Class Action Alleging Market Timing Acts in Violation of State and Federal Laws were Time-Barred because Public Complaints, SEC Actions and Guilty Plea Arising out of Market Timing Claims Placed Class Representatives on Inquiry Notice of Basis for Class Action Claims Maryland Federal Court Holds
Investors filed a class action against numerous defendants, ultimately coordinated by the Judicial Panel on Multidistrict Litigation, alleging marketing timing acts in violation of the Securities Act, the Exchange Act, the Investment Company Act and various state laws. In re Mutual Funds Inv. Litig., 478 F.Supp.2d 833, 834 (D. Md. 2007). The class action complaint was attacked by motions to dismiss, which the district court granted as to the Securities Act and the ICA § 48(a) claims, denied as to the Exchange Act claims, and denied without prejudice as to the ICA § 36(b) claim, id.; plaintiffs voluntarily dismissed their state law claims, id. n.1. Plaintiffs filed a second amended class action complaint that added new defendants and claims, and defense attorneys filed another series of motions to dismiss, id., at 834. After reaffirming its prior rulings to the extent applicable, id.; the district court addressed numerous issues, but we address here only that portion of the court’s holding concerning the statute of limitations defense.
Plaintiffs conceded that any claims based on allegedly fraudulent conduct that occurred prior to July 1999 were time-barred. In re Mutual Funds, at 835. The district court recognized that Fourth Circuit decisional law holds that “Inquiry notice is triggered by evidence of the possibility of fraud, not by complete exposure of the alleged scam.” Id., at 836 (quoting Brumbaugh v. Princeton Partners, 985 F.2d 157, 162 (4th Cir. 1993)). And the court immediately rejected a defense effort to push inquiry notice back to 1999, explaining: “The attempt to place notice inquiry as far back as 1999 because of the shareholder letter and prospectus supplements warning of the risks of market timing is not persuasive, when those same documents indicated that additional steps would be taken to prevent timing and the funds are alleged instead to have concealed from investors specific agreements to permit that very practice.” Id., at 836 n.6.
Defendants Millennium, the Calugar defendants and Trautman raised the statute of limitations as a complete defense in their motion to dismiss. As to Calugar, the district court held, in pertinent part, that “the publicly filed complaints, including the SEC action alleging that Calugar, through Security, market timed ‘various’ mutual funds, although ‘most of’ the trades were made through Alliance and MFS, should have put the plaintiffs on notice of the possibility of similar activity in the Scudder funds.” In re Mutual Funds, at 836. Because the class action complaint did not allege any market-timing by Calugar after August 1999, the court held that the class action claims against those defendants were time-barred. Id.
With respect to Millennium, the court agreed with defense attorneys that the publicity surrounding a guilty plea and settlement with the SEC by former Millennium trader Steven Markovitz in October 2003 “was sufficient to put the plaintiffs on inquiry notice that Millennium may have engaged in improper market timing activity in Scudder funds.” In re Mutual Funds, at 836. While the material cited by defense was not part of the record, the court took judicial notice of the fact that the guilty plea and SEC settlement occurred and that the publicity surrounding these events “unquestionably was extensive,” id., at 837. Accordingly, the district court concluded that the class action claims against Millennium were also time-barred, id.
The district court did not grant the motion to dismiss as to Trautman, however, because it found that “no similar form of notice” was identified by that defendant. In re Mutual Funds, at 837. The court rejected a defense effort to link inquiry notice of market-timing claims against Trautman to press releases in January 2004 that Deutsche Asset Management “had identified market timing arrangements with an investment advisory [firm] in Scudder funds.” Id. The court explained at page 837, “While it is a close question, that media statement did not in any way identify Trautman as being involved in timing, and consequently these claims will not be dismissed as a matter of law.”