     09-4609-cv
     City of Pontiac Gen. Emps. Ret. Sys. v. MBIA, Inc.

 1
 2                   UNITED STATES COURT OF APPEALS
 3
 4                       FOR THE SECOND CIRCUIT
 5
 6                         August Term, 2010
 7
 8
 9     (Argued: November 1, 2010    Decided: February 28, 2011)
10
11                       Docket No. 09-4609-cv
12
13   - - - - - - - - - - - - - - - - - - - - -x
14
15   CITY OF PONTIAC GENERAL EMPLOYEES’
16   RETIREMENT SYSTEM and SOUTHWEST
17   CARPENTERS PENSION TRUST, on behalf of
18   themselves and all others similarly
19   situated,
20
21            Plaintiffs-Appellants,
22
23   ANTHONY CAPONE, individually and on
24   behalf of all others similarly situated,
25   TODD SIMON, individually and on behalf
26   of all others similarly situated, MARISS
27   PARTNERS, LLP, individually and on
28   behalf of all others similarly situated,
29   THOMAS CASSADY, individually and on
30   behalf of all others similarly situated,
31   ALAN D. SADOWSKY, individually and on
32   behalf of all others similarly situated,
33   and BARBARA S. KATZIN, individually and
34   on behalf of all others similarly
35   situated,
36
37            Consolidated-Plaintiffs,
38
39            -v.-                                    09-4609-cv
40
41   MBIA, INC., JOSEPH W. BROWN, GARY C.
42   DUNTON, NICHOLAS FERRERI, NEIL G.
43   BUDNICK, DOUGLAS C. HAMILTON, and
1    RICHARD WEILL,
2
3             Defendants-Appellees.*
4
5    - - - - - - - - - - - - - - - - - - - -x
6

 7       Before:       DENNIS JACOBS, Chief Judge,
 8                     JOSÉ A. CABRANES,
 9                     JOHN M. WALKER, JR., Circuit Judges.
10
11
12       Appellants, a pair of retirement funds representing a

13   proposed class of individuals who purchased stock in MBIA,

14   Inc., appeal a decision by the United States District Court

15   for the Southern District of New York (Stanton, J.)

16   dismissing their proposed class action as barred by the

17   statute of limitations for security fraud claims.   The

18   district court concluded that the proposed class was on

19   inquiry notice of the alleged fraud by December 2002, more

20   than two years before suit was filed in April 2005.    We

21   vacate the district court’s dismissal and remand for

22   reconsideration of the statute of limitations analysis in

23   light of the Supreme Court’s decision in Merck & Co. v.

24   Reynolds, 130 S. Ct. 1784 (2010).   We also instruct the

25   district court to rule on Defendants-Appellees’ arguments

26   under the statute of repose and Rule 9(b).


          *
            The Clerk of Court is respectfully instructed to
     amend the official case caption as shown above.
                                  2
 1   FOR APPELLANTS:   Sanford Svetcov
 2                     Susan K. Alexander
 3                     Robbins Geller Rudman & Dowd LLP
 4                     San Francisco, CA
 5
 6                     Samuel H. Rudman
 7                     David A. Rosenfeld
 8                     Mario Alba, Jr.
 9                     Robbins Geller Rudman & Dowd LLP
10                     Melville, NY
11
12   FOR APPELLEES:    Steven Klugman
13                     Christopher J. Hamilton
14                     Emily J. Mathieu
15                     David Gopstein
16                     Debevoise & Plimpton LLP
17                     New York, NY
18
19                     Lance J. Gotko
20                     John N. Orsini
21                     Friedman Kaplan Seiler & Adelman LLP
22                     New York, NY

23
24   DENNIS JACOBS, Chief Judge:
25
26       Appellants, a pair of retirement funds representing a

27   proposed class of individuals who purchased stock in MBIA,

28   Inc., appeal a decision by the United States District Court

29   for the Southern District of New York (Stanton, J.)

30   dismissing their proposed class action as barred by the

31   statute of limitations for security fraud claims.    The

32   district court concluded that the proposed class was on

33   inquiry notice of the alleged fraud by December 2002, more

34   than two years before suit was filed in April 2005.    We

35   vacate the district court’s dismissal and remand for

                                   3
1    reconsideration of the statute of limitations analysis in

2    light of the Supreme Court’s decision in Merck & Co. v.

