Opinion
Case No. 02 C 4735
April 11, 2003
MEMORANDUM AND ORDER
Levenfeld and Howard Goldman brought the instant action alleging that Defendants David Boyd, Jim Daffada, North Manchester Holdings, Inc. ("MM Holdings"), Ronald F. Prebish Irrevocable Trust, Lawrence Shane, Richard Fanslow Trust No. 314, Crowe Chizek and Company, LLP ("Crowe"), North Manchester Foundry, Inc.("the Foundry"), DCI Holding Co., PFFS, Inc., Ronald Prebish, and Richard Fanslow (collectively, "Defendants"), violated federal and state securities law and the Illinois Consumer Fraud Act, in connection with Plaintiffs' purchase of a minority interest in NM Holdings, which indirectly owns all the outstanding stock of the Foundry.
The present matter comes before this Court on Defendants' Motions to Dismiss, pursuant to Federal Rule of Civil Procedure 12(b)(1) and 12(b)(6). For the reasons that follow, the Motions are GRANTED.
Three motions to dismiss were filed — one by Defendant Crowe; another by Defendants Shane, Perbish, and the Perbish Trust; and the third by Defendants Boyd, Daffada, NM Holdings, PFFS, Inc., and DCI Holdings. Because all three motions essentially raise the same contentions, this Court will refer to them collectively as the "Motions" unless otherwise noted.
BACKGROUND
The facts in the Background section are taken from Plaintiffs' Second Amended Complaint and the documents attached thereto.
Defendants allegedly played various roles in the operation and control of the Foundry Ownership Group and in the sale of the shares of NM Holdings to Plaintiffs. Defendant Boyd is a director of the Foundry, NM Holdings, and PFFS, and the majority owner of NM Holdings. Likewise, Defendants Prebish, the Prebish Trust, Shane, and Fanslow held various executive positions and had ownership interests in the Foundry Ownership Group. Defendant Daffada acted as in-house counsel to the Foundry Ownership Group. Defendant Crowe is an accounting firm which provided auditing and accounting services to the Foundry, NM Holdings, PFFS, and DCI Holding and prepared various documents in connection with the sale of the ownership interest to Plaintiffs.
In early January of 2000, after expressing an interest in purchasing a stake in the Foundry, Daffada gave Plaintiffs a Confidential Information Memorandum ("the Memorandum"), which detailed the Foundry's finances and business plan. The Memorandum was prepared by Crowe and Defendant Shane in 1999. Crowe allegedly told Plaintiffs that the information contained in the Memorandum was current. The managing director and a partner at Crowe told Plaintiffs that the Foundry was a "cash cow" and the "investment was a no brainer." In late January of 2000, after performing due diligence, Plaintiffs, with the assistance of Crowe, prepared an offer to purchase an interest in the Foundry. Defendants, however, did not accept this offer.
Almost a year later, in December 2000/January 2001, Daffada informed Plaintiffs that Defendants were still interested in selling an interest in the Foundry, and that if Plaintiffs were still interested, they should prepare an offer within 30 days. Plaintiffs subsequently made an offer which was accepted. To facilitate the transaction, Defendants created NM Holdings "to acquire DCI Holding," which purchased all the shares of PFFS, Inc., which in turn purchased the Foundry. NM Holdings' sole asset was all of the outstanding stock in DCI Holding. To acquire their shares in NM Holdings, Plaintiffs paid $250,000 in cash and provided a $750,000 loan to the Foundry and agreed to provide an additional $250,000 loan after the close of the transaction.
In connection with the purchase of the Foundry, Defendants allegedly made several material misstatements regarding the financial condition and outlook of the Foundry. For example, Crowe and Boyd told Plaintiffs that there were "no significant changes in the financials or management of the Foundry" and that the status of the Foundry was essentially the same as when Plaintiffs made their first offer the previous year. Likewise, Prebish allegedly made material misstatements to Plaintiffs regarding the management of the Foundry. Additionally, the Memorandum, which was prepared by Crowe and Shane, allegedly contained several material misstatements and omissions. Plaintiffs contend that they would not have invested in the Foundry but for Defendants' misrepresentations.
