Tello v. Dean Witter Reynolds, Inc.

• Decision Date: 27 July 2007
• Docket Number: No. 03-12545.,03-12545.
• Citation: 494 F.3d 956
• Parties: Mark TELLO, on behalf of himself and all others similarly situated, Plaintiff-Appellee, v. DEAN WITTER REYNOLDS, INC., n.k.a. Morgan Stanley DW, Inc., Paul Grande, Defendants-Appellants, Mark Rodgers, Defendant.
• Court: U.S. Court of Appeals — Eleventh Circuit

494 F.3d 956

Mark TELLO, on behalf of himself and all others similarly situated, Plaintiff-Appellee, v. DEAN WITTER REYNOLDS, INC., n.k.a. Morgan Stanley DW, Inc., Paul Grande, Defendants-Appellants Mark Rodgers, Defendant.

No. 03-12545.

United States Court of Appeals, Eleventh Circuit.

July 27, 2007.

William H. Pratt, Katherine J. Alprin, Eric F. Leon, Kirkland & Ellis, LLP, New

York City, Katherine Claire Lake, Fowler, White, Boggs & Banker, P.A., Stanley T. Padgett, Padgett & Mierzwinski, P.A., Tampoa, FL, Luther M. Dorr, Jr., A. Inge Selden, III, Maynard, Cooper, Frieraon & Gale, P.C., Birmingham, AL, for Defendants-Appellants.

Jonathan L. Alpert, The Alpert Law Firm, Tampa, FL, Conor R. Crowley, Much, Shelist, Freed, Denenberg, Ament & Rubenstein, Chicago, IL, Shannon P. Keniry, Finkelstein Thompson LLP, San Francisco, CA, for Tello.

Appeal from the United States District Court for the Middle District of Florida.

Before EDMONDSON, Chief Judge, and BIRCH and FARRIS,^* Circuit Judges.

BIRCH, Circuit Judge:

The interlocutory appeal in this class-action, securities-fraud case asks us to decide whether the amended statute of limitations in the Public Company Accounting Reform and Investor Protection Act of 2002, the Sarbanes-Oxley Act ("SOA"), 28 U.S.C. § 1658(b), revives securities-fraud actions that were time-barred before the effective date of the SOA. Following our determination that specific facts relating to inquiry notice were necessary for our decision, we returned this case to the district judge on limited remand. Tello v. Dean Witter Reynolds, Inc., 410 F.3d 1275 (11th Cir.2005). After reviewing the facts concerning inquiry notice produced on limited remand, we conclude that this case was time-barred by both the former statute of limitations and the SOA statute of limitations, when it was filed. Accordingly, we reverse denial of defendants' motion to dismiss and remand for dismissal.

I. BACKGROUND

A. Factual and Procedural History

This class-action, securities-fraud case concerns alleged conduct by Dean Witter Reynolds, Inc., currently known as Morgan Stanley DW, Inc., and its former brokers Mark Rodgers and Paul Grande (collectively, "Dean Witter") regarding e-Net, Inc., stock for Internet telephone service from January 1, 1998, until August 19, 1998.¹ On October 1, 2002, the Securities and Exchange Commission ("SEC") issued an Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant to Sections 15(b) and 21C of the Securities Exchange Act of 1934, Making Findings and Imposing Remedial Sanctions ("SEC Order") on Dean Witter, Rodgers, and Grande SEC Securities Exchange Act of 1934 Release No. 46578 (attached to class-action complaint). The complaint was filed on November 15, 2002, by then class representative, E. Paul Roberts, who subsequently was replaced as class representative by Mark Tello. Tello, 410 F.3d at 1277 n. 1.

Dean Witter moved to dismiss the complaint and argued that the SOA statute of limitations, which is two years from the date of discovery or five years from the date of the securities fraud, that became effective on July 30, 2002, does not control this case. 28 U.S.C. 1658(b). Instead, Dean Witter contended that the former statute of limitations governed, which required bringing an action within one year after discovery of the facts constituting the securities fraud or three years after the violation. 15 U.S.C. § 78i(e). Although the original district judge determined that the SOA limitations period revives formerly time-barred claims and denied Dean Witter's motion to dismiss, he nonetheless permitted Dean Witter to seek appellate determination of this question.

On interlocutory appeal, we determined that our circuit law on inquiry notice required that we know whether the class had sufficient inquiry notice of the alleged securities fraud to have filed the complaint before the effective date of the SOA. At the preliminary, motion-to-dismiss stage of the case, these facts had not been developed. Accordingly, on limited remand, we asked the reassigned district judge to provide the answers to two questions: "(1) What established inquiry notice to the plaintiff class, and when did that occur?" and "(2) When did the plaintiff class have sufficient information to file suit?" Tello, 410 F.3d at 1294.

