fact, GACC's debt made such a comparison impossible.
The fallacy of all of these representations became very clear at most one year after October 11, 1989. By October 1990, GACC stock had ended a steady and consistent slide and was trading in the $ 1 and $ 2 range, down from its price one year earlier of approximately $ 12.
Nonetheless, plaintiffs continued to purchase GACC stock and, therefore, were very aware of the stock slide. Plaintiffs' complaint characterizes GACC's stock slide as a slow decline from approximately $ 12 per share in October, 1989 to approximately $ 1 per share by December, 1991. In reality, GACC stock hit the low one and two dollar mark by October 1990, much more than a year before plaintiffs filed their complaint. Although the sale of Hanna Barbera, which Lehman brokers alleged in June 1990 would provide $ 350-400 million, but ultimately only produced $ 255 million, was not completed until December 1991, this fact alone did not prevent plaintiffs from being placed on notice by the stock slide. Plaintiffs do not rely on the Hanna Barbera sale to justify their delay in filing.
Plaintiffs were on notice of the possible fallacy of Lehman's predictions regarding the effect of the Hanna Barbera sale much earlier than December 1991, as the sale was not accomplished until nearly two years after the statements were allegedly made.
Plaintiffs' complaint was filed September 21, 1992, one month within the three-year limit from plaintiff, Tregenza's initial purchase on October 11, 1989, and almost that long after Haas' and Seegers' first transactions in November, 1989. Haas and Seegers, argue in their response brief that they did not become aware of an alleged fraud until an article that appeared in the February, 1992 issue of Equities magazine called the relationship between Lehman and GACC into question.
Similarly, plaintiff Tregenza argues in the response brief that he first became aware of the possible violations when his broker, Tim Hayes, passed on a rumor in March, 1992. See Tregenza affid. P 9.
Having accepted as true plaintiffs' allegations regarding defendants' misrepresentations and omissions, there is no genuine issue of material fact as to the enormous stock slide which occurred throughout 1990. As a matter of law, plaintiffs were on inquiry notice and should have discovered the facts constituting the violation more than one year prior to the filing of their complaint. Therefore, plaintiffs' § 10(b) and Rule 10b-5 claims will be dismissed as time-barred.
The same inquiry notice standard, and a one-and-three year limitation, also applies to plaintiffs' § 12(2) Securities Act claims. 15 U.S.C. § 77m. Therefore, the statute of limitations applicable to either plaintiffs' § 10(b) or § 12(2) claims begins to run at the same time. Plaintiffs' § 12(2) claims, are also time-barred and will be dismissed.
Not only are plaintiffs required to file within the relevant statute of limitations, but they are also required to affirmatively plead facts showing compliance with the one-year statute of limitations applicable to their claims. Davidson v. Wilson, 973 F.2d 1391, 1402 n. 8 (8th Cir. 1992) (dismissing plaintiff's § 12(2) claim for failure to affirmatively allege compliance with statute of limitations); In re VMS Securities Litigation, 752 F. Supp. 1373, 1389 (N.D. Ill. 1990) (dismissing § 12(2) and § 10(b) claims and noting failure to affirmatively plead compliance with statute of limitations); Caliber Partners, Ltd. v. Affeld, 583 F. Supp. 1308, 1312 (N.D. Ill. 1984) (citing Adair v. Hunt Int'l Resources Corp., 526 F. Supp. 736, 748-49 (N.D. Ill. 1981)) (§ 12(2) claim dismissed for failure to affirmatively allege limitations compliance); In re Chaus Securities Litigation, [Current]Fed. Sec. L. Rep. (CCH) P 96,987 at 94,282, 94,286 (S.D.N.Y. Sept. 1, 1992). With the exception of P 43
of the amended complaint, plaintiffs fail to affirmatively allege when and how each plaintiff discovered the untrue statements, the reasons the untruth of the statements was not discovered earlier than one year after they were made, and the efforts made to discover the untruths. See Chaus, at 94,282. This failure to plead compliance with the applicable limitations period also justifies dismissal of plaintiffs' federal securities claims.
