and had adequate notice of potential claims by May 1984.
Plaintiffs argue that they lacked knowledge of all the elements of the RICO cause of action, particularly the "pattern of racketeering activity" and "injury" requirements, until June 30, 1984, at the earliest, the date of the alleged first clear breach of defendant Delmed's obligation to plaintiffs. They furthermore argue that they did not begin to suspect a pattern of racketeering activity until August 1984 when MANC was sold to a third party. Plaintiffs contend that until there was evidence of the alleged pattern, the RICO claim had not accrued, even if the individual predicate acts making up certain elements of plaintiffs' claim occurred before that time. Plaintiffs also argue that defendants fraudulently concealed facts that prevented plaintiffs from discovering the pattern of racketeering activity prior to June 27, 1984.
The Court agrees with defendants that, from the face of the complaint, there can be no doubt that plaintiffs had either actual or inquiry notice of defendants' alleged pattern of fraudulent activity prior to June 27, 1984. At the closing on December 29, 1983, after months of written and oral reassurances about the financial health of Delmed, defendants provided plaintiffs with an officer's certificate stating that Delmed expected to experience substantial losses in the fourth quarter of 1983. Plaintiffs allege that the certificate was buried in the middle of voluminous closing documents and that none of the defendants gave any indication that Delmed was experiencing financial woes. However, plaintiff Solano, then the CEO of MANC and represented by able counsel, had himself requested the officer's certificate. He was on the verge of closing a deal in which he would receive $ 10 million in unregistered stock in exchange for the company he created. As a matter of law, plaintiff, an intelligent professional and businessman who was represented by counsel, is charged with knowledge of the information contained in that certificate. See Colonial Lincoln-Mercury, Inc. v. Musgrave, 749 F.2d 1092, 1099 (4th Cir. 1984); Platsis v. E.F. Hutton & Co., Inc., 642 F. Supp. 1277, 1292 (W.D. Mich. 1986), aff'd, 829 F.2d 13 (6th Cir. 1987), cert. denied, 485 U.S. 962, 99 L. Ed. 2d 427, 108 S. Ct. 1227 (1988).
In order to trigger the statute of limitations, however, "the plaintiffs must know facts giving notice of the particular cause of action at issue, not of just any cause of action." Hobson v. Wilson, 237 U.S. App. D.C. 219, 737 F.2d 1, 35 (D.C. Cir. 1984), cert. denied, Brennan v. Hobson, 470 U.S. 1084, 85 L. Ed. 2d 142, 105 S. Ct. 1843 (1985). Thus, the question is whether plaintiffs knew or should have known that they could file suit for alleged violations of the RICO statute prior to June 27, 1984. Accepting all allegations in the complaint as true, the Court must answer the question in the affirmative.
In paragraph 75 of the complaint, plaintiffs set forth several alleged violations of 18 U.S.C. § 1341, the mail fraud statute, and 18 U.S.C. § 1343, the wire fraud statute, and alleged incidents of fraud in the sale of securities by Delmed. In paragraph 76, plaintiffs state that each of the alleged violations and incidents is a "predicate act" and constitutes an instance of "racketeering activity" for purposes of civil RICO. In paragraph 77, plaintiffs go on to allege that these multiple acts of racketeering activity constituted a pattern of racketeering activity as defined in the RICO statute.
Thirteen of the 19 acts of racketeering alleged by plaintiffs and enumerated in paragraph 75 of the complaint occurred prior to June 27, 1984. Yet, plaintiffs in their opposition claim that the alleged pattern did not occur, or at least was not detectable by plaintiffs, until some time after June 27, 1984. They therefore conclude in their opposition that, absent this necessary element of a RICO cause of action, their RICO claim could not have accrued prior to June 27, 1984. It is evident from the face of the complaint, however, that plaintiffs considered the alleged 19 enumerated acts of racketeering to form a pattern that would support a RICO claim. Plaintiffs provide no reason why the pattern was clearly formed at act number 14, but not at act number 13.
Turning again to the complaint, it is evident that in the months between the closing and plaintiff's June 27, 1984, date, plaintiffs received overwhelming evidence that defendants had made misrepresentations and omitted material information. At the very least, the information plaintiffs received should have led them, through the exercise of due diligence, to make further inquiries. In early March, Delmed filed an 8-K report with the SEC which showed substantial losses for the last quarter of 1983. In May, Delmed filed its 1983 Annual Report and its report for the first quarter of 1984, both of which revealed significant losses.