3    Reynolds, 130 S. Ct. 1784 (2010).      We also instruct the

4    district court to rule on Defendants-Appellees’ arguments

5    under the statute of repose and Rule 9(b).

6
7                              BACKGROUND
8        The facts of this case have been set out in all

9    relevant detail by the district court in its first decision

10   in this case.   See In re MBIA Inc. Sec. Litig., 05 Civ.

11   03514, 2007 U.S. Dist. LEXIS 10416 (S.D.N.Y. Feb. 13, 2007).

12   We recount only the brief summary needed to understand our

13   decision.

14       MBIA sells insurance policies guaranteeing the

15   principal and interest on bonds, thereby allowing its bond-

16   issuing clients to pay lower interest rates.      In 1998, one

17   of MBIA’s major policyholders defaulted on a bond-issue

18   insured by MBIA, leaving MBIA with a $170 million debt that

19   threatened its liquidity and credit rating.      To avoid this

20   impairment of its credit rating, MBIA made a deal with three

21   European reinsurance companies whereby they reinsured MBIA

22   on the defaulted bonds nunc pro tunc, which resulted in

23   their paying the $170 million loss incurred by the bond

                                   4
1    default.     In exchange, MBIA paid $3.85 million “upfront” as

2    a premium and committed to purchasing additional reinsurance

3    from the European companies over a six-year period at a

4    premium of $297 million.     The bonds that would be reinsured

5    over the following six years were among MBIA’s highest rated

6    bonds.     MBIA initially booked this odd transaction (“1998

7    transaction”) as income, and it continued to do so in its

8    SEC Form 10-Ks from 1998 through 2003.

9        Several times in later years, the 1998 transaction

10   became the subject of comment in the financial trade press,

11   most of it either positive or ambivalent; but some of it

12   suggested that the transaction was more a loan than a

13   reinsurance contract.     In early 2005, after the SEC and the

14   New York Attorney General both launched investigations into

15   its accounting practices, MBIA publicly restated its

16   financials for 1998-2003 to treat the 1998 transaction as a

17   loan rather than as income.

18       The original class action complaint in this case, filed

19   in April 2005, proposed a class of all individuals who

20   purchased stock in MBIA between August 5, 2003 and March 30,

21   2005.    The complaint alleged that MBIA committed securities

22   fraud in violation of section 10b of the Securities and

23   Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b-

                                     5
1    5, 17 C.F.R. § 240.10b-5, when it accounted for the 1998

2    transaction as income rather than as a loan in its 10-Ks

3    from 1998 through 2003.   The City of Pontiac General

4    Employees’ Retirement System and the Southwest Carpenters

5    Pension Trust (“Pension Funds”) were appointed to represent

6    the proposed class.

7        MBIA moved to dismiss the complaint for failure to

8    adequately plead causation, material misrepresentation, and

9    scienter under Federal Rule of Civil Procedure 9(b).      MBIA

10   also moved to dismiss the complaint as time-barred by the

11   applicable two-year statute of limitations and five-year

12   statute of repose under The Sarbanes-Oxley Act of 2002

13   (“Sarbanes-Oxley”).   Pub. L. No. 107-204, § 804, 116 Stat.

14   745, 802 (2002) (codified at 28 U.S.C. § 1658(b)).      The

15   district court ruled that the trade press discussions of the

16   1998 transaction put the proposed class on inquiry notice by

17   December 2002.   It accordingly granted MBIA’s motion and

18   dismissed the complaint on the statute of limitations

19   ground, expressly declining to reach MBIA’s alternative

20   defenses involving Rule 9(b) and the statute of repose.

21       On a prior appeal, we concluded that the district

22   court’s dismissal had been without prejudice, and we granted

23   leave for the Pension Funds to amend the record with

                                   6
1    additional trade press reports and refile the complaint.

2    The Pension Funds refiled after amending the record with

3    four additional trade press reports.     After considering the

4    four new documents, the district court again found that the

5    class had been on inquiry notice by December 2002 and again

6    dismissed the complaint as barred by the statute of

7    limitations without reaching MBIA’s statute of repose and

8    Rule 9(b) defenses.   The Pension Funds again appeal this

9    dismissal.

10

11                               DISCUSSION

12       We review de novo a district court’s grant of a

13   defendant’s motion to dismiss, “accepting all factual

14   allegations in the complaint as true, and drawing all

15   reasonable inferences in the plaintiff’s favor.”     Shomo v.

