Brief Fact Summary. GlaxoSmithKline, PLC (GSK)(Defendant), had a punitive securities fraud class action against brought against them by Masters (Plaintiff) who argued that three out of the four of his crucial claims should not have been dismissed on the statute of limitations grounds by reason of him not being on inquiry notice of those claims, seeing as not even two years had passed since his original complaint filing.
Synopsis of Rule of Law. When lawsuits are brought against the corporation claiming the behavior that is the foundation of securities fraud claims and when the corporation’s stock value declines due to the revelations of the lawsuits or ongoing litigation, an investor is placed on inquiry notice of a corporation’s probable violations of § 10(b) of the Securities Exchange Act and Rule 10(b).
We review a district court's grant of a motion to dismiss under Rule 12(b)(6) de novo.
View Full Point of LawIssue. When lawsuits are brought against the corporation claiming the behavior that is the foundation of securities fraud claims and when the corporation’s stock value declines due to the revelations of the lawsuits or ongoing litigation, is an investor is placed on inquiry notice of a corporation’s probable violations of § 10(b) of the Securities Exchange Act and Rule 10(b)?
Held. (Summary Order) Yes. When lawsuits are brought against the corporation claiming the behavior that is the foundation of securities fraud claims and when the corporation’s stock value declines due to the revelations of the lawsuits or ongoing litigation, an investor is placed on inquiry notice of a corporation’s probable violations of § 10(b) of the Securities Exchange Act and Rule 10(b). As in this case, the eliciting of an inquiry notice is an issue that may be resolved on a motion to dismiss when the facts required when deciding when a reasonable investor of normal intellect would have been cognizant of the presence of fraud can be ascertained from the complaint and supplementary documents. Regarding the Paxil Withdrawal Claim, the disclosures, the litigation, and drop in GSK’s stock price were satisfactory to elicit inquiry notice. His argument that these were inadequate to be considered “storm warnings†is worthless, and even though the actions failed to assert fraud, the underlying factual allegations were satisfactorily acknowledged and acted as the foundation of Master’s securities fraud claim. In closing, even if the FDA’s warning label understated the full extent of Paxil’s purported withdrawal effects, the warning was lacking elements of being the “reassuring statement†that would alleviate a reasonable investor’s apprehensions. Correspondingly, the Patent Claim, the disclosures, litigation and supplementary price declines elicited inquiry notice too. Masters’ assertions that the limitations period was not elicited due to the trial courts’ decisions being on appeal and as a result of the price drops in GSK’s securities were not “sharp†enough to place an investor on notice are futile. District court filings and opinions may be adequate to activate the limitations period and particular amount of price drop necessary prior to the limitations period can begin. The corporation’s CEO assertions of confidence of triumphing in litigation were not the type of “reassuring words†that could stop an inquiry notice but were the type that could be seen as simple terms of hope by a reasonable investor. With regard to the Overcharge Claim, Master’s statement that it was the settlement of this litigation that elicited inquiry notice is denied. Precedent establishes that knowledge of a lawsuit may be satisfactory to elicit inquiry notice. So, all claims were properly dismissed. [The court went on to hold that the remaining Paxil Pediatric Clam was properly dismissed on different grounds.] Affirmed.
Discussion. Initially, the inquiry notice periods were shorter than the periods mentioned here. They followed one year after the discovery of the facts establishing a violation or three years following the violation. These periods lengthened in Section 804 of the Public Company Accounting Reform and Investor Protection Act of 2002 (in 2002)(Sarbanes-Oxley), which was passed as a response to key corporate and accounting scandals, (similar to Enron, Tyco International and Worldcom), partially to build the public’s confidence the securities markets. It is obvious that the longer inquiry notice period extends the time when an investor may bringa securities fraud action but even with the time extension, investors must remain attentive and bring their actions in a timelyfashion, as evidenced here.