The opinion of the court was delivered by: Rodriguez, District Judge.
A. I think it was in the range of $2 to $3.
A. I believe so.
A. I became aware that something was wrong.
A. It's hard to say. Maybe late in the spring.
Q. Late in the spring of 1994?
(Cutler dep., April 14, 1999, pp. 46-49)
A. I don't think so.
A. I would say no.
Q. Did you ever try to sell any of your Jasmine
Q. Did you ever complain to anybody about your
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
(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
Q. Yes. When you filled out this form in 1996 what
did you believe was not correct about the
A. The information.
Q. What information are you referring to?
A. About the company.
Q. What information about the company?
A. Gross sales, net profit all the way down the line.
. . . . All of it was wrong. . . . Well, accounts
receivable, payable, the whole thing.
A. Because of the way this company went down. It went
down so fast.
Q. So the rapid decline in the stock price of Jasmine
lead you to believe that the information in the
prospectus was not correct; is that fair?
A. Yes, because it was too good to go down like that.
The prospectus stated earnings of about 40 cents
and they didn't have earnings of 40 cents.
Well, after speaking to probably someone at Sands I
asked how much are they earning, and I asked what
about the 49 cents on the prospectus, and he said
no, that's not their earnings.
Q. When did you have your discussion with Sands
regarding the 40 cents per share earnings?
A. Probably in one of my telephone calls.
Q. And when did that occur, sir?
A. In the spring of '94.
Q. Mr. Cutler, what were you told about Jasmine's
earnings when you talked to Sands in the spring of
1994 and inquired about the 40 cents per share
A. I must have asked how much are they earning and
the reply was below 40 cents if anything.
. . . Well, not from that. It's from later what
happened to the stock, and then I recalled what
their earnings were stated and how that wasn't the
Q. And during those telephone conversations you
inquired about Jasmine's current earnings at that
time in 1994; is that true?
A. I must have, yes.
(Cutler dep., April 14, 1999, pp. 158-165)
A. Now on page six you see increasing sales,
increasing gross profit, increasing operating
income. Income before taxes, net income is very
good as far as its increase. And then earnings per
share 18 cents, 7 cents wasn't that good but 54
cents looked very good. It increases number of
shares too. They still made more money. The ratio
of assets liabilities is excellent.
Q. Are you referring to the balance sheet data on
(Cutler dep., April 14, 1999, p. 207)
Q. By August 1994, you knew something was terribly
wrong with the Jasmine stock, correct?
A. By terribly, what do you mean?
Q. Well, I think you — I don't want to repeat your
prior testimony, but I think you testified by the
late spring of 1994 you were — a light went on, to
use your language.
A. I don't know if it was '94 now.
Q. Okay. Do you know at what price the stock was when
you, the light went on?
A. I'd say around $2, $2 a share. . . . I said '94
but I think it's probably '95.
Q. Now you think it's spring of '95?
Q. But do you know what the stock price was in March
and April 1994?
A. I'm not sure.
Q. Do we agree that the light went on when the stock
price was around two, $3 a share?
A. Not three. Say two.
Q. Okay. If I told you that in May of 1994, the stock
was at two and an eighth, would that refresh your
recollection that, in fact, it was in 1994 that you
A. Well, I was concerned but —
Q. And a light went on, correct?
MR. FUTTERMAN: Let him finish his answer, please.
A. I was concerned but I didn't think it warranted my
doing anything. Everything else seemed to be all
right. . . . In 1994, I just, I just figured there
was something wrong with the stock, but I had hopes
that it would come back. Everything else seemed to
be all right. At Sands they didn't say anything was
(Cutler dep., April 29, 1999, pp. 59-64)
Q. Is it the case that you don't recall what year it
was, but when the stock was going to $2 a share you
knew something was wrong?
A. I probably have my time frames wrong because this
isn't the only stock I've been buying and I have
many more stocks to look at than this.
Q. Listen to my question, if you could. Isn't it a
fact when this stock started going from 5.50 a
share in December, when it hit two to $3 a share
you became increasingly concerned, correct?
A. I became concerned.
Q. And you thought something was wrong?
A. Something was wrong with the stock, yes, because
it was going down.
Q. And, in fact, you thought something was wrong with
the company, correct, because it wasn't hitting .40
MR. FUTTERMAN: At what time are you talking about?
Q. Isn't it a fact that when the stock came down to
about two to $3 a share you were concerned not only
about the price of the stock but about your
A. Yes, I became concerned.
Q. And, in fact —
A. If you're investing.
Q. And, in fact, you began to question whether or not
the information provided in the prospectus was
MR. FUTTERMAN: Object to the form of the question.
