Credito Aguado v. Kidder, Peabody & Co, 1st Cir. (1997)

7/26/2019 Credito Aguado v. Kidder, Peabody & Co, 1st Cir. (1997)

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USCA1 Opinion

UNITED STATES COURT OF APPEALS

FOR THE FIRST CIRCUIT

____________________

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 partners

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] ___________________

____________________

Before

Selya and Boudin, Circuit Judges, ______________

and Young,* District Judge. ______________

____________________

Enrique Peral with whom Roberto Boneta and Munoz Boneta_____________ ______________ ______________

Arbona Benitez & Peral were on brief for appellant. ______________________

Nestor M. Mendez-Gomez with whom Pietrantoni Mendez & Alva______________________ ________________________

on brief for appellee Kidder, Peabody & Company.

Maria Bobonis-Zequeira with whom Harry E. Woods and Woods &

______________________ ______________ ______

were on brief for appellees Ramon Almonte and Mayleen Gratacos.


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____________________

November 12, 1997

____________________

____________________

*Of the District of Massachusetts, sitting by designation.

BOUDIN, Circuit Judge. The present appeal arises out_____________


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a federal securities lawsuit filed by Cooperativa de Ahorro

Credito Aguada ("Cooperativa"). Cooperativa is a small, on

branch savings and loan "cooperative" located in Agua

Puerto Rico. Between June and December 1986, Cooperati

purchased $3.5 million in Drexel Burnham Lambert "un

trusts," securities representing participations in sever

trusts whose assets were corporate bonds. The securiti

were purchased at the recommendation of Ramon Almont

Cooperativa's broker at Kidder, Peabody & Co. ("Kidder").

According to Cooperativa, Almonte told it that t

securities were a low-risk, safe and unspeculati

investment, that the securities were not redeemable f

another seven to ten years and that a steady stream of inco


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at favorable interest rates could be expected. T

securities were in fact backed by low-rated or unrated "jun

bonds bearing high interest rates; and if the value of t

bonds fell drastically, the trustees had power to termina

the trusts. Allegedly, Almonte disclosed neither the ris

character of the bonds nor the termination provision.

In the course of its 1986 purchases of the securities

question, Cooperativa received confirmation slips that stat

that prospectuses were being forwarded under separate cove

No prospectus covering these securities ever arrived a

Cooperativa did not request copies. Cooperativa's office

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were admittedly unsophisticated in financial matters. O

the year following the purchases, the unit trusts declin

substantially in value, but their market value was n

reported in any public listing.

In June 1987, Almonte moved from Kidder to anot

brokerage firm, Paine Webber Inc. On July 29, 1987, Kid

sent Cooperativa an account summary indicating that the un


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trusts had lost about ten percent of their value sin

Cooperativa's purchases. Kidder's letter said that it

prepared "to analyze these results in more detail and t

present situation of your portfolio." Cooperativa did n

reply but transferred its account to Paine Webber, followi

Almonte to his new brokerage firm.

During August 1987, Cooperativa's investme

administrator did call Almonte to ask why the unit trusts

lost value. Almonte allegedly replied that such ups a

downs were normal, that the securities would soon rega

strength and that Cooperativa would continue to recei

interest payments regardless of market value. The underlyi

bonds continued to decline in value until July 1989, when t

trusts were liquidated by the trustee. Cooperativa alle


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that it suffered a loss of about $780,000 in principal as

result of the purchases.

On December 28, 1989, just over three years after i

last purchase of the securities in question, Cooperati

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filed a suit against Almonte, Kidder, and Paine Webber. T


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only claims remaining in this case are claims under secti

10(b) of the Securities and Exchange Act of 1934, 15 U.S.C.

78j(b) (1997). The defendants pled the statute

limitations and extensive litigation ensued addressed to t

subject.

