The Ninth Circuit Court of Appeals recently held that a magazine article's "general skepticism" about a company's product was insufficient to trigger the one-year statute of limitations for claims brought under Section 10(b) of the Securities Exchange Act of 1934 (the "1934 Act") and Rule 10b-5 promulgated thereunder.
Plaintiffs were purchasers of stock in Valence Technology, Inc. ("Valence") after Valence publicly announced in May 1992 that it was developing a prototype battery superior to those already on the market. Press coverage of Valence was positive until February 15, 1993, when Forbes magazine published an article questioning the viability of Valence's technology. The article asserted that "while 'the folks at Valence can put on a good show' in demonstrating prototypes of their battery, the investment community remain[s] largely ignorant to 'what is really energizing this stock,'" and that "although Valence's battery 'works beautifully in the lab,' '[t]he world doesn't know' whether it will 'last' or if it can be 'made cheaply.'" The article further noted that Valence's largest shareholder had profited from two other enterprises even though the companies themselves were unprofitable. The article also cautioned that investors should "be a little choosier" before buying stock in Valence because its technology "remained unproven." Responding to the negative characterization in the Forbes article, Valence made several public announcements, including a letter sent to Forbes and Valence shareholders that described the article as "inaccurate." Subsequent press coverage of Valence was largely positive and never mentioned the Forbes article.
Following the Forbes article, Valence's stock price briefly dipped, but rose over 25% over the next several months. In May 1994, however, Valence's stock price dropped dramatically after it announced that it would not be able to meet the specifications contained in one of its outstanding battery contracts. Valence made a similar announcement in June 1994 with respect to another battery contract, and in August 1994 announced that it was abandoning its new battery technology.
On May 3, 1994, plaintiffs filed suit for securities fraud pursuant to Section 10(b) of the 1934 Act and Rule 10b-5 promulgated thereunder. The United States District Court for the Northern District of California subsequently granted Valence's motion for summary judgment, holding that plaintiffs' claims were barred by the statute of limitations because the March 1993 Forbes article placed plaintiffs on "inquiry notice" of the possibility of fraud more than one year before they filed suit. Plaintiffs appealed to the Ninth Circuit, arguing that "actual discovery" was the proper standard to start the running of the statute of limitations.
On appeal, the Ninth Circuit reversed. While declining to rule on whether an "inquiry notice" or "actual discovery" standard should start the Section 10(b) limitations period running, the court held that under either standard, the Forbes article did not trigger the statute of limitations. First, the court noted, and the parties did not dispute, that the Forbes article did not allege actual fraud on the part of Valence or its principals, and hence could not constitute "actual discovery of fraud."
Nor did the article put investors on "inquiry notice," the court ruled. "[I]n order for a press article to put shareholders on inquiry notice," the court noted, "there must be some reasonable nexus between the allegations made in the article and the nature of the action subsequently brought." Because the Forbes article merely raised doubt about the viability of Valence's new batteries, the court deemed it insufficient "to excite inquiry into the specific possibility of fraud." The court bolstered its conclusion by noting the "negligible impact" the Forbes article had on the market, i.e., Valence's stock price dipped only temporarily after the article was published. "Since the market did not react adversely . . . , a reasonable investor can hardly be expected to have suspected fraud," reasoned the court. Accordingly, the Ninth Circuit ruled that the plaintiffs' claims were not time-barred and reinstated the case. *
Berry v. Valence Technology, Inc., - F.3d - , No. 97-17346, 1999 WL 249207 (9th Cir. Apr. 29, 1999).