7(d) of the Investment Company Act are of a similar nature as nonregistration claims brought under section 12(1) of the Securities Act; therefore, following the rationale in Lampf, the appropriate implied limitations period for claims brought under section 7(d) is the express limitations period provided for nonregistration claims brought under section 12(1).
Accordingly, defendants contend that plaintiffs' nonregistration claims under section 7(d) should be dismissed because those claims were not asserted within one year after the alleged violation. The Court agrees.
The Court rejects plaintiffs' argument that World Fund's failure to register with the SEC is a continuing violation, and that, therefore, the statute of limitations has not yet begun to run. To adopt that argument would annul the application of a limitations period for nonregistration claims. Indeed, to consider an investment company's failure to register with the SEC as a continuing violation would ignore the whole purpose behind a statute of limitations and the importance of the policy of repose. Cf. Kahn v. Kohlberg, Kravis, Roberts & Co., 970 F.2d 1030, 1039 (2d Cir.) (The continuing duty to register under the Investment Advisors Act did not extend the limitations period.), cert. denied, 506 U.S. 986, 113 S. Ct. 495 (1992); Slagell v. Bontrager, 616 F. Supp. 634, 636-37 (W.D. Pa. 1985), aff'd, 791 F.2d 921 (3d Cir. 1986) (rejecting the argument that the limitations period does not begin to run until a security is first legally offered to the public).
Similarly, the Court rejects plaintiffs' invitation to apply the "discovery rule" to their section 7(d) claims. Plaintiffs assert that the discovery rule applies, because defendants allegedly concealed the scope of their solicitation activity within the United States and misrepresented whether World Fund required registration with the SEC.
Under the discovery rule, the limitations period for a claim "begin[s] to run when the claim accrued or upon discovery of the facts constituting the alleged" violation. Dodds v. CIGNA Securities, Inc., 12 F.3d 346, 350 (2d Cir. 1993), cert. denied, 128 L. Ed. 2d 74, 114 S. Ct. 1401 (1994). That is, "discovery takes place when plaintiff obtains actual knowledge of the facts giving rise to the action or notice of the facts, which in the exercise of reasonable diligence, would have led to actual knowledge." Kahn, 970 F.2d at 1042 (construing both the Securities Act and the Exchange Act).
A plain reading of section 13 of the Securities Act, however, indicates the inappropriateness of applying the discovery rule to nonregistration claims. Section 13 employs a discovery rule to commence the running of the limitations period for false registration claims under section 11 of the Securities Act and for antifraud claims under section 12(2) of the Securities Act. Therefore, for claims under either section 11 or section 12(2), the start of the limitations period is flexible and depends on the discovery of the omission or misstatement. For nonregistration claims brought under section 12(1) of the Securities Act, however, section 13 provides that the limitations period commences at the time of the violation. When the two clauses are compared, the language of section 13 excludes application of either the discovery rule or the doctrine of equitable tolling for nonregistration claims under section 12(1).
Notwithstanding the text of section 13, the Court notes that there is a split of authority as to whether the discovery rule and the doctrine of equitable tolling applies to the one year limitation period governing nonregistration claims under section 12(1). Compare Cook v. Avien, Inc., 573 F.2d 685, 691 (1st Cir. 1978) (holding "that, under the explicit language of section 13, the limitations period runs from the date of the violation irrespective of whether the plaintiff knew of the violation" or whether information was concealed from the plaintiff); Gridley v. Cunningham, 550 F.2d 551, 552-55 (8th Cir. 1977) (same); Mason v. Marshall, 412 F. Supp. 294, 299 (N.D. Tex. 1974), aff'd, 531 F.2d 1274 (5th Cir. 1976) (same); Gardner v. Investors Diversified Capital, Inc., 805 F. Supp. 874 (D. Colo. 1992) (same); Snyder v. Newhard, Cook & Co., Inc., 764 F. Supp. 612, 618-19 (D. Colo. 1991) (same); Barton v. Peterson, 733 F. Supp. 1482, 1490 (N.D. Ga. 1990) (same); Shotto v. Laub, 635 F. Supp. 835, 838 (D. Md. 1986) (same); McCullough v. Leede Oil & Gas, Inc., 617 F. Supp. 384, 387 (W.D. Okla. 1985) (same); Felts v. National Account System Assoc., Inc., 469 F. Supp. 54, 64 (N.D. Miss. 1978); Ferland v. Orange Groves of Florida, Inc., 377 F. Supp. 690, 703 (M.D. Fla. 1974); Shuman v. Sherman, 356 F. Supp. 911, 912-13 (D. Md. 1973)); with Katz v. Amos Treat & Co., 411 F.2d 1046, 1055 (2d Cir. 1969) (applying a discovery rule tolling the limitations period applicable to nonregistration claims); In re Colonial Ltd. Partnership Litig., 854 F. Supp. 64, 86 (D. Conn. 1994) (finding that equitable tolling may apply to section 12(1) claims); Sanderson v. Roethenmund, 682 F. Supp. 205, 208 (S.D.N.Y. 1988) (same); Jones v. Lewis, 1988 WL 163026, at *2 (D. Kan. 1988) (same); Dyer v. Eastern Trust & Banking Co., 336 F. Supp. 890, 901 (D. Me. 1971) (same).
