USCA1 Opinion
United States Court of Appeals
United States Court of Appeals
For the First Circuit
For the First Circuit
____________________
No. 93-2055
ROBERT LUCIA, ET AL.,
Plaintiffs, Appellants,
v.
PROSPECT STREET HIGH INCOME PORTFOLIO, INC., ET AL.,
Defendants, Appellees.
____________________
No. 93-2056
ERIC MILLER, ET AL.,
Plaintiffs, Appellants,
v.
THE NEW AMERICAN HIGH INCOME FUND, ET AL.,
Defendants, Appellees.
____________________
APPEALS FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. A. David Mazzone, U.S. Senior District Judge]
__________________________
____________________
Before
Cyr, Circuit Judge,
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Aldrich, Senior Circuit Judge,
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and Stahl, Circuit Judge.
_____________
____________________
Eugene A. Spector, with whom Robert M. Roseman, Mark S. Goldman,
_________________ __________________ ________________
Robert G. Eisler, Spector & Roseman, Nancy Gertner, Jody L. Newman,
_________________ __________________ _____________ ______________
Dwyer, Collora & Gertner, Garwin, Bronzaft, Gerstein & Fisher, Elwood
________________________ ____________________________________ ______
S. Simon & Associates, Elwood S. Simon, Wechsler, Skirnick Harwood,
______________________ _______________ ___________________________
Halebian & Feffer, Robert I. Harwood, Levin, Fishbein, Sedran &
__________________ __________________ ____________________________
Berman, Arnold Levin, Esq., Kohn, Nast & Graf, P.C., Robert S.
______ ____________________ ___________________________ __________
Kitchenoff, Chertow & Miller, Marvin Miller, Shapiro Grace & Haber,
__________ ________________ _____________ ______________________
and Edward Haber were on brief for appellants.
____________
Thomas J. Dougherty, with whom Skadden, Arps, Slate, Meagher &
____________________ _________________________________
Flom, was on brief for appellees Messrs. Omohundro, Frabotta, Carey,
____
Cote, Meyohas and Platt.
John D. Donovan, Jr., with whom Ivan B. Knauer, Timothy J.
______________________ ________________ ___________
Hinkle, Kurt S. Kusiak, and Ropes & Gray, were on brief for appellees
______ _______________ ____________
The New High Income Fund, Inc., Patricia Ostrander, Ellen Terry, and
Richard E. Floor.
Robert A. Buhlman, with whom Gerald F. Rath and Bingham, Dana &
__________________ _______________ _______________
Gould, were on brief for Prudential Securities Incorporated.
_____
Peter M. Saparoff and Palmer & Dodge were on brief for appellees
_________________ ______________
Ernest E. Monrad, Joseph L. Bower, Bernard J. Korman, and Franco
Modigliani.
Paul C. Madden, Paul D. Shaffner, David Moffit, and Saul, Ewing,
______________ ________________ ____________ _____________
Remick & Saul were on brief for appellees Butcher Corporation and
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Bateman Eichler, Hill Richards, Inc.
Harry L. Manion, III, Thomas G. Guiney, and Cooley, Manion, Moore
____________________ _________________ _____________________
& Jones, P.C. were on brief for appellee Ostrander Capital Management
______________
Corp.
Eric A. Deutsch, Margaret A. Flanagan, and Testa, Hurwitz &
_________________ ______________________ _________________
Thibeault were on brief for Prospect Street High Income Portfolio,
_________
Inc. and Prospect Street Investment Management Co., Inc.
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September 28, 1994
____________________
STAHL, Circuit Judge. In the late 1980's,
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plaintiffs-appellants purchased shares of two separate "junk
bond" funds. After the value of the purchased shares
plummeted, plaintiffs alleged various federal securities law
violations. In a series of related rulings, the district
court dismissed some of plaintiffs' allegations for failure
to state a claim, and granted summary judgment in favor of
defendants on all remaining claims. We affirm in part and
reverse in part.
I.
I.
