Reed v. Prudential Securities Inc.

• Decision Date: 03 February 1995
• Docket Number: Civ. A. No. H-93-819.
• Parties: Chester J. REED, Plaintiff, v. PRUDENTIAL SECURITIES INCORPORATED and Scott A. Jaffe, Defendants.
• Court: U.S. District Court — Southern District of Texas

875 F. Supp. 1285

Chester J. REED, Plaintiff, v. PRUDENTIAL SECURITIES INCORPORATED and Scott A. Jaffe, Defendants.

Civ. A. No. H-93-819.

United States District Court, S.D. Texas.

February 3, 1995.

COPYRIGHT MATERIAL OMITTED

Wayne C. Fox; Kenneth T. Fibich; and Karen M. Zuckerman, McFall, Sherwood & Sheehy, Houston, TX, for plaintiff.

David Sterling and Bill Kroger, Baker & Botts, Houston, TX, for defendants.

MEMORANDUM AND ORDER

CRONE, United States Magistrate Judge.

Pending before the court is Defendants Prudential Securities Incorporated ("Prudential") and Scott A. Jaffe's ("Jaffe") Motion for Summary Judgment (Docket Entry # 35). Defendants seek summary judgment on Plaintiff Chester J. Reed's ("Reed") claims of common law fraud, federal securities law violations, state securities law violations, breach of fiduciary duty, and breach of contract. Having reviewed the motion, the submissions of the parties, the pleadings, and the applicable law, this court is of the opinion that the defendants' motion for summary judgment should be granted in part and denied in part.

I. Background.

Reed is a real estate investor who has invested in real estate extensively in Harris County, Texas, since 1952. Jaffe is a Vice President of Investments at the Prudential office in Tampa, Florida. Between 1988 and 1990, Jaffe solicited Reed over the telephone to invest large sums of money in the stock market. At Jaffe's suggestion, Reed opened a nondiscretionary brokerage account with Prudential on July 21, 1989, with Jaffe serving as Reed's broker.

During the next two years, Reed invested in a number of stocks through his Prudential account, including Tseng Lab, Inc., QMS, Inc., Great Northern Nekoosa, International Paper, National Media, Corporation, American Southwest Mortgage, and Key Tronic Corporation. In April 1990, Jaffe told Reed about AT & E Corporation ("AT & E") and its plans to develop and market a wristwatch pager. At that time, shares of AT & E were publicly traded over the American Stock Exchange. Before recommending AT & E stock, Jaffe spoke with members of the company's senior management and reviewed reports on AT & E written by market analysts in addition to documents filed by AT & E with the Securities & Exchange Commission ("SEC"). Jaffe also sent Reed a significant amount of written material on AT & E, including press releases issued by AT & E, research and analyst reports by firms other than Prudential, and copies of AT & E's SEC filings.

Between May 9, 1990, and May 30, 1990, Reed purchased 30,000 shares of AT & E stock. Reed purchased an additional 10,300 shares of AT & E on June 1, 1990, and another 10,000 shares on June 11, 1990. After each purchase, Reed received a confirmation notice from Prudential detailing the purchase. In addition, Reed received a monthly account statement which contained information about each of Reed's purchases during the month, including the number of shares purchased in each company, the price paid, and the number of stock certificates delivered to Reed. When Reed purchased AT & E stock on May 9, 1990, the price was $17.25 per share. The price of AT & E stock rose with each of Reed's subsequent purchases. In fact, on June 11, 1990, AT & E stock closed at $24.125 per share, up forty percent in less than four weeks.

On June 12, 1990, AT & E officially unveiled its product at a news conference in Portland, Oregon. The price of AT & E stock began to drop immediately after the unveiling. On July 24, 1990, the price was down to $14.125 per share, and by October 1, 1990, the stock was selling at $6.375 per share. Reed sold 5,000 shares of his AT & E stock on July 24, 1990, when the price fell to $14.125 per share. On August 3, 1990, however, he purchased an additional 5,000 shares of AT & E.

In September 1990, Reed began to sell his stock in mass quantities. For instance, on September 10, Reed sold 7,600 shares at $10 per share. He sold an additional 12,000 shares at $6.375 per share and 13,000 shares at $6.00 per share on October 1, 1990. Between October 2, 1990, and October 5, 1990, Reed sold the remaining 12,700 shares at prices fluctuating between $7.00 per share and $6.375 per share.

On February 15, 1993, Reed filed suit against the defendants alleging claims of common law fraud, federal securities law violations, state securities law violations, breach of fiduciary duty, and breach of contract. The defendants presently move for summary judgment on Reed's claims.