B. Proceedings on Limited Remand

The district judge conducted a status conference and requested that the parties provide him with a joint stipulation of the time that they would need for the limited discovery required to answer our inquiry-notice questions. The parties stipulated that they would need ninety days to conduct limited discovery necessary to answer our questions and that this limited discovery would consist of an exchange of document requests and Tello's deposition. Thereafter, the district judge entered an order scheduling limited discovery and briefs on the inquiry-notice issues to be addressed on limited remand to be followed by an evidentiary hearing and oral argument.

In the brief for the class with accompanying exhibits on remand, Tello's position is that there was no inquiry notice of Dean Witter's far-ranging scheme regarding e-Net stock until it was exposed and delineated in the SEC Order on October 1, 2002. He asserts that the class complaint was filed promptly within six weeks after the SEC Order issued. In contrast, Dean Witter's view, supported by its brief and exhibits, is that the precipitous drop in e-Net stock, combined with numerous articles in nationally and regionally distributed publications, discussing the abrupt decline in the price of e-Net stock, put the putative class on inquiry notice of the allegations in the complaint no later than August 14, 2000, the date that the last such nationally significant article was published. Consequently, the class was on notice well before the new SOA statute of limitations became effective on July 30, 2002, the former statute of limitations controls, and this case was time-barred under the prior, three-year repose statute. As we explain hereinafter, neither side is correct in stating the cause of inquiry notice from which to calculate the time required to file the class-action complaint.

The evidentiary hearing purportedly sought to resolve the two questions that we had posed to the district judge on limited remand. Accepting the time period for the alleged securities fraud conduct by Dean Witter as stated in the complaint, January 1, 1998, through August 19, 1998, the parties agree that the alleged fraud ended on August 19, 1998. Dean Witter presented evidence that three events established inquiry notice for the plaintiff class. First was the 80 percent drop in e-Net stock that occurred from August 18, 1998, to September 11, 1998, during which time "e-Net's CEO was issuing public statements saying nothing ha[d] changed about the company." Second Supp. R. at 17. Tello purchased 1,500 shares of e-Net stock on July 13, 1998, at $17 1/16 per share, and he purchased 1,000 shares of e-Net stock on July 15, 1998, at the same price. Tello Dep. at 42-44. As of July 1998, he had invested over $40,000 in e-Net stock, a substantial investment that Tello testified caused him to "check the price regularly." Id. at 44.

Second was the Washington Post article, "A `Doonesbury' Imitation That's No Laughing Matter," which was published on September 14, 1998. Tello testified that "[t]his is the only article that I ever read about e-Net." Id. at 132. In conjunction with the dramatic drop in the price of e-Net stock, he asserted that this Washington Post article "made me think that the stock price took a nose dive. I read this, and in my opinion, the whole world had read it and were running to sell their e-Net." Id. at 133. Recognizing that the signs of the collapse of e-Net stock were on the Internet from numerous postings and articles following the drastic drop in e-Net stock value, the Washington Post article explains that, while e-Net revenue rose 32 percent to $723,000, expenses rose 300 percent to $4,200,000. "Only in cyberspace and satiric cartoons did anyone argue that a start-up company could be worth 200 times its annual revenue." Jerry Knight, "A `Doonesbury' Imitation That's No Laughing Matter," The Washington Post, Sept. 14, 1998. The company never made a profit. The price of e-Net stock plummeted from a high of $19 a share to $2.78 and 1/8 a share, which caused 85 percent of the investment of e-Net shareholders to evaporate and made e-Net a repetitive source of commentary on Internet investment bulletin boards. Such commentary, noted in the Washington Post article, included TheStreet.com,² which had warned that, with the stock value down to $9, "E-Net stock might tank when those freshly registered shares were unloaded." Id. Since e-Net "stock was sold privately and not registered with the Securities and Exchange Commission, it could not be traded and did not dilute the holdings of current investors." Id.

But on Aug. 25 E-Net disclosed in filings available on the Internet that it had registered those shares and two other batches, dumping an additional 1.125 million shares on the market.

....

In fact, according to sources familiar with trading in the stock report, investors who held the newly issued stock already had cashed in their investment before the shares were even registered, when the stock was still trading in the high teens.

Selling unregistered stock is illegal, but what some investors are believed to have done was to get out in advance by short-selling — that is, borrowing stock from someone else and then selling it. Usually, short-sellers "cover" their positions and repay the stock loans by purchasing the stock later at a lower price. But in this case, they simply used the newly registered shares to repay the stock loans.

Sale of the new shares was the third strike for E-Net stockholders, who already had been whacked by the overall stock market decline and the...