__
FACTUAL BACKGROUND AND PRIOR PROCEEDINGS
FACTUAL BACKGROUND AND PRIOR PROCEEDINGS
________________________________________
Prior to this appeal, the proceedings in these two
cases were not formally consolidated. As the district court
noted, the two cases raise many identical issues. Thus, our
discussion, unless we specifically state otherwise, applies
equally to both cases.
In 1988, both New America High Income Fund, Inc.
and Prospect Street High Income Portfolio, Inc. ("the New
America Fund," and "the Prospect Street Fund," or
collectively "the funds") were first publicly offered on the
New York Stock Exchange. Each fund's purpose, as stated in
their nearly identical prospectuses, was to invest in a
diversified portfolio of high yield fixed-income securities,
commonly known as "junk bonds."
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3
In April 1989, well after the initial public
offerings, a study headed by Professor Paul Asquith ("the
Asquith study") disclosed that the default rate of junk bonds
was much higher than had been previously believed.1 This
conclusion was reached by calculating the adverse effects of
"aging" on junk bonds.2
Within months of the study, though not necessarily
as a direct result of the study, the market for junk bonds
began to collapse. By November 1989, both funds had reduced
their dividends, and the share value of each fund had
declined considerably.
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1. The results of the Asquith study were first made public
through various financial and general periodicals in April of
1989. See, e.g., Kenneth N. Gilpin, Further Rise in Rates is
___ ____ ________________________
Expected, N.Y. Times, Apr. 10, 1989, at D9; Linda Sandler &
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Michael Siconolfi, Junk Bonds are Taking Their Lumps, Wall
___________________________________
St. J., Apr. 14, 1989, at C1. The study itself was not
published until September 1989. See Paul Asquith, et al.,
___
Original Issue High Yield Bonds: Aging Analyses of Defaults,
_____________________________________________________________
Exchanges and Calls, 44 J. Fin., No. 4 (September 1989).
___________________
2. The record reveals that, prior to the Asquith study, the
traditionally accepted method of determining annual bond
default rates was to divide the total number of defaults per
year by the total size of the relevant market sector for that
year. As the affidavit of Professor Asquith points out,
however, this method loses its accuracy in a rapidly
expanding market, such as the junk bond market of the 1970's
and '80's, where new issues greatly enlarged the existing
market. In other words, the traditional method does not
reveal whether a preponderance of older or newer issues are
defaulting in a given year.
Breaking from the traditional method of
calculation, Asquith's study tracked the default rate of
bonds based on their dates of issuance. The study revealed
that junk bonds become more likely to default as they grow
older, hence the term "aging."
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4
Plaintiffs, who consist of putative classes of
purchasers of each fund, commenced parallel actions against
the two funds. The First Amended Complaints (hereinafter
"the original complaints") were lengthy, alleging violations
of a variety of federal securities laws, including section
10(b) of the Securities Exchange Act of 1934, 15 U.S.C.
78j(b), and sections 11 and 12(2) of the Securities Act of
1933, 15 U.S.C. 77k, 77l(2).3 The gist of the original
complaints was that the funds' directors, advisors and
underwriters ("defendants") knew of, but failed to disclose,
adverse information about the junk bond market. In
particular, the complaints alleged that defendants had agreed
to act, and had in fact acted, as purchasers of last resort
for undesirable junk bonds; that they knew of infirmities in
____________________
3. Sections 10(b), 11 and 12(2) all prohibit the use of
materially misleading information in the sale of securities,
and the same conduct may be actionable under all three
sections. See, e.g., Herman & MacLean v. Huddleston, 459
___ ____ _________________ __________
U.S. 375, 382-83 (1983) (stating that the same conduct may be
actionable under sections 10(b) and 11); Shapiro v. UJB Fin.
_______ ________
Corp., 964 F.2d 272, 279, 286-89 (3d Cir.) (explaining that
_____
single set of factual allegations may state claim under
sections 11 and 12(2)), cert. denied, 113 S. Ct. 365 (1992).