On July 2, 2002, well over a year after the close of the transaction, Plaintiff brought the instant action and then moved to amend their complaint. After the filing of the Amended Complaint, Defendants Shane, Prebish, and the Prebish Trust brought a motion to dismiss the Amended Complaint. In response to this motion, Plaintiffs sought leave to and were permitted to amend the Amended Complaint. Subsequently, Plaintiffs filed the Second Amended Complaint, which alleged that Defendants violated: (1) section 10(b) of the Exchange Act and SEC Rule 10b-5 (Count I); (2) section 20(a) of the Exchange Act (Count II); (3) the Illinois Consumer Fraud and Deceptive Practices Act (825 ILCS 505/10a) (Count III); and (4) the Illinois Securities Law of 1953 ( 815 ILCS 5/12) (Count IV). Defendants now seek to dismiss the Second Amended Complaint.
STANDARD OF REVIEW
In ruling on a motion to dismiss pursuant to Rule 12(b)(6), the court must assume the truth of all facts alleged in the pleadings, construing allegations liberally and viewing them in the light most favorable to the non-moving party. See, e.g., McMath v. City of Gary, 976 F.2d 1026, 1031 (7th Cir. 1992); Gillman v. Burlington N. R.R. Co., 878 F.2d 1020, 1022 (7th Cir. 1989). Dismissal is properly granted only if it is clear that no set of facts which the plaintiff could prove consistent with the pleadings would entitle the plaintiff to relief. Conley v. Gibson, 355 U.S. 41, 45-46 (1957); Kunik v. Racine County. Wis., 946 F.2d 1574, 1579 (7th Cir. 1991) citing Hishon v. King Spalding, 467 U.S. 69, 73 (1984)).
The court will accept all well-pled factual allegations in the complaint as true. Miree v. DeKalb County, 433 U.S. 25, 27 n. 2 (1977). In addition, the court will construe the complaint liberally and will view the allegations in the light most favorable to the non-moving party. Craigs. Inc. v. General Electric Capital Corp., 12 F.3d 686, 688 (7th Cir. 1993). However, the court is neither bound by the plaintiffs legal characterization of the facts, nor required to ignore facts set forth in the complaint that undermine the plaintiffs claims.Scott v. O'Grady, 975 F.2d 366, 368 (7th Cir. 1992).
ANALYSIS
Defendants contend that this Court should dismiss Plaintiffs section 10(b) claim because: (I) they do not have standing; (II) the statute of limitations precludes their claim; (III) the non-reliance clause in the Confidentiality Agreement bars this action; and (IV) they have failed to allege sufficient facts to plead a claim under section 10(b). Because this Court finds that Plaintiffs have standing but their 10(b) claim is barred by the statute of limitations, the Court will only address these two contentions.
I. Standing
Defendants contend that Plaintiffs lack standing to assert a claim under section 10(b) because they did not and cannot allege that they actually purchased any shares in the Foundry. In support of this contention, Defendants cite to the long-standing rule, established by the Supreme Court in Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 731-33 (1975), that to have standing to bring an action under section 10(b), a party must have been a purchaser or seller of the securities about which the alleged material misstatement or omission was made. Thus, according to Defendants, because NM Holdings made the actual purchase of the stock, not Plaintiffs themselves, Plaintiffs do not have standing. In response, Plaintiffs, relying on Grubb v. FDIC, 868 F.2d 1151 (10th Cir. 1989), contend that NM Holdings was simply a "shell" corporation created solely to purchase the Foundry Ownership Group, and therefore, they were "de facto" purchasers of shares in the Foundry. To examine the validity of these contentions, this Court will review the decisions in Blue Chip and Grubb and other cases where courts examined whether shareholders of "holding companies," created solely to purchase stock in another company, have standing to bring an action under section 10(b).