There's no testimony to that effect.
A. No. I was just concerned about the stock at its
price. I didn't think about the other things at
that time. I was just concerned about the stock.
Q. And didn't you, in fact, question yourself, not to
someone else, didn't you question to yourself, by
the late spring of 1994, whether the information in
the prospectus was accurate in light of the fact
that the stock price went from 5.50 a share down to
$2 a share?
A. I probably began to think that in my mind.
(Cutler dep., April 29, 1999, pp. 65-68)
Q. When is it that you first believed, to use the
term you used two weeks ago,
that you had been jipped in this investment in
A. Well, jipped probably as the stock was going down.
Q. Which was in 1994 or '95?
Q. So at no time in 1994 did you come to the
conclusion that you had been jipped or cheated in
your investment in Jasmine?
A. Well, I didn't like the direction of the stock but
seemed to be all right.
Q. Seemed to be all right?
A. It will come back.
Q. So you were satisfied, were you, in 1994 about the
question of whether or not you had been defrauded
or cheated in your investment in Jasmine?
MR. FUTTERMAN: Object to the form of the question.
A. Not defrauded in '94.
Q. All right. Well, at any time in 1994 did you begin
to ask yourself the question whether or not you had
been cheated in investing in Jasmine?
A. Well, you always ask yourself what seems to be
going wrong here.
Q. All right. And did the question arise in your own
mind in 1994 as to whether or not you had been
cheated in being induced in some way to invest in
A. It may have arisen in my mind. Something like that
always does go through your mind.
Q. And when was it in 1994 that that arose in your
A. Probably in the late spring.
Q. Of 1994; is that right?
(Cutler dep., April 29, 1999, pp. 119-121)
Q. And the question was: Late in the spring of 1994?
And the answer was: Right. When you gave that
testimony, were you guessing about the date?
A. I was guessing.
Q. After thinking about it, do you still believe that
the light came on in the spring of 1994?
Q. When do you think that happened?
A. Following year.
Q. You testified that late in the summer of 1994, you
told your son-in-law that it doesn't look good. Did
you have any reason to suspect fraud at the time
you told him that?
A. No, I didn't.
Q. If you had suspected fraud in December of 1994 in
connection with your Jasmine investment, what would
you have done?
A. Sold the stock.
Q. Did you have any reason to believe in the summer
of 1994 that Jasmine stock couldn't come back?
Q. At any time in 1994 did you have any facts that
indicated to you that Jasmine had perpetrated a
fraud in its IPO?
Q. At any time in 1994 did you have any information
that Arthur Andersen had failed to conduct its
audit of Jasmine's September 30, 1993 numbers —
Q. — with generally accepted auditing standards or
generally accepted accounting principles?
Q. If at any time in 1994 you had any information
that Jasmine had reported phoney numbers in its
prospectus, what would you have done?
A. Sold the stock.
Q. If at any time in 1994 you had any information
that Arthur Andersen's 1993 audit or Fishbein's
1992 audit had not been conducted in accordance
with the proper standards of their
profession, what would you have done?
A. Same thing, sell the stock.
Q. The record in this case shows that Jasmine stock
last traded on NASDAQ at the end of March of 1995.
Before Jasmine stopped trading in 1995, did you
have any information that led you to believe that
Jasmine had perpetrated a fraud in connection with
Q. Before the stock stopped trading in March 1995,
did you have any information that led you to
believe that Arthur Andersen's audit of the 1993
financial statements of Jasmine had not complied
with generally accepted accounting principles or
generally accepted auditing standards?
A. No, I didn't.
Q. During any conversation that you had with Sands'
employees in 1994, did anyone from Sands ever tell
you that Jasmine reported phoney figures for the
year ending September 30, 1993?
A. No, they didn't.
Q. If somebody at Sands had done that, what would you
A. Sell the stock.
Q. At any time in 1994 did you think Jasmine, to use
your vernacular, was going in the can?
A. I didn't think so.
Q. If you had, what would you have done?
Q. I would have sold the stock.
Q. Do you recall if you formed your belief that the
rapid decline in the stock meant the prospectus was
not correct before or after the date on which you
made that notation, No market for the stock?
A. It would have been after.
Q. Did anyone or anything warn you of any risk before
you made your investment in Jasmine that its
financial statements, as reflected in the
prospectus, might be fraudulent?
Q. Were you willing to make an investment in the
stock — would you have been willing to make an
investment in the stock if you knew the financial
statements were fraudulent?