16   City of New York, 579 F.3d 176, 183 (2d Cir. 2009) (internal

17   quotation marks omitted).    A district court’s legal

18   conclusions, including its interpretation and application of

19   a statute of limitations, are likewise reviewed de novo.

20   Somoza v. N.Y.C. Dep’t of Educ., 538 F.3d 106, 112 (2d Cir.

21   2008).

22

23

                                     7
1                                    I

2        When a case has already been heard by this Court, our

3    previous disposition ordinarily becomes “law of the case,”

4    foreclosing relitigation of issues expressly or impliedly

5    decided previously by this Court.     United States v. Frias,

6    521 F.3d 229, 234 (2d Cir. 2008).     When we last heard this

7    case, we affirmed the district court’s ruling that the

8    original unamended record put the class on inquiry notice by

9    December 2002, thereby rendering the fraud claim time-barred

10   under the applicable two-year statute of limitations.     City

11   of Pontiac Gen. Emps.’ Ret. Sys. v. MBIA, Inc., 300 F. App’x

12   33 (2008).     This prior determination would ordinarily be

13   binding as the “law of the case,” so that the district court

14   could not revisit whether the unamended record sufficed to

15   put the class on inquiry notice.

16       However, the law of the case does not withstand “an

17   intervening change of controlling law.”     Frias, 521 F.3d at

18   235 n.6.     After the district court’s latest decision in this

19   case and prior to oral argument in this appeal, the Supreme

20   Court decided Merck & Co. v. Reynolds, 130 S. Ct. 1784

21   (2010), which changed the securities fraud law of this

22   Circuit with respect to the onset of the applicable two-year

23   statute of limitations.     The law of the case is thus

                                     8
1    inapplicable here to the extent Merck changed the

2    controlling law on securities fraud.    As a result, when

3    reconsidering whether the statute of limitations bars the

4    class’s securities fraud claim in light of Merck, the

5    district court should consider the full record, not just the

6    four documents added by the parties after our previous

7    remand.

8

9                                  II

10       Prior to Merck, the law of our Circuit had provided

11   that a plaintiff was on “inquiry notice” when public

12   information would lead a reasonable investor to investigate

13   the possibility of fraud.   Shah v. Meeker, 435 F.3d 244, 249

14   (2d Cir. 2006); Levitt v. Bear Stearns & Co., 340 F.3d 94,

15   101 (2d Cir. 2003).   If at that point, the plaintiff fails

16   to initiate such an investigation, our Circuit deemed the

17   statute of limitations to start running on the day the

18   plaintiff should have begun investigating.    Shah, 435 F.3d

19   at 249; Levitt, 340 F.3d at 101.

20       Merck overruled this analysis:     “[T]he discovery of

21   facts that put a plaintiff on inquiry notice does not

22   automatically begin the running of the limitations period.”

23   130 S. Ct. at 1798 (internal quotation marks omitted).

                                   9
1    Instead, Merck held that the limitations period begins to

2    run only after “a reasonably diligent plaintiff would have

3    discovered the facts constituting the violation, including

4    scienter--irrespective of whether the actual plaintiff

5    undertook a reasonably diligent investigation.”   Id.

6    (internal quotation marks omitted).   In other words, the

7    limitations period commences not when a reasonable investor

8    would have begun investigating, but when such a reasonable

9    investor conducting such a timely investigation would have

10   uncovered the facts constituting a violation.

11       In light of Merck, two questions remain unresolved.

12       A.   What are the facts that together constitute a
13            securities fraud violation for purposes of
14            commencing the statute of limitations?
15
16       B.   With regard to any particular one of these facts,
17            how much information does the reasonable investor
18            need to have about it before it is deemed
19            “discovered” for purposes of commencing the
20            statute of limitations?
21

22                                A.

23       The Merck Court expressly declined to prescribe a full

24   list of the facts needed to constitute a securities law

25   violation for purposes of the statute of limitations.

26   Merck, 130 S. Ct. at 1796 (“We consequently hold that facts

27   showing scienter are among those that ‘constitut[e] the


                                  10
1    violation.’    In so holding, we say nothing about other facts

2    necessary to support a private § 10(b) action.”).         We need

3    not attempt to prescribe such a list here.         It is sufficient

4    for our purposes to note only that the facts establishing

5    “scienter” are among those “that constitute the violation”

6    and may require inquiry.    Id.        It follows that a securities

7    fraud statute of limitations cannot begin to run until the

8    plaintiff discovers--or a reasonably diligent plaintiff

9    would have discovered--the facts constituting scienter,

10   defined as “a mental state embracing intent to deceive,

11   manipulate, or defraud.”    Id.