In Blue Chip Stamps, 421 U.S. at 725-26, the defendant was compelled to make a stock offering pursuant to a consent decree. The plaintiffs, the offerees, alleged that they were defrauded because the defendant, the offerer, lied about the financial health of the offering company, thereby causing the plaintiffs to decide not to partake in the offer. Id. at 727, Adopting the long-standing rule from the Second Circuit's decision in Birnbaum v. Newport Steel Corp., 193 F.2d 461 (2d Cir. 1952) ("the Birnbaum Rule"), the Supreme Court held that because the plaintiff did not actually purchase the stock, it lacked standing to bring a section 10(b) action. Id. at 731.
The Supreme Court noted that there are "[t]hree principal classes of potential plaintiffs" who lack standing under this rule:
First are potential purchasers of shares . . . who allege that they decided not to purchase because of an unduly gloomy representation or the omission of favorable material which made the issuer appear to be a less favorable investment vehicle than it actually was. Second are actual shareholders in the issuer who allege that they decided not to sell their shares because of an unduly rosy representation or a failure to disclose unfavorable material. Third are shareholders, creditors, and perhaps others related to an issuer who suffered loss in the value of their investment due to corporate or insider activities in connection with the purchase or sale of securities which violate Rule 10b-5.Id. at 737-38.
Blue Chip went on to detail the dangers that are avoided by the Birnbaum Rule. For example, the rule avoids "conjectural and speculative recovery in which the number of shares involved will depend on the plaintiffs subjective hypothesis." Id. at 735. Additionally, the rule protects companies from vexatious litigation and the danger of "strike" suits which may delay or frustrate normal business activity. Id. at 739-40. The Court also noted that the rule lessens "the possibility that unduly expansive imposition of civil liability will lead to large judgments, payable in the last analysis by innocent investors, for the benefit of speculators and their lawyers."Id. at 739. Moreover, limiting standing decreases the "potential for possible abuse of the liberal discovery provisions of the Federal Rules of Civil Procedure." Id. at 741. Finally, the Court noted that
Without the Birnbaum rule, an action under Rule 10b-5 will turn largely on which oral version of a series of occurrences the jury may decide to credit, and therefore no matter how improbable the allegations of the plaintiff, the case will be virtually impossible to dispose of prior to trial other than by settlement. . . . TheBirnbaum rule, on the other hand, permits exclusion prior to trial of those plaintiffs who were not themselves purchasers or sellers of the stock in question. The fact of purchase of stock and the fact of sale of stock are generally matters which are verifiable by documentation, and do not depend upon oral recollection. . . .
Id. at 742.
Despite the seemingly bright-line rule established in Blue Chip, several courts have held that in certain instances, shareholders of "holding companies," created solely to purchase stock in another company, have standing to bring an action under section 10(b). For example, in Grubb, 868 F.2d at 1157, the plaintiff purchased shares in a bank through a holding company, which actually made the purchase. To facilitate the purchase, the plaintiff executed a promissory note guaranteeing the loan which funded the purchase.Id. After it was revealed that the defendant, seller, misrepresented the financial condition of the bank, the plaintiff brought a section 10(b) action. Id. at 1153.
On appeal, the defendant contended that the plaintiff did not have standing to bring a section 10(b) action under Blue Chip because the holding company, not the plaintiff, purchased the shares in the bank. Grubb, 868 F.2d at 1161. In rejecting this contention, the Tenth Circuit noted that although the Blue Chip rule barred shareholders and creditors from bringing a section 10(b) action in connection with the corporation's purchase of securities, the policy considerations (as set forth above) underlying the creation of the rule did not apply to the plaintiff. Id. Of particular importance to the court was the fact that: (1) the plaintiff was not a typical shareholder in that the purchasing company was simply a shell company created three days before the execution of the purchase for the sole purpose of facilitating the purchase; (2) many of the alleged misrepresentations were made before the creation of the holding company; (3) the plaintiff "was the actual party at risk in the transaction"; and (4) the plaintiffs damages could be easily computed in that he sought damages for "the direct injury he suffered as a result" of the alleged misrepresentations. Id. at 1161-62. Noting that the "remedial purpose of [section 10(b)] should not be defeated by taking a technical, unrealistic view" of the transaction, the court held that "in effect" the plaintiff was the actual purchaser of the stock and therefore had standing to bring a section 10(b) action. Id. at 1161-62.