_____ ______
While sections 10(b), 11 and 12(2) differ significantly
from one another, see, e.g., Herman & MacLean, 459 U.S. at
___ ____ ________________
382; Ernst & Ernst v. Hochfelder, 425 U.S. 185, 210-11
______________ __________
(1976), the parties focus solely on the materiality
requirement, which is common to all three sections. Cf. In
___ __
re Donald J. Trump Casino Sec. Litig., 7 F.3d 357, 368 n.10
______________________________________
(3d Cir. 1993) ("Because our analysis here is predicated on
the materiality requirement, which is common to [plaintiffs'
section 10(b), 11 and 12(2) claims], we do not here
distinguish between [those provisions.]"), cert. denied, 114
_____ ______
S. Ct. 1219 (1994).
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5
the junk bond market at the time they publicly offered shares
of the funds and thereafter; and that misleading statistics
were used in the prospectuses to portray the historical
performance of junk bonds.4
The district court dismissed many of plaintiffs'
claims on the pleadings, see Miller v. New Am. High Income
___ ______ ____________________
Fund, 755 F. Supp. 1099 (D. Mass. 1991) ("Miller I"); Lucia
____ _________ _____
v. Prospect St. High Income Portfolio, Inc., 769 F. Supp. 410
________________________________________
(D. Mass. 1991) ("Lucia I"), but nonetheless allowed both
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sets of plaintiffs to replead.
Plaintiffs' Second Amended Complaints (hereinafter
"the revised complaints") alleged causes of action only under
sections 11 and 12(2). All section 10(b) claims presented in
the original complaints were dropped. Among other things,
the revised complaints focused on a ten-year comparison
between junk bonds and United States Treasury securities
("Treasury securities") that was included in the
prospectuses.5 Though the ten-year figure showed that junk
____________________
4. The original complaints also alleged RICO claims and
common law fraud claims, which were dismissed by the district
court. Plaintiffs do not appeal these dismissals.
5. The relevant portion of the New America Fund's prospectus
states:
The Fund's portfolio will consist
primarily of "high yield" corporate
bonds. . . .
"High yield" bonds offer a higher yield
to maturity than bonds with higher
-6-
6
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ratings as compensation for holding an
obligation of an issuer perceived to be
less credit worthy. The DBL composite
measures the performance of the most
representative bonds in the "high yield"
market and is compiled monthly by Drexel
Burnham Lambert Incorporated. As of
December 31, 1987, the DBL Composite
offered a yield spread of 484 basis
points (i.e., 4.84%; 1% equals 100 basis
points) over the comparable Treasury
security, 7% U.S. Treasury due 1994.
U.S. Treasury securities are considered
to have minimal risk. The average spread
between the DBL Composite and the
comparable U.S. Treasury issue was 358
basis points for 1980, 397 basis points
for 1981, 503 basis points for 1982, 337
basis points for 1983, 311 basis points
for 1984, 362 basis points for 1985, 496
basis points for 1986 and 451 basis
points for 1987.
For the years 1977 through 1986, the
spread in yields between "high yield"
securities and representative U.S.
Treasury securities has averaged
approximately 393 basis points. For this
period, the loss in principal and
interest due to defaults on "high yield"
securities has averaged approximately 97
basis points. Thus, for the period 1977
to 1986, the net average spread between
"high yield" securities and
representative U.S. Treasury securities
(i.e., the average spread between "high
yield" securities and U.S. Treasury
securities, minus the average default
loss on "high yield" securities) was 296
basis points. For 1987, the loss of
principal and interest due to defaults is
estimated to have been 125 basis points.*
However, past performance is not
necessarily indicative of future
performance. . . .
The capital structure of the Fund has
been designed to take advantage of the
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7
bonds had outperformed Treasury securities, the revised
complaints alleged that during the six years leading up to
each fund's public offering, Treasury securities had actually
outperformed junk bonds.6
Shortly after the revised complaints were filed,
defendants moved for summary judgment. The district court
began by ruling as a matter of law that the comparison to
Treasury securities in the prospectuses was not misleading.
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historical spread in yields between "high
yield" securities and representative U.S.
