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MCKOWAN LOWE & CO., LTD. v. JASMINE LTD.

June 30, 2000

MCKOWAN LOWE & CO., LTD., PLAINTIFF,
V.
JASMINE LTD., ET AL., DEFENDANTS, HARRY BERGER, INDIVIDUALLY AND ON BEHALF OF A CLASS SIMILARLY SITUATED, AND BERNARD CUTLER, INDIVIDUALLY AND ON BEHALF OF A CLASS SIMILARLY SITUATED, PLAINTIFFS, V. JASMINE LTD., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Rodriguez, District Judge.

  OPINION

This matter is before the court on defendant Arthur Andersen LLP's motion for summary judgment on plaintiffs' claims against it brought pursuant to Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k and Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, and on plaintiff Harry Berger's state law claims, and on plaintiff Harry Berger's motion to file a surreply in opposition to the summary judgment motion.

I. BACKGROUND

A. The Parties

Plaintiff Harry Berger is a resident of Winnetka, Illinois who purchased 2700 shares of Jasmine stock on January 11, 1994. Plaintiff Bernard Cutler is a resident of Cherry Hill, New Jersey who purchased 1000 shares of Jasmine stock on December 16, 1993 from Sands Brothers & Co., Ltd.

Defendant Jasmine, a Delaware corporation with its principal executive offices in Pennsauken, New Jersey, is an importer and supplier of women's footwear and handbags. Irving Mangel was its Chief Executive Officer, President, and Chairman of the Board. Samuel Mangel was its Vice President, Secretary, and Managing Director of Overseas Production and Sourcing. Melvin Twersky was the Managing Director of Sales and Marketing, Edward Maskaly the Managing Director of Finance and until March 1994, Chief Financial Officer, and Thomas Ciocco was the Treasurer and Controller.

Defendant Sands Brothers & Co., Ltd., is a licensed broker/dealer located in New York, New York. Although primarily engaged in investment banking, it functioned as the underwriter for the initial public offering of Jasmine's stock. Both defendants Martin Sands and Steven B. Sands are principals of the company and were named directors of Jasmine pursuant to the procedure detailed in the Prospectus for Sands Brothers & Co., Ltd. to nominate two designees to Jasmine's board subsequent to the initial public offering.

Defendant Arthur Andersen L.L.P. is an independent accounting/auditing firm headquartered in Chicago, Illinois. Andersen's Philadelphia, Pennsylvania office prepared audited financial statements in 1993 for use in the Prospectus provided in conjunction with the initial public offering of Jasmine's stock. Andersen's Report of Independent Public Accountant dated November 22, 1993 was included in a Registration Statement containing a prospectus dated December 15, 1993.

Defendant McKowan Lowe, a Hong Kong corporation registered to conduct business in New Jersey, was Jasmine's exclusive purchasing agent in the Far East. Evelyn Wong, a citizen of Hong Kong, is McKowan's Chief Financial Officer. Tony Ngai, also a citizen of Hong Kong, is a Senior Director of the company.

B. Facts

1. Nature of the Action

This action stems out of the events surrounding the initial public offering of defendant Jasmine Ltd.'s ("Jasmine's") stock in December of 1993. According to the Amended Class Action Complaint, filed July 15, 1999, in order to achieve a successful initial public offering ("IPO"), the defendants caused or participated in the sale of shares of Jasmine pursuant to the Registration Statement and Prospectus which contained numerous misrepresentations and omissions of material fact. Additionally, plaintiffs allege that subsequent to the IPO, the defendants continued to make material misstatements and misrepresentations about the financial information which had been contained in the Registration Statement and Prospectus and about Jasmine's financial condition for the quarters ending December 31, 1993, March 31, 1994, and June 30, 1994, including in filings with the Securities and Exchange Commission ("SEC"). It is alleged that, as a result of defendants' wrongdoing, numerous shareholders like plaintiffs purchased now-worthless Jasmine stock at inflated prices.

2. Events Leading to the IPO

According to the Amended Class Action Complaint, during the period leading up to its IPO, Jasmine had become insolvent.*fn1 Plaintiffs allege that the Jasmine and McKowan defendants engaged in various fraudulent activities which would allow the IPO to proceed.

Allegedly, at the time of the IPO, Jasmine owed McKowan approximately $15 million. In an attempt to make the prospectus more appealing and provide Jasmine with the funds necessary to pay off the debt, the parties, plaintiffs contend, attempted to conceal a large portion of this amount through fraudulent accounting practices.*fn2 Plaintiffs claim that false certifications were supplied to Andersen in the process of preparing the audited financial statements. Plaintiffs also claim that Andersen accepted the false certifications without confirming the actual debt owed by McKowan and without further inquiry. Thus, the financial statements did not reflect the actual amount owed to McKowan at the time the prospectus was issued.

Plaintiffs also allege that Jasmine falsely inflated its 1993 income though a sham sale to McKowan of an option to purchase Lucky Leader Trading Ltd. ("Lucky Leader"), an entity created and controlled by Jasmine as its purchasing agent in Asia. According to the Amended Class Action Complaint, the sale was through accounting entries only, as McKowan paid no money or other consideration. This paper transaction had the sole purpose, plaintiffs conclude, of allowing Jasmine to record an unrealized gain of approximately $1.16 million to make Jasmine appear profitable and allow the IPO to proceed.