12

13                                     B.

14       To apply Merck with consistency, a standard is needed

15   to assess how much information a reasonably diligent

16   investor must have about the facts constituting a securities

17   fraud violation before those facts are deemed “discovered”

18   and the statute of limitations begins to run.         Are the facts

19   “discovered” when a reasonable investor would suspect a

20   violation?    When the reasonable investor would become

21   absolutely convinced that the violation occurred?         When the

22   reasonable investor could prove in a courtroom that the

23   violation occurred?

                                       11
1        The Merck decision provides some guidance.          In

2    discussing the limitations trigger, Merck specifically

3    considered scienter, casting discovery of scienter in terms

4    of what information and evidence a plaintiff would need to

5    survive a motion to dismiss.     Merck, 130 S. Ct. at 1796 (“As

6    a result, unless a § 10(b) plaintiff can set forth facts in

7    the complaint showing that it is ‘at least as likely as’ not

8    that the defendant acted with the relevant knowledge or

9    intent, the claim will fail.”).        The fact that Merck

10   specifically referenced pleading requirements when

11   discussing the limitations trigger indicates to us that the

12   Merck Court thought about the requirements for “discovering”

13   a fact in terms of what was required to adequately plead

14   that fact and survive a motion to dismiss.        Id.

15       Further guidance on this question can be inferred from

16   the basic purpose of a statute of limitations.          In contrast

17   to a statute of repose, a statute of limitations is intended

18   to prevent plaintiffs from unfairly surprising defendants by

19   resurrecting stale claims.     In re Worldcom Sec. Litig., 496

20   F.3d 245, 253 (2d Cir. 2007).        A statute of limitations

21   prevents such surprises by extinguishing a plaintiff’s

22   remedy after he has slept on his claim for a prolonged

23   period of time, failing “to bring suit within a specified

                                     12
1    period of time after his cause of action accrued.”     Ma v.

2    Merrill Lynch, Pierce, Fenner & Smith, Inc., 597 F.3d 84, 88

3    n.4 (2d Cir. 2010).   Since the purpose is to prevent stale

4    claims, it would make no sense for a statute of limitations

5    to begin to run before the plaintiff even has a claim: A

6    claim that has not yet accrued could never be considered

7    stale.   Thus, in the limitations context, it makes sense to

8    link the standard for “discovering” the facts of a violation

9    to the plaintiff’s ability to make out or plead that

10   violation.   Only after a plaintiff can adequately plead his

11   claim can that claim be said to have accrued, and only after

12   a claim has accrued can the statute of limitations on that

13   claim begin to run.

14       Based on this analysis, we hold that a fact is not

15   deemed “discovered” until a reasonably diligent plaintiff

16   would have sufficient information about that fact to

17   adequately plead it in a complaint.   In other words, the

18   reasonably diligent plaintiff has not “discovered” one of

19   the facts constituting a securities fraud violation until he

20   can plead that fact with sufficient detail and particularity

21   to survive a 12(b)(6) motion to dismiss.

22       Under this standard, the amount of particularity and

23   detail a plaintiff must know before having “discovered” the

                                   13
1    fact will depend on the nature of the fact.     For example, a

2    sufficient allegation of scienter requires the pleader to

3    “state with particularity facts giving rise to a strong

4    inference that the defendant acted with the required state

5    of mind” such that “it is at least as likely as not that the

6    defendant acted with the relevant knowledge or intent.”

7    Merck, 130 S. Ct. at 1796 (internal quotation marks

8    omitted).   Until the plaintiff has uncovered--or a

9    reasonably diligent plaintiff would have uncovered--enough

10   information about the defendant’s knowledge or intent to

11   satisfy this pleading standard, he has not “discovered” the

12   fact of scienter, and the statute of limitations cannot

13   begin to run.

14       For this reason, we remand to the district court to

15   reconsider, based on the entire record and in light of Merck

16   and this opinion, when the Pension Funds had enough

17   information about MBIA’s scienter to plead it with

18   sufficient particularity to survive a motion to dismiss

19   under the heightened pleading requirements for scienter

20   under 15 U.S.C. § 78u-4(b)(2).     The two-year statute of

21   limitations cannot commence before that point.

