Rahr v. Grant Thornton Llp

• Decision Date: 08 March 2000
• Docket Number: CIV. A. No. 3:99CV2305G.
• Citation: 142 F.Supp.2d 793
• Parties: Stewart RAHR, Plaintiff, v. GRANT THORNTON LLP, et al., Defendants.
• Court: U.S. District Court — Northern District of Texas

Page 793

142 F.Supp.2d 793

Stewart RAHR, Plaintiff, v. GRANT THORNTON LLP, et al., Defendants.

CIV. A. No. 3:99CV2305G.

United States District Court, N.D. Texas, Dallas Division.

March 8, 2000.

COPYRIGHT MATERIAL OMITTED

Tom P. Allen, Timothy M. McDaniel, McDaniel & Allen, Houston, TX, for plaintiff.

Robert W. Coleman, Brown McCarroll Trammell Crow Center, Dallas, TX, for Grant Thornton, LLP.

Stephen Granberry Gleboff, Hughes & Luce, Dallas, TX, for Holland & Knight, LLP.

R. Keith Walker, Law Office of R. Keith Walker, Dallas, TX, for Gary L. Rowan.

MEMORANDUM ORDER

FISH, District Judge.

Before the court are the following motions: (1) the motions of the defendants, Grant Thornton, L.L.P. ("Grant Thornton"), Holland & Knight, L.L.P. ("Holland & Knight"), and Gary L. Rowan ("Rowan") (collectively, the "defendants") to dismiss this case for failure to state a claim on which relief can be granted; (2) Holland & Knight's motion to sever and transfer; and (3) the motion of the plaintiff, Stewart Rahr ("Rahr"), to consolidate this case with other cases presently pending in this court. For the reasons set forth below, the defendants' motions to dismiss are granted, and the rest of the motions are denied as moot.

I. BACKGROUND

In the fall of 1995, Rahr began investing in Continental Investment Corporation ("CIC"), motivated by a series of representations made by Dale Sterritt ("Sterritt"), CIC's president, to Rahr's son. Defendant Grant Thornton LLP's Brief in Support of Motion to Dismiss ("Brief") at 3. From that time through March of 1998, Rahr spoke with Sterritt in person and by telephone on several occasions, and for part of that period, the two conversed daily. Id. at 4. Rahr relied upon Sterritt's representations and assurances in making further investments in CIC and even granted Sterritt full discretion to purchase stock on his behalf. Id.

From the last half of 1997 and into 1998, the price of CIC's stock declined from a high of $25 per share to below $10, and by August of 1998, CIC's stock was closing at prices between $3 and $1.94 per share. Id. at 5. Concerned with the dramatic decline in CIC's price, Rahr began investigating the business affairs of Sterritt and CIC and discovered what he believed was evidence of a "massive securities fraud." Id. On October 9, 1998, Rahr filed a complaint, alleging that Sterritt had violated sections 10(b) and 18 of the Securities Exchange Act of 1934 ("Exchange Act"). Id. 5-6. That case — styled Rahr v. Sterritt, No. 3:99-CV-0628-G — is also pending before this court.

On October 8, 1999, Rahr filed this action against Grant Thornton, Holland & Knight, and Rowan — the auditors and attorneys for CIC at the time of its alleged fraud. In his complaint, Rahr alleges that beginning in 1994 and continuing over the next several years, the defendants learned of but concealed mounting evidence of Sterritt's fraud and may have even aided it. Plaintiff's Response to Defendant Grant Thornton's Motion to Dismiss and Brief in Support ("Grant Thornton Response") at 3; Plaintiff's Response to Defendant Holland & Knight's Motion to Dismiss and Brief in Support at 2-3. Further, Rahr alleges that Grant Thornton assisted Sterritt in covering up his fraudulent activities by repeatedly approving accounting treatments that violated generally accepted accounting principles and by issuing "clean" audit reports on CIC's financial condition upon which Rahr relied. Grant Thornton Response at 3. Each of these defendants now brings a separate motion to dismiss, arguing that Rahr's claims are time barred or, alternatively, that his pleadings are deficient.

II. ANALYSIS

A. Statute of Limitations — Federal Claims

Claims brought pursuant to section 10(b), Rule 10b-5, and section 18 of the Securities Exchange Act of 1934 must be filed "within one year after the discovery of the facts constituting the violation and within three years after such violation." Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350, 364, 111 S.Ct. 2773, 115 L.Ed.2d 321 (1991); Topalian v. Ehrman, 954 F.2d 1125, 1135 (5th Cir.), cert. denied, 506 U.S. 825, 113 S.Ct. 82, 121 L.Ed.2d 46 (1992); see also 15 U.S.C. § 78r(c) (1997) (providing limitations for section 18 claims). The one-year "discovery" limitations period begins to run on the date that the plaintiff discovers or, in the exercise of reasonable diligence, should have discovered the alleged fraudulent conduct. See Jensen v. Snellings, 841 F.2d 600, 606 (5th Cir.1988); Vigman v. Community National Bank & Trust Co., 635 F.2d 455, 459 (5th Cir.1981).