Similarly, in HB Holdings Corp. v. Scovill Inc., 1990 WL 37869, at *1, 3 (S.D.N.Y. Mar. 26, 1990), the court held that although the plaintiff did not directly make the purchase of the stock, it nevertheless had standing to bring a section 10(b) action because it "was the de facto purchaser." In reaching this conclusion, the court noted that: (1) the purchase was actually made by a holding company "organized solely to purchase [the] stock"; (2) the defendant solicited the plaintiff to make the sale; and (3) the plaintiff, not the holding company, negotiated the transaction and suffered direct harm from the transaction. Id. at *3-4.
Likewise, in Walther v. Maricopa International Investment Corp., 1999 WL 64280, at *2 (S.D.N.Y. Feb. 9, 1999), in finding that the plaintiffs had standing, the court noted that the entities which made the actual purchases "were simply shell entities set up by [the defendant] to facilitate the securities investments." Noting that "[t]he purchase-sale requirement must be interpreted so that the broad design of the Exchange Act, to prevent inequitable and unfair practices on securities exchanges . . . is not frustrated by the use of novel or atypical transactions," the court found that the plaintiffs were the actual purchasers. Id. at *2.
Here, although Plaintiffs did not make the actual purchase of shares in the Foundry, the transaction was structured almost identically to the purchases in the cases above which held that the plaintiffs were de facto purchasers and thus had standing to bring a section 10(b) action.
In early January of 2000, a year before the actual purchase was executed, after expressing an interest in purchasing a stake in the Foundry, Plaintiffs received from Defendant Daffada the Memorandum, which was prepared by Defendant Crowe and detailed the Foundry's finances and business plan and allegedly contained a number of material misstatements. After Defendants rejected their offer, almost a year later, in December 2000/January 2001, Defendant Daffada informed Plaintiffs that Defendants were still interested in selling an interest in the Foundry, and that if Plaintiffs were still interested, they should prepare an offer within 30 days. During the second negotiations for the sale of the Foundry, Defendants allegedly made several material misstatements regarding the financial condition and outlook of the Foundry.
On January 29, 2001, two days before the actual transaction was executed (February 1, 2001), Defendant Boyd, at the suggestion of Defendant Crowe, created NM Holdings "to acquire DCI Holding," which purchased all the shares of PFFS, Inc., which in turn purchased the Foundry. NM Holdings' sole asset was all of the outstanding stock in DCI Holding. To acquire their shares in NM Holdings, Plaintiffs paid $250,000 in cash and provided a $750,000 loan to the Foundry and agreed to provide an additional $250,000 loan after the close of the transaction.
After carefully examining the above transaction, this Court finds that Plaintiffs were the de facto purchasers of the shares in the Foundry and that the concerns expressed by the Supreme Court in Blue Chip are not present here. This finding is based on the fact that: (1) NM Holdings was a shell corporation created solely to facilitate Plaintiffs' purchase of an interest in the Foundry; (2) Defendants initiated the purchase and suggested the creation of NM Holdings to facilitate the transaction; (3) the negotiations and alleged misrepresentations occurred before NM Holdings was even created; (4) the negotiations for the purchase was conducted between Plaintiffs and Defendants, without regard to the shell company; (5) the Plaintiffs' money, not NM Holdings', was at risk in the transaction; and (6) the damages Plaintiff are seeking are a direct result of Defendants' actions and are not speculative — the $250,000 initial investment and $1,000,000 loan. Consequently, this Court finds that Plaintiffs have standing. To hold otherwise would frustrate the remedial purpose of section 10(b) by allowing Defendants to avoid liability by using a novel corporate structure to facilitate Plaintiffs' purchase of the Foundry. II. Statute of Limitations
Defendants contend that this Court should follow Judge Shadur's decision in Rayman v. People Savings Corp., 735 F. Supp. 842 (N.D. Ill, 1990), which declined to follow the reasoning inGrubb. In Rayman, however, unlike the instant case, the court found that the company which actually made the purchase "was not a mere conduit" formed by the investors for the purchase of the securities. 735 F. Supp. at 847. Thus, this Court finds thatRayman is not applicable to the instant action.
