USCA1 Opinion
UNITED STATES COURT OF APPEALS
FOR THE FIRST CIRCUIT
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No. 96-2282
COOPERATIVA DE AHORRO Y CREDITO AGUADA,
Plaintiff, Appellant,
v.
KIDDER, PEABODY & COMPANY, PAINE WEBBER INCORPORATED,
RAMON M. ALMONTE, MAYLEEN GRATACOS and the property partnership
existing between them,
Defendants, Appellees.
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APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF PUERTO RICO
[Hon. Jose Antonio Fuste, U.S. District Judge]
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Before
Selya and Boudin, Circuit Judges,
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and Young,* District Judge.
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Enrique Peral with whom Roberto Boneta and Munoz Boneta Gonzalez
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Arbona Benitez & Peral were on brief for appellant.
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Nestor M. Mendez-Gomez with whom Pietrantoni Mendez & Alvarez was
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on brief for appellee Kidder, Peabody & Company.
Maria Bobonis-Zequeira with whom Harry E. Woods and Woods & Woods
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were on brief for appellees Ramon Almonte and Mayleen Gratacos.
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November 12, 1997
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*Of the District of Massachusetts, sitting by designation.
BOUDIN, Circuit Judge. The present appeal arises out of
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a federal securities lawsuit filed by Cooperativa de Ahorro y
Credito Aguada ("Cooperativa"). Cooperativa is a small, one-
branch savings and loan "cooperative" located in Aguada,
Puerto Rico. Between June and December 1986, Cooperativa
purchased $3.5 million in Drexel Burnham Lambert "unit
trusts," securities representing participations in several
trusts whose assets were corporate bonds. The securities
were purchased at the recommendation of Ramon Almonte,
Cooperativa's broker at Kidder, Peabody & Co. ("Kidder").
According to Cooperativa, Almonte told it that the
securities were a low-risk, safe and unspeculative
investment, that the securities were not redeemable for
another seven to ten years and that a steady stream of income
at favorable interest rates could be expected. The
securities were in fact backed by low-rated or unrated "junk"
bonds bearing high interest rates; and if the value of the
bonds fell drastically, the trustees had power to terminate
the trusts. Allegedly, Almonte disclosed neither the risky
character of the bonds nor the termination provision.
In the course of its 1986 purchases of the securities in
question, Cooperativa received confirmation slips that stated
that prospectuses were being forwarded under separate cover.
No prospectus covering these securities ever arrived and
Cooperativa did not request copies. Cooperativa's officers
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were admittedly unsophisticated in financial matters. Over
the year following the purchases, the unit trusts declined
substantially in value, but their market value was not
reported in any public listing.
In June 1987, Almonte moved from Kidder to another
brokerage firm, Paine Webber Inc. On July 29, 1987, Kidder
sent Cooperativa an account summary indicating that the unit
trusts had lost about ten percent of their value since
Cooperativa's purchases. Kidder's letter said that it was
prepared "to analyze these results in more detail and the
present situation of your portfolio." Cooperativa did not
reply but transferred its account to Paine Webber, following
Almonte to his new brokerage firm.
During August 1987, Cooperativa's investment
administrator did call Almonte to ask why the unit trusts had
lost value. Almonte allegedly replied that such ups and
downs were normal, that the securities would soon regain
strength and that Cooperativa would continue to receive
interest payments regardless of market value. The underlying
bonds continued to decline in value until July 1989, when the
trusts were liquidated by the trustee. Cooperativa alleges
that it suffered a loss of about $780,000 in principal as a
result of the purchases.
On December 28, 1989, just over three years after its
last purchase of the securities in question, Cooperativa
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filed a suit against Almonte, Kidder, and Paine Webber. The
only claims remaining in this case are claims under section
10(b) of the Securities and Exchange Act of 1934, 15 U.S.C.
78j(b) (1997). The defendants pled the statute of
limitations and extensive litigation ensued addressed to that
subject.