In the Third Circuit, this issue was addressed in Pell v. Weinstein, where the court dismissed plaintiffs' section 12(1) claims, holding that the "vast majority of cases have concluded that the limitations period runs from the date of the violation regardless of whether the plaintiff knew of the violation." 759 F. Supp. 1107, 1111 (M.D. Pa. 1991), aff'd without opinion, 961 F.2d 1568 (3d Cir. 1992).
This Court agrees with Pell and the majority rule that the one year limitations period applicable to claims brought under section 12(1) is absolute.
And, therefore, by implication that the one year limitations period under section 7(d) is absolute.
The Court notes, moreover, that had Congress intended to subject nonregistration claims to the discovery rule, it could easily have utilized the discovery rule used in the limitations provision applicable to claims under sections 11 and 12(2) of the Securities Act. On the contrary, by including a discovery rule limitation for certain classes of claims but omitting it for nonregistration claims, in the very same provision, Congress reflected its intent to prohibit application of the discovery rule to section 12(1) nonregistration claims.
Furthermore, there is little justification for application of the discovery rule outside the fraud-based causes of action. The discovery rule, or any equitable tolling on the basis of fraudulent concealment, is premised on a wrongdoers ability to conceal his violations, however, violations of section 12(1) are easily uncovered, i.e., the seller of securities cannot conceal the fact that the securities he sells are not registered: While he may misrepresent that the securities are properly registered, or that registration is not required, he cannot prevent the purchaser from discovering the true facts. See, e.g., Snyder, 764 F. Supp. at 618-19 ("The kind of information needed to inform a section 12(1) claim need not be obtained through discovery.") (citation omitted). In the same manner, an investment company cannot conceal the fact that it is unregistered, and while it may misrepresent that it is properly registered, or that registration is not required, it cannot prevent an investor from discovering the true facts as to the lack of or requirement of its registration.
Accordingly, since the World Fund plaintiffs purchased their shares between June 1990 and August 1991, and the Original Complaint was filed on June 8, 1993, the Court finds that plaintiffs' claims stemming from World Fund's alleged failure to register with the SEC were not asserted within the one year limitations period and are, therefore, time-barred.
2. Securities Act Section 12(1) Claims
Section 12(1) of the Securities Act imposes a liability on any person who offers or sells a security in violation of the registration requirements contained in section 5 of the Securities Act.
15 U.S.C. § 77l(1). As stated above, under section 13 of the Securities Act, a section 12(1) claim must be brought "within one year after the violation upon which it is based," and "in no event . . . more than three years after the security was bona fide offered to the public." 15 U.S.C. § 77m. The limitations period, therefore, runs from the date of the violation, which is the date the unregistered securities were sold.
Defendants challenge plaintiffs' claims under section 12(1), on the ground that plaintiffs failed to file their complaint within one year of the purchase of the unregistered securities. Specifically, defendants contend that since plaintiffs first commenced their securities claims under section 12(1) when filing their Second Amended Complaint in 1995, almost five years after the shares were offered to the public, such claims are barred by the limitations period. To save their claim, plaintiffs contend that under Rule 15(c) these claims relate back to the filing of their original complaint on June 8, 1993, and that the Court should toll the limitations period on account of defendants' alleged fraudulent concealment of World Fund's obligation to register its securities.