A. I wouldn't.
Q. Did anyone or anything warn you prior to your
investment in Jasmine stock that Arthur Andersen's
1993 audit might be contrary to generally accepted
auditing standards or generally accepted accounting
Q. And, in fact, when it was down to $2 a share,
forget about the year, when it was down to $2 a
share the light went on, didn't it?
A. Came very concerned.
Q. Very concerned. And in fact, you thought when it
was about $2 a share that you were being cheated?
A. In a way.
Q. Okay. And in a way that you thought that there was
something going on that was not right here because
you but it at 5.50 and six months later it's down
to a dollar and-a-half,$2 a share, correct?
A. I just thought it wasn't performing, and calls to
Sands Brothers they said that it's all right,
they're just, I think their earnings were not going
to meet expectations, that's why, but everything
was all right.
Q. Right. All I want to know is that: In your own
mind, by about June or July 1994, you had great
concerns, did you not, that what was represented to
you in December about the, in the prospectus about
the financials and the wherewithal of Jasmine
wasn't actually truthful?
Q. You didn't have that concern in July?
A. No, no.
A. Just that the stock was not performing. I didn't
Q. And, well, didn't you call Sands Brothers and say
to Sands, say to Mr. Bonaventura at Sands Brothers,
Something's wrong with the stock?
A. No. I asked them what's wrong.
Q. And they said — then they gave you a typical
Q. But, in fact, instead of asking them, didn't you
say, Something's got to be wrong with this stock?
Q. You never said that?
A. No. . . . I thought it was going to come back. . .
. You know, you keep emphasizing this light went
on. You look at the price, you see it's going down,
you say, well, it's not doing well but it should be
all right, especially when I got encouragement from
Q. So all through 1995, then, there was no concern
that the prospectus wasn't as stated?
A. Through 1995?
Q. So in 1995 sometime you became concerned that the
prospectus wasn't as stated?
A. Not about the prospectus, no. I didn't know what
was going on.
Q. In 1995, did you become concerned that the
financials of Jasmine weren't as stated in the
A. The only time I became concerned is when it
Q. Is it your testimony now that not until the stock
stopped trading was that when you became concerned
about the financials that were in the prospectus?
A. When it stopped trading I became concerned about
the whole thing, yes.
Q. Because you lost your money?
Q. And did you ever try to sell the stock from the
date you bought it up to the date it stopped
Q. And specifically, sir, did you consider or think
about at all during these last two weeks the
question of whether your testimony on April 14 as
to 1994 being the time when you came to the
conclusion that you had been cheated in the Jasmine
investment would help or hurt your position in this
lawsuit with regard to the statute of limitations?
A. I didn't think about cheated. I said jipped in the
reference that I had made a bad investment, but
cheated has a different meaning to me.
(Cutler dep., April 29, 1999, pp. 61-187). Bonaventura's
deposition testimony follows:
Q. Did there ever come a time, sir, when you began to
question the integrity of Jasmine management?
MR. FEENEY: Object to form.
A. Well, any time a stock goes down significantly,
you question whether or not there is a problem at
the company regardless of what the stock is.
Q. When did that time come for you?
A. When I started questioning whether or not this was
— there was a problem with the company?
A. Oh, probably when the stock was roughly — I don't
know if it is necessarily the price of the stock,
but roughly, $3, 2-1/2, $3, $4.
Q. Did you tell your clients you were questioning
management's integrity at that time?
A. I wasn't questioning management's integrity. I
said I believe there possibly was a problem at the
Normally, the stock price dictates what is going on
in the company.
Q. Did you tell your clients there might be a problem
at the company?
A. I — I was trying to obtain any information I
possibly could which would give me an explanation
as to why the stock price was going down.
Q. From whom were you trying to obtain information.
A. We would call the company all the time. In fact, I
personally spoke to Irv Mangel myself. I even went
to one of their trade shows.
Q. What information did you obtain about why the
stock was going down?
A. Nothing, really.
Q. What did you tell your clients the price of the
stock was going down?
A. I explained to them we were doing all we possibly
can to find out what is going on at the company,
stock going down, possibly people getting bored
with the stock, moving out of the stock, moving on
to the next one. We certainly never recommended
selling the stock because we had no reason to do
that. We had, you know, tried to do everything we
possibly could to obtain information on Jasmine,
and we told people just to sit tight.
Q. So that was your advice to clients?
A. Not to see?
A. We did not recommend to sell, no.
Q. And that's what you told Bernie Cutler?
A. I told Bernie Cutler, who called many times, and
after a while I said to him "Bernie, if you're not
satisfied with the information that I've given you,
why don't you call the people you know over at
Jasmine to find out information as well," which he
did many time as well, he told me.