Defendants next contend that Plaintiffs section 10(b) claim is barred by the one-year statute of limitations, which applies to securities actions. Fujisawa Pham. Co. Ltd, v. Kapoor, 115 F.3d 1332, 1334 (7th Cir. 1997). While a plaintiff is not required to plead facts which negate a statute of limitations defense, if the plaintiff "plead[s] facts that show that [its] suit is time-barred . . . [it] has pleaded [itself] out of court." Tregenza v. Great American Com. Co., 12 F.3d 717, 718 (7th Cir. 1993).
Count II of Plaintiffs' Second Amended Complaint alleges a violation of section 20(a) of the Exchange Act, which is also governed by the one-year statute of limitations. See 766347 Onterio Ltd, v. Zurich Capital Markets, Inc., 249 F. Supp.2d 974, 988 (N.D. Ill. 2003) (applying section 10(b)'s one-year statute of limitations to a section 20(a) control person claim, where the provision alleged to be violated under the Act was section 10(b); Dodds v. Cigna Securities, Inc., 12 F.3d 346, 350 n. 2 (2d Cir. 1993) (same); Tracinda Corp. v. Daimlerchrysler AG, 197 F. Supp.2d 42, 55 n. 5 (D. Del. 2002).
The one-year limitation period for securities claims accrues upon actual notice or "inquiry notice" of the claim, whichever comes first.Whirlpool Fin. Corp. v. GN Holdings, Inc., 67 F.3d 605, 609 (7th Cir. 1995); Tregenza, 12 F.3d at 721-22. "Inquiry notice starts the running of the statute of limitations `when the victim of the alleged fraud became aware of the facts that would have led a reasonable person to investigate whether he might have a claim.'"Whirlpool, 67 F.3d at 609 (quoting Tregenza, 12 F.3d at 718). In determining if there were sufficient facts to trigger inquiry notice, the court should apply "an objective reasonable diligence standard . . . to the facts." Id.
In Whirlpool, 67 F.3d at 607, the plaintiff brought a section 10(b) claim against the defendant, after the defendant defaulted on a loan from the plaintiff. In determining whether to make the loan, the plaintiff reviewed a private placement memorandum which detailed the defendant's historical financial performance and projection of future performance. Id. at 607-08. Unfortunately, "the projections painted a much rosier picture than what actually unfolded." Id. at 608. In the two years after the loan, the net sales were 32% to 48% lower than predicted and net income was 104% to 283% below projections.Id. Two months after the loan, the plaintiff first learned of the defendant's poor financial performance. Id. When questioned as to its low sales and profits, the defendants explained that the problem was due to a "general economic recession" and that "better times were just around the corner." Id. The "better times," however, never materialized, and three years after making the loan, the plaintiff brought suit. Id.
Affirming the district court's dismissal of the section 10(b) claim based on the one-year statute of limitations, the Seventh Circuit held that "the dramatic discrepancies" between the projections and actual performance "were sufficient to give notice to [the plaintiff] and spur [it] to investigate — inquiry notice which started the limitations clock." Id. at 610. Rejecting the plaintiffs contention that it needed time to "uncover" the alleged fraud, the court noted that once put on inquiry notice of the discrepancies, the information needed to investigate the fraud was "in the public domain," and therefore, the defendant was imputed with constructive knowledge of this information.Id.
