City of Pontiac Gen. Emps. Ret. Sys. v. MBIA, Inc. 1

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

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* The Clerk of Court is respectfully instructed to
amend the official case caption as shown above.
2
RICHARD WEILL, 1
2
Defendants-Appellees.*
3
4
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6
Before: DENNIS JACOBS, Chief Judge, 7
JOSÉ A. CABRANES, 8
JOHN M. WALKER, JR., Circuit Judges. 9
10
11
Appellants, a pair of retirement funds representing a 12
proposed class of individuals who purchased stock in MBIA, 13
Inc., appeal a decision by the United States District Court 14
for the Southern District of New York (Stanton, J.) 15
dismissing their proposed class action as barred by the 16
statute of limitations for security fraud claims. The 17
district court concluded that the proposed class was on 18
inquiry notice of the alleged fraud by December 2002, more 19
than two years before suit was filed in April 2005. We 20
vacate the district court’s dismissal and remand for 21
reconsideration of the statute of limitations analysis in 22
light of the Supreme Court’s decision in Merck & Co. v. 23
Reynolds, 130 S. Ct. 1784 (2010). We also instruct the 24
district court to rule on Defendants-Appellees’ arguments 25
under the statute of repose and Rule 9(b). 26

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3
FOR APPELLANTS: Sanford Svetcov 1
Susan K. Alexander 2
Robbins Geller Rudman & Dowd LLP 3
San Francisco, CA 4
5
Samuel H. Rudman 6
David A. Rosenfeld 7
Mario Alba, Jr. 8
Robbins Geller Rudman & Dowd LLP 9
Melville, NY 10
11
FOR APPELLEES: Steven Klugman 12
Christopher J. Hamilton 13
Emily J. Mathieu 14
David Gopstein 15
Debevoise & Plimpton LLP 16
New York, NY 17
18
Lance J. Gotko 19
John N. Orsini 20
Friedman Kaplan Seiler & Adelman LLP 21
New York, NY 22
23 DENNIS JACOBS, Chief Judge: 24
25 Appellants, a pair of retirement funds representing a 26
proposed class of individuals who purchased stock in MBIA, 27
Inc., appeal a decision by the United States District Court 28
for the Southern District of New York (Stanton, J.) 29
dismissing their proposed class action as barred by the 30
statute of limitations for security fraud claims. The 31
district court concluded that the proposed class was on 32
inquiry notice of the alleged fraud by December 2002, more 33
than two years before suit was filed in April 2005. We 34
vacate the district court’s dismissal and remand for 35

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4
reconsideration of the statute of limitations analysis in 1
light of the Supreme Court’s decision in Merck & Co. v. 2
Reynolds, 130 S. Ct. 1784 (2010). We also instruct the 3
district court to rule on Defendants-Appellees’ arguments 4
under the statute of repose and Rule 9(b). 5
6
BACKGROUND 7
The facts of this case have been set out in all 8
relevant detail by the district court in its first decision 9
in this case. See In re MBIA Inc. Sec. Litig., 05 Civ. 10
03514, 2007 U.S. Dist. LEXIS 10416 (S.D.N.Y. Feb. 13, 2007). 11
We recount only the brief summary needed to understand our 12
decision. 13
MBIA sells insurance policies guaranteeing the 14
principal and interest on bonds, thereby allowing its bond- 15
issuing clients to pay lower interest rates. In 1998, one 16
of MBIA’s major policyholders defaulted on a bond-issue 17
insured by MBIA, leaving MBIA with a $170 million debt that 18
threatened its liquidity and credit rating. To avoid this 19
impairment of its credit rating, MBIA made a deal with three 20
European reinsurance companies whereby they reinsured MBIA 21
on the defaulted bonds nunc pro tunc, which resulted in 22
their paying the $170 million loss incurred by the bond 23