Q. Did there ever come a time when you questioned the
integrity of Jasmine's management?
MR. FEENEY: Objection to form.
A. Well, when companies don't meet their business
plan, you obviously are not happy with the
situation. They forecasted numbers, and eventually
didn't meet those numbers, and that's when the
stock eventually went to zero.
Q. Did there come a time when you questioned the
integrity of Jasmine management?
MR. FEENEY: Object to form.
A. When the stock was at zero, I certainly questioned
the integrity of management.
(Bonaventura dep., 7/9/99, pp. 56-61)
A. I've seen companies report bad earnings before.
Doesn't necessarily mean the company is going out
of business. All various factors companies —
Q. Companies run into difficulties and things happen
and they suffer losses?
A. In this particular instance, I think a lot of it
at that point was blamed on the weather.
Q. So the publication of that 10-Q was no particular
warning sign of any kind that there was something
drastically wrong with the company, was it?
MS. TEMPLE: Objection.
MR. FEENEY: Objection to form.
A. It wasn't a good sign.
Q. It didn't tell you a fraud had been perpetrated,
MS. TEMPLE: Objection to form.
MR. ROTH: Objection.
A. I don't think you can derive fraud from that, but
I'm sure people were questioning whether this
company was going to rebound.
A. By the time we got to, let's say June, July, I
mean we got to a certain point where we were no
longer getting as many answers from management as
we would have liked, so you know people obviously
becoming very upset with the price of the stock. We
have any answers to give them. . . . At that point
we certainly began to question the integrity of the
Q. Are you changing your testimony?
A. Well, when you have no answers to give somebody,
then you have to obviously say that, you know. I
didn't give up on the stock certainly until the
stock went to zero.
Q. You didn't start to recommend people selling the
stock before it went to zero, did you?
(Bonaventura dep., 7/9/99, pp. 67-73)
A. Did I tell my clients to get out of the stock as
fast as possible? . . . No, I didn't.
Q. At any point prior to the stock stopping — at
anytime prior to the time when the stock stopped
trading, did you ever suspect that there had been a
fraud perpetrated by Jasmine management?
A. Again, I personally did not go to the extent of
thinking that was fraud. I just thought it was
mismanagement at some point not meeting
Q. Mismanagement in your mind is not a fraud?
A. Mismanagement is not fraud, no, not in my opinion.
Q. Did there ever come a point when you believed that
Jasmine management had perpetrated a fraud?
MS. TEMPLE: Not just suspected, but believed?
A. Did I suspect possibly a fraud in Jasmine's —
A. Yes I had suspicions. I don't know what the —
Q. What caused you to have that suspicion?
A. Stock went to zero and the company is no longer in
(Bonaventura dep., 7/9/99, pp. 131-139)
Q. When Mr. Cutler called you, what did he say, "I'm
upset with the price of the stock"?
MR. ROTH: Which time?
A. "I'm upset, I'm irate, there must be something
wrong." He started saying there must be something
wrong with the company, it is fraud, this and that,
and I said, "I'll give you every piece of
information I could give you, Mr. Cutler."
Q. When did he say it was fraud?
A. Obviously later on.
Q. When obviously?
A. I don't recall the exact time, he called so many
Q. What words did he use in connection with the use
of the word "fraud"?
A. "There must be some type of fraud going on here
with the stock being the way it is."
Q. What did you tell him?
A. "I'm not aware of any fraud."
Q. If you had been, you would have told him, wouldn't
A. I believe so, yes.
Q. You didn't suspect any fraud, did you?
A. As any [sic] mentioned earlier, I felt there was
obviously something wrong with the company, with
the stock the way it is. . . . As I told you
before, sitting in this chair right now I would say
there had to be some fraud because the company is
out of business and the stock is at zero, but I
don't know that for sure. I can only speculate on
fraud. I have no idea.
Q. Let's make the record perfectly clear now. At no
time prior to the stock ceasing its trading in
March of '95 did you believe that a fraud had been
perpetrated; is that correct?
A. No, I suspected or thought to myself that there
might be a problem or
there might be fraud, but that would only be
speculation, and I don't pass on speculative rumors
to my clients, I deal in facts.
(Bonaventura dep., 7/9/99, pp. 186-190).
