268 F. Supp. 3d 515
S.D.N.Y.2017Background
- Lead plaintiff Roofers Local No. 149 Pension Fund filed a consolidated Securities Act complaint against Inovalon, six of its officers and directors, and nine IPO underwriters alleging material misstatements/omissions in the Registration Statement about New York revenue and tax exposure, asserting claims under §§ 11, 12(a)(2) and 15.
- Defendants moved to dismiss; the Court denied that motion on May 23, 2017. Defendants then sought reconsideration and/or interlocutory certification under 28 U.S.C. § 1292(b) on June 6, 2017.
- The core dispute is which accrual/discovery standard controls the one-year limitations period for Securities Act claims: the Supreme Court’s Merck discovery rule (accrual when plaintiff discovers or a reasonably diligent plaintiff would have discovered the facts constituting the violation) or an older “inquiry notice” standard.
- Defendants argued inquiry notice should apply and, under that standard, plaintiffs’ claims would be time-barred (citing stock-price decline and press disclosures). Lead Plaintiff argued Merck controls and that claims are timely even under inquiry notice.
- The Court concluded Merck applies to Securities Act claims, found Defendants had not shown clear error or newly available evidence warranting reconsideration, and denied certification for interlocutory appeal because the statute-of-limitations question presented disputed facts inappropriate for resolution on a Rule 12(b)(6) motion and would not materially advance termination of the litigation.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Which discovery standard governs accrual of Securities Act claims | Merck standard applies; discovery means actual discovery or what a reasonably diligent plaintiff would have discovered | Inquiry-notice standard should govern; accrual can be triggered when facts would prompt investigation | Court held Merck applies to Securities Act actions and extended Merck to §§11/12 claims |
| Whether reconsideration is warranted | Order correctly applied Merck and denied dismissal; no clear error | Court clearly erred by applying discovery rule; new stock-price evidence shows claims time-barred | Reconsideration denied—Defendants failed to show clear error or newly discovered evidence that would alter prior ruling |
| Whether Plaintiffs’ claims are time-barred under inquiry-notice | Even under inquiry notice, competing factual evidence shows claims would not be barred; resolution improper on Rule 12 | Under inquiry notice, public disclosures and stock-price movements put plaintiffs on notice before the limitations period | Court found factual disputes would preclude dismissal at Rule 12 stage; claims not dismissed as time-barred |
| Whether to certify interlocutory appeal under §1292(b) on the standards question | Certification unnecessary; resolution would not materially advance termination because claims would survive under either standard here | Certification warranted because controlling legal question exists and interlocutory review could dispose of the case | Certification denied—appeal disfavored and issue would not materially advance litigation given factual disputes |
Key Cases Cited
- Merck & Co. v. Reynolds, 559 U.S. 633 (Sup. Ct.) (adopts discovery rule: accrual when plaintiff discovers or a reasonably diligent plaintiff would have discovered facts constituting the violation)
- City of Pontiac Gen. Employees’ Ret. Sys. v. MBIA, Inc., 637 F.3d 169 (2d Cir.) (applies Merck to Exchange Act claims)
- In re Bear Stearns Mortg. Pass-Through Certificates Litig., 851 F. Supp. 2d 746 (S.D.N.Y.) (applies Merck to Securities Act claims)
- Koch v. Christie’s Int’l PLC, 699 F.3d 141 (2d Cir.) (discusses applicability of Merck to other statutes; limited guidance here)
- California Pub. Emps.’ Ret. Sys. v. ANZ Sec., Inc., 137 S. Ct. 2042 (Sup. Ct.) (contains dicta on discovery/start of limitations period)
- Pension Tr. Fund for Operating Eng’rs v. Mortg. Asset Securitization Tr. Inc., 730 F.3d 263 (3d Cir.) (holds Merck applies to Securities Act)
- Dodds v. Cigna Sec., Inc., 12 F.3d 346 (2d Cir.) (noting similar accrual language in Securities and Exchange Acts)
- Newman v. Warnaco Grp., Inc., 335 F.3d 187 (2d Cir.) (stock-price stability can bear on whether inquiry notice was triggered)