursue a "conservative investment strategy" in order to allow her to support her family and provide her daughters with a college education.

other than receiving an allowance for maintaining the household.

On April 1, 1990, Palumbos left Dodds a large portfolio containing prospectuses, marketing materials, and other information on the securities and insurance products that he recommended. In addition, he left a fifteen-page report entitled "Financial Planning Considerations for Mary Dodds," which broadly outlined Dodds' financial situation and the sort of investment portfolio Palumbos recommended. Included were several limited partnerships that ultimately gave rise to the present action. Palumbos told Dodds that he would return in two weeks to discuss her investments.

On April 18, 1990, Palumbos and Dodds met again. At that meeting, Dodds told Palumbos that she had attempted to but had not read the prospectuses because "they looked like greek" to her and she could not understand them. Dodds also told Palumbos that she had given the materials to her brother-in-law, Daniel LaLonde, but that he had not had time to review them. Palumbos discussed the securities he had recommended and assured her that the investments were suitable. The discussion never touched upon the risks of investing in limited partnerships generally or on the risks associated with investing in the specific limited partnerships Palumbos recommended. At the meeting, Dodds signed over the funds she had received from her husband's savings and investment plan account and his I.R.A. On April 24, 1990, Palumbos returned to Dodds' home. At this meeting, Dodds signed the checks necessary to invest the proceeds of her husband's life insurance policy in the securities and insurance products that Palumbos had recommended.

Paragraph 37 of the amended complaint reads as follows:

37. On both April 18, 1990 and April 24, 1990, defendant Palumbos arrived at the plaintiff's home with a number of documents he wanted the plaintiff to sign, stating that the documents were purchase orders for the various securities being purchased. Plaintiff had never seen these documents prior to signing them. The documents were placed in a stack for the plaintiff to sign, and the defendant Palumbos induced the plaintiff to sign the documents without either reviewing them with her, or giving her an opportunity to read them. Additionally, Palumbos induced plaintiff to sign the disclosure statements and subscription agreements without dating them because of 'timing considerations'....

After Dodds had signed the documents, Palumbos left the yellow duplicate copies of the purchase orders but took the originals of the purchase orders and all the other documents that were signed with him. In June 1990, Palumbos returned, sorted the documentation on Dodds' investments, and disposed of the yellow copies of the purchase orders, saying they were "useless."

Dodds took no further action regarding her finances until February 7, 1991, when she met with an accountant to complete her 1990 tax returns. The accountant told her that the investments in the limited partnerships were unsuitable for her. Soon thereafter, Dodds contacted Palumbos and arranged a meeting with him, another financial planner, and her brother-in-law LaLonde.

Dodds contacted an attorney in April 1991. From April through November, Dodds' attorney sought to help her by corresponding with appellee Connecticut General Life Insurance Company. In November, the firm stopped representing Dodds. Dodds hired her present counsel in December 1991 and the instant suit was filed in the Western District on February 4, 1992. Dodds filed an amended complaint on April 30, 1992.

Dodds' amended complaint sets forth eleven claims. Counts one through four allege violations of Section 12(2) of the Securities Dodds' federal claims are based on the sale of interests in five limited partnerships that Dodds purchased at the April 18 and 24 meetings. These investments were as follows: (A) 230 units of Technology Funding Secured Investors III limited partnership for $23,000, (B) 32 units of Berry and Boyle Development Partners III limited partnership for $16,000, (C) 800 units of Krupp Cash Plus V limited partnership for $16,000, (D) 500 units of PLM Equipment Growth Fund V limited partnership for $10,000, and (E) 400 units of Net 2 limited partnership for $40,000. All the investments except the last were to be held in Dodds' I.R.A. Dodds' total investment in these five limited partnerships was $105,000.

Act of 1933, 15 U.S.C. Sec. 77l(2) (1988) (the " '33 Act"), Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. Sec. 78j(b) (1988) (the " '34 Act"), SEC Rule 10b-5, 17 C.F.R. Sec. 240.10b-5, Section 15 of the '33 Act, 15 U.S.C. Sec. 77o (1988), and Section 20 of the '34 Act, 15 U.S.C. Sec. 78t (1988), by the Cigna Companies and Palumbos. Counts five through eleven of Dodds' amended complaint are pendent state law claims for common law fraud, breach of fiduciary duty, negligent misrepresentation, and violation of Section 349 of the General Business Law of New York.

The gravamen of Dodds' federal claims is that Palumbos and the Cigna Companies made material false statements and omissions inducing her to invest in securities--the five limited partnerships--that were unsuitable for her because they were too risky and illiquid.

Judge Larimer dismissed Dodds' federal securities claims on the grounds that she had not brought suit within the statute of limitations period. Dodds v. Cigna Securities, Inc., 841 F.Supp. 89, 96 (W.D.N.Y.1992). The court then dismissed Dodds' state law claims without prejudice.

DISCUSSION

We begin by defining what is not in dispute. Appellant filed this action more than one year after the date on which she made the investments and suffered the alleged losses. It is also uncontested that she did file her suit within one year of when her accountant told her of the investments' unsuitability. All parties also agree that the applicable statute of limitations for

Dodds' federal securities claims is the

one-year-after-discovery / no-later-than-three years scheme established in Ceres Partners v. GEL Associates, 918 F.2d 349 (2d Cir.1990), and Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, --- U.S. ----, 111 S.Ct. 2773, 115 L.Ed.2d 321 (1991).

Appellant challenges the district court's decision on three grounds. First, she argues that the district court erred in not measuring the timeliness of her federal claims from the date on which her accountant told her of the unsuitability of her investments. Second, she argues that the court erred in ruling that there was no fraudulent concealment that would have tolled the statute of limitations. Third, appellant claims that the Supreme Court's decision in Lampf, and the language of Section 9(e) of the '34 Act, 15 U.S.C. Sec. 78i(e) (1988), require that the statute of limitations in Section 10(b) of the '34 Act cases run from the time of actual rather than constructive notice. We address these contentions in turn.

I. Triggering the Statutory Period

Appellant's claims under Sections 11, 12, and 15 of the '33 Act are governed by the statute of limitations contained in Section 13 of the '33 Act. 15 U.S.C. Sec. 77m (1988). ¹ Dodds' claims under Sections 10(b), 9, and 20 of the '34 Act are subject to the statute of limitations in Section 9(e) of the '34 Act. ² Broadly speaking, the statutory periods for claims under either of these provisions begin to run when the claim accrued or upon discovery of the facts constituting the alleged fraud. Discovery, however, includes constructive and inquiry notice as well as actual notice.

A plaintiff in a federal...