Zarecor ex rel. Iras v. Morgan Keegan & Co.

• Decision Date: 01 September 2015
• Docket Number: No. 13–3315.,13–3315.
• Citation: Zarecor ex rel. Iras v. Morgan Keegan & Co., 801 F.3d 882 (8th Cir. 2015)
• Parties: Herschel ZARECOR and Mona Zarecor, Individually and on behalf of their IRAs; Herschel Zarecor, III, Individually and on behalf of his IRA, Plaintiffs–Appellants, v. MORGAN KEEGAN & COMPANY, INC., Defendant–Appellee.
• Court: U.S. Court of Appeals — Eighth Circuit

801 F.3d 882

Herschel ZARECOR and Mona Zarecor, Individually and on behalf of their IRAs; Herschel Zarecor, III, Individually and on behalf of his IRA, Plaintiffs–Appellants

v.MORGAN KEEGAN & COMPANY, INC., Defendant–Appellee.

No. 13–3315.

United States Court of Appeals, Eighth Circuit.

Submitted: Dec. 9, 2014.

Filed: Sept. 1, 2015.

Rehearing Denied Oct. 7, 2015.

Howard B. Prossnitz, argued, Chicago, IL, Peter Drake Mann, on the brief, Little Rock, AR, for Plaintiffs–Appellants.

George Chester Freeman, III, argued, New Orleans, LA, David B. Vandergriff, Little Rock, AR, Larry E. Mobley, New Orleans, LA, on the brief, for Defendant–Appellee.

Before WOLLMAN, COLLOTON, and BENTON, Circuit Judges.

Opinion

COLLOTON, Circuit Judge.

Herschel and Mona Zarecor and their son Herschel Zarecor III brought Arkansas, New Jersey, and federal securities fraud claims against Morgan Keegan & Company, Inc. The Zarecors alleged that they relied on misrepresentations made by Morgan Keegan, and misrepresentations by others that Morgan Keegan prepared, influenced, or approved, in purchasing securities that caused them substantial losses. The district court granted Morgan Keegan's motion to dismiss all claims as time-barred, and denied the Zarecors leave to amend the complaint after judgment. We affirm the dismissal of the Zarecors' claims under Arkansas law and federal law, but conclude that the claim under New Jersey law was timely filed under the law of that jurisdiction as best we can predict it. We therefore affirm in part and reverse in part.

I.

We recite the facts according to the amended complaint and matters of public record cited by the parties. See Dittmer Props., L.P. v. Fed. Deposit Ins. Corp., 708 F.3d 1011, 1021 (8th Cir.2013). The Zarecors invested nearly $800,000, including reinvested dividends and distributions, in the RMK Advantage Income Fund, the RMK Strategic Income Fund, and the RMK Multi–Sector High Income Fund (collectively, the RMK Funds) to secure their retirement. Morgan Keegan was the lead underwriter for the RMK Funds and was heavily involved in the operations of the Funds.

The Zarecors allege that Morgan Keegan omitted facts regarding the dividend policies and the structure of the RMK Funds and misrepresented the quality of the RMK Funds in conversations with Herschel Zarecor. According to the Zarecors, Morgan Keegan also “was intimately involved with” misrepresentations and omissions regarding securities that the RMK Funds made in filings with the Securities and Exchange Commission, prospectuses, and other marketing materials. The Zarecors allege that Morgan Keegan prepared key sections of the documents, and approved the S.E.C. filings and marketing materials. For instance, the Zarecors allege that although the RMK Funds' public filings promised that some of the assets held by the Funds would be evaluated independently and in good faith, Morgan Keegan and a fund manager unilaterally set the prices for the assets. This unilateral action allegedly manipulated the share prices of the RMK Funds.

Relying on these alleged misrepresentations, the Zarecors invested most of their retirement savings in the RMK Funds. When the Funds collapsed in 2007, the Zarecors lost $718,577, close to ninety percent of their total investment.

Some history of litigation involving the RMK Funds is relevant to whether the Zarecors timely filed their claims in this action. On December 21, 2007, plaintiffs unrelated to the Zarecors filed a class action against Morgan Keegan and other defendants in the United States District Court for the Western District of Tennessee. According to an order in the case cited by the Zarecors, the district court consolidated two pending suits, and the plaintiffs filed a consolidated amended complaint in February 2011. The plaintiffs sued on behalf of a class of individuals and entities that purchased securities of four mutual funds, including the RMK Funds at issue in this case.

The class action plaintiffs claimed that Morgan Keegan was liable as a “controlling person” under § 20(a) of the Securities Exchange Act of 1934, 15 U.S.C. § 78t(a), for violations of § 10(b) of the Exchange Act, 15 U.S.C. § 78j(b), and S.E.C. Rule 10b–5, 17 C.F.R. § 240.10b–5, that were committed by other defendants, including the RMK Funds, over whom Morgan Keegan exercised control. The plaintiffs also alleged that Morgan Keegan violated §§ 11 and 12(a)(2) of the Securities Act of 1933. 15 U.S.C. §§ 77k, 771. The Zarecors were part of the putative class because they purchased securities of three of the four funds at issue. The parties agree that the Zarecors opted out of the class at some point. The class action eventually was resolved by settlement.