"In the context of the statute of limitations defense, where
contrary inferences may reasonably be drawn from the facts which
are material to when the cause of action accrued, defendants bear
a heavy burden of showing that the claims are untimely as a
matter of law." Gruber v. Price Waterhouse, 697 F. Supp. 859,
861 (E.D.Pa. 1988), aff'd 911 F.2d 960 (3d Cir. 1990) (citing
Van Buskirk v. Carey Canadian Mines, Ltd., 760 F.2d 481, 487
(3d Cir. 1985); Mosesian v. Peat, Marwick, Mitchell & Co.,
727 F.2d 873, 877 (9th Cir.), cert. denied, 469 U.S. 932, 105 S.Ct.
329, 83 L.Ed.2d 265 (1984)). Cutler's Section 11 claim would be
barred if he knew or should have known by the exercise of
reasonable diligence of the untrue statements or omissions in the
registration statement more than one year before Berger filed the
Complaint in this action on November 17, 1995. See Gruber, 697
F. Supp. at 861. Similarly, the 10(b) claim would be barred if
Cutler knew of the alleged fraud prior to November of 1994. As
can be seen from a reading of the above testimony, although when
taken in a vacuum there is testimony which could lead one to make
a determination on the statute of limitations and whether there
was notice, the entirety of the record indicates that genuine
issues of material fact preclude summary judgment on this ground.
The Court does not find that Andersen has established, through
the use of Cutler's deposition testimony, an absence of genuine
issues of material fact regarding Cutler's having actual notice
of his securities claims in the Spring of 1994. Further, the
Court is not convinced as a matter of law that prior to November
of 1994, plaintiff Cutler had sufficient information of possible
wrongdoing to "excite `storm warnings' of culpable activity" to
impose a duty of reasonable diligence which, if pursued, would
have disclosed the alleged fraud.
In this case, Andersen has pointed to no rumors or vague
charges of sufficient substance to arouse suspicion. The actual
notice theory is based on the decline in stock price, which, as
Cutler alluded to during his deposition, could have an innocuous
cause, nothing to do with fraud. Thus, the alleged "storm
warnings" cited by Andersen are not necessarily indicative of
fraud or culpable conduct.*fn15 Compare Gruber v. Price
Waterhouse, 911 F.2d 960 (3d Cir. 1990) (Earlier than one year
before the section 11 cause of action was filed, plaintiff was
aware of the following reports of fraud by management of the
subject company, which were held to have put him on inquiry
notice: "after reporting knowledge of fraud by [the company]
management to the bankruptcy trustee, outside counsel for [the
company] withdrew from representation; the trustee was also
informed that the FBI had found several of [the company]'s
financial and accounting records in a city dump; the trustee was
served with a state grand jury subpoena after a state
investigation into [the company] was instituted; a federal
investigation was similarly initiated; and investigators linked
[the company's primary customer]'s sole shareholder and principal
officer to organized crime. . . . [A] former financial officer of
[the company] and an accountant both testified to occurrences of
fraud by [the company] in connection with financial reporting. .
. . [P]laintiffs began to receive documents from Price
Waterhouse, including a "Management Letter" specifying
deficiencies in [the company]'s accounting procedures.").
The Court realizes that "the time from which the statute of
to run is not the time at which a plaintiff becomes aware of all
of the narrow aspects of the alleged fraud, but rather the time
at which plaintiff should have discovered the general fraudulent
scheme." In re Prudential Ins. Co. of Am. Sales Practice
Litig., 975 F. Supp. 584, 599 (D.N.J. 1996) (quotation omitted).
Nonetheless, as this Court discussed in a prior Order, related to
the drop in the price of stock,
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.
December 1, 1997 Order, pp. 15-18. Thus, the drop in the price of
stock did not seem to excite storm warning as far as Andersen was
concerned. The Fifth Circuit, in Summer v. Land & Leisure,
Inc., 664 F.2d 965, 969 (5th Cir. 1981), cert. denied,
458 U.S. 1106, 102 S.Ct. 3484, 73 L.Ed.2d 1367 (1982), stated, in
dicta, "[w]e can conceive of several factual situations in which
a price decline, under the circumstances here, would not be
indicative of fraud in the least, e.g., a depressed real estate
market caused either by tight money or recession." Id. The
cases cited by Andersen for the proposition that dramatic stock
price declines can put investors on inquiry notice of potential
securities claims may be distinguished because they each also
involved misrepresentations relating to the value of the stock
and that the investments would produce a stable or stellar income
with minimal risk. See, e.g., Tregenza v. Great Am.
Communications Co., 12 F.3d 717, 720 (7th Cir. 1993), cert.
denied, 511 U.S. 1085, 114 S.Ct. 1837, 128 L.Ed.2d 465
(1994) (Where a stock which plaintiffs had been told a year
earlier was greatly under-valued and would soon be worth twice as
much and at worst would not fall by more than 10 percent had lost
almost 90 percent of its value, an investor would have become
suspicious and investigated when the company's "emphatic and
precise prediction was so swiftly and dramatically falsified.").