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5
default. In exchange, MBIA paid $3.85 million “upfront” as 1
a premium and committed to purchasing additional reinsurance 2
from the European companies over a six-year period at a 3
premium of $297 million. The bonds that would be reinsured 4
over the following six years were among MBIA’s highest rated 5
bonds. MBIA initially booked this odd transaction (“1998 6
transaction”) as income, and it continued to do so in its 7
SEC Form 10-Ks from 1998 through 2003. 8
Several times in later years, the 1998 transaction 9
became the subject of comment in the financial trade press, 10
most of it either positive or ambivalent; but some of it 11
suggested that the transaction was more a loan than a 12
reinsurance contract. In early 2005, after the SEC and the 13
New York Attorney General both launched investigations into 14
its accounting practices, MBIA publicly restated its 15
financials for 1998-2003 to treat the 1998 transaction as a 16
loan rather than as income. 17
The original class action complaint in this case, filed 18
in April 2005, proposed a class of all individuals who 19
purchased stock in MBIA between August 5, 2003 and March 30, 20
2005. The complaint alleged that MBIA committed securities 21
fraud in violation of section 10b of the Securities and 22
Exchange Act of 1934, 15 U.S.C. § 78j(b), and SEC Rule 10b- 23

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6
5, 17 C.F.R. § 240.10b-5, when it accounted for the 1998 1
transaction as income rather than as a loan in its 10-Ks 2
from 1998 through 2003. The City of Pontiac General 3
Employees’ Retirement System and the Southwest Carpenters 4
Pension Trust (“Pension Funds”) were appointed to represent 5
the proposed class. 6
MBIA moved to dismiss the complaint for failure to 7
adequately plead causation, material misrepresentation, and 8
scienter under Federal Rule of Civil Procedure 9(b). MBIA 9
also moved to dismiss the complaint as time-barred by the 10
applicable two-year statute of limitations and five-year 11
statute of repose under The Sarbanes-Oxley Act of 2002 12
(“Sarbanes-Oxley”). Pub. L. No. 107-204, § 804, 116 Stat. 13
745, 802 (2002) (codified at 28 U.S.C. § 1658(b)). The 14
district court ruled that the trade press discussions of the 15
1998 transaction put the proposed class on inquiry notice by 16
December 2002. It accordingly granted MBIA’s motion and 17
dismissed the complaint on the statute of limitations 18
ground, expressly declining to reach MBIA’s alternative 19
defenses involving Rule 9(b) and the statute of repose. 20
On a prior appeal, we concluded that the district 21
court’s dismissal had been without prejudice, and we granted 22
leave for the Pension Funds to amend the record with 23

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additional trade press reports and refile the complaint. 1
The Pension Funds refiled after amending the record with 2
four additional trade press reports. After considering the 3
four new documents, the district court again found that the 4
class had been on inquiry notice by December 2002 and again 5
dismissed the complaint as barred by the statute of 6
limitations without reaching MBIA’s statute of repose and 7
Rule 9(b) defenses. The Pension Funds again appeal this 8
dismissal. 9
10
DISCUSSION 11
We review de novo a district court’s grant of a 12
defendant’s motion to dismiss, “accepting all factual 13
allegations in the complaint as true, and drawing all 14
reasonable inferences in the plaintiff’s favor.” Shomo v. 15
City of New York, 579 F.3d 176, 183 (2d Cir. 2009) (internal 16
quotation marks omitted). A district court’s legal 17
conclusions, including its interpretation and application of 18
a statute of limitations, are likewise reviewed de novo. 19
Somoza v. N.Y.C. Dep’t of Educ., 538 F.3d 106, 112 (2d Cir. 20
2008). 21
22
23

