The primary issue presented in this case is whether an insurer of municipal bonds that becomes the owner of those bonds upon default has standing pursuant to § 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated
I. Facts
In the early 1990s, Crisp County, Georgia approved plans for a regional solid waste processing facility (the “Facility”), which would extend the life of a newly-opened landfill by removing recyclable material from waste before dumping the remainder into the landfill. The County established the Solid Waste Management Authority of Crisp County (the “Authority”) to construct and operate the Facility. To finance its initial construction, the Authority obtained approximately $53 million in short-term bank loans in 1996 (the “Bank Financing”).
Once constructed, the Authority would obtain revenue for the Facility by accepting waste from cities, counties and private companies and by selling materials of value (“MOV”) from the waste it сollected. Accordingly, before the Facility was built, the Authority contracted with more than thirty of these entities (the “Participants”), each of which agreed to make minimum payments to the Authority based on the expected tonnage of waste the Authority would collect or the number of households the Authority would service in the city or county. They executed “put or pay” contracts. The Authority also contracted with TransWaste Services LLC (“Tran-sWaste”), a waste hauler, to pick up the Participants’ waste and deliver it to the Facility, paying a tipping fee for each ton delivered. TransWaste agreed to deliver enough waste for the Authority to break even. In turn, the Authority agreed that TransWaste would reсeive a rebate from the Authority’s revenues from the sale of recyclable MOV.
The Authority contracted with defendant Hayes James for civil engineering services, including the conduct of a feasibility study based on the Bank Financing and the preparation of a report on the results of an Acceptance Test that Hayes James had developed for the Facility’s equipment.
The Authority hired Stephens to act as underwriter for a bond financing for the Facility. In early 1998, Stephens prepared a Request for Proposal (“RFP”) for potential credit enhancers, including FSA. The RFP included a pro forma financial representation (the “Pro Forma”). The RFP’s disclaimer instructed potential credit enhancers to perform their own due diligence.
FSA assigned one of its employees, Margaret Gifford, to analyze the RFP and make a recommendation as to whether FSA should insure the bonds. Gifford toured the Facility and obtained information about the equipment, the quantities of waste delivered and processed, and the amount of MOV recovered. She recommended that FSA insure the bonds. Gif-ford’s report noted that the Authority’s contracts were the ultimate security for the bond issue. She reviewed only one sample contract between the Authority and a Participant, however, and she did not request copies of the contracts with TransWaste or with Crisp County. Gif-ford testified in her deposition that she did
FSA submitted a bid in late July 1998, which was later aсcepted. The bid was conditioned on full review of all legal documentation pertaining to the deal.
The RFP indicated that the Facility would be subjected to an Acceptance Test to ensure that the Facility met its design specifications. Hayes James supplied the Acceptance Test’s design specifications for inclusion in the RFP, based on the original contract created in connection with the Bank Financing. Hayes James made a few minor changes to these specifications and then provided them to Stephens for inclusion in the RFP. The Acceptance Test was administered after FSA agreed to insure the bonds. FSA never requested a copy of the test results, nor did it inquire as to how thе Facility performed.
After Stephens accepted FSA’s bid, Stephens’s counsel prepared a Preliminary Official Statement (the “POS”) for the Authority. Though her duties were officially finished by that point, Gifford testified that she did “glance at” the POS when it was provided to FSA. Ron Millet, in-house counsel for FSA, also testified that he read and made suggestions regarding at least one draft of the POS.
In October 1998, at the request of Tran-sWaste, the Authority and TransWaste executed an amendment to their contract. The amendment extended the period for which TransWaste was eligible for its rebate based on MOV receipts and delayed enforcement of the break-even guarantee requirement. Stephens did not notify FSA of this amendment or the conversations that led to it. Also in October, Stephens, Hayes James and the Authority prepared a first-year budget for the Authority, which was sent to FSA. Hayes James also provided a budget certification letter (the “BCL”), certifying that the budget was reasonable.