The court further rejected the plaintiffs contention that the defendant was "equitably estopped" from asserting the statute of limitations because it "lulled" the plaintiff into "missing the statute of limitations" based on the defendant's explanation that its problems were due to a "general economic recession" and that "better times were just around the comer." Id. The court noted that equitable estoppel is only applicable where "a defendant took active steps to conceal evidence from the plaintiff that the plaintiff needed in order to determine it had a claim." Id.
Therefore, although the defendant apparently misled the plaintiff with its explanations, because the court determined that the information needed to uncover the fraud was "in the public domain," the plaintiff could have nevertheless uncovered the true financial condition of the defendant. Id.
Similarly, in Tregenza, 12 F.3d at 719-20, the plaintiffs purchased stock from defendants based on representations that; (1) the stock price was "greatly undervalued" and would reach a price of $20 a share from its current price of $12.00 to $12.50 a share; and (2) the price would not decline more than 10% from its current price. Two years after the purchase, the plaintiffs brought a section 10(b) claim alleging that the price of the stock "was grossly inflated" because of the amount of debt that the company was carrying. Id.
Affirming the district court's dismissal of the section 10(b) claim on statute of limitations grounds, the Seventh Circuit held that the plaintiffs were put on "inquiry notice" when the stock price immediately began to fall after the purchase and within one year had declined by 90%.Id. at 720. With such a dramatic decline, "no reasonable investor" would have taken the defendants' prior representations as true.Id. Instead, a reasonable investor would "have become suspicious and investigated when [the defendants'] emphatic and precise prediction was so swiftly and dramatically falsified." Id. In reaching this conclusion, the Seventh Circuit noted that the one-year statute of limitations prevents investors from using federal securities law to hedge their bets. Id. at 722. For example, if not required to sue within one year, an investor could wait to see if the stock rebounds and then take their profits and if it "stayed in the cellar" take their "legal damages. . . . [a] tactic discouraged by the doctrine of inquiry notice." Id.
Here, Defendants contend that Plaintiffs were put on inquiry notice after they received: (1) notice of a lawsuit between Defendants Fanslow and Prebish regarding the management, finances, and performance of the Foundry; and (2) the Foundry's audited financial statements for years ended 1999 and 2000. To determine if Plaintiffs had inquiry notice, the Court will analyze the facts surrounding each of these events, but will first address the alleged misrepresentations and omissions surrounding the transaction at issue.
Plaintiffs first expressed an interest in purchasing a stake in the Foundry in January 2000. Defendant Daffada gave Plaintiffs the Memorandum, prepared by Defendant Crowe, which detailed the Foundry's historical finances, financial projections, and business plan. The historical information stated that since it inception in 1989, the Foundry's sales had grown from $9.3 to $18.8 million in 1998. The Memorandum also predicted that in 2001 the Foundry would have revenues of $18 million and net income of $1,570,000. Plaintiffs allege that the Memorandum was based on false information and contained material misstatements and omissions.
Defendant Crowe allegedly told Plaintiffs that the information contained in the Memorandum was current and that the Foundry was a "cash cow" and the "investment was a no brainer." In late January of 2000, after performing due diligence, Plaintiffs, with the assistance of Crowe, prepared an offer to purchase an interest in the Foundry. Defendants, however, did not accept this offer.
Almost a year later, in December 2000/January 2001, Daffada informed Plaintiffs that Defendants were still interested in selling an interest in the Foundry, and that if Plaintiffs were still interested, they should prepare an offer within 30 days. Plaintiffs subsequently made an offer which was accepted.
In connection with the purchase of the Foundry, Defendants allegedly made several material misstatements regarding the financial condition and outlook of the Foundry. For example, Crowe and Boyd told Plaintiffs that there were "no significant changes in the financials or management of the Foundry" and that the status of the Foundry was essentially the same as when Plaintiffs made their first offer the previous year. Likewise, several Defendants allegedly made material misstatements to Plaintiffs regarding the management of the Foundry and the result of the recent unionization of the workforce. Plaintiffs contend that they would not have invested in the Foundry but for Defendants' misrepresentations and omissions.