Additionally, plaintiffs maintain that there were several material misrepresentations contained in the prospectus and 1993 financial statements, including Andersen's audit report and the extensive discussion of the information about Jasmine contained therein.

3. Post IPO Misrepresentations

After the IPO opened, Martin Sands made public statements about Jasmine's stock and its potential for success which allegedly contained misleading, unfounded, and false claims of future earnings and acquisitions. Plaintiffs claim that these statements were made because Sands Brothers, as underwriters and Jasmine directors, stood to profit handsomely if the venture was successful.*fn3

In the meantime, plaintiffs contend that the Jasmine defendants continued their scheme to defraud by filing quarterly 10-Q reports with the Securities Exchange Commission which contained material misstatements and omissions. Plaintiffs further allege that Jasmine filed a false and misleading Form 8 K report, intentionally omitting the fact that Andersen, during its audit of the 1994 financial statements, withdrew after disagreements with Jasmine management which could have caused it to modify its previously unqualified 1993 audit report.*fn4

C. Procedural History

After Jasmine's stock became essentially valueless, plaintiff filed a complaint in the United States District Court for the Northern District of Illinois, alleging that the actions of the Jasmine defendants and Sands Brothers constituted violations of, among other things, federal and state securities fraud laws and the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1961 et seq. Upon plaintiff's motion, the case was transferred to this court on May 13, 1996. Soon thereafter, on June 10, 1996, plaintiff filed an Amended Complaint which added the McKowan defendants as parties.*fn5 A Second Amended Complaint was filed on November 18, 1996, adding Andersen as a defendant. The Third Amended Complaint, filed on April 22, 1997, added Fishbein as a defendant and raised additional claims against the Sands Brothers.

In lieu of answering the second amended complaint, the defendants filed their respective motions to dismiss. With these motions pending, both Andersen and the McKowan defendants applied for a stay of discovery under the Private Securities Litigation Reform Act of 1995, 15 U.S.C. § 77a et seq. In denying the stay of discovery, the Honorable Robert B. Kugler, U.S.M.J., determined that the Reform Act did not apply. That ruling was affirmed by this court on May 19, 1997.

On May 8, 1997, plaintiff was granted leave to file a Third Amended Complaint, which was filed on May 16, 1997. Because the Third Amended Complaint had the potential of impacting defendants' various arguments in their motions to dismiss the Second Amended Complaint, and in anticipation of the filing of a Revised Third Amended Complaint, this Court dismissed all defendants' motions as moot on August 11, 1997. Defendants were given the opportunity to renew their motions against the Revised Third Amended Complaint, incorporating any of their previous submissions that remained applicable. They did so, and on December 1, 1997, this Court granted in part and denied in part these motions.

In the December 1, 1997 Order, this Court read Shapiro v. UJB Financial Corp., 964 F.2d 272, 286 (3d Cir.), cert. denied, 506 U.S. 934, 113 S.Ct. 365, 121 L.Ed.2d 278 (1992), as interpreting the provision in Section 11 of the Securities Act of 1933 ("1933 Act"), 15 U.S.C. § 77k, that "any person acquiring a security issued pursuant to a false or misleading registration statement may recover damages", to mean that a plaintiff need not have purchased stock during the IPO, but that a plaintiff merely must prove that his purchased shares "are traceable to a false or misleading registration statement." The Court stated:

Reliance on the registration statement is not necessary if the stock is purchased less than twelve months after the effective date.*fn6 15 U.S.C. § 77k(a). If, however, the shares were purchased in the secondary market, "it would not be linked to a registration statement filed during the class period and the § 11 claim would fail." Shapiro, 964 F.2d at 286.
Here, Jasmine's IPO was filed with the SEC on December 15, 1993. After the IPO was closed on December 22, 1993, Sands Brothers exercised an option to purchase an additional 250,000 overalloted shares on January 7, 1994. Third Am. Compl. at Ex. B, p. 5 (10-Q Report for period ending Dec. 31, 1993). Plaintiff claims to have purchased his shares, pursuant to the registration statement and prospectus, directly from Sands Brothers on January 11, 1994. Therefore, it is possible that plaintiff can prove that these shares were not purchased in the secondary market and can be traced to those issued pursuant to the IPO.*fn7 Shapiro, 964 F.2d at 286.
Furthermore, the requirement that the shares be "traceable" to the registration statement would be meaningless if § 11 was applied only to the limited window of the IPO. Plaintiff purchased the stock less than three weeks after the IPO officially closed. Section 11 liability is narrowly focused on the registration statement. Since this purchase was so close in time to the original issuance of stock, it seems unlikely that indicators other than the registration statement, such as quarterly financial reports for example, could have been disseminated and relied on in plaintiff's decision to purchase. "Because we cannot say that plaintiffs can prove no set of facts that would entitle them to relief, the § 11 claim cannot be dismissed at this time." Id.

December 1, 1997 Order, pp. 9-10.