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I 1
When a case has already been heard by this Court, our 2
previous disposition ordinarily becomes “law of the case,” 3
foreclosing relitigation of issues expressly or impliedly 4
decided previously by this Court. United States v. Frias, 5
521 F.3d 229, 234 (2d Cir. 2008). When we last heard this 6
case, we affirmed the district court’s ruling that the 7
original unamended record put the class on inquiry notice by 8
December 2002, thereby rendering the fraud claim time-barred 9
under the applicable two-year statute of limitations. City 10
of Pontiac Gen. Emps.’ Ret. Sys. v. MBIA, Inc., 300 F. App’x 11
33 (2008). This prior determination would ordinarily be 12
binding as the “law of the case,” so that the district court 13
could not revisit whether the unamended record sufficed to 14
put the class on inquiry notice. 15
However, the law of the case does not withstand “an 16
intervening change of controlling law.” Frias, 521 F.3d at 17
235 n.6. After the district court’s latest decision in this 18
case and prior to oral argument in this appeal, the Supreme 19
Court decided Merck & Co. v. Reynolds, 130 S. Ct. 1784 20
(2010), which changed the securities fraud law of this 21
Circuit with respect to the onset of the applicable two-year 22
statute of limitations. The law of the case is thus 23

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9
inapplicable here to the extent Merck changed the 1
controlling law on securities fraud. As a result, when 2
reconsidering whether the statute of limitations bars the 3
class’s securities fraud claim in light of Merck, the 4
district court should consider the full record, not just the 5
four documents added by the parties after our previous 6
remand. 7
8
II 9
Prior to Merck, the law of our Circuit had provided 10
that a plaintiff was on “inquiry notice” when public 11
information would lead a reasonable investor to investigate 12
the possibility of fraud. Shah v. Meeker, 435 F.3d 244, 249 13
(2d Cir. 2006); Levitt v. Bear Stearns & Co., 340 F.3d 94, 14
101 (2d Cir. 2003). If at that point, the plaintiff fails 15
to initiate such an investigation, our Circuit deemed the 16
statute of limitations to start running on the day the 17
plaintiff should have begun investigating. Shah, 435 F.3d 18
at 249; Levitt, 340 F.3d at 101. 19
Merck overruled this analysis: “[T]he discovery of 20
facts that put a plaintiff on inquiry notice does not 21
automatically begin the running of the limitations period.” 22
130 S. Ct. at 1798 (internal quotation marks omitted). 23

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Instead, Merck held that the limitations period begins to 1
run only after “a reasonably diligent plaintiff would have 2
discovered the facts constituting the violation, including 3
scienter--irrespective of whether the actual plaintiff 4
undertook a reasonably diligent investigation.” Id. 5
(internal quotation marks omitted). In other words, the 6
limitations period commences not when a reasonable investor 7
would have begun investigating, but when such a reasonable 8
investor conducting such a timely investigation would have 9
uncovered the facts constituting a violation. 10
In light of Merck, two questions remain unresolved. 11
A. What are the facts that together constitute a 12
securities fraud violation for purposes of 13
commencing the statute of limitations? 14
15
B. With regard to any particular one of these facts, 16
how much information does the reasonable investor 17
need to have about it before it is deemed 18
“discovered” for purposes of commencing the 19
statute of limitations? 20
21
A. 22
The Merck Court expressly declined to prescribe a full 23
list of the facts needed to constitute a securities law 24
violation for purposes of the statute of limitations. 25
Merck, 130 S. Ct. at 1796 (“We consequently hold that facts 26
showing scienter are among those that ‘constitut[e] the 27

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violation.’ In so holding, we say nothing about other facts 1
necessary to support a private § 10(b) action.”). We need 2
not attempt to prescribe such a list here. It is sufficient 3
for our purposes to note only that the facts establishing 4
“scienter” are among those “that constitute the violation” 5
and may require inquiry. Id. It follows that a securities 6
fraud statute of limitations cannot begin to run until the 7
plaintiff discovers--or a reasonably diligent plaintiff 8
would have discovered--the facts constituting scienter, 9
defined as “a mental state embracing intent to deceive, 10
manipulate, or defraud.” Id. 11
12
B. 13
To apply Merck with consistency, a standard is needed 14
to assess how much information a reasonably diligent 15
investor must have about the facts constituting a securities 16
fraud violation before those facts are deemed “discovered” 17
and the statute of limitations begins to run. Are the facts 18
“discovered” when a reasonable investor would suspect a 19
violation? When the reasonable investor would become 20
absolutely convinced that the violation occurred? When the 21
reasonable investor could prove in a courtroom that the 22
violation occurred? 23