The bond transaction closed on November 12, 1998 (the “Bond Closing”). The final version of the Official Statement (the “OS”) was delivered to FSA just prior to the closing. Within two months of the Bond Closing, the Authority informed FSA that it was revising its budget and cash flow analysis. FSA terminated Gifford’s employment shortly thereafter, based in part on her performance in this transaction. The Authority and TransWaste then further amended their contract by reducing the tipping fee and relieving TransWaste of its tonnage guarantee. Eventually, the Authority exhausted its debt service reserve fund and was unable to continue to make payments on the bonds.
In anticipation of litigation, the parties to this action entered into a tolling agreement on March 29, 2000. On December 1, 2000, FSA brought the present action in the United States District Court for the Northern District of Georgia, alleging federal securities fraud under Rule 10b-5 against Stephens, and state law claims for fraud and negligent misrepresentation against both Stephens and Hayes James. The district court later granted Stephens’s Rule 12(b)(6) motion to dismiss the federal securities claim. After a period of discovery, the defendants moved for summary judgment on the state law claims, which the district court granted, based primarily on FSA’s failure to meet the due diligence requirements for justifiable reliance under Georgia law. FSA then filed the instant appeal.
II. Discussion
A. 10b-5 Standing
The district court dismissed FSA’s Rule 10b-5 claim on the ground that FSA was not a purchaser or seller of securities as
We review de novo a district court’s dismissal of a complaint for failure to state a claim upon which relief could be granted, accepting the allegations in the complaint as true and construing them in the light most favorable to the plaintiff. Roberts v. Fla. Power & Light Co.,
FSA contends that it has standing on four grounds: (1) as the true party at risk in this transaction, it was effectively the purchaser of the bonds; (2) it is entitled to standing as a guarantor of the bonds; (3) it actually purchased the securities pursuant to the terms of the insurance policy; and (4) it is fully subrogated to the rights of the individual bondholders and therefore entitled to bring suit based on their purchases.
i. Party At Risk
FSA suggests that as the true “party at risk” in the bond transaction, it should have standing to assert a claim under Rule 10b-5. That is, FSA argues that it satisfies the purchaser-seller requirement set forth in Bimbaum and endorsed by the Supreme Court in Blue Chip Stamps, because, as the insurer of the bonds, it bore the risk that a purchaser would ordinarily bear. FSA is mistaken, however, in interpreting the purchaser-seller requirement to entail a functional, and not a formal, inquiry. Although the Supreme Court discussed the functional
ii. Guarantor Standing
FSA argues that it also has standing as a guarantor of the bonds. FSA first argues that it has standing as a guarantor because a guarantor qualifies as a purchaser of securities. This is not so. Granting standing to a guarantor as a purchaser would contravene the rule that this court announced in Pelletier v. Stuart-James Co., Inc.,
FSA next advances the novel theory that, in insuring the bonds, it sold a security, i.e., a guaranty. This argument fails because a guaranty does not qualify as a security for Rule 10b-5 purposes. Section 3(a)(10) of the Exchange Act defines a “security” as follows:
The term “security” means any note, stock, treasury stock, bond, debenture, certificate of interest or participation in any profit-sharing agreement or in any oil, gas, or other mineral royalty or lease, any collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, or in general, any instrument commonly known as a “security”; or any certificate of interest or participation in, temporary or interim certificate for, receipt of, or warrant or right to subscribe to or purchase, any of the foregoing ...
15 U.S.C. § 78c(a)(10). As the foregoing definition does not include a guaranty, FSA lacks standing as a guarantor of the bonds.
iii. Contract to Otherwise Acquire the Bonds
FSA argues that its insurance policy constitutes a contract to purchase the Bonds, qualifying FSA as a purchaser pursuant to Blue Chip Stamps. Notably, § 3(a)(13) of the Exchange Act defines the term “purchase” to include “any contract to buy, purchase, or otherwise acquire ” securities. See 15 U.S.C. § 78e(a)(13) (emphasis added). The policy provides that
[u]pon disbursement in resрect of a Bond, [FSA] shall become the owner of the Bond, any appurtenant coupon to the Bond or right to receipt of payment of principal of or interest on the bond and shall be fully subrogated to the rights of the Owner, including the Owner’s right to receive payments under the Bond, to the extent of any payment by [FSA] hereunder.