II. Analysis.

A. The Applicable Standard.

Rule 56(c) provides that "summary judgment shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law." FED.R.Civ.P. 56(c). The party seeking summary judgment bears the initial burden of informing the court of the basis for its motion and identifying those portions of the pleadings, depositions, answers to interrogatories, admissions on file, and affidavits, if any, which it believes demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986); Williams v. Adams, 836 F.2d 958, 960 (5th Cir.1988). Once a proper motion has been made, the non-moving party may not rest upon mere allegations or denials in the pleadings, but must set forth specific facts showing the existence of a genuine issue for trial. Celotex Corp., 477 U.S. at 322-23, 106 S.Ct. at 2552-53; Anderson, 477 U.S. at 257, 106 S.Ct. at 2514-15; Topalian v. Ehrman, 954 F.2d 1125, 1131 (5th Cir.), cert. denied, ___ U.S. ___, 113 S.Ct. 82, 121 L.Ed.2d 46 (1992). Summary judgment is mandated if the non-movant fails to make a showing sufficient to establish the existence of an element essential to the nonmovant's case on which it bears the burden of proof at trial. Celotex Corp., 477 U.S. at 322, 106 S.Ct. at 2552.

B. Statute of Limitations.

Defendants argue that plaintiff's federal securities law claims and breach of fiduciary duty claim were filed outside the applicable statutes of limitations and are thus time-barred.

1. Section 10(b) and Rule 10b-5.

Claims brought pursuant to § 10(b) and Rule 10b-5 of the 1934 Federal Securities Exchange Act must be commenced "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, 2782, 115 L.Ed.2d 321 (1991); Topalian, 954 F.2d at 1135. 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 Nat'l Bank & Trust Co., 635 F.2d 455, 459 (5th Cir.1981); see also DeBruyne v. Equitable Life Assur. Soc., 920 F.2d 457, 466 (7th Cir.1990); Corwin v. Marney, Orton Inv., 843 F.2d 194, 197 (5th Cir. 1988), cert. denied, 488 U.S. 924, 109 S.Ct. 305, 102 L.Ed.2d 324 (1988); Breen v. Centex Corp., 695 F.2d 907, 911 (5th Cir.1983); Summer v. Land & Leisure, Inc., 664 F.2d 965, 968 (5th Cir.1981), cert. denied, 458 U.S. 1106, 102 S.Ct. 3484, 3485, 73 L.Ed.2d 1367 (1982). It is not necessary for the plaintiff to have actual knowledge of fraud for the limitations period to begin to run. Lampf, Pleva, Lipkind, Prupis & Petigrow, 501 U.S. at 363, 111 S.Ct. at 2782; Jensen, 841 F.2d at 607; Ohio v. Peterson, Lowry, Rall, Barber & Ross, 651 F.2d 687, 694 (10th Cir.), cert. denied, 454 U.S. 895, 102 S.Ct. 392, 70 L.Ed.2d 209 (1981); Klein v. Bower, 421 F.2d 338, 343 (2d Cir.1970). Rather, "the 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 607 (quoting Vigman, 635 F.2d at 459) (emphasis in original); see also Azalea Meats, Inc. v. Muscat, 386 F.2d 5, 9 (5th Cir.1967). Accordingly, a potential plaintiff who has discovered facts which would require a reasonable person to inquire further has an affirmative duty to make diligent inquiry to discover fraud. Jensen, 841 F.2d at 607; see also Corwin, 843 F.2d at 197; Summer, 664 F.2d at 968; Vigman, 635 F.2d at 459.

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); Jensen, 841 F.2d at 607; Armstrong v. McAlpin, 699 F.2d 79, 88 (2d Cir.1983); Vigman, 635 F.2d at 459; Hallman v. Northwestern Nat'l Ins. Co., 766 F.Supp. 575, 579 (S.D.Tex.1991); see also Koke v. Stifel, Nicolaus & Co., 620 F.2d 1340, 1343 (8th Cir.1980). Under this standard, a plaintiff must diligently pursue discovery of the claim. See Jensen, 841 F.2d at 607. A potential plaintiff is not permitted a "leisurely discovery of the full details of an 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.; DeBruyne, 920 F.2d at 467; Cook v. Avien, Inc., 573 F.2d 685, 697-98 (1st Cir.1978). 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; In re Beef Indus. Antitrust Litig., 600 F.2d 1148, 1171 (5th Cir.1979), cert. denied, 449 U.S. 905, 101 S.Ct. 280, 281, 66 L.Ed.2d 137 (1980); Armstrong, 699 F.2d at 88.

Applying these...