When the complaint was filed in 1989, federal cour

applied the local statute of limitations to claims un

section 10(b), but thereafter the Supreme Court adopted

one-and-three-year limitations period for such clai

Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 5 _________________________________________ __________

U.S. 350, 364 (1991). The district court then fou

Cooperativa's claims barred under this new rule and dismiss

them. See Cooperativa de Ahorro y Credito Aguada v. Kidde ___ _______________________________________ ____


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Peabody & Co., 777 F. Supp. 153, 156 (D.P.R. 1991). Congre _____________

then passed a new statute providing that local statutes

limitations should continue to govern suits filed prior_____

the Supreme Court decision, and allowing reinstatement

claims that had already been dismissed under the new Supre

Court rule.1

____________________

1See Federal Deposit Insurance Corporation Improveme

___

Act of 1991, Pub. L. No. 102-242, 476, 105 Stat. 2236, 23

(codified as 27A of the Securities and Exchange Act

1934, 15 U.S.C. 78aa-1 (1997)) (superseding Lampf). T _____

Act was recently held unconstitutional insofar as

purported to reopen prior final judgments, Plaut_____

Spendthrift Farm, Inc., 514 U.S. 211 (1995).


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______________________

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Cooperativa then moved to reinstate its section 10(

claims, but the district court held that even if local l

were applied the claims would be time-barred under Puer

Rico's two-year statute of limitations for blue-sky clai

799 F. Supp. 261, 263 (D.P.R. 1992) (citing 10 L.P.R.A.


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890(e)). On appeal, we remanded for further considerati

because the district court had relied on evidence outside t

pleadings in dismissing the claim. 993 F.2d 269 (1st Ci

1993), cert. denied, 514 U.S. 1082 (1995). On remand, t _____________

district court reached the same conclusion on summa

judgment, 942 F. Supp. 735 (D.P.R. 1996), and we now affir

In securities cases, federal case law permits tolli

for fraudulent concealment even where state law does not

so. The statute does not begin to run until "the time w

plaintiff in the exercise of reasonable diligence discover

or should have discovered the fraud of which he complains

Cook v. Avien, Inc., 573 F.2d 685, 694 (1st Cir. 1978). B ____ ____________

"`storm warnings' of the possibility of fraud trigger


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plaintiff's duty to investigate in a reasonably dilige

manner . . . and his cause of action is deemed to accrue

the date when he should have discovered the alleged frau

____________________

2Because we agree that the case should be dismissed,

need not reach the question whether the reinstatement

Cooperativa's dismissed claim was unconstitutional un

Plaut, an issue neither side has briefed. See Tirado-Acos _____ ___ __________

v. Puerto Rico National Guard, 118 F.3d 852, 854 (1st Ci ___________________________

1997).

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Maggio v. Gerard Freezer & Ice Co., 824 F.2d 123, 128 (1 ______ _________________________

Cir. 1987) (emphasis omitted).

The district court held that, by mid-August 198

Cooperativa had reasonable notice of the possibility of fra

by Almonte and did not thereafter exercise due diligence

pursuing the issue. In reviewing this assessment, we ta

all reasonably disputed facts in the light most favorable

Cooperativa. See J. Geils Band Employee Benefit Plan___ ______________________________________

Smith Barney Shearson, Inc., 76 F.3d 1245, 1250 (1st Cir. ___________________________

cert. denied, 117 S. Ct. 81 (1996). And we review de no ____________ ____


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the district court's decision that the record, so viewe

nevertheless compelled a determination in favor of t

defendants. See Maggio, 824 F.2d at 128. ___ ______

The securities acquired by Cooperativa were generatin

very generous interest rate--over 12 percent at a time w

Cooperativa was paying its own depositors six percent; t

confirmation slips and the title of the units themsel

reflected this facet of the investment, using the phra

"high yield." Yet Cooperativa knew that within one year (a

much less for some of the purchases), the market value of t

investment had dropped by about $340,000 or ten percent

the original investment.