Accordingly, FSA contends that it acquired a contingent interest in the bonds because the policy constitutes a contract to otherwise acquire them upon the occurrence of a specified contingent event, ie., default.
Stephens argues first that FSA failed to allege a crucial element of a Rule 10b-5 action in its complaint — that it had purchased or sold a security. As Stephеns notes, FSA did not specifically allege that it had entered into a contract to acquire the bonds. Nor did FSA attach the insurance policy or quote relevant terms of the policy in its complaint. Indeed, on reading the allegations in FSA’s complaint, one
Ordinarily, we do not consider anything beyond the face of the complaint and documents attached thereto when analyzing a motion to dismiss. Brooks v. Blue Cross & Blue Shield of Fla., Inc.,
In considering this question, the First Circuit has held, with respect to a complaint alleging libel and other related claims, that a magazine article referred to in the complaint and attached to the defendant’s motion to dismiss was central to the plaintiffs’ claim because “Plaintiffs unquestionably would have had to offer a copy of the article in order to prove their case.” Fudge v. Penthouse Int’l, Ltd.,
This case presents a closer question than most cases in which this issue arises, however. Although the purpose of this exception is to prevent a plaintiff from surviving a motion to dismiss by failing to append relevant documents to its complaint, see, e.g., 188 LLC v. Trinity Indus. Inc.,
Because the insurance policy is the mode by which FSA arguably “otherwise acquired” the bonds, we find that the complaint, vague as it is, nevertheless meets the liberal notice pleading standards embodied in the Federal Rules of Civil Procedure. Because FSA alleges that it issued the policy as a result of Stephens’s fraud and that Stephens is therefore subject to Rule 10b-5 liability, we can infer that FSA purchased or sold securities by issuing the policy. Given these allegations and the provision of the policy vesting ownership of the bonds in FSA upon disbursement, we cannot conclude that FSA’s complaint fails to meet the “exceedingly low” thresh
In addition to asserting the above pleading defect, Stephens contends that the insurance policy does not constitute an “enforceable contract” to purchase securities. Stephens claims that the ownership clause in the policy is not enforceable because there is (1) no purchase price, (2) no provision for delivery of the bonds to FSA, and (3) uncertainty regarding FSA’s post-disbursement rights. This argument is without merit. First, under FSA’s contingent interest theory, no purchase price would appear in the insurance contract because the “purchase price” would effectively be the risk assumed by FSA in choosing to insure the bonds, less the value of the premiums charged. Second, the lack of provision for delivery of the bonds would not render the contract unenforceable. A court could fill in this missing term if FSA were to sue on the policy. Finally, a sensible reading of the relevant provision in the insurance policy reveals no uncertainty as to FSA’s post-disbursement rights. Although Stephens interprets the word “or” in the relevant clause — “[FSA] shall become the owner of the Bond, any appurtenant coupon to the Bond or right to receipt of payment of principal of or interest on the bond” — to be disjunctive, creating uncertainty as to FSA’s rights, a more reasonable interpretation is that both appearances of the word “or” are in the conjunctive. Thus, the most reasonable interpretation of this clause indicates that FSA shall become the owner of the Bond, any appurtenant coupon and right to receipt of payment of principal of and interest on the bond. Statutory interpretation conventions indicate that courts need not mechanically interpret every “or” as disjunctive, but rather that courts should interpret the word “or” according to context. See, e.g., Union Ins. Co. v. United States,
Stephens also argues that FSA cannot constitute a purchaser of the bonds because, as a factual matter, FSA has not actually acquired the bonds (ie., the bonds are still in the physical possession of the original bondholders). To the extent that FSA has an enforceable contract to otherwise acquire the bonds, however, it has an ownership interest in the bonds regardless of whether it has physical possession of them. Moreovеr, pursuant to the terms of the policy, ownership automatically vested in FSA upon disbursement. Accordingly, the fact that the bonds continue to be “held by” the bondholders is of no moment.