The Court dismissed the claim against Andersen for liability under Section 15, finding that Andersen was not a "controlling person" under that section. It held, however, that the McKowan defendants could be "controlling persons" and therefore could be sued under Section 15. The Court then dismissed plaintiff's conspiracy liability claims against the Jasmine and McKowan defendants.

Regarding the statute of limitations, the Court found:

An action under § 11 of the 1933 Act must be brought "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. . . ." 15 U.S.C. § 77m; In re Data Access Systems Securities Litigation, 843 F.2d 1537, 1550 (3d Cir.), cert. denied, 488 U.S. 849, 109 S.Ct. 131, 102 L.Ed.2d 103 (1988). Because § 15 control person liability is derivative of § 11 liability, the same limitations period applies. Wiley [v. Hughes Capital Corp.], 746 F. Supp. [1264,] 1277 [(D.N.J. 1990)]; Insurance Consultants of America, Inc. v. Southeastern Insurance Group, Inc., 746 F. Supp. 390, 404 (D.N.J. 1990). Moreover, "[t]he statute of limitations of section [11] of the 1933 Act runs not from `the time at which a plaintiff becomes aware of all of the various aspects of the alleged fraud, but rather [from] the time at which plaintiff should have discovered the general fraudulent scheme.'" Insurance Consultants, 746 F. Supp. at 405 (emphasis in original) (quoting Berry Petroleum Co. v. Adams & Peck, 518 F.2d 402, 410 (2d Cir. 1975)). As one court in this circuit explained:
Whether plaintiffs should have known of their claims in the exercise of reasonable diligence requires consideration of several elements. First, plaintiffs must have sufficient information of possible wrongdoing to place them on "inquiry notice" or to excite "storm warnings" of culpable activity. Once on inquiry notice, plaintiffs have a duty to exercise reasonable diligence to uncover the basis for their claims and are held to have constructive notice of all facts they could have learned through diligent investigation during the limitations period.
Gruber v. Price Waterhouse, 697 F. Supp. 859, 864 (E.D.Pa. 1988) (footnote and citations omitted), aff'd, 911 F.2d 960 (3d Cir. 1990); see also Elysian Federal Savings Bank v. First Interregional Equity Corp., 713 F. Supp. 737, 745-46 (D.N.J. 1989) (citing Gruber).
Plaintiff contends that his complaint was filed within one year of the date of inquiry notice. The initial complaint was filed on November 17, 1995. Defendants claim that plaintiff received adequate notice as early as the registration statement and prospectus were filed with the SEC on December 15, 1993, because the cover page stated Jasmine was a very high-risk stock. . . . Further, defendants contend that other indicators — such as a drop in price of Jasmine stock in light of representations that it would produce a high return — put plaintiff on inquiry notice.
Viewing the allegations in the Revised Third Amended Complaint in the light most favorable to the non-moving party, plaintiff was first given inquiry notice in the May 19, 1995 form 8-K which disclosed irregularities discovered by BDO Seidman, who succeeded Andersen and shortly thereafter terminated its relationship with Jasmine. Revised Third Am. Compl. at Ex. N. It cannot be said that the warnings in the prospectus by themselves created notice because they did not contradict oral representations made prior to purchase of the stock.*fn8 See Insurance Consultants, 746 F. Supp. at 406 (holding inquiry notice present where oral representation made prior to purchase contradict written representations in offering memoranda). Furthermore, as defendants strenuously point out, Jasmine did experience losses, and these economic conditions were reported in its 10-Q forms as early as February 14, 1994. However, throughout this period, Andersen, one of the "big six" accounting firms, did not adjust its position which approved of Jasmine's financial statements and economic viability. Additionally, the December 19, 1994 8-K form, while it revealed Andersen withdrew as Jasmine's accountant, did not reveal any discrepancies or irregularities in Jasmine's previous financial statements. Andersen's withdrawal was reported as a "mutual" parting, which does not necessarily infer any potential illicit conduct, and in the context of this motion to dismiss, should not have instinctively "excite[d] `storm warnings' of culpable activity." Gruber, 697 F. Supp. at 864. Therefore, all defendants' motions to dismiss on the basis of the statute of limitations are denied.

December 1, 1997 Order, pp. 15-18.

The Court continued with the statute of limitations issue as applied to actions brought under § 10(b) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. § 78j(b), and Securities and Exchange Commission Rule 10b-5 ("Rule 10b-5"), 17 C.F.R. § 240.10b-5, finding that "the same limitations period applies as with claims brought under § 11 of the 1933 Act" and citing for support Rolo v. City Investing Co. Liquidating Trust, 845 F. Supp. 182, 243-44 (D.N.J. 1993)*fn9 ("Accordingly, to have a timely securities fraud claim, plaintiffs here need to allege that (1) they did not know and should not have known that they had a claim for a violation of the securities laws earlier than . . . one year before the commencement of this action . . . and (2) more than three years had not passed since the violation itself."). Thus, the Court denied dismissal of the § 10(b) claims for the same reasons it denied dismissal of the § 11 claims. December 1, 1997 Order, pp. 20-21.

