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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
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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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