On February 16, 2001, sixteen days after the closing of the transaction, Plaintiffs received Defendant Crowe's audited financial statements for the Foundry for the period up to December 31, 2000 ("the 2000 Financials"). The 2000 Financials revealed that from 1999-2000, contrary to the predictions in the Memorandum, the Foundry had a $700,000 decline in sales and a 93% decline in profits.
The second piece of information which Defendants contend put Plaintiffs on inquiry notice is the lawsuit filed by Defendant Prebish against Defendant Fanslow ("the Prebish Suit"), which was filed in Illinois state court in Chicago — a copy of the Verified Complaint was attached to Plaintiffs' Second Amended Complaint. Plaintiffs first learned of the Prebish Suit in January of 2001, before they closed on the present transaction.
The Prebish suit alleged that since Prebish took over the Foundry in 1994 its profits had increased over 200%, to $2,430,000, and that under his leadership, over the next five years, the Foundry's net income had averaged $2,400,000 on annual sales averaging $17,334,800. Despite his stellar performance, Prebish alleged that Fanslow (as a 57% majority owner) had devalued the shares of the minority shareholders in an attempt to increase the value of his interest in an anticipated future sale of the Foundry. Prebish further alleged that Fanslow: (1) gained control of the board; (2) locked Prebish out of his office; (3) prevented Prebish from operating the Foundry; (4) voiced his intent to fire Prebish as the Foundry's president; and (5) converted and wasted the Foundry's assets for personal gain. According to Prebish, Fanslow converted $160,000 cash from the Foundry to his own use and used the Foundry's funds to charter private planes and limousines and to pay for personal expenses not related to the Foundry. Based on these allegations, Prebish sought compensatory and punitive damages of not less than $5 million.
After reviewing the alleged misstatements and omissions made by Defendants, this Court finds that, similar to Whirlpool andTregenza, knowledge of the Prebish Suit and receipt of the 2000 Financials would have put a reasonable person on notice to investigate whether they might have a potential claim. Of particular importance to the Court are the facts: (1) that Prebish, who was alleged to be largely responsible for the Foundry's financial success, was apparently on his way out at the time the transaction was completed; and (2) of the dramatic decline in the Foundry's sales and profits set out in the 2000 Financials. These two facts, along with the litany of problems, detailed in the Prebish Suit, should have alerted Plaintiffs that the Foundry was not in as good financial health as they were led to believe by Defendants.
Because Plaintiffs knew of the Prebish Suit, the Court will impute Plaintiffs with constructive knowledge of the facts alleged in the Verified Complaint. See Whirlpool, 67 F.3d at 610. A reasonable investor upon learning of litigation between the majority shareholder and the president of a potential target company, would most certainly have reviewed and investigated the serious allegations contained in the Prebish Suit.
As for Plaintiffs' contention that Defendants are equitably estopped from asserting the statute of limitations, this Court finds Plaintiffs have not alleged that Defendants took active steps to conceal the fraud. While Defendants were not as straight-forward as they could have been, Plaintiffs as minority shareholders and directors of the Foundry should have investigated the cause of these discrepancies because once placed on inquiry notice, a plaintiff cannot rely on reassurances and optimistic projections to avoid the duty to investigate. See Whirlpool, 67 F.3d at 609-10; Tregenza, 12 F.3d at 720.
Accordingly, this Court finds that Plaintiffs had inquiry notice no later than February 16, 2001. the date Plaintiffs received the 2000 Financials, and therefore, the one-year statute of limitations ended on February 16, 2002. Because Plaintiffs did not file this action until July 7, 2002. Plaintiffs' federal securities claims (Counts I and II) are barred by the statute of limitations.
As for Plaintiffs' state law claims (Counts III and IV) this Court dismisses these counts without prejudice.