The Court also declined to dismiss the § 10(b) claim against Andersen on the ground that plaintiff did not properly plead the scienter requirement. The Court found that scienter may also include reckless behavior which the plaintiff sufficiently pled on Andersen's part. Similarly, the Court declined to dismiss the § 10(b) claim on the ground that the Third Circuit had not answered the question of whether the fraud on the market presumption of reliance applies in a case of newly issued stock because the plaintiff sufficiently alleged reliance on the misstatements and omissions in the prospectus and registration statement to get past the motion to dismiss.

The Court did dismiss plaintiff's federal RICO and RICO conspiracy claims, but allowed the New Jersey RICO claim to proceed. The New Jersey securities fraud claim, and the Illinois securities fraud claim against all but the McKowan defendants also withstood the motion to dismiss. The Court also found that plaintiff stated a claim under the Illinois Consumer Fraud Act and claims for common law fraud and negligent misrepresentation under New Jersey law and under Illinois law against only Sands Brothers and Andersen.

On August 6, 1998, the Court denied plaintiff Harry Berger's motion for class certification of "a class consisting of all purchasers of publically-traded securities of Jasmine, Ltd. who purchased during the period from December 15, 1993 through and including June 20, 1995." Although the Court found the putative class to be sufficiently numerous and found that the commonality requirement in itself did not pose a problem, the Court found Berger to be an atypical class representative. The Opinion stated,

Indeed, this is not a run-of-the-mill securities fraud case. Plaintiff did not purchase during the limited window of the IPO, but from an over-allotment of shares approximately three weeks after the close of the IPO. Moreover, as Plaintiff testified in his deposition, he relied solely on the oral representations of his broker (an employee of Defendant Sands Brothers & Co., Ltd. who was also the underwriter of the IPO) and without even seeing the Prospectus beforehand. . . . Thus, his reliance on this prospectus or other related documents such as the audit reports and the advice of Plaintiff's broker who was also an insider to the IPO, will be proved differently for Plaintiff than for those class members who may have only seen the prospectus (and/or other documents prepared by some of the named defendants) before purchasing the stock. The time of the purchase of the stock — whether it was purchased during the IPO or the short time frame following the IPO when Plaintiff purchased his shares — causes additional differences in proving each class members' case, possibly even affecting Plaintiff's standing to sue under Section 11. When considering these facts and the many permutations of proving reliance against the many defendants, in addition to the differing factual circumstances, it becomes evident that Plaintiff's claims and their anticipated methods of proof would not be typical of the class he seeks to represent and he has therefore not met the requirement of typicality.*fn10

August 6, 1998 Order, pp. 7-9. The Court also questioned the adequacy of representation because plaintiff Berger seemed to know very little about the factual predicate of the lawsuit and about his duties as a class representative. On March 9, 1999, this Court denied plaintiff Berger's motion for reconsideration of the denial of class certification. On May 24, 1999, the United States Court of Appeals for the Third Circuit denied plaintiff's petition for leave to file an interlocutory appeal from the Order denying class certification.

On June 29, 1999, the Honorable Robert B. Kugler, U.S.M.J., granted plaintiff's September 9, 1998 motion to have Bernard L. Cutler intervene as a plaintiff and allowed for an amendment to the complaint in order to do so. In the Amended Class Action Complaint, filed July 15, 1999, plaintiffs again name as class members "all persons other than defendants who purchased shares of Jasmine stock between December 15, 1993, and June 20, 1995 inclusive (the "Class Period")."

On July 16, 1999, Andersen filed a motion to dismiss the Complaint for lack of subject matter jurisdiction, which was joined in by several other defendants, but which was denied by this Court on September 23, 1999.

Also on September 23, 1999, this Court denied plaintiffs' motion to certify a settlement class and preliminarily approve a settlement agreement between plaintiffs and Fishbein & Company, P.C. The Court found that because of Cutler's relationship, through his son-in-law, with Sam Mangel, Cutler brought certain encumbrances to the case not typical of the class members he sought to represent. His reliance on the Prospectus and on the advice of Sands Brothers, rather than on the advice of a Jasmine insider, may have had to be proved differently from other class members. Finally, "[e]ven if he did not rely on any information provided by a Jasmine insider, the Court [saw] that because of his relationships, he will be subject to attacks that other class members would not be." September 23, 1999 Order, p. 11. Quoting Andersen's opposition brief, the Court continued, "The very existence of th[e] issue of Mr. Cutler's [possible] reliance on non-public information renders him an atypical and inadequate representative because it would be distracting to focus class resources on these issues to the detriment of a putative class." Id. at p. 12. Moreover, Cutler did not meet his burden of showing that his status as a so-called "insider" actually was typical of the class of investors he sought to represent.

On November 12, 1999, Andersen filed the instant motion for summary judgment. On February 1, 2000 plaintiff Berger filed a motion for leave to file a surreply to the motion for summary judgment.

On February 2, 2000, plaintiff Cutler filed a motion for class certification on behalf of all purchasers, other than the defendants, of publicly-traded securities of Jasmine, Ltd. who purchased during the period from December 15, 1993 through and including June 20, 1995. In this newest motion, Cutler asks this Court to certify a class for those claims in Count One and Count Fourteen which were not before the Court in the motion for preliminary approval of the Fishbein settlement and where reliance is not an element. Thus, Cutler seeks certification of his claims under Sections 11 and 12(2) of the Securities Act of 1933, 15 U.S.C. § 77k and 77l(2), arguing that any relationships he may have had with Jasmine insiders are irrelevant to these claims which do not require a showing of reliance.