Treasury securities, compared with the
average default loss on "high yield"
securities.
* Statistical data appearing above are
based on information provided by Drexel
Burnham Lambert Incorporated.
The Prospect Street prospectus is similarly structured and
worded.
We note in passing that the Prospect Street
prospectus reports significantly different annual spreads for
the years 1980 through 1987. Because neither the Miller nor
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the Lucia plaintiffs have argued, either below or on appeal,
_____
that these inconsistencies are actionable, we deem the issue
waived.
6. Both revised complaints at 29 state:
29. The [Asquith] Study also disclosed
that high yield debt had not in fact
produced higher realized returns and
lower standard deviations of returns than
either investment grade or treasury bonds
for the period 1982 through 1987 . . . .
The Asquith study, in turn, relies on statistics from
Marshall E. Blume & Donald B. Keim, Volatility Patterns of
_______________________
Fixed Income Securities, Rodney L. White Center For Financial
_______________________
Research, Wharton School, University of Pennsylvania (March
1989) ("the Blume and Keim study").
-8-
8
See In re New Am. High Income Fund Sec. Litig., 834 F. Supp.
___ __________________________________________
501, 506-07 (D. Mass. 1993) ("Miller II"). It went on to
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grant summary judgment in favor of defendants on all other
claims. Id.; Lucia v. Prospect St. High Income Portfolio,
___ _____ _____________________________________
Inc., No. 90-10781-MA (D. Mass. Aug. 26 1993) ("Lucia II").
____ ________
Plaintiffs appeal these various rulings. We address
plaintiffs' claims in the order in which they were decided by
the district court.
II.
II.
___
DISCUSSION
DISCUSSION
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A. Section 10(b) Claims
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The district court dismissed plaintiffs' section
10(b) claims at the first of these cases' two pleading
stages. We affirm that dismissal, though on somewhat
narrower grounds than those relied upon by the district
court.
1. Standard of Review
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Rule 12(b)(6) dismissals are subject to de novo
__ ____
review. Northeast Doran, Inc. v. Key Bank of Maine, 15 F.3d
______________________ _________________
1, 2 (1st Cir. 1994). While we generally credit all
allegations in the complaint and draw all reasonable
inferences favorable to the plaintiff, id., Rule 9(b) imposes
___
heightened pleading requirements for allegations of fraud.
"In all averments of fraud or mistake, the circumstances
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9
constituting fraud or mistake shall be stated with
particularity." Fed. R. Civ. P. 9(b).
As we have stated in a recent discussion of Rule
9(b) in the securities context:
[G]eneral averments of the defendants'
knowledge of material falsity will not
suffice. Consistent with Fed. R. Civ. P.
9(b), the complaint must set forth
specific facts that make it reasonable to
believe that defendant[s] knew that a
statement was materially false or
misleading. The rule requires that the
particular times, dates, places or other
details of the alleged fraudulent
involvement of the actors be alleged.
Serabian v. Amoskeag Bank Shares, Inc., 24 F.3d 357, 361 (1st
________ __________________________
Cir. 1994) (citations and internal quotation marks omitted).
"We have been especially rigorous in demanding such factual
support in the securities context." Romani v. Shearson
______ ________
Lehman Hutton, 929 F.2d 875, 878 (1st Cir. 1991). Moreover,
______________
this heightened pleading is required "even when the fraud
relates to matters peculiarly within the knowledge of the
opposing party." Id.
___
2. The Original Complaints
___________________________
Plaintiffs' original complaints alleged various
wrongdoing by defendants. The common thread running
throughout the original complaints, however, was that
defendants knew of infirmities in the junk bond market, and
that they nonetheless entered a vast web of illicit
agreements with Drexel Burnham Lambert, and with former junk
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10
bond dealer Michael Milken, in order to become purchasers of
last resort for undesirable junk bonds.
