In a ruling that could have a far-reaching impact on investor lawsuits, a federal appeals court has breathed new life into a securities fraud class action lawsuit against Biomune Systems Inc.
A federal judge in Salt Lake City dismissed the case last year, finding that the aggrieved investors hadn't filed their lawsuit within one year of learning about possible problems with the company.But a three-judge panel of the U.S. 10th Circuit Court of Appeals Wednesday adopted a new standard for starting the clock on the statute of limitations: It's now triggered when a reasonable investor discovers the facts underlying an alleged fraud.
A stockholder named Roman Sterlin sued Biomune, its principle officers and associated entities on Oct. 12, 1995, on behalf of himself and "all others similarly situated."
Sterlin alleged "a fraud of massive proportions" designed to manipulate the company's finances and inflate its stock price.
The alleged fraud occurred as the Utah-based biotechnology company was developing a protein known as Immuno-C, which was intended to be used in enhancing human immune systems. According to Sterlin, Biomune principles misled securities regulators to obtain a NASDAQ listing of the company stock and misrepresented the efficacy of Immuno-C.
U.S. District Judge J. Thomas Greene dismissed the lawsuit last year after concluding the claims were barred by the applicable one-year statute of limitations.
Greene said the limitations period began running on Aug. 1, 1994, when Barron's (a financial newspaper) published an article that was generally critical of the company's founders and questioned the veracity of its claims regarding Immuno-C.
That article should have raised sufficient doubt to trigger questions and, if appropriate, a lawsuit, Greene said thus requiring them to take legal action within a year.
Sterlin appealed to the 10th Circuit Court in Denver, arguing, among other things, that he couldn't have known about the doubts surrounding Immuno-C until the company disclosed the results of a scientific study in January 1995.
In a ruling released Wednesday, a three-judge appeals panel said case law seems to support Greene's finding that the statute of limitations begins to run when a plaintiff is placed on inquiry notice, "regardless of whether an inquiry would have borne fruit."
However, the judges said a closer examination of the law "suggests that inquiry notice alone may not be the determinative factor, at least when a reasonable investor could not reasonably have discovered the facts underlying the alleged fraud until some time after being placed on inquiry notice."
Writing for the court, Judge Michael Murphy said the ruling attempts to strike a balance between two competing policies underlying the securities laws.
Murphy said the purpose of commencing the one-year period upon inquiry notice is to discourage investors from adopting a "wait-and-see approach." However, he said delaying the start of the clock under the new standard will ensure investors an opportunity to adequately develop the facts and determine whether they merit a lawsuit, "thus giving meaning to the term `inquiry.' "