II. DISCUSSION

A. Andersen's Motion for Summary Judgment

Arthur Andersen has moved for summary judgment on both the proposed class and the individual federal securities claims of plaintiff Cutler, arguing that those claims are time-barred by the applicable limitations period, which Arthur Andersen asserts was not tolled during the pendency of plaintiff Berger's proposed class action. In addition, Arthur Andersen argues that plaintiff Berger's federal securities law claims also are time-barred, and that, in any event, Berger cannot prove the elements essential to those claims.

1. Summary Judgment Standard

The entry of summary judgment is appropriate only when "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). An issue is "genuine" if it is supported by evidence such that a reasonable jury could return a verdict in the non-moving party's favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A fact is "material" if, under the governing substantive law, a dispute about it might affect the outcome of the suit. Id. In determining whether a genuine issue of material fact exists, the court must view the facts and all reasonable inferences drawn from those facts in the light most favorable to the non-moving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).

The moving party has the initial burden of demonstrating the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Once the moving party has met its opening burden, the non-moving party must identify, by affidavits or otherwise, specific facts showing that there is a genuine issue for trial. Id. at 324, 106 S.Ct. 2548. The non-moving party may not rest upon the mere allegations or denials of its pleading. Id.; Maidenbaum v. Bally's Park Place, Inc., 870 F. Supp. 1254, 1258 (D.N.J. 1994), aff'd 67 F.3d 291 (3d Cir. 1995). "[T]he plain language of Rule 56(c) mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex, 477 U.S. at 322, 106 S.Ct. 2548.

However, in deciding the motion, the court does not "weigh the evidence and determine the truth of the matter, but [instead] determine[s] whether there is a genuine issue for trial." Anderson, 477 U.S. at 248, 106 S.Ct. 2505. If the non-movant has provided evidence exceeding the "mere scintilla" threshold in demonstrating a genuine issue of material fact, the court cannot weigh the evidence and credit the movant's interpretation of the evidence. This is so even if the movant's evidence far outweighs the non-movant's evidence. Credibility determinations are the province of the factfinder. Big Apple BMW, Inc. v. BMW of North America, Inc., 974 F.2d 1358, 1363 (3d Cir. 1992), cert. denied, 507 U.S. 912, 113 S.Ct. 1262, 122 L.Ed.2d 659 (1993).

2. Motion as Against Cutler's Claims

i. Andersen argues that Cutler's proposed class claims are time-barred because equitable tolling does not apply.

The controlling statute of limitations for a Section 11 claim is found in the Securities Act of 1933, and is one year from the time the plaintiff discovered or, after the exercise of reasonable diligence, should have discovered the untrue statements or omissions, but in no event shall the action be brought more than three years after the security was bona fide offered to the public. 15 U.S.C. § 77m. Thus, the Court must determine for a section 11 claim whether and when the plaintiff was under inquiry notice.

The "proper period of limitations for a complaint charging violation of section 10(b) and Rule 10b-5 is one year after the plaintiff discovers the facts constituting the violation, and in no event more than three years after such violation." In re Data Access Sys. Sec. Litig., 843 F.2d 1537, 1550 (3d Cir.) (in banc), cert. denied, 488 U.S. 849, 109 S.Ct. 131, 102 L.Ed.2d 103 (1988). This period of limitations comes from the Securities Exchange Act of 1934 which does not provide for inquiry notice. Id.

In this case, Jasmine's registration statement and prospectus were filed with the SEC on December 15, 1993. The initial Complaint was filed on November 17, 1995. Plaintiffs have argued that they did not receive notice of their claims until May of 1995, and when this case was in the procedural stance of a motion to dismiss, this Court found that plaintiff Berger was first given inquiry notice in the May 19, 1995 form 8 K which disclosed irregularities discovered by BDO Seidman, who succeeded Andersen and shortly thereafter terminated its relationship with Jasmine. Revised Third Am. Compl. at Ex. N. On August 6, 1998, this Court denied plaintiff Berger's motion for class certification. On September 8, 1998, plaintiff Cutler filed his motion to intervene. Thus, absent tolling, Cutler's federal securities claims would be time-barred.

For purposes of this portion of its motion, Andersen assumes that notice of the claims did not occur until May of 1995. Andersen's argument is that the pendency of a class action tolls the limitations period for class members' individual claims, but not for additional class action claims by putative members of the original asserted class. Cutler argues that the filing of a class action tolls the running of any applicable limitations period for all persons in the putative class; once certification is denied, the period begins to run again. Cutler states that the potential for abuse is in raising new claims, not in perpetuating the rights of putative class members.