The district court properly concluded that these
general allegations in the original complaints were wholly
conclusory. No factual basis is put forward to support
plaintiffs' theory that defendants consorted with Drexel,
that they dealt with Michael Milken, that they agreed to act
as purchasers of last resort for undesirable bonds, or that
they knew enough to anticipate the impending fall-out of the
junk bond market. Because all of plaintiffs' 10(b) claims
rely fundamentally on such unsupported allegations, the
district court properly dismissed these claims for failure to
meet Rule 9(b).7 Cf. Romani, 929 F.2d at 878 (finding that
___ ______
complaint failed to satisfy Rule 9(b) where it contained "no
factual allegations that would support a reasonable inference
that adverse circumstances existed at the time of the
offering, and were known and deliberately or recklessly
disregarded by defendants").
B. Section 11 and 12(2) Claims
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7. Given adequate grounds to support dismissal of
plaintiffs' section 10(b) claims, we expressly decline to
address the district court's "loss causation" analysis, and
its use of Bastian v. Petren Resources Corp., 892 F.2d 680
_______ ______________________
(7th Cir.), cert. denied, 496 U,S. 906 (1990), in rejecting
_____ ______
these same claims.
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11
As noted above, plaintiffs were allowed to replead.
Defendants' motions for summary judgment soon followed, and
summary judgment was granted in favor of defendants.
1. Standard of Review
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"A district court's grant of summary judgment is
subject to plenary review." Calenti v. Boto, 24 F.3d 335,
_______ ____
338 (1st Cir. 1994). We read the record indulging all
inferences in favor of the non-moving party. Id. Summary
___
judgment is appropriate only "if the pleadings, depositions,
answers to interrogatories, and admissions on file, together
with the affidavits, if any, show that there is no genuine
issue as to any material fact and that the moving party is
entitled to a judgment as a matter of law." Fed. R. Civ. P.
56(c). In seeking to forestall the entry of summary
judgment, a nonmovant may not rely upon allegations in its
pleadings. Rather, the nonmovant must "set forth specific
facts showing that there is a genuine issue for trial." Fed.
R. Civ. P. 56(e).
2. Parallel Paths Diverge
__________________________
Both complaints alleged that the six-year
comparison favored Treasury securities. And the Miller
______
plaintiffs, unlike the Lucia plaintiffs, in their response to
_____
defendants' motion for summary judgment, set forth facts
showing that the six-year figure, as well as a shorter three-
year figure, actually favored Treasury securities. Moreover,
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12
the district court squarely addressed this argument in ruling
on the Miller defendants' motion for summary judgment. See
______ ___
In re New Am. High Income Fund Sec. Litig., 834 F. Supp. 501,
__________________________________________
506-07 (D. Mass. 1993). Accordingly, we see no merit to
defendants' argument that the Miller plaintiffs waived this
______
issue.
The Lucia plaintiffs, however, failed to preserve
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this issue. In fact, the Lucia plaintiffs' opposition to
_____
defendants' summary judgment motion fails to even mention the
six-year comparison. Despite the striking similarities in
these two cases, the Lucia plaintiffs pursued a significantly
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different tack in opposing defendants' motion for summary
judgment, and failed to argue that the Prospect Street
prospectus was misleading due to its failure to include a
shorter-term comparison to Treasury securities. As noted
above, a nonmovant faced with a motion for summary judgment
may not rest on its pleadings. Moreover, we see no reason in
this case to relax our general rule that "theories not raised
squarely before the district court cannot be surfaced for the
first time on appeal." McCoy v. Massachusetts Inst. of
_____ ________________________
Technology, 950 F.2d 13, 22 (1st Cir. 1991), cert. denied,
__________ _____ ______
112 S. Ct. 1939 (1992). Accordingly, our discussion of the
six-year comparison applies only to the Miller case.
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3. Materiality under Sections 11 and 12(2) and the
___________________________________________________
Omission of the Six-Year Comparison
___________________________________
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13
Sections 11 and 12(2) both prohibit, inter alia,
_____ ____
the use of any "untrue statement of a material fact," 15
U.S.C. 77l(2), as well the use of any information which
"omits to state a material fact necessary in order to make
the statements, in the light of the circumstances under which
they are made, not misleading." Id.; see also 15 U.S.C.