In such a case, it is conceivable that a sharp decline in the
value of a security shortly after a representation that the
security will produce a stable income without any risk "would in
fact tend to indicate that the representation was false."
Summer, 664 F.2d at 969 n. 2.
In this case, however, the decline in stock price alone which
caused "concern" to Cutler is insufficient to have put him on
inquiry notice prior to November of 1994. He did not have
knowledge of facts sufficient to put a reasonable person on
notice of the alleged fraud.*fn16 Moreover, reading the entirety
of his testimony, the Court cannot hold, as a matter of law, that
there are no genuine issues of material fact precluding a finding
that Cutler was on actual notice of the securities claims in the
Spring of 1994. In so holding, this Court is mindful of its duty
to refrain from making credibility determinations on a motion for
3. Motion as Against Berger's Claims
i. Andersen argues that Berger's federal securities claims are
Again, Andersen argues that Berger's federal claims are
time-barred because his testimony confirms that he was put on
inquiry notice by May of 1994 but did not contact counsel until
September of 1995.
Andersen also argues that inquiry notice is established by
Jasmine's quarterly reports and decline in stock price, Jasmine's
December 31, 1993 Form 10-Q filed February 14, 1994 which
disclosed a $1 million loss for the quarter ending two weeks
after the IPO, Jasmine's March 31, 1994 10-Q filed May 11, 1994
which reported a $1.4 million loss for the previous six month
period and the termination of McKowan Lowe as a source of income,
and the fact that McKowan still owed $856,000 on the $915,000 it
had given as part of an Option Sale.
Plaintiffs argue that these same arguments were raised in a
motion to dismiss and were rejected by this Court. Further,
plaintiffs argue that Andersen chopped up the deposition
testimony it cites for support and that although Berger's
testimony indicates his anxiety, it does not indicate that he
suspected culpable activity or fraud.
Having reviewed the deposition testimony which is now part of
the record, the Court does not find that Andersen has met its
burden of establishing no genuine issue of material fact in the
premise that Berger was on inquiry notice before November of
1994. As with Cutler, the testimony indicates Berger's anxiety
with the performance of the stock, but not that he suspected
culpable activity. For the additional reasons discussed in the
denial of the motion to dismiss based on these grounds and in the
above subsection relating to whether Cutler's federal claims are
time-barred, the Court will deny summary judgment on the basis
that Berger's claims are time-barred.
ii. Andersen argues that Berger's section 10(b) claim, as well as
his claims for negligent misrepresentation and common law
fraud, must fail because Berger did not rely on Andersen's 1993
The second argument raised by Anderson in support of its motion
on plaintiff Berger's claims is that Berger cannot demonstrate
the requisite causation under Rule 10b-5 because his decision to
purchase the Jasmine stock was based "solely on the oral
representations of his broker . . . and without even seeing the
Prospectus beforehand." In response, Berger argues that he
indirectly relied on the 1993 audit report and Prospectus because
his broker relied on them when he recommended the Jasmine stock.
Moreover, he argues that he is entitled to a presumption of
reliance under a "fraud on the market" or "fraud created the
Where a 10b-5 action is premised on an alleged
misrepresentation, the plaintiff must demonstrate that the
defendant's misrepresentation caused him to purchase stock and
incur damages. See Rule 10b-5. But see Semerenko v. Cendant
Corp., 216 F.3d 315, 2000 WL 772933, * 10 (3d Cir. June 16,
2000) (noting that presumption of reliance is recognized in
certain cases). In order to establish such reliance, it is not
necessary for a plaintiff to show that he personally read the
allegedly misleading materials. Derivative reliance is
sufficient. See VT Investors v. R & D Funding Corp.,
733 F. Supp. 823, 834 (D.N.J. 1990) (noting that 10b-5 does not
require direct contact between plaintiff and defendant). See
also Itoba Ltd. v. Lep Group PLC, 54 F.3d 118, 122 (2d Cir.
1995), cert. denied, 516 U.S. 1044, 116 S.Ct. 702, 133 L.Ed.2d
659 (1996) (finding reliance where plaintiffs relied upon report
which contained conclusions that were predicated upon allegedly
misleading materials); Austin v. Loftsgaarden, 675 F.2d 168,
177-78 & n. 19 (8th Cir. 1982), rev'd on other grounds sub nom.