The gravamen of Cooperativa's claim in this case is t


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it had been assured by Almonte in 1987 that its investme

was low-risk, safe and not of a speculative characte

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Notwithstanding that bond prices commonly fluctuate, the hi

interest rates coupled with the drastic short-term decline

value ought to have suggested to a reasonable investor t


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possibility that Almonte had not accurately described t ___________

investment. The possibility of fraud is buttressed

Almonte's failure to provide the promised prospectuses.

Cooperativa says that it did ask Almonte for

explanation of the decline. But even an investor of ordina

judgment and experience can discern that there is some ri

in limiting inquiry to the very broker who may have misled

even defrauded the investor. In this instance, moreove

there is no indication that Almonte provided anything mo

than bland generalities about market fluctuations a

repeated reassurances that the investment was safe. T

does not seem sufficient to dispel a reasonable suspicion

fraud.


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Therefore, in August 1987, Cooperativa had "sto

warnings" of fraud and, in the exercise of due diligence,

obliged to do something more than sit on its hands.

might, for example, have pursued Kidder's offer to assess t

situation, Almonte no longer being associated with the fir

or it might have sought an expert opinion on this set

investments from a wholly independent party; or it might ha

made an effort through its own resources to investiga

-7- -7-


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promptly the nature of the investment it made. It took no

of these steps.3

As it happens, by the fall of 1987, adverse informati

about high-yield junk bonds from Drexel Burnham in particul

would not have been hard to uncover. The extraordinary sto

market plunge in October 1987 focused considerable pre

attention on both junk bonds and Drexel Burnham, turnin

small trickle of earlier newspaper references into a swel

In any case, an analyst could quickly have identified t


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inaccuracy of Almonte's alleged description, based merely

the relatively poor ratings of the bonds underlying t

trusts.

We need not decide whether the statute of limitatio

begins to run on the date the storm warnings appear or t

later date on which an inquiring investor would throu

reasonable diligence have discovered the fraud. Compar _____

e.g., General Builders, 796 F.2d at 13 (suggesting t ____ ________________

former), with Maggio, 824 F.2d at 129 (suggesting t ____ ______

latter). The time between the two dates in most cases is n

likely to be long enough to affect the outcome. So it

here: even if the statute did not begin to run until t

____________________


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3Despite Cooperativa's claim to the contrary, t

obligation of diligent inquiry exists whether or not Almon

is labeled a "fiduciary." See Salois v. The Dime Savin

___ ______ ______________

Bank, ___ F.3d ___, Nos. 97-1049, 97-1050, slip op. at____

n.11 (1st Cir. Nov. 3, 1997); Maggio, 824 F.2d at 12 ______

General Builders Supply Co. v. River Hill Coal Venture, 7 ____________________________ ________________________

F.2d 8, 12 (1st Cir. 1986).

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fall of 1987, more than two years elapsed between that poi ____

and late December 1989 when the suit was finally brought.

In reaching our conclusion, we give little weight to t

other pieces of evidence. The district court thought t

Cooperativa's responsibility to investigate was heighten

because of letters from its own auditors, including ones

1985 and 1986, warning that its aggressive investment progr

presented some level of risk and ought to be careful

scrutinized. There is force in Cooperativa's answer t

these boilerplate warnings were not in any way specifical

directed to the securities at issue in this case.

Conversely, Cooperativa is mistaken in invoking

opinion letter to it dated March 3, 1988, from anot

auditor. The opinion, apparently commissioned by Almon


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himself, deals only with how Cooperativa might report i

investments in long-term obligations and opines that t

could still be carried at purchase price despite a decline

market value. The letter does not comment at all on t

safety or riskiness of the securities here involved, a

obtaining the opinion does not represent due diligence.

In sum, Cooperativa was on notice by mid- or late sum

1987 that Almonte's alleged description of the securiti

might well have been inaccurate or even dishonest.

diligent inquiry, it could quickly have learned that t

alleged statements were false. Thus the statute

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limitations began to run no later than the fall of the 198

Its suit, brought in December 1989, was therefore barred

Puerto Rico's two-year statute of limitations.

Affirmed. ________


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Credito Aguado v. Kidder, Peabody & Co, 1st Cir. (1997)

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