___ ___ ____
77k(a).
The boundaries of materiality in the securities
context are clearly enunciated in our case law.
The mere fact that an investor might find
information interesting or desirable is
not sufficient to satisfy the materiality
requirement. Rather, information is
"material" only if its disclosure would
alter the "total mix" of facts available
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to the investor and "if there is a
substantial likelihood that a reasonable
___________ __________
shareholder would consider it important"
to the investment decision.
Milton v. Van Dorn Co., 961 F.2d 965, 969 (1st Cir. 1992)
______ ____________
(quoting Basic, Inc. v. Levinson, 485 U.S. 224, 231-32
____________ ________
(1988)). It is equally well established that "[w]hen a
corporation does make a disclosure--whether it be voluntary
or required--there is a duty to make it complete and
accurate." Roeder v. Alpha Indus., Inc., 814 F.2d 22, 26
______ ___________________
(1st Cir. 1987). Moreover, disclosed facts may "not be `so
incomplete as to mislead.'" Backman v. Polaroid Corp., 910
_______ _______________
F.2d 10, 16 (1st Cir. 1990) (en banc) (quoting SEC v. Texas
___ _____
Gulf Sulphur Co., 401 F.2d 833, 862 (2d Cir. 1968), cert.
________________ _____
denied, 394 U.S. 976 (1969)).
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14
In addition, the fact that a statement is literally
accurate does not preclude liability under federal securities
laws. "Some statements, although literally accurate, can
become, through their context and manner of presentation,
devices which mislead investors. For that reason, the
disclosure required by the securities laws is measured not by
literal truth, but by the ability of the material to
accurately inform rather than mislead prospective buyers."
McMahan v. Wherehouse Entertainment, Inc., 900 F.2d 576, 579
_______ _______________________________
(2d Cir. 1990), cert. denied, 501 U.S. 1249 (1991). Under
_____ ______
the foregoing standards, "emphasis and gloss can, in the
right circumstances, create liability." Isquith v. Middle S.
_______ _________
Utils., Inc., 847 F.2d 186, 203 (5th Cir.), cert. denied, 488
____________ _____ ______
U.S. 926 (1988).
Finally, we note that the question of whether an
omission or misleading statement is material "is normally a
jury question and should not be taken from it unless the
court has engaged in meticulous and well articulated analysis
of each item of withheld or misrepresented information." SEC
___
v. Seabord Corp., 677 F.2d 1301, 1306 (9th Cir. 1982). See
_____________ ___
also Milton, 961 F.2d at 970 ("`[T]he [objective]
____ ______
determination [of materiality] requires delicate assessments
of the inferences a `reasonable shareholder' would draw from
a given set of [undisputed] facts and the significance of
those inferences to him and those assessments are peculiarly
-15-
15
ones for the trier of fact.'") (quoting TSC Indus. Inc. v.
________________
Northway, Inc., 426 U.S. 438, 450 (1976)); Isquith, 847 F.2d
_______________ _______
at 208 (stating that the adequacy of disclosures in
securities cases is generally a question for a jury).
As we have said, plaintiffs argue that the ten-year
comparison between Treasury securities and junk bonds, though
accurate, was misleading because a shorter, six-year
comparison favored Treasury securities. We begin by noting
that the six years at issue are the six years leading up to
the fund's public offering. Moreover, while any one or two
years might favor Treasury securities without amounting to an
unfavorable trend, we think that a six-year comparison
favoring Treasury securities is substantial enough to cast
some doubt on the reliability of the reported ten-year
figure. In other words, we cannot say as a matter of law
that the undisclosed information about the six-year period
would not alter the total mix of facts available to the
investor. Rather, a jury could find that there is a
substantial likelihood that a reasonable shareholder would
consider the six-year comparison important to the investment
decision. See Milton, 961 F.2d at 969.
___ ______
We expressly decline to make hard and fast rules
about the time length of reported investment results, i.e.,
we do not hold that ten-year comparisons must always be
accompanied by shorter-term comparisons. Nor do we hold that
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16
a plaintiff always creates a triable issue of fact by merely
unearthing unfavorable news regarding shorter time intervals
than those reported.