It is unnecessary for the plaintiff to have actual knowledge of fraud for the limitations period to begin to run. Lampf, 501 U.S. at 363, 111 S.Ct. 2773; Jensen, 841 F.2d at 607. Rather, "[t]he requisite knowledge that a plaintiff must have to begin the running of the limitations period `is merely that of "the facts forming the basis of his cause of action," ... not that of the existence of the cause of action itself.'" Jensen, 841 F.2d at 606 (quoting Vigman, 635 F.2d at 459); see also Azalea Meats, Inc. v. Muscat, 386 F.2d 5, 9 (5th Cir. 1967).

Courts apply an objective standard to determine whether a plaintiff has satisfied his duty to exercise reasonable diligence to discover fraud. Jackson v. Speer, 974 F.2d 676, 679 (5th Cir.1992). Under this standard, a plaintiff must diligently pursue discovery of his claim. See Jensen, 841 F.2d at 607. A potential plaintiff is not permitted a "leisurely discovery of the full details of the alleged scheme," nor are investors "free to ignore `storm warnings' which would alert a reasonable investor to the possibility of fraudulent statements or omissions in his securities transaction." Id. Instead, an investor "who has learned of facts which would cause a reasonable person to inquire further must proceed with a reasonable and diligent investigation, and is charged with the knowledge of all facts such an investigation would have disclosed." Jensen, 841 F.2d at 607. The defendants argue that, under this objective standard, Rahr had acquired notice more than one year before he filed this suit and that his claims are, in consequence, time barred.

1. Resolution as a Matter of Law

In response to the defendants' arguments, Rahr first contends that the question of whether a plaintiff has exercised reasonable diligence is usually a question for the jury and that a determination of the issue by the court, at this stage of the case, is therefore improper. The overwhelming balance of case law, however, is to the contrary. Several courts have explicitly rejected Rahr's argument, going so far as to hold that the objective test to determine diligence not only allows but "mandates dismissal of ... a plaintiff's securities fraud claim when the `pleadings disclose facts sufficient to have placed the plaintiff on inquiry notice of the alleged fraud prior to the one-year cutoff.'" Barnes v. Printron, Inc., No. 93-CIV-5085(JFK), 1998 WL 778378 at *6 (S.D.N.Y. Nov.5, 1998) (emphasis added); see also Reed v. Prudential Securities Inc., 875 F.Supp. 1285, 1290 (S.D.Tex.1995) (dismissing claims as time barred based on plaintiff's inquiry notice), aff'd, 87 F.3d 1311 (5th Cir.1996) (table); Wachovia Bank & Trust Company v. National Student Marketing Corporation, 461 F.Supp. 999, 1010 (D.D.C.1978) (holding that a plaintiff's knowledge that a law firm represented a company in connection with its stock sales, was sufficient as a matter of law to put plaintiffs on inquiry notice), rev'd on other grounds, 650 F.2d 342 (D.C.Cir.1980), cert. denied, 452 U.S. 954, 101 S.Ct. 3098, 69 L.Ed.2d 965 (1981); In re General Development Corporation Bond Litigation, 800 F.Supp. 1128, 1136 (S.D.N.Y.1992) (dismissing case brought under the Exchange Act as time barred and holding that "a court's determination that the information available to a plaintiff in a given instance should (or should not) have given him reason to consider and investigate the probability of fraud is surely warranted in appropriate cases...."), aff'd, 991 F.2d 36 (2d Cir.1993). Therefore, the court may dismiss Rahr's claims as time barred if it concludes that the facts put Rahr on notice of the existence of the fraud.

2. Inquiry Notice

As discussed above, an investor who has learned facts that would cause a reasonable person to inquire further must proceed with a reasonable and diligent investigation and is charged with the knowledge of all facts such an investigation would have disclosed. This standard is referred to as "inquiry notice." If Rahr had inquiry notice of the defendants' alleged fraud more than one year before he filed the present case, his claims are time barred.

Rahr argues that while he may have had knowledge of Dale Sterritt and CIC's wrongdoing, his "[k]nowledge of fraud by CIC does not equate to knowledge of fraud by its accountants [or other defendants]." Grant Thornton Response at 6. However, this argument somewhat misstates the proper test. The question this court must decide is not whether Rahr's knowledge of CIC's fraud equates to knowledge of the defendants' fraud. Rather, this court must determine at what point Rahr acquired knowledge that would have caused a reasonable investor to investigate the possibility that the defendants had been involved in CIC's scheme. It is on that date that the limitations period for Rahr's claims against the defendants would have been triggered. To determine this date, the court will look both to the specific facts of this case, as well as to what facts other courts have deemed sufficient to place potential plaintiffs on inquiry notice.

Because relevant case law from this circuit is scant, each party contends that court decisions outside of this circuit favor his/its position. First, the defendants point to Wachovia Bank, 461 F.Supp. at 1009. There, the trial court held that the plaintiffs had notice of a company's attorneys' wrongdoing when they had knowledge of (1) a...