Additionally, defendants argue that § 12(2) does not apply to after market purchases and that, therefore, the § 12(2) claims of at least Haas and Seegers should be dismissed. Although plaintiff notes the split of authority on this issue and cites various cases including after market transactions within § 12(2), see e.g., Farley v. Bair, Patrick & Co., 1991Fed. Sec. L. Rep. (CCH) P 95,658 (S.D.N.Y. 1991); Elysian Federal Sav. Bank v. First Interregional Equity Corp., 713 F. Supp. 737, 749 (D.N.J. 1989); Ramtek Sec. Litigation, 1990Fed. Sec. L. Rep. (CCH) P 95,483 at 97,521 (N.D. Cal. 1990); Scotch v. Moseley, Hallgarten, Estabrook & Weeden, Inc., 709 F. Supp. 95, 98 (M.D. Pa. 1988); Wilko v. Swan, 127 F. Supp. 55, 58 (S.D.N.Y.), aff'd on other grounds, 346 U.S. 427, 98 L. Ed. 168, 74 S. Ct. 182 (1953), the Third Circuit authority and other cases in this district holding that § 12(2) does not apply to after market purchases are both more numerous and more persuasive, see Ballay v. Legg Mason Wood Walker, Inc., 925 F.2d 682 (3d Cir.), cert. denied, 116 L. Ed. 2d 52, 112 S. Ct. 79 (1991); Fujisawa Pharmaceutical Co. v. Kapoor, 814 F. Supp. 720, 1993 WL 45147 (N.D. Ill. 1993) (compiling cases, noting vast majority of cases generally hold § 12(2) only applies to initial offerings); Pacific Dunlop Holdings, Inc. v. Allen & Co., Inc., 1991 U.S. Dist. LEXIS 6748, 90 C 5678, 1991 WL 348493 (N.D. Ill. May 15, 1991) (app. pending). Fujisawa represented a case factually very similar to this case. In that case, two entities essentially owned all the public stock of a corporation and sold it. In Fujisawa, defendants argued that plaintiffs failed to state a § 12(2) claim because the stock was not sold in an initial offering. The court, noting a possible exception to this general rule where a majority insider sold stock, declined to hold that plaintiffs had failed to state a § 12(2) claim. In so ruling, however, the Fujisawa court reviewed the large volume of cases involving application of § 12(2) to after market transactions stating: "The great weight of authority" seems to support the position that § 12(2) does not apply to after market transactions. Fujisawa, 1993 WL 45147; see Ballay, 925 F.2d at 687-91 (express language and intent of Congress leads to finding that 12(2) applies only to initial offerings); Pacific Dunlop Holdings, Inc. v. Allen & Co., No. 90 C 5678, 1991 WL 348493 (N.D. Ill. May 16, 1991) (adopting the holding of Ballay).
The Third Circuit's decision in Ballay that § 12(2) does not apply to after market transactions was based on the language of Section 12(2), its legislative history, the structure and purpose of the Securities Act, including the specific intent to regulate initial offerings, and policy considerations. Plaintiffs argue, with some cited support, see 9 L. Loss & J. Seligman, Securities Regulation (3d ed.) 1417 (1992), that Ballay was based on the mistaken belief that the Securities Act applies exclusively to new stock issues. Supporting this argument, plaintiffs note that § 17(a) of the Securities Act is not limited to initial offerings. Plaintiffs apparently ignore Ballay's analysis of legislative history indicating that § 17 was intended to have broader application than § 12(2). 925 F.2d at 691-92. Since the Third Circuit and the great majority of district courts examining this issue have determined that § 12(2) does not apply to after market transactions, those claims of plaintiffs, Haas and Seegers, will also be dismissed for failure to state a claim.
Plaintiffs' state claims are brought under supplemental jurisdiction. 28 U.S.C. § 1367. Because plaintiffs' federal claims will be dismissed before trial, this court declines to exercise jurisdiction over those supplemental state claims. Martin-Trigona v. Champion Federal Sav. & Loan Ass'n, 892 F.2d 575, 578 (7th Cir. 1989); Midwest Grinding, Inc. v. Spitz, 769 F. Supp. 1457, 1470 (N.D. Ill. 1991). They will be dismissed without prejudice.
IT IS THEREFORE ORDERED that the motions of defendants, Great American Communications Company and Shearson Lehman Brothers, Inc., to dismiss the amended complaint of plaintiffs, Tregenza, Haas and Seegers [27, 28] are granted. Class certification is denied. The Clerk of the Court is directed to enter judgment in favor of defendants and against plaintiffs, dismissing plaintiffs' federal claims stated in Counts I and II. Plaintiffs' individual state claims in Counts III and IV and class allegations are dismissed without prejudice.
William T. Hart
UNITED STATES DISTRICT JUDGE
Dated: APRIL 30, 1993