The opinion of the court was delivered by: BROTMAN
Defendants Magnetic Metals Company (hereinafter "Metals"), Magmetco, Inc., Butcher & Singer, Inc., and D.C. Langworthy have renewed their motions for summary judgment. The court previously ruled on these motions, holding that a two-year statute of limitations applies to the alleged violations of the Securities Exchange Act of 1934, Sections 10(b) and 14(a), and Securities and Exchange Commission (hereinafter "SEC") Rules 10(b)-5 and 14(a)-9. The complaint was filed some two and one-half years after the proxy materials at issue were mailed and the merger therein discussed was approved.
However, the court ruled that if the plaintiff could plead facts sufficient to allege fraudulent concealment, he could avail himself of the equitable doctrine whereby the statute of limitations is tolled until the plaintiff discovered or, in the exercise of reasonable diligence, should have discovered the fraud alleged. Plaintiff amended his complaint to allege that, due to defendants' acts of fraudulent concealment, he was not aware of illegalities until defendants Magmetco and Langworthy sold their stock interests in Metals for substantially more than plaintiff was offered for his stock two years earlier pursuant to the merger. The instant motions were then renewed, defendants claiming that the amended complaint is insufficient to create a jury question as to the date of discovery from which the statute of limitations began to run.
Originally formulated in the case of Bailey v. Glover, 88 U.S. (21 Wall.) 342, 22 L. Ed. 636 (1875), the doctrine of fraudulent concealment does not require active concealment by the defendant, but does place a positive duty upon the plaintiff to diligently inquire in order to discover the fraud alleged. Arneil v. Ramsey, 550 F.2d 774 (2nd Cir. 1977); Dayco Corp. v. Goodyear Tire & Rubber Co., 523 F.2d 389 (6th Cir. 1975); Morgan v. Koch, 419 F.2d 993 (7th Cir. 1969); Rosenberg v. Hano, 121 F.2d 818 (3rd Cir. 1941).
The burden is on the plaintiff to show he exercised reasonable care and diligence in seeking the facts that demonstrate fraud. Brick v. Dominion Mortgage & Realty Trust, 442 F. Supp. 283, 304 (W.D.N.Y.1977); Osadchy v. Gans, 436 F. Supp. 677, 682 (D.N.J.1977); Hupp v. Gray, 500 F.2d 993, 996 (7th Cir. 1974). Furthermore, a complaint is insufficient if it merely states in conclusory fashion that due diligence was exercised; plaintiff must specifically allege what steps he took prior to the running of the limitations period to discover the facts constituting fraud. Brick v. Dominion Mortg. & Realty Trust, supra at 292; Kroungold v. Triester, 407 F. Supp. 414, 419 (E.D.Pa.1975); Dayco Corp. v. Goodyear Tire & Rubber Co., supra at 394; Hupp v. Gray, supra at 996.
In paragraph 21 of the amended complaint, plaintiff makes the same conclusory allegations of due diligence and fraudulent concealment made in paragraph 19 of the original complaint. The only substantial difference is that the new complaint incorporates by specific reference the allegations of the fraud which constitutes the substantive offenses. These allegations are virtually identical to those in the original complaint. Only where the substantive fraud includes active concealment directly thwarting diligent efforts to discover wrongdoing can that substantive fraud suffice to toll the statute of limitations. See Tomera v. Galt, 511 F.2d 504, 510 (7th Cir. 1975).
If this were not so, there would be, in effect, no statute of limitations on any fraud action.
The price of the stock and the expressions of dissatisfaction with that price at the time of the merger demonstrate that plaintiff had reasonable notice of the alleged fraud. Courts have repeatedly held that where there is any fact or circumstance which would arouse the suspicions of a reasonable person, that person has sufficient notice so that he must make inquiry. Dayco Corp. v. Goodyear Tire & Rubber Co., supra at 394; Hupp v. Gray, supra at 966; Morgan v. Koch, supra at 998. Where a plaintiff should have been aware of "at least the possibility of fraud," the limitations period begins to run. Klein v. Shields & Co., 470 F.2d 1344, 1347 (2nd Cir. 1972).
In paragraphs 15 and 21 of the amended complaint, plaintiff alleges there was a wide disparity between the price offered the minority shareholders and the book value of the stock. As plaintiff's counsel noted in oral argument, the book value of a stock does not necessarily indicate its true value. But the difference between the price and book value should at least have alerted plaintiff to the possibility of fraud and caused him to investigate further.
Plaintiff and the potential class members originally paid $ 12.00 per share for their stock, and were offered only $ 6.50 per share under the merger proposal. This also should have caused them to inquire about the financial condition of Metals, the manner of valuation, and whether there was a misrepresentation or manipulation of the price.
Indeed, it is clear from the materials in the appendix to defendants' brief that a number of minority shareholders were highly dissatisfied at the time of the merger approval with the offered price. Many of them, including plaintiff's father, verbalized that dissatisfaction at the June 25, 1975 meeting at which the merger was ratified. Appendix, p. 53. Plaintiff was present at that meeting. Appendix, p. 57. Moreover, plaintiff's father wrote to the vice president of Metals before the meeting to express his dissatisfaction with the price offered and to threaten a class suit. This letter was written on stationery whose business letterhead includes plaintiff's name. Appendix, p. 1.
A drop in stock price contrary to a plaintiff's expectations is often held to be a circumstance which should have indicated the possibility of fraud and prompted further investigation. See Berry Petroleum Co. v. Adams & Peck, supra; Hupp v. Gray, supra; Rosenberg v. Hano, supra. Similarly, in the instant case, the suspiciously low price offered to minority shareholders like plaintiff provided sufficient notice of fraud to trigger the running of the limitations period.
In assessing a plaintiff's claim that he could not have discovered the fraud earlier, consideration of the nature of the specific fraud alleged is also appropriate. See Morgan v. Koch, supra at 997. Here, the fraud alleged is misrepresentation and omission in the proxy statement, masking acts of illegal manipulation designed to force out minority stockholders at an unreasonably low price. All the allegations derive directly from material in the proxy statement. Had plaintiff carefully reviewed it at the time of the events here at issue and conducted an investigation into the statements contained in it, this action could have been brought well within the limitations period. For instance, the complaint alleges that defendants fraudulently failed to increase dividends or publicly disseminate information concerning Metals, actions which allegedly depressed the market for its stock. Amended Complaint P 15(a). The dividend history of Metals was in the proxy statement, and was necessarily known to holders of Metals stock. The shareholders must also be charged with substantial awareness of the marketability of their stock. Similarly, another allegation is that the proxy materials failed to disclose why defendant Butcher & Singer did not use a particular method of calculating the value of plaintiff's stock. Amended Complaint P 15(d). The report of Butcher & Singer was made available to shareholders at the meeting at which the merger was approved. See Proxy Statement, appendix, p. 11. The method of valuation could have been challenged as of that time. The widespread dissatisfaction with the price makes plaintiff's failure to investigate the method employed by Butcher & Singer particular suspect.
This is not a case where the alleged fraud is the kind that only sophisticated investors would recognize. Compare Dzenits v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 494 F.2d 168 (10th Cir. 1974), where the court ruled that a jury question was created as to due diligence because the fraud alleged, "churning," is ...