When the complaint was filed in 1989, federal courts
applied the local statute of limitations to claims under
section 10(b), but thereafter the Supreme Court adopted a
one-and-three-year limitations period for such claims.
Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501
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U.S. 350, 364 (1991). The district court then found
Cooperativa's claims barred under this new rule and dismissed
them. See Cooperativa de Ahorro y Credito Aguada v. Kidder,
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Peabody & Co., 777 F. Supp. 153, 156 (D.P.R. 1991). Congress
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then passed a new statute providing that local statutes of
limitations should continue to govern suits filed prior to
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the Supreme Court decision, and allowing reinstatement of
claims that had already been dismissed under the new Supreme
Court rule.1
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1See Federal Deposit Insurance Corporation Improvement
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Act of 1991, Pub. L. No. 102-242, 476, 105 Stat. 2236, 2387
(codified as 27A of the Securities and Exchange Act of
1934, 15 U.S.C. 78aa-1 (1997)) (superseding Lampf). The
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Act was recently held unconstitutional insofar as it
purported to reopen prior final judgments, Plaut v.
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Spendthrift Farm, Inc., 514 U.S. 211 (1995).
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Cooperativa then moved to reinstate its section 10(b)
claims, but the district court held that even if local law
were applied the claims would be time-barred under Puerto
Rico's two-year statute of limitations for blue-sky claims.
799 F. Supp. 261, 263 (D.P.R. 1992) (citing 10 L.P.R.A.
890(e)). On appeal, we remanded for further consideration
because the district court had relied on evidence outside the
pleadings in dismissing the claim. 993 F.2d 269 (1st Cir.
1993), cert. denied, 514 U.S. 1082 (1995). On remand, the
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district court reached the same conclusion on summary
judgment, 942 F. Supp. 735 (D.P.R. 1996), and we now affirm.2
In securities cases, federal case law permits tolling
for fraudulent concealment even where state law does not do
so. The statute does not begin to run until "the time when
plaintiff in the exercise of reasonable diligence discovered
or should have discovered the fraud of which he complains."
Cook v. Avien, Inc., 573 F.2d 685, 694 (1st Cir. 1978). But
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"`storm warnings' of the possibility of fraud trigger a
plaintiff's duty to investigate in a reasonably diligent
manner . . . and his cause of action is deemed to accrue on
the date when he should have discovered the alleged fraud."
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2Because we agree that the case should be dismissed, we
need not reach the question whether the reinstatement of
Cooperativa's dismissed claim was unconstitutional under
Plaut, an issue neither side has briefed. See Tirado-Acosta
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v. Puerto Rico National Guard, 118 F.3d 852, 854 (1st Cir.
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1997).
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Maggio v. Gerard Freezer & Ice Co., 824 F.2d 123, 128 (1st
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Cir. 1987) (emphasis omitted).
The district court held that, by mid-August 1987,
Cooperativa had reasonable notice of the possibility of fraud
by Almonte and did not thereafter exercise due diligence in
pursuing the issue. In reviewing this assessment, we take
all reasonably disputed facts in the light most favorable to
Cooperativa. See J. Geils Band Employee Benefit Plan v.
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Smith Barney Shearson, Inc., 76 F.3d 1245, 1250 (1st Cir.),
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cert. denied, 117 S. Ct. 81 (1996). And we review de novo
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the district court's decision that the record, so viewed,
nevertheless compelled a determination in favor of the
defendants. See Maggio, 824 F.2d at 128.
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The securities acquired by Cooperativa were generating a
very generous interest rate--over 12 percent at a time when
Cooperativa was paying its own depositors six percent; the
confirmation slips and the title of the units themselves
reflected this facet of the investment, using the phrase
"high yield." Yet Cooperativa knew that within one year (and
much less for some of the purchases), the market value of the
investment had dropped by about $340,000 or ten percent of
the original investment.
The gravamen of Cooperativa's claim in this case is that
it had been assured by Almonte in 1987 that its investment
was low-risk, safe and not of a speculative character.