Moreover, the unfavorable six-year figure in this
case does not necessarily render the ten-year comparison
___________
misleading. Rather, a jury, knowing the individual annual
returns over the ten-year period at issue (which are not now
ascertainable on the record before us) and perhaps having
other guideposts for determining the relative reliability of
shorter- and longer-term bond comparisons, may conclude that
the ten-year comparison standing alone is not misleading at
all. Because the district court felt it irrelevant
that defendants had not reported the claimed six-year
negative trend, it gave no attention to whether the Miller
______
plaintiffs had adequately established a factual base -- viz.,
that defendants knew, or reasonably should have known, of
that change of circumstances. While we have some doubt about
the adequacy of the Miller plaintiffs' proof of defendants'
______
knowledge, we nonetheless recognize that discovery on this
issue was limited. We reverse and remand to permit further
discovery in this area. Following such discovery, the court
may then reconsider defendants' motion for summary judgment,
if defendants choose to renew it.
Thus, on the current state of the record in the
Miller case, summary judgment on this issue was improper. We
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17
agree with the district court that the ten-year comparison
"paints a much rosier picture," New America, 834 F. Supp. at
___________
507, than the six-year comparison. Having established this
fact, the district court erred in concluding in the Miller
______
case that the comparison nonetheless was not misleading as a
matter of law.
4. Other Summary Judgment Issues
_________________________________
While fact issues remain with regard to the
Treasury security comparison in the Miller case, the district
______
court properly granted summary judgment on all other issues
in both cases. For example, plaintiffs alleged that (1)
defendants knew or should have known of the effect that
"aging" calculations have on determining junk bond returns,
and (2) defendants should not have used the DBL composite as
an indicator of past performance of junk bonds because that
composite failed to account for "forced bond exchanges."8
It is doubtless true, as plaintiffs allege, that
several significant studies with regard to "aging" discovered
statistical infirmities in the traditional methods of
calculating junk bond returns. However, these studies were
completed only after the prospectuses were issued. Moreover,
according to affidavits in the record, the Asquith study was
____________________
8. Forced bond exchanges, also known as "distressed" bond
exchanges, occur when a bond issuer, rather than default on
its existing obligations, exchanges them for a new set of
obligations.
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18
the first study of its kind to display the infirmities of
previous calculation methods. Plaintiffs failed to adduce
any facts which, contrary to defendants' affidavits, would
tend to show that defendants were aware of these infirmities,
or that they could or should have been aware of the effects
of "aging" analysis at the time the funds were initially
offered to the public. Given plaintiffs' failure to raise a
triable issue of fact, we affirm the district court's grant
of summary judgment on this issue.
A similar analysis disposes of plaintiffs'
allegation that the DBL composite, relied on extensively by
defendants in the prospectuses, failed to account for forced
bond exchanges. Defendants offered affidavits to the effect
that forced bond exchanges in fact were accounted for in the
DBL composite. Plaintiffs offer no evidence to the contrary.
Accordingly, we find no error in the district court's grant
of summary judgment on this issue. Because further discovery
will occur in the Miller case, we leave to the district court
______
the formulation of the extent of that discovery, consistent
with the ruling made herein.
Lastly, defendant Prudential Bache, an underwriter
of the New America Fund, argues that claims against it were
untimely filed. The district court did not rule on when the
statute of limitations in this case began to run, nor can we
make such a determination on the record before us.
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19
Accordingly, we leave this important procedural issue to be
determined in the first instance by the district court.
III.
III.
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CONCLUSION
CONCLUSION
__________
We have carefully considered all other arguments
and find them to be either waived or without merit. For the
foregoing reasons, the various orders of the district court
are
Affirmed in full as to the Lucia case, and, as to
___________________________________________________
the Miller case, affirmed in part, reversed in part, and
_____________________________________________________________
remanded for further proceedings consistent with this
_____________________________________________________________
opinion.
________
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20
