Robertson v. Seidman & Seidman

• Decision Date: 29 August 1979
• Docket Number: No. 193,D,193
• Citation: 609 F.2d 583
• Court: U.S. Court of Appeals — Second Circuit
• Parties: Fed. Sec. L. Rep. P 97,100 Donald J. ROBERTSON, Plaintiff-Appellant, v. SEIDMAN & SEIDMAN, Defendant-Appellee. ocket 78-7278.

Page 583

609 F.2d 583

Fed. Sec. L. Rep. P 97,100

Donald J. ROBERTSON, Plaintiff-Appellant, v. SEIDMAN & SEIDMAN, Defendant-Appellee.

No. 193, Docket 78-7278.

United States Court of Appeals, Second Circuit.

Argued Nov. 1, 1978.

Decided Aug. 29, 1979.

Donald I. Laventhall, New York City (Laventhall & Zicklin, New York City, on the brief), for plaintiff-appellant.

Mathias E. Mone, New York City (Loretta A. Preska, and Cahill Gordon & Reindel, New York City, on the brief), for defendant-appellee.

Before MOORE, FEINBERG and TIMBERS, Circuit Judges.

TIMBERS, Circuit Judge:

This is another in a series of cases which are occupying with increasing frequency the attention of the federal courts. They involve the responsibility of certified public On this appeal from an order entered in the Southern District of New York, Dudley B. Bonsal, District Judge, granting summary judgment in favor of defendant and dismissing plaintiff's federal securities laws claims and pendent state law claims, the essential question is whether summary judgment was properly granted on the ground that the claims alleged in the complaint were time-barred. For the reasons below, we hold that genuine issues of material fact were presented and that summary judgment was improper. Accordingly, we reverse and remand the case to the district court for jury trial, under proper instructions from the court, on all issues of fact, including whether, if plaintiff had exercised due diligence, he should have discovered the alleged fraud on the part of the accounting firm more than two years before commencement of this action; and whether there was sufficient concealment on the part of the accounting firm to invoke the federal equitable tolling doctrine.

accountants in preparing and certifying financial documents required by the Securities and Exchange Commission. The instant case arises in the context of an accounting firm's reliance on the statute of limitations in an action brought against the firm by a shareholder to recover damages under Section 10(b) and Rule 10b-5 alleged to have resulted from false and misleading statements in the financial documents prepared and certified by the accountants.

I. FACTS AND PRIOR PROCEEDINGS

Appellant Donald J. Robertson (hereinafter "appellant" or "plaintiff") was a shareholder of SaCom, a California corporation which is now defunct. It specialized in the development and manufacture of electronic communications equipment. On July 6, 1977, appellant commenced the instant class action in the Southern District of New York on behalf of himself and all others similarly situated who had purchased common shares of SaCom during the period from October 31, 1972 to June 25, 1974. The complaint named as defendant an independent firm of certified public accountants, Seidman & Seidman (hereinafter "appellee" or "defendant"), which had audited the books and records of SaCom and had prepared and certified the accuracy of certain SaCom financial documents contained in its October 1972 offering prospectus and registration statements, as well as in its annual report (Form 10-K) for the fiscal year ending September 30, 1972.

The complaint alleged that the financial documents prepared and certified by Seidman & Seidman contained false and misleading statements in violation of § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1976), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5 (1978). The complaint further alleged that defendant aided and abetted fraudulent activities of SaCom's management and conspired with management to violate the securities laws. Plaintiff demanded a jury trial.

Defendant filed an answer which admitted that it had audited the books and records of SaCom and had issued a report on the financial documents in question. It denied all wrongdoing alleged in the complaint. On October 5, 1977, defendant filed a motion for judgment on the pleadings pursuant to Fed.R.Civ.P. 12(c) on the ground that the claims alleged in the complaint were barred by the applicable statute of limitations. The district court treated the motion as one for summary judgment pursuant to Fed.R.Civ.P. 56, since matters outside the pleadings were presented to and not excluded by the court. Fed.R.Civ.P. 12(c).