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The Merck decision provides some guidance. In 1
discussing the limitations trigger, Merck specifically 2
considered scienter, casting discovery of scienter in terms 3
of what information and evidence a plaintiff would need to 4
survive a motion to dismiss. Merck, 130 S. Ct. at 1796 (“As 5
a result, unless a § 10(b) plaintiff can set forth facts in 6
the complaint showing that it is ‘at least as likely as’ not 7
that the defendant acted with the relevant knowledge or 8
intent, the claim will fail.”). The fact that Merck 9
specifically referenced pleading requirements when 10
discussing the limitations trigger indicates to us that the 11
Merck Court thought about the requirements for “discovering” 12
a fact in terms of what was required to adequately plead 13
that fact and survive a motion to dismiss. Id. 14
Further guidance on this question can be inferred from 15
the basic purpose of a statute of limitations. In contrast 16
to a statute of repose, a statute of limitations is intended 17
to prevent plaintiffs from unfairly surprising defendants by 18
resurrecting stale claims. In re Worldcom Sec. Litig., 496 19
F.3d 245, 253 (2d Cir. 2007). A statute of limitations 20
prevents such surprises by extinguishing a plaintiff’s 21
remedy after he has slept on his claim for a prolonged 22
period of time, failing “to bring suit within a specified 23

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period of time after his cause of action accrued.” Ma v. 1
Merrill Lynch, Pierce, Fenner & Smith, Inc., 597 F.3d 84, 88 2
n.4 (2d Cir. 2010). Since the purpose is to prevent stale 3
claims, it would make no sense for a statute of limitations 4
to begin to run before the plaintiff even has a claim: A 5
claim that has not yet accrued could never be considered 6
stale. Thus, in the limitations context, it makes sense to 7
link the standard for “discovering” the facts of a violation 8
to the plaintiff’s ability to make out or plead that 9
violation. Only after a plaintiff can adequately plead his 10
claim can that claim be said to have accrued, and only after 11
a claim has accrued can the statute of limitations on that 12
claim begin to run. 13
Based on this analysis, we hold that a fact is not 14
deemed “discovered” until a reasonably diligent plaintiff 15
would have sufficient information about that fact to 16
adequately plead it in a complaint. In other words, the 17
reasonably diligent plaintiff has not “discovered” one of 18
the facts constituting a securities fraud violation until he 19
can plead that fact with sufficient detail and particularity 20
to survive a 12(b)(6) motion to dismiss. 21
Under this standard, the amount of particularity and 22
detail a plaintiff must know before having “discovered” the 23

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fact will depend on the nature of the fact. For example, a 1
sufficient allegation of scienter requires the pleader to 2
“state with particularity facts giving rise to a strong 3
inference that the defendant acted with the required state 4
of mind” such that “it is at least as likely as not that the 5
defendant acted with the relevant knowledge or intent.” 6
Merck, 130 S. Ct. at 1796 (internal quotation marks 7
omitted). Until the plaintiff has uncovered--or a 8
reasonably diligent plaintiff would have uncovered--enough 9
information about the defendant’s knowledge or intent to 10
satisfy this pleading standard, he has not “discovered” the 11
fact of scienter, and the statute of limitations cannot 12
begin to run. 13
For this reason, we remand to the district court to 14
reconsider, based on the entire record and in light of Merck 15
and this opinion, when the Pension Funds had enough 16
information about MBIA’s scienter to plead it with 17
sufficient particularity to survive a motion to dismiss 18
under the heightened pleading requirements for scienter 19
under 15 U.S.C. § 78u-4(b)(2). The two-year statute of 20
limitations cannot commence before that point. 21
22
23