These reports, combined with Delmed's pleas that plaintiffs withhold registering their shares, put plaintiffs on sufficient notice such that their cause of action accrued, at the latest, in late May 1984, more than four years before they filed this action.
Moreover, plaintiffs' argument that their claims could not have accrued until the stock was ripe for sale and actually sold is contrary to case law. In a securities fraud case, the injury occurs at the time the investor enters into a transaction relying on material misrepresentations, and the statute of limitations begins to run at the time the investor is placed on inquiry notice. Volk v. D.A. Davidson & Co., 816 F.2d 1406, 1412 (9th Cir. 1987). "Defrauded securities purchasers are not permitted to delay bringing an action while avoidable damages accrue." Id. (citing Stull v. Bayard, 561 F.2d 429, 433 n. 4 (2d Cir. 1977), cert. denied, 434 U.S. 1035, 54 L. Ed. 2d 783, 98 S. Ct. 769 (1978)). In other words, an investor who has actual or inquiry notice that misrepresentations have been made may not sit on his cause of action, waiting to see the results of his investment. Id.
Although plaintiffs have filed this action under the RICO statute, with securities fraud claims constituting only some of the underlying predicate acts alleged, plaintiffs clearly are in the posture of being disgruntled investors alleging fraud. Thus, the securities fraud cases and their underlying principles apply to plaintiffs. Plaintiffs' alleged injury occurred on December 29, 1983, at the time the deal for the acquisition of MANC by Delmed was closed. As stated above, plaintiffs faced a barrage of evidence that would indicate that defendants made material misrepresentations both in the course of the acquisition negotiations and thereafter. The statute of limitations then began to run when plaintiffs were placed on notice of the facts constituting their potential claims, certainly prior to June 1984.
It is true, however, that if defendants fraudulently concealed facts that prevented plaintiffs from discovering the alleged fraudulent activities, that fraudulent concealment would have tolled the statute of limitations. See Hobson, 737 F.2d at 33. Although plaintiffs did not directly raise the fraudulent concealment issue in their complaint, they do raise it in their opposition as a defense to defendants' statute of limitations argument. Moreover, plaintiffs do allege facts in the complaint which, if true, might constitute fraudulent concealment. The Court will therefore consider the argument.
A defendant who has engaged in fraudulent concealment "must show something closer to actual notice than the merest inquiry notice that would be sufficient to set the statute of limitations running in a situation untainted by fraudulent concealment." Riddell, 866 F.2d at 1491. The reason for the more stringent standard is that "the fraudulent concealment by its nature makes discovery of the true facts more difficult, in part because it obscures the significance of such information as it comes to plaintiffs' attention." Id.
The Court concludes that plaintiffs had "something closer to actual notice" of their potential claims against these defendants. Surely they could have discovered the cause of action through the exercise of due diligence. See id. In fact, the Court would be hard pressed to think of a situation in which an investor could have received something closer to actual notice, short of defendants' submitting a written confession addressed to plaintiffs. Both the nature of the notice and the degree of notice received lead the Court to this conclusion. That is, plaintiffs received several reports, filed with the SEC as required by law, which indicated that the company was in a far different state financially than plaintiffs allege that defendants had indicated. On the face of the complaint, it is obvious: as plaintiffs allege the facts, defendants were lying either to plaintiffs or to the SEC, either scenario of which would place plaintiffs on notice that the defendants had made or were making misrepresentations, to the detriment of plaintiffs. Moreover, plaintiffs did not simply receive a few isolated clues. Rather, they were bombarded with information from the date of the closing in December 1983 through May 1984. While the information taken in isolation might not have placed plaintiffs on more than mere inquiry notice, surely the information taken together as a whole put these plaintiffs on something very close to actual notice.
Because it is clear from the face of the complaint that the four-year statute of limitations bars plaintiffs' RICO claims, the complaint cannot survive defendants' motions to dismiss. See Doe v. Dept. of Justice, 753 F.2d at 1116.
An appropriate Order accompanies this Opinion.
ORDER - February 26, 1991, Filed
Upon consideration of defendants' motions to dismiss, plaintiffs' opposition thereto, and the entire record herein, for the reasons set forth in the accompanying Opinion it hereby is
ORDERED, that the motions are granted, and the case is dismissed.