The United States Supreme Court has held that "the commencement of an original class suit tolls the running of the statute for all purported members of the class who make timely motions to intervene after the court has found the suit inappropriate for class action status." American Pipe and Const. Co. v. Utah, 414 U.S. 538, 553, 94 S.Ct. 756, 38 L.Ed.2d 713 (1974). The Court reasoned that a federal class action serves a purpose of efficiency and economy of litigation and is "a truly representative suit designed to avoid, rather than encourage, unnecessary filing of repetitious papers and motions." Id. at 550, 94 S.Ct. 756. The Court also has stated that such a tolling rule for class actions is not inconsistent with the purposes served by statutes of limitations: putting defendants on notice of adverse claims and preventing plaintiffs from sleeping on their rights. Crown, Cork & Seal Co., Inc. v. Parker, 462 U.S. 345, 352-53, 103 S.Ct. 2392, 76 L.Ed.2d 628 (1983) ("Tolling the statute of limitations thus creates no potential for unfair surprise, regardless of the method class members choose to enforce their rights upon denial of class certification."). The clock begins to run anew when the district court denies certification. In re Westinghouse Sec. Litig., 982 F. Supp. 1031, 1033 (W.D.Pa. 1997) (citing American Pipe, 414 U.S. at 561, 94 S.Ct. 756).

American Pipe and its progeny have made clear that the pendency of a previously filed class action tolls the limitations period for a proposed class member's subsequent individual actions. However, neither the United States Supreme Court nor the Third Circuit has decided whether the American Pipe tolling rule applies, after a denial of class certification, to class claims brought by a new class representative. The vast majority of the circuits which have examined this issue have declined to expand the American Pipe rule beyond individual claims to allow tolling for subsequent class actions. See, e.g., Basch v. Ground Round, Inc., 139 F.3d 6, 10-11 (1st Cir.), cert. denied, 525 U.S. 870, 119 S.Ct. 165, 142 L.Ed.2d 135 (1998) ("Plaintiffs may not stack one class action on top of another and continue to toll the statute of limitations indefinitely. Permitting such tactics would allow lawyers to file successive putative class actions with the hope of attracting more potential plaintiffs and perpetually tolling the statute of limitations as to all such potential litigants, regardless of how many times a court declines to certify the class."); Griffin v. Singletary, 17 F.3d 356, 359-60 (11th Cir. 1994), cert. denied sub nom., Florida v. Platt, 513 U.S. 1077, 115 S.Ct. 723, 130 L.Ed.2d 628 (1995) ("[P]laintiffs may not piggyback one class action onto another, and thereby engage in endless rounds of litigation . . . over the adequacy of successive named plaintiffs to serve as class representatives." (Internal quotations omitted.)); Andrews v. Orr, 851 F.2d 146, 149 (6th Cir. 1988) ("The courts of appeals that have dealt with the issue appear to be in unanimous agreement that the pendency of a previously filed class action does not toll the limitations period for additional class actions by putative members of the original asserted class."); Korwek v. Hunt, 827 F.2d 874, 879 (2d Cir. 1987) ("[T]he tolling rule established by American Pipe, and expanded upon by Crown, Cork, was not intended to be applied to suspend the running of statutes of limitations for class action suits filed after a definitive determination of class certification; such an application of the rule would be inimical to the purposes behind statutes of limitations and the class action procedure."); Robbin v. Fluor Corp., 835 F.2d 213, 214 (9th Cir. 1987) ("`American Pipe and Crown, Cork represent a careful balancing of the interest of plaintiffs, defendants, and the court system.' . . . We agree with the Second Circuit that to extend tolling to class actions `tests the outer limits of the American Pipe doctrine and . . . falls beyond its carefully crafted parameters into the range of abusive options.'" (Quoting Korwek at 879.)); Salazar-Calderon v. Presidio Valley Farmers Ass'n, 765 F.2d 1334, 1351 (5th Cir. 1985), cert. denied, 475 U.S. 1035, 106 S.Ct. 1245, 89 L.Ed.2d 353 (1986) ("Plaintiffs have no authority for their contention that putative class members may piggyback one class action onto another and thus toll the statute of limitations indefinitely, nor have we found any. To the contrary, it has repeatedly been noted that `the tolling rule [in class actions] is a generous one, inviting abuse,'" (Quoting American Pipe concurrence.)). Indeed, the general rule is that once class certification has been denied, the pendency of the previously filed class action does not toll the limitations period for later class actions by putative members of the originally asserted class.

In this case, plaintiff Cutler is attempting to certify a class which has already been denied certification by this Court. Thus, a decision on the appropriateness of proceeding as a class has been decided, and Cutler should not be able to force this Court to "engage in endless rounds of litigation over the adequacy or propriety of proceeding as a class." Griffin, 17 F.3d at 359. In addition, it is of no moment that Cutler has intervened as a plaintiff and attempted to assert class claims, rather than having filed a separate suit alleging his class causes of action. See Fleming v. Bank of Boston Corp., 127 F.R.D. 30, 36 (D.Mass. 1989) (finding it impermissible to use intervention after certification has been denied "to circumvent the statute of limitation by filing a lawsuit without an appropriate plaintiff and then searching for one who can later intervene with the benefit of the tolling rule."). In a case on all fours with the procedural posture of this case, albeit from another district, the court found "too formalistic" plaintiffs' attempt at distinguishing their case from those outlined above by arguing that the filing of a subsequent complaint is different from the addition of the proposed class representative through amendment to the original complaint. Fleck v. Cablevision VII, Inc., 807 F. Supp. 824, 827 (D.D.C. 1992) ("The potential for abuse is the same whichever procedure is used to renew the motion for class certification through the use of a new class representative.").