22

23

                                   14
1                                III

2        The district court’s initial decision and its decision

3    on remand both concluded that the statute of limitations for

4    the proposed class commenced in December 2002.     See In re

5    MBIA Inc. Sec. Litig., 05 Civ. 03514, 2007 U.S. Dist. LEXIS

6    10416, at *3, *27 (S.D.N.Y. Feb. 13, 2007).     However, the

7    class period for the proposed class does not begin until

8    August 2003, the date on which the first class members

9    purchased their shares of MBIA stock.     This means (under the

10   district court’s analysis) that the statute of limitations

11   period began to run more than six months before the first

12   stock purchase giving rise to the class’s claims.     That

13   cannot be.

14       As we have already pointed out, the statute of

15   limitations for securities fraud cannot begin to run before

16   a reasonably diligent plaintiff would have uncovered enough

17   information about the defendant’s intent to satisfy the

18   heightened pleading standard for fraud.     That by itself is

19   not enough to trigger the statute of limitations, however.

20   Unlike a statute of repose, which begins to run from the

21   defendant’s violation, a statute of limitations cannot begin

22   to run until the plaintiff’s claim has accrued.     Ma, 597

23   F.3d at 88 n.4 (noting that statute of limitations begins

                                  15
1    when the cause of action accrues); Stuart v. Am. Cyanamid

2    Co., 158 F.3d 622, 627 (2d Cir. 1998) (same); see also P.

3    Stolz Family P’ship v. Daum, 355 F.3d 92, 102-03 (2d Cir.

4    2004) (contrasting statute of limitations and statute of

5    repose).     A securities fraud claim does not accrue until

6    after the plaintiff actually purchases (or sells) the

7    relevant security.     Blue Chip Stamps v. Manor Drug Stores,

8    421 U.S. 723, 734-35 (1975).     Thus, if the statute of

9    limitations cannot begin to run until a claim has accrued,

10   and a securities fraud claim does not accrue until the

11   plaintiff has bought or sold the relevant security, then the

12   statute of limitations cannot begin to run until after the

13   plaintiff’s transaction.     The district court’s conclusion

14   that the statute of limitations began to run prior to the

15   beginning of the class period--which was defined by when the

16   class members first transacted MBIA’s stock--violates this

17   principle.

18       However, when a class is composed of persons who

19   purchased a security after facts came to light that exposed

20   fraud related to that security, the case also lends itself

21   to analysis in terms of whether there was reliance by the

22   plaintiffs, or, similarly, whether there was transactional

23   causation.     See Lattanzio v. Deloitte & Touche LLP, 476 F.3d

                                     16
1    147, 156-57 (2d Cir. 2007) (discussing the concepts of

2    reliance and transactional causation, i.e., the notion that

3    “but for the claimed misrepresentations or omissions, the

4    plaintiff would not have entered into the detrimental

5    securities transaction,” in the context of securities

6    fraud).   Therefore, we also remand for the district court to

7    reconsider whether MBIA’s inquiry notice defense should be

8    analyzed as, for example, an alleged defect in causation.

9

10                                 IV

11       On remand, the district court should rule on two other

12   arguments MBIA made in its motion to dismiss: (1) that the

13   class’s claims are time-barred by the applicable statute of

14   repose; and (2) that the class failed to plead its fraud

15   claim with particularity sufficient to satisfy the

16   heightened requirements of Federal Rule of Civil Procedure

17   9(b) and 15 U.S.C. § 78u-4(b)(2).   Specifically, the

18   district court should consider whether the applicable

19   statute of repose commences at the time of the defendant’s

20   misrepresentation or at the time the relevant securities

21   were purchased.   The district court should also consider

22   whether the applicable statute of repose is reset each time

23   the defendant repeats or incorporates its original

                                   17
1    fraudulent statement.   The district court should, of course,

2    also consider any other issues related to these two defenses

3    that it thinks are relevant.

4
5                              CONCLUSION

6        We hereby VACATE the district court’s decision and

7    REMAND for reconsideration of the application of the statute

8    of limitations in light of Merck and this opinion.   We also

9    instruct the district court to rule on Defendants-Appellees’

10   statute of repose and Rule 9(b) arguments.




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