Like plaintiffs' nonregistration claims under section 7(d), the Court finds that plaintiffs nonregistration claims under section 12(1) are deemed to relate back to plaintiffs' Original Complaint. Here, as with plaintiffs' section 7(d) claims, the added claims are premised upon the same conduct, the same transaction and the same factual foundation as stated in the Original Complaint. For these claims, therefore, the Original Complaint provided the necessary notice.
Further, as stated above, the one-year limitation period for nonregistration claims brought under section 12(1) focuses on when the violation occurred, therefore, the one year limitation period was triggered when defendants sold what were unregistered securities. It does not matter when plaintiffs learned of this violation. Hence, any argument by plaintiffs that information was concealed from them is irrelevant.
Therefore, since the World Fund plaintiffs purchased their shares between June 1990 and August 1991, and the Original Complaint was filed on June 8, 1993, the Court finds that plaintiffs' section 12(1) claims are barred by the one year limitations period provided in section 13.
C. Plaintiffs' Misrepresentation And Nondisclosure Claims
1. Securities Act Section 12(2) Claims
Section 12(2) of the Securities Act imposes a liability for material misrepresentations or omissions in connection with the sale or offer for sale of a security. 15 U.S.C. § 77l(2). Claims brought pursuant to section 12(2) must be commenced "within one year after the discovery of the untrue statement or the omission, or after such discovery should have been made by the exercise of reasonable diligence," and in no event "more than three years after the sale." 15 U.S.C. § 77m.
A misrepresentation or omission is material, and therefore actionable, if it significantly alters the total mix of information available to investors. Basic, Inc. v. Levinson, 485 U.S. 224, 230-32, 108 S. Ct. 978, 982-83, 99 L. Ed. 2d 194 (1988). Thus, "the central inquiry for determining materiality is whether defendants representations, taken together and in context, would have mislead a reasonable investor about the nature of the investment." In re Hyperion Sec. Litig., 1995 WL 422480, at *6 (S.D.N.Y. 1995) (citations and quotation marks omitted); see also TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 96 S. Ct. 2126, 2132, 48 L. Ed. 2d 757 (1976).
Defendants assert that plaintiffs' section 12(2) claims should be dismissed on two grounds. First, defendants contend that the disclosures made in the prospectuses were sufficient to put a reasonable investor of ordinary intelligence on notice of the Funds' inherent financial risks and the Funds' fee structure, and, therefore, plaintiffs were on inquiry notice of any claims regarding such financial risks or fees more than one year before these claims were filed. Second, defendants contend that the Funds' prospectuses contained detailed, cautionary disclosures about the risks associated with investing in the Funds and, on that account, the Funds disclosed the material information plaintiffs now allege was misrepresented and omitted. The Court disagrees with both grounds.
The Court is mindful that on a motion to dismiss plaintiffs allegations are deemed to be true. Here, plaintiffs allege that the Funds speculated in purchasing $ 1 billion of derivative securities. Plaintiffs further allege that, notwithstanding that the Funds were marketed as prudent investments, such speculation was necessary and always intended in order to cover all of the Funds' expenses while providing a return to the investors.
Consequently, while there were warnings concerning the risks associated with net asset fluctuation, investments in indexed notes, foreign exchange, political risks, and higher fees,
taking all the facts alleged in the complaint as true and drawing all inferences favorable to the plaintiff, as this Court must, the prospectuses failed to disclose that it would be necessary for the Funds to take speculative positions in derivative securities. On the contrary, the Funds disclosed that derivative securities would only be used to reduce risk by hedging against interest rate and exchange rate risk, or, with respect to indexed obligations, to generate current income.
The Global Fund prospectus, for example, stated:
THE INVESTMENT OBJECTIVE OF THE FUND IS TO SEEK . . . AS HIGH A LEVEL OF CURRENT INCOME AS IS CONSISTENT WITH PRUDENT INVESTMENT MANAGEMENT FROM A GLOBAL PORTFOLIO OF HIGH QUALITY DEBT . . . . AT TIMES, THE FUND MAY SEEK TO HEDGE ITS PORTFOLIO AGAINST CURRENCY RISKS AND, TO A LESSER EXTENT, INTEREST RATE RISKS THROUGH THE USE OF OPTIONS ON FUTURES AND CURRENCY TRANSACTIONS.
(Compl. Ex. 4 at 1).
The Global Fund Prospectus also stated:
the Fund will purchase such indexed obligations to generate current income or for hedging purposes and will not speculate in such obligations. (Id. at 8.)