This Court finds persuasive the rationale discussed within these cases and finds the cases cited by plaintiffs distinguishable in that none of them treated with a case after certification was denied in the first instance. See, e.g., Goodman v. Lukens Steel Co., 777 F.2d 113 (3d Cir. 1985), judgment aff'd, 482 U.S. 656, 107 S.Ct. 2617, 96 L.Ed.2d 572 (1987) (After district court certified class*fn11 and tried case, court of appeals found that no named plaintiff adequately represented class for a particular claim. To "salvage" the work of the district court and counsel, appellate court instructed district court to explore the possibility of intervention by qualified class representatives.); Haas v. Pittsburgh Nat'l Bank, 526 F.2d 1083, 1097 (3d Cir. 1975) (Court applied tolling to allow the amendment of additional class members after an initial grant of class action status had the effect of vesting "the class with a legal status separate from the interest asserted by the nominal plaintiffs."); Trief v. Dun & Bradstreet, 144 F.R.D. 193 (S.D.N.Y. 1992) (Defendant conceded that the case was appropriate for certification, but contended the named plaintiffs were not adequate. Before the court decided the class certification motion, so with no danger of relitigating decided issues, plaintiffs filed a motion for an "adequate" person to intervene as plaintiff.).

The Court does recognize that two district courts in California and one in Washington, D.C. reached contrary decisions in unreported cases, In re Quarterdeck Office Systems, Inc. Sec. Litig., 1994 WL 374452 (C.D.Cal. 1994) and Shields v. Smith, 1992 WL 295179 (N.D.Cal. 1992); Shields v. Washington Bancorporation, 1992 WL 88004 (D.D.C. 1992). These cases distinguish the great weight of authority by stating that all of the cases in which the courts held that the statute was not tolled for later class actions involved either an attempt to file an entirely separate class action lawsuit after the dismissal of an earlier action or an attempt to bring a later action after the court had determined that proceeding as a class action was an inappropriate method of resolving the lawsuit*fn12, as opposed to allowing an intervening plaintiff, in an attempt to find a more appropriate class representative, to perpetuate the class action. Absent controlling authority to the contrary, however, this Court opts to follow the reasoning established by the circuit courts, as set forth above.

The only other court within this circuit to have addressed this issue came to the same conclusion as this Court:

[A] contrary rule would allow the attorney for a class to revive the class claims upon denial of certification by simply refiling a new class action using a different putative class member as representative. The attorney would be able to bring a potentially endless succession of class actions, each tolling the [statute of limitations] for its successor. Such a rule would frustrate the principal purpose of the class action procedure — promotion of efficiency and economy of litigation.

In re Westinghouse Sec. Litig., 982 F. Supp. 1031, 1034 (W.D.Pa. 1997) (quoting Smith v. Flagship Int'l, 609 F. Supp. 58, 64 (N.D.Tex. 1985)). It is not difficult to envision this type of "slippery slope" simply serving as a vehicle for attorneys to abuse the American Pipe rule.

Although the defendants have been on notice of the claims asserted, because this Court does not definitively believe that class action treatment in this case would be the most efficient manner of resolution for all parties concerned, it finds that the statute of limitations was not tolled for Cutler's class claims. Even assuming that the statute did not begin to run for each of the federal securities claims until May of 1995, Cutler's attempt to assert these claims in September of 1998, more than one year after they arose, was untimely. Accordingly, summary judgment will be granted on Cutler's federal securities class claims.

ii. Andersen argues that Cutler's individual federal securities claims, based on the theory that Andersen's 1993 Audit Report (included in the Prospectus) was not correct, are time-barred.

Andersen argues that Cutler's deposition testimony, confirmed by testimony of Robert Bonaventura of Sands Brothers, establishes that Cutler was on actual notice, in that he believed he had been defrauded with respect to the Jasmine investment, by Spring of 1994. Therefore, according to Andersen, the statute of limitations ran by the Spring of 1995 but Berger's suit was not filed until November of that year. On the other hand, plaintiffs argue that this Court already found that plaintiffs' noticing Jasmine's poor performance did not constitute inquiry notice, especially when Andersen also did not see any indications of fraud. Plaintiffs also argue that Andersen presents a skewed version of the testimony, which is subject to conflicting interpretations and therefore must be resolved in favor of the non-movant. In addition, regarding any conflicts or changes in Cutler's deposition testimony between the first and second day of depositions, plaintiffs argue that the law in the Third Circuit precludes summary judgment.

At the outset, the Court notes that Andersen has conceded that the American Pipe rule tolled Cutler's individual claims during the pendency of Berger's case. Thus, from November 17, 1995 until August 6, 1998 when class certification was denied, the statute of limitations was tolled. The Court also notes that it ruled on a motion to dismiss that plaintiff Berger was first given inquiry notice in the May 19, 1995 form 8-K which disclosed irregularities discovered by BDO Seidman, and that warnings in the prospectus by themselves did not create notice "because they did not contradict oral representations made prior to purchase of the stock.*fn13 See Insurance Consultants, 746 F. Supp. at 406 (holding inquiry notice present where oral representation made prior to purchase contradict written representations in offering memoranda)." December 1, 1997 Order, p. 15.