On May 3, 1978, Judge Bonsal filed a well reasoned opinion granting defendant's motion for summary judgment and dismissing the complaint. ¹ He first determined that From the judgment entered on Judge Bonsal's opinion, the instant appeal has been taken. Plaintiff contends that the factors relied upon by the district court raised genuine issues of material fact on which he was entitled to a trial.

                the applicable statute of limitations was Alaska's two year limitations period for "any injury to the person or rights of another not arising on contract."  Alaska Stat. § 09.10.070.  He then held that, since plaintiff had knowledge of certain information which should have alerted him to defendant's fraudulent activities had he exercised "reasonable diligence", Arneil v. Ramsey, 550 F.2d 774, 781 (2 Cir. 1977), plaintiff should be charged with knowledge of the fraud "before July 6, 1975 more than two years before he commenced this action."  The factors relied upon by Judge Bonsal in granting summary judgment and dismissing the complaint were: (1) plaintiff's asserted suspicion of fraud based on the precipitous decline in the value of his SaCom shares; (2) plaintiff's participation as an intervenor in an action commenced in the Southern District of New York on April 8, 1975 which arose out of the October 1972 public offering of SaCom shares and which named as defendants certain underwriters and marketmakers who were charged with market manipulation and other securities laws violations; 2  and (3) certain public information relating to Seidman & Seidman's role in the 1972 underwriting
                

With the foregoing brief summary of the facts ³ and prior proceedings in mind, we shall consider in the remainder of this opinion the applicable statute of limitations and when it begins to run; the relevant factors in determining when appellant should have discovered the alleged fraud; the standard for granting summary judgment in this type of case; and the applicability of the equitable tolling doctrine.

II. STATUTE OF LIMITATIONS

In enacting § 10(b) of the Exchange Act, Congress did not specify any particular statute of limitations or period in which an action must be commenced. Accordingly, we have held, in determining whether a suit is timely brought, that courts should refer to the statute of limitations of the forum state, including any "borrowing statute" of the forum. Arneil v. Ramsey, supra, 550 F.2d at 779. The borrowing statute of the forum state here, New York provides that any cause of action which accrues outside 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." N.Y.C.P.L.R. § 202 (McKinney 1972). Since appellant is an Alaska resident, conducted his business in Alaska, negotiated his purchase of SaCom shares by phone from Alaska, and paid for the shares by check mailed from Alaska, the district court properly determined, and the parties agreed, that the relevant Alaska statute of limitations should apply. After considering several Alaska statutes of limitations, ⁴ the court held that the proper statute of limitations was Alaska's two year limitations period referred to above.

While the law of the forum determines the Length of the limitations period, federal law determines When that period begins to run. Arneil v. Ramsey, supra, 550 F.2d at 780. Accord, Berry Petroleum Co. v. Adams & Peck, 518 F.2d 402, 410 (2 Cir. 1975). The classic statement of this rule is:

"(T)he time from which the statute of limitations begins to run is not the time at which a plaintiff becomes aware of all of the various aspects of the alleged fraud, but rather the statute runs from the time at which plaintiff should have discovered the general fraudulent scheme. '(T)he statutory period . . . (does) not await appellant's leisurely discovery of the full details of the alleged scheme.' " Berry Petroleum Co. v. Adams & Peck, supra, 518 F.2d at 410, Quoting from Klein v. Bower, 421 F.2d 338, 343 (2 Cir. 1970).

Appellant does not deny that the statute of limitations begins to run from the time he Should have discovered the relevant facts regarding the alleged fraud. He contends, however, contrary to the district court's conclusion, that he " 'exercised reasonable care and diligence in seeking to learn the facts which would disclose fraud.' " Arneil v. Ramsey, supra, 550 F.2d at 781, Quoting from Morgan v. Koch, 419 F.2d 993, 997 (7 Cir. 1969). He further contends that the factors relied on by the district court were not sufficient from which to conclude as a matter of law that a reasonably diligent person should have discovered the participation of this particular defendant prior to the release of the SEC's Opinion and Order of September 1, 1976 which specifically named Seidman & Seidman as participants in the fraud. ⁵ Although there were sufficient indicia prior to the SEC release to put appellant on "inquiry notice", he contends that he more than adequately fulfilled his duty to investigate but still was unable to discover the frauds of this particular defendant.

Accordingly, in order to determine whether there was an absence of genuine issues of material fact sufficient to warrant a grant of summary judgment, we next must consider in some detail the factors relied on by the district court in concluding that appellant should have discovered the fraud prior to July 6, 1975 and before the SEC's Opinion and Order of September 1, 1976.

III. RELEVANT FACTORS

The central issue in this case is whether the factors relied upon by the district court in holding that appellant " 'in The district court relied basically upon three...