Randall v. Loftsgaarden, 478 U.S. 647, 106 S.Ct. 3143, 92
L.Ed.2d 525 (1986) (finding derivative reliance where plaintiff
relied upon third parties who testified that they relied upon
In this case, it is undisputed that Berger relied upon the
representations of his Sands broker, Steven Franklin, when he
purchased the Jasmine stock. Berger
Dep. at 31. Anderson argues, however, that Berger has failed to
demonstrate that Mr. Franklin in turn relied upon the Prospectus
or 1993 audit report when he recommended the Jasmine stock.
The only evidence in the record as to what information Mr.
Franklin based his recommendations comes from Berger's
deposition. During his deposition, Berger describes how Mr.
Franklin "strongly urged" him to buy the Jasmine stock.
Specifically, Mr. Franklin allegedly told him that "an I.P.O.
[was] coming out" and "he mentioned Jasmine and he mentioned to
me that this is a very good I.P.O. I mean the company is doing
extremely well, they're expanding sales. I mean, they're a — it's
a very excellent firm. Their earnings are increasing, and he
strongly urged me to buy that stock." Berger Dep. at 31. Berger
subsequently explained that he relied on Mr. Franklin's
recommendation because he "took for granted that they had
thoroughly examined the claims made in the prospectus." Berger
Dep. at 36.
From Mr. Franklin's purported statements that Jasmine "was
expanding sales" and "its earnings are increasing," a reasonable
jury could infer that Mr. Franklin was relying on the
"fraudulently inflated" sales and earnings reported in the
Prospectus when he recommended the Jasmine stock to Mr. Berger.
Therefore, the Court will deny summary judgment on this ground
and need not address plaintiff's theories of "fraud on the
market" or "fraud created the market" or resolve the nature of
the 10b-5 violations.
iii. Andersen argues that Berger's section 11 claim must fail
because Berger did not buy in the IPO.
Section 11 provides:
In case any part of the registration statement, when
such part became effective, contained an untrue
statement of a material fact or omitted to state a
material fact required to be stated therein or
necessary to make the statements therein not
misleading, any person acquiring such security
(unless it is proved that at the time of such
acquisition he knew of such untruth or omission) may,
either at law or in equity, in any court of competent
(1) every person who signed the registration
(2) every person who was a director of (or person
performing similar functions) or partner in the
issuer at the time of the filing of the part of the
registration statement with respect to which his
liability is asserted;
(3) every person who, with his consent, is named in
the registration statement as being or about to
become a director, person performing similar
functions, or partner;
(4) every accountant, engineer, or appraiser, or any
person whose profession gives authority to a
statement made by him, who has with his consent been
named as having prepared or certified any part of the
registration statement, or as having prepared or
certified any report or valuation which is used in
connection with the registration statement, with
respect to the statement in such registration
statement, report, or valuation, which purports to
have been prepared or certified by him;
(5) every underwriter with respect to such security .
If such person acquired the security after the issuer
has made generally available to its security holders
an earning statement covering a period of at least
twelve months beginning after the effective date of
the registration statement, then the right of
recovery under this subsection shall be conditioned
on proof that such person acquired the security
relying upon such untrue statement in the
registration statement or relying upon the
registration statement and not knowing of such
omission, but such reliance may be established
without proof of
the reading of the registration statement by such
15 U.S.C. § 77k(a).
In Ballay v. Legg Mason Wood Walker, Inc., 925 F.2d 682 (3d
Cir.), cert. denied, 502 U.S. 820, 112 S.Ct. 79, 116 L.Ed.2d 52
(1991), the Third Circuit held that § 11 and § 12(2) of the 1933
Securities Act apply only to stocks bought in an initial public
offering and not to stocks purchased through secondary market
transactions. Further, the Supreme Court in Gustafson v. Alloyd
Co., Inc., 513 U.S. 561, 115 S.Ct. 1061, 131 L.Ed.2d 1 (1995),
referring to the Ballay case asserted that the word
"prospectus" in § 12(2) precludes liability under this section
for anything other than a stock purchase on an initial offering.