Now that the case is at the summary judgment stage, Andersen cites to Cutler's deposition testimony. A review of the entirety of his testimony leaves the Court with the impression that Cutler became concerned when the price of Jasmine stock went from the $5.50 per share that he paid down to $2 per share. Exhibit A of Andersen's Appendix, Part II reveals that the price of the stock first closed at $2 on June 23, 1994, although it traded at $2 at some point during the trading day a month before. It closed at $1.75 on July 8, 1994, but went up to close at 3-7/8 on September 15, 1994 before it declined again to close at $1 beginning December 5, 1994, then hovered in the area of $1 until February and March of 1995 when the stock fairly consistently closed below $1.

The first day of his testimony, Cutler made clear that the initial drop in the stock price did not lead him to believe that the Jasmine prospectus figures were not correct, but when the stock continued to go down, and after he spoke with some people, and certainly after he had received the August 24, 1998 letter from Futterman and Howard, he suspected that the facts presented to him relative to Jasmine were incorrect. Two weeks later, at the second day of his deposition, Cutler testified that he may have felt "gypped" when the stock went down to $2, as if he had made a bad investment, but he always felt "it would come back" because "everything else seemed to be alright" and Sands Brothers did not seem troubled by the declining price. He did admit when led by counsel's question, that the question of whether he had been cheated in his investment in Jasmine, or induced in some way to invest, may have gone through his mind in late Spring of 1994. He also testified, in the end, that he did not feel he had been "cheated" (as opposed to "gypped") until the stock stopped trading in June of 1995.*fn14 He did not suspect that the information presented in the prospectus about Jasmine's financial condition was not truthful until that time.

Relevant portions of each deposition follow, along with excerpts from the deposition of Bonaventura, a Managing Director and Stockbroker at Sands Brothers.

Q. Mr. Cutler, when you received this August 24, 1998 letter from Futterman and Howard, had you heard of Futterman and Howard before?

A. No.

Q. What did you do when you received this letter in the mail?
A. I was very interested in it and contacted the firm.

Q. Why were you very interested in it?

A. I don't like to lose money under peculiar circumstances.
Q. Can you tell us what you mean by peculiar circumstances?

A. I feel I was jipped [sic throughout transcript].

Q. Why do you feel that you were jipped?

A. Because the facts that were presented to me relative to Jasmine were very definitely incorrect.
Q. What facts are you talking about that you believe were represented to you relative to Jasmine?
A. Everything I read in the prospectus, except the flowery parts, and of course they always say there is a downfall, but when you read the figures, as I later found out, all the figures were wrong.
Q. When did you believe that you had been jipped, as you put it, in your investment?
A. When I saw the stock dropping. Not initially, but later on.
Q. Do you recall when it was that you saw the stock dropping?
A. Well, it came out December, so I would say the spring of the following year. That would be 1994.
Q. Do you recall that you bought the stock at $5.50 per share?

A. Right.

Q. And what happened to the best of your recollection to the stock price between the time you purchased the stock and the spring of 1994?
A. Well, there was an initial blip up and then thereafter it just started drifting down.
Q. Do you recall approximately how far down it drifted by the spring of 1994?

A. I think it was in the range of $2 to $3.

Q. And was it at that time that you felt that you had been jipped in your investment in Jasmine?

A. I believe so.

Q. Was it at that time that you thought there were peculiar circumstances with respect to your investment in Jasmine?

A. Yes.

Q. Was it the drop in the stock price that led you to believe that the figures in the prospectus were not correct?
A. Not necessarily the initial drop because that happens quite frequently. But it was the drop and later on discussions with people, mainly my son-in-law, who knows Sam Mangel.
Well, like I said, the initial drop is something that happens quite often, but as it proceeded to go down, then the light went on.
Q. You mention that at some point the light went on. What did you mean by that?

A. I became aware that something was wrong.

Q. And to the best of your recollection when did that occur?

A. It's hard to say. Maybe late in the spring.

Q. Late in the spring of 1994?

A. Right.

(Cutler dep., April 14, 1999, pp. 46-49)

A. Well, they said it is a little low but it will be all right; it's only natural; give it time.
Q. Did you receive quarterly reports relating to Jasmine?

A. No.

Q. So you don't recall ever receiving Jasmine's first quarter Q10 report for the quarter ending December 31, 1993?

A. I don't think so.

Q. Do you recall receiving Jasmine's second quarter report for the quarter ending March 31, 1994?

A. I would say no.

Q. Did you ever try to sell any of your Jasmine stock?

A. No.

Q. Did you ever complain to anybody about your Jasmine investment?

A. Yes.

Q. To whom did you complain?

A. My son-in-law. I said it didn't look very good.

Q. Was that based on any other information that you had?

(Cutler dep., April 14, 1999, pp. 150-153)

A. Bought stock of company after reading prospectus which was not correct.

It says date filed January 5th '96.

Q. In 1996 what did you believe was not correct that ...

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