On July 27, 2009, the Zarecors filed a statement of claim in arbitration with the Financial Industry Regulatory Authority (FINRA), alleging that Morgan Keegan had violated New Jersey securities law, N.J. Stat. Ann. § 49:3–71(a)(2)–(4), and Arkansas securities law, Ark.Code § 23–42–106 (1999). Herschel and Mona Zarecor are citizens of Arkansas, while Herschel Zarecor III is a citizen of New Jersey. On August 12, 2010, the Zarecors amended their claim to include an alleged violation of § 10(b) of the Exchange Act and Rule 10b–5. Zarecor v. Morgan Keegan & Co., No. 4:10CV01643 SWW, 2011 WL 5592861, at *1 n. 2 (E.D.Ark. July 29, 2011). The FINRA arbitration panel awarded the Zarecors $541,000 on October 27, 2010, but a district court later vacated the award, holding that the dispute was not subject to arbitration under FINRA rules. Id. at *2, *6. The court denied the Zarecors' motion for reconsideration on November 10, 2011. Zarecor v. Morgan Keegan & Co., No. 4:10CV01643 SWW, 2011 WL 5508860, at *4 (E.D.Ark. Nov. 10, 2011).

The Zarecors filed the current action a week later, on November 17, 2011. They alleged that Morgan Keegan is liable to Herschel and Mona Zarecor as a broker dealer under Arkansas securities law, Ark.Code § 23–42–106(c) (1999), and to Herschel Zarecor III under New Jersey securities law. N.J. Stat. Ann. § 49:3–71(d). In August 2013, the Zarecors moved for leave to file an amended complaint and attached the amended complaint. The proposed amendment added factual allegations and a claim that Morgan Keegan violated § 10(b) and Rule 10b–5 by making material false statements and omissions and by manipulating the price of assets. The proposed amendment also altered the claims under Arkansas and New Jersey law to assert that Morgan Keegan was liable not only as a broker dealer, as the first complaint had asserted, but also as a control person.

Morgan Keegan opposed leave to amend, but moved to dismiss all claims, including those in the proposed amendment. The district court granted leave to amend and dismissed all claims as time-barred. The Zarecors then moved under Federal Rules of Civil Procedure 59(e) and 60(b) for post-judgment leave to amend the complaint a second time. The Zarecors sought to include a claim for control-person liability under § 20(a) of the Exchange Act, but the court denied the motion based on undue delay.

II.

The Zarecors appeal the district court's dismissal of their claims as time-barred. They argue that the statutes of limitations governing their claims are each subject to a discovery rule providing that the limitations period does not begin until they could have discovered the fraud. With the benefit of a discovery rule, the Zarecors argue, the claims were timely filed. The Zarecors also contend that the FINRA arbitration and the 2007 class action tolled the statutes of limitations and rendered this action timely. We review the district court's ruling de novo, Bradley Timberland Res. v. Bradley Lumber Co., 712 F.3d 401, 406 (8th Cir.2013), considering the complaint itself and matters of public record that are capable of judicial notice. Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 322, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007) ; Dittmer Props., L.P., 708 F.3d at 1021.

The Zarecors bring three different securities fraud claims that arise under the laws of Arkansas, New Jersey, and the United States, respectively. The parties agree with the district court that the law of each respective jurisdiction governing the timeliness of claims applies to the claims arising under the laws of that jurisdiction. Accordingly, the parties have waived any objection to the district court's choice of law, and we will decide the appeal on the same basis. See Kostelec v. State Farm Fire & Cas. Co., 64 F.3d 1220, 1224 (8th Cir.1995).

A.

The Zarecors' claim under § 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), is timely if it was filed no later than two years “after the discovery of the facts constituting the violation.” 28 U.S.C. § 1658(b)(1). Under the federal discovery rule, the statute of limitations begins to run when a plaintiff actually discovers, or “a reasonably diligent plaintiff would have discovered, the facts constituting the violation.” Merck & Co. v. Reynolds, 559 U.S. 633, 637, 130 S.Ct. 1784, 176 L.Ed.2d 582 (2010) (internal quotation marks omitted). The facts constituting the violation include scienter, or “that a defendant made a material misstatement with an intent to deceive. ” Id. at 648–49, 130 S.Ct. 1784. The limitations period does not begin to run when a plaintiff is put merely on “inquiry notice,” or when there are “storm warnings,” such that “the facts would have prompted a reasonably diligent plaintiff to begin investigating.” Id. at 653, 130 S.Ct. 1784 (emphasis added) (internal quotation marks omitted). Instead, the statute of limitations is triggered when the reasonably diligent plaintiff would have discovered “the facts constituting the violation” after an appropriate investigation. Id. (internal quotation marks omitted); see Pension Tr. Fund v. Mortg. Asset Securitization Transactions, Inc., 730 F.3d 263, 272–73, 276–79 (3d Cir.2013).

We conclude that by the end of 2007, a reasonably diligent plaintiff would have begun...