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III 1
The district court’s initial decision and its decision 2
on remand both concluded that the statute of limitations for 3
the proposed class commenced in December 2002. See In re 4
MBIA Inc. Sec. Litig., 05 Civ. 03514, 2007 U.S. Dist. LEXIS 5
10416, at *3, *27 (S.D.N.Y. Feb. 13, 2007). However, the 6
class period for the proposed class does not begin until 7
August 2003, the date on which the first class members 8
purchased their shares of MBIA stock. This means (under the 9
district court’s analysis) that the statute of limitations 10
period began to run more than six months before the first 11
stock purchase giving rise to the class’s claims. That 12
cannot be. 13
As we have already pointed out, the statute of 14
limitations for securities fraud cannot begin to run before 15
a reasonably diligent plaintiff would have uncovered enough 16
information about the defendant’s intent to satisfy the 17
heightened pleading standard for fraud. That by itself is 18
not enough to trigger the statute of limitations, however. 19
Unlike a statute of repose, which begins to run from the 20
defendant’s violation, a statute of limitations cannot begin 21
to run until the plaintiff’s claim has accrued. Ma, 597 22
F.3d at 88 n.4 (noting that statute of limitations begins 23

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when the cause of action accrues); Stuart v. Am. Cyanamid 1
Co., 158 F.3d 622, 627 (2d Cir. 1998) (same); see also P. 2
Stolz Family P’ship v. Daum, 355 F.3d 92, 102-03 (2d Cir. 3
2004) (contrasting statute of limitations and statute of 4
repose). A securities fraud claim does not accrue until 5
after the plaintiff actually purchases (or sells) the 6
relevant security. Blue Chip Stamps v. Manor Drug Stores, 7
421 U.S. 723, 734-35 (1975). Thus, if the statute of 8
limitations cannot begin to run until a claim has accrued, 9
and a securities fraud claim does not accrue until the 10
plaintiff has bought or sold the relevant security, then the 11
statute of limitations cannot begin to run until after the 12
plaintiff’s transaction. The district court’s conclusion 13
that the statute of limitations began to run prior to the 14
beginning of the class period--which was defined by when the 15
class members first transacted MBIA’s stock--violates this 16
principle. 17
However, when a class is composed of persons who 18
purchased a security after facts came to light that exposed 19
fraud related to that security, the case also lends itself 20
to analysis in terms of whether there was reliance by the 21
plaintiffs, or, similarly, whether there was transactional 22
causation. See Lattanzio v. Deloitte & Touche LLP, 476 F.3d 23

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147, 156-57 (2d Cir. 2007) (discussing the concepts of 1
reliance and transactional causation, i.e., the notion that 2
“but for the claimed misrepresentations or omissions, the 3
plaintiff would not have entered into the detrimental 4
securities transaction,” in the context of securities 5
fraud). Therefore, we also remand for the district court to 6
reconsider whether MBIA’s inquiry notice defense should be 7
analyzed as, for example, an alleged defect in causation. 8
9
IV 10
On remand, the district court should rule on two other 11
arguments MBIA made in its motion to dismiss: (1) that the 12
class’s claims are time-barred by the applicable statute of 13
repose; and (2) that the class failed to plead its fraud 14
claim with particularity sufficient to satisfy the 15
heightened requirements of Federal Rule of Civil Procedure 16
9(b) and 15 U.S.C. § 78u-4(b)(2). Specifically, the 17
district court should consider whether the applicable 18
statute of repose commences at the time of the defendant’s 19
misrepresentation or at the time the relevant securities 20
were purchased. The district court should also consider 21
whether the applicable statute of repose is reset each time 22
the defendant repeats or incorporates its original 23

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fraudulent statement. The district court should, of course, 1
also consider any other issues related to these two defenses 2
that it thinks are relevant. 3
4
CONCLUSION 5
We hereby VACATE the district court’s decision and 6
REMAND for reconsideration of the application of the statute 7
of limitations in light of Merck and this opinion. We also 8
instruct the district court to rule on Defendants-Appellees’ 9
statute of repose and Rule 9(b) arguments. 10

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