The Bond Market Association filed an amicus curiae brief in support of Stephens, arguing that an insurance policy is a fundamentally different instrument than contracts to purchase securities and that it
An analogous situation arises where a bank accepts a security as collateral for a loan. The bank realizes any appreciation or depreciation in the value of the collateral only in the event of default. Nevertheless, the Supreme Court has indicated that such pledges of securities fall within the purview of the securities laws. See Rubin v. United States,
Nor does FSA’s status as a sophisticated institution deprive it of protection under § 10(b), for banks are also sophisticated parties and nevertheless benefit from such protection. The Bond Market Association, however, argues that FSA differs from other investors in another relevant respect: A bond insurer is on the deal team and is therefore in a superior position with respect to the investors the Exchange Act was intended to protеct both in terms of its ability to perform due diligence and its ability to negotiate changes in the structure of a transaction. This argument is unpersuasive. No case law exists suggesting that members of a deal team are not entitled to rely on representations made in
iv. Subrogation
Finally, FSA argues that it has standing based on subrogation. “Subrogation is ‘[t]he substitution of one person in the place of another with reference to a lawful claim, demand or right, so that he who is substituted succeeds to the rights of the other in relation to the debt or claim, and its rights, remedies, or securities.’ ” Jones Motor Co. v. Anderson,
Stephens does not dispute that, had FSA properly pleaded a subrogation claim, it might be entitled to standing.
Because we have held that FSA has standing to bring a Rule 10b-5 claim as a purchaser of the bonds, we need not consider whether FSA adequately pled a sub-rogation claim and, if so, whether it has standing as a subrogee.
B. Statute of Limitations and Due Diligence
Stephens argues that, regardless of whether FSA has standing, FSA’s Rule 10b-5 claim is time-barred. Rule 10b-5 suits “must be commenced within one year after the discovery of the facts constituting the violation and within three years after such violation.” Lampf Pleva, Lipkind, Prupis & Petigrow v. Gilbertson,
In Tello, a Rule 10b-5 case, this court adopted the position that to provide a potential plaintiff with inquiry notice, the facts known by that party must be
sufficiently probative of fraud — sufficiently established beyond the stage of mere suspicion, sufficiently confirmed or substantiated — not only to incite the victim to investigate but also enable him to tie up any loose ends and complete the investigation in time to file a timely suit.
Id. at 1284-88 (quoting Fujisawa Pharm. Co., Ltd. v. Kapoor,
Because we agree with the district court that issues of material fact exist as to precisely what information was known to FSA on March 29, 1999 and whether that information was sufficient to provide FSA with inquiry notice, we cannot conclude at this stage of thе proceedings that FSA’s Rule 10b-5 claim is time-barred.
Finally, Stephens contends that FSA’s failure to perform due diligence bars it from bringing a Rule 10b-5 action. In this circuit, plaintiffs bringing Rule 10b-5 claims must establish “the justifiability of [their] reliance, frequently translated into a requirement of due diligence by the plaintiff.” Dupuy v. Dupuy,
C. State • Law Fraud and Negligent Misrepresentation Claims
The district court granted summary judgment in favor of Stephens and Hayes James on FSA’s common law fraud and negligent misrepresentation claims, holding that: (1) Stephens and Hayes James did not owe FSA a duty to disclose, (2) the alleged misrepresentations were not actionable, and (3) FSA did not justifiably rely on any alleged misrepresentations because it failed to exercise due diligence as a matter of law.