The Third Circuit has noted that if a plaintiff's "shares were
purchased in the secondary market, they would not be linked to a
registration statement filed during the class period, and the §
11 claim would fail." 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). Thus, purchasers on the open or secondary
market have no cause of action under section 11 because, by
definition, their purchases were not made pursuant to an initial
public offering. Gannon v. Continental Ins. Co., 920 F. Supp. 566,
575 (D.N.J. 1996). See also Brosious v. Children's Place
Retail Stores, 189 F.R.D. 138, 143-44 (D.N.J. 1999) (concluding
that legislative history supports theory that secondary market
purchasers do not have standing under § 11 because Congress has
not required the distribution of the registration statement for a
period after an IPO as a necessary safeguard of secondary market
Jasmine conducted its initial public offering on December 15,
1993 when its registration statement became effective. Sands
Brothers was to sell 1,666,667 shares of Jasmine stock to the
public at $5.50 per share.*fn17 In addition, Jasmine granted
Sands Brothers an option, exercisable within 30 days, to purchase
up to 250,000 additional shares "on the same terms" to cover any
over-allotments. The IPO closed on December 22, 1993. On January
7, 1994, Sands Brothers exercised its over-allotment option for
Plaintiff Harry Berger purchased 2,700 shares of Jasmine stock
from Sands Brothers on January 11, 1994 at a price of $6 7/8 per
share with a markup of 1/8. Andersen has produced an expert
affidavit from the former Commissioner and Acting Chairman of the
SEC who has interpreted this information to conclude that Berger
did not buy in either the IPO or from the over-allotment of
shares. Affidavit of Charles C. Cox, Exhibit 1 to Appendix, Part
I attached to Andersen's motion. If Berger purchased in the IPO,
his purchase would have been on December 15, 1993*fn18, the date
the registration statement became effective, and whether he
purchased in the IPO or from the over-allotment, his purchase
price would have been $5.50. The affidavit of Alan Bluestine.
Managing Director of Sands Brothers, corroborates this*fn19.
Exhibit 2 to Appendix, Part I attached to Andersen's motion.
Berger argues that he can trace his shares to Jasmine's
registration statement, as can all shareholders because Jasmine
could only issue shares to the public pursuant to the
registration statement, thus the only shares that the public
could have traded were those issued pursuant to that registration
statement. This argument
has been rejected within this circuit, however. See Warden v.
Crown Am. Realty Trust, 1998 WL 725946, *3 n. 2 (W.D.Pa. 1998)
(argument "effectively guts Ballay's cabining of § 11 to
initial offerings and gives that section essentially the same
reach as the Exchange Act, but without its scienter
requirement.") This Court also is not persuaded by Berger's
tracing argument, but rather is convinced by the rationale of
Brosious, 189 F.R.D. at 143-44, which is based in large part on
legislative history combined with the recent decisions of the
Supreme Court and the Third Circuit, that Berger must have
purchased in the IPO in order to be able to recover on his
section 11 claim. The Third Circuit also has used legislative
history to construe the meaning of the 1933 Act:
Congress' intent in enacting the 1933 Act was clearly
to regulate initial offerings. In the House Report
accompanying the 1933 Act, the legislators
specifically stated: `[t]he bill affects only new
offerings of securities sold through the use of the
mails or of instrumentalities of interstate or
foreign transportation or communication. It does not
affect the ordinary redistribution of securities
unless such redistribution takes on the
characteristics of a new offering by reason of the
control of the issuer possessed by those responsible
for the offering.'
Ballay, 925 F.2d at 690 (quoting H.R. No. 85, 73d Cong., Sess.
7(1933)). Though the Ballay court ostensibly considered a
different section of the 1933 Act, it is its interpretation of
the 1933 Act in its entirety that is consequential and which
leads this Court to rely on the Brosious opinion.
Berger has filed a motion for leave to file a surreply to
Andersen's motion for summary judgment in order to present
additional evidence that Berger did purchase his Jasmine stock in
the IPO. Berger has produced "trade runs" from Morgan Stanley,
Sands' clearing broker, covering the period December 15, 1993
through January 10, 1994 which supposedly reflect every sale of
Jasmine stock during this period. These trade runs, according to
Berger, show that only 1,910,167 Jasmine shares sold at $5.50
prior to December 22, 1993, leaving 6500 shares of IPO-issued
stock unaccounted for, and possibly bought by Berger and others
shortly after January 7, 1994.
At the outset, the Court notes that these "trade runs" are
unauthenticated.*fn20 Nonetheless, plaintiff Berger will be
granted leave to file his surreply, but the Court finds it
insufficient, in light of the evidence provided by defendants
pursuant to Rule 56(e), to create a genuine issue of material
fact regarding whether he purchased in the IPO. The Court finds
that Berger did not purchase his shares of Jasmine stock in the
IPO or over-allotment, and so summary judgment will be granted on
his section 11 claim.
iv. Andersen argues that Berger's state law based claims must
fail because Berger has not established causation.
Finally, Andersen summarily argues that Berger's state law
claims under the Illinois Consumer Fraud Act, negligent
misrepresentation, and common law fraud