The opinion of the court was delivered by: Rodriguez, District Judge.
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.
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
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.
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
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
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
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
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
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
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
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
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  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
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)
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
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
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
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
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
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
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.
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
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?
Q. What did you do when you received this letter in
A. I was very interested in it and contacted the
Q. Why were you very interested in it?
A. I don't like to lose money under peculiar
Q. Can you tell us what you mean by peculiar
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
Q. Do you recall when it was that you saw the stock
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
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?
Q. Was it at that time that you thought there were
peculiar circumstances with respect to your
investment in Jasmine?
Q. Was it the drop in the stock price that led you to
believe that the figures in the prospectus were not
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
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. 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
Q. So you don't recall ever receiving Jasmine's first
quarter Q10 report for the quarter ending December
Q. Do you recall receiving Jasmine's second quarter
report for the quarter ending March 31, 1994?
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