Under Georgia law, a plaintiff alleging fraud must demonstrate: (1) a false representation by the defendant, (2) the defendant’s knowledge that the information is false (scienter), (3) intention to induce the plaintiff to act or to refrain from acting, (4) justifiable reliance by the plaintiff, and (5) damage to the plaintiff. See, e.g., Avery v. Chrysler Motors Corp.,
i. Claims Against Hayes James
FSA argues that it justifiably relied on both Hayes James’s BCL and the description of Hayes James’s Acceptance Test contained in the RFP. To establish reasonable reliance under Georgia law as to either fraud or negligent misrepresentation, a plaintiff must show that it exercised due diligence. White v. BDO Seidman, LLP,
Because FSA failed to put forth any evidence that any of its employees had actually read the Hayes James BCL,
Likewise, we find that FSA did not justifiably rely on any alleged misrepresentation contained in the description of the Acceptance Test found in the RFP. FSA failed to perform any due diligence with respect to the Acceptance Test. FSA did not ask Hayes James or Stephens any questions regarding the Acceptance Test and did not even inquire as to whether the Facility passed the test. Nor did FSA request a copy of the report prepared in connection with the Acceptance Test. Accordingly, we hold as a matter of law that FSA failed to meet its due diligence burden, both with respect to the BCL and the description of the Acceptance Test contained in the RFP. Because we hold that FSA failed to exercise due diligence with respect to either of the above documents, we need not consider whether Hayes
ii. Claims Against Stephens
FSA claims that Stephens committed fraud and made negligent misrepresentations under Georgia law in four documents: the RFP, the POS, the OS, and the BCL. Because we have already held that FSA did not justifiably rely on the BCL, we will address only the alleged misrepresentations and omissions in the remaining three documents.
As an initial matter, we note that the district court excluded the evidence offered by FSA regarding due diligence standards in the bond insurance industry. As FSA has not appealed that ruling, we do not consider the testimony of FSA’s experts regarding those standards.
Regardless of whether the RFP, the POS and the OS contained material misrepresentations, FSA cannot prevail оn its fraud and negligent misrepresentation claims due to its abject failure to satisfy its due diligence burden.
Most importantly, perhaps, FSA failed to perform any due diligence relating to TransWaste. Gifford identified the Participants’ put or pay contracts as the ultimate security for the bonds, but she failed to recognize the importance of TransWaste’s contribution to the success of the Facility. TransWaste was responsible for a significant portion of the Facility’s rеvenue, yet Gifford failed to discuss the Facility with TransWaste, inquire into TransWaste’s financial wherewithal (to assess its ability to meet its performance guaranty) or, for that matter, review its contract. We hold that this due diligence failure was so egregious that FSA could not have reasonably relied on any representation relating to TransWaste.
We therefore agree with the district court that the facts regarding FSA’s due
III. Conclusion
For the foregoing reasons, we AFFIRM the district court’s grant of summary judgment on FSA’s state law claims, but we REVERSE the dismissal of FSA’s federal securities claim. We REMAN'D this case to the district court for further proceedings consistent with this opinion.
Notes
. The petitioner in Rubin v. United States,
. The Bond Market Association asserts that there is no automatic subrogation to Rule 10b-5 rights. However, the Association fails to cite any controlling authority to that effect. Instead, the Association cites three district court opinions, two of which are unpublished, from outside of this circuit.
. In Bonner v. Prichard,
. Ron Millet, FSA's in-house counsel, stated in an affidavit that he “relied on [the BCL] to the extent that [he] knew FSA required its receipt prior to the bond closing.” That statement does not help FSA, however. Because Millet did not rely on the contents of the BCL, he could not have relied on any alleged misrepresentations contained therein.
. The district court ruled that FSA failed to introduce competent evidence that anyone at FSA read the OS. However, in light of FSA’s argument that in reviewing drafts of the POS, Millet effectively reviewed the OS (which is dated as of the closing date), we will assume for purposes of this appeal that Millet reviewed both the POS and the OS.
. FSA argues that the question of whether a party justifiably relied on alleged misrepresentations "should not be decided on summary judgment if there is any evidence showing the person exercised due diligence.” Potts v. UAP-GA AG CHEM, Inc.,