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Notwithstanding that bond prices commonly fluctuate, the high
interest rates coupled with the drastic short-term decline in
value ought to have suggested to a reasonable investor the
possibility that Almonte had not accurately described the
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investment. The possibility of fraud is buttressed by
Almonte's failure to provide the promised prospectuses.
Cooperativa says that it did ask Almonte for an
explanation of the decline. But even an investor of ordinary
judgment and experience can discern that there is some risk
in limiting inquiry to the very broker who may have misled or
even defrauded the investor. In this instance, moreover,
there is no indication that Almonte provided anything more
than bland generalities about market fluctuations and
repeated reassurances that the investment was safe. This
does not seem sufficient to dispel a reasonable suspicion of
fraud.
Therefore, in August 1987, Cooperativa had "storm
warnings" of fraud and, in the exercise of due diligence, was
obliged to do something more than sit on its hands. It
might, for example, have pursued Kidder's offer to assess the
situation, Almonte no longer being associated with the firm;
or it might have sought an expert opinion on this set of
investments from a wholly independent party; or it might have
made an effort through its own resources to investigate
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promptly the nature of the investment it made. It took none
of these steps.3
As it happens, by the fall of 1987, adverse information
about high-yield junk bonds from Drexel Burnham in particular
would not have been hard to uncover. The extraordinary stock
market plunge in October 1987 focused considerable press
attention on both junk bonds and Drexel Burnham, turning a
small trickle of earlier newspaper references into a swell.
In any case, an analyst could quickly have identified the
inaccuracy of Almonte's alleged description, based merely on
the relatively poor ratings of the bonds underlying the
trusts.
We need not decide whether the statute of limitations
begins to run on the date the storm warnings appear or the
later date on which an inquiring investor would through
reasonable diligence have discovered the fraud. Compare,
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e.g., General Builders, 796 F.2d at 13 (suggesting the
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former), with Maggio, 824 F.2d at 129 (suggesting the
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latter). The time between the two dates in most cases is not
likely to be long enough to affect the outcome. So it is
here: even if the statute did not begin to run until the
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3Despite Cooperativa's claim to the contrary, the
obligation of diligent inquiry exists whether or not Almonte
is labeled a "fiduciary." See Salois v. The Dime Savings
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Bank, ___ F.3d ___, Nos. 97-1049, 97-1050, slip op. at 15
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n.11 (1st Cir. Nov. 3, 1997); Maggio, 824 F.2d at 129;
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General Builders Supply Co. v. River Hill Coal Venture, 796
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F.2d 8, 12 (1st Cir. 1986).
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fall of 1987, more than two years elapsed between that point
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and late December 1989 when the suit was finally brought.
In reaching our conclusion, we give little weight to two
other pieces of evidence. The district court thought that
Cooperativa's responsibility to investigate was heightened
because of letters from its own auditors, including ones in
1985 and 1986, warning that its aggressive investment program
presented some level of risk and ought to be carefully
scrutinized. There is force in Cooperativa's answer that
these boilerplate warnings were not in any way specifically
directed to the securities at issue in this case.
Conversely, Cooperativa is mistaken in invoking an
opinion letter to it dated March 3, 1988, from another
auditor. The opinion, apparently commissioned by Almonte
himself, deals only with how Cooperativa might report its
investments in long-term obligations and opines that they
could still be carried at purchase price despite a decline in
market value. The letter does not comment at all on the
safety or riskiness of the securities here involved, and
obtaining the opinion does not represent due diligence.
In sum, Cooperativa was on notice by mid- or late summer
1987 that Almonte's alleged description of the securities
might well have been inaccurate or even dishonest. By
diligent inquiry, it could quickly have learned that the
alleged statements were false. Thus the statute of
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limitations began to run no later than the fall of the 1987.
Its suit, brought in December 1989, was therefore barred by
Puerto Rico's two-year statute of limitations.
Affirmed.
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