Former employees of a private company that merged with defendant company brought securities fraud claims under § 10(b) of the Securities and Exchange Act and Rule 10b-5 against defendant company and its principals after steep share value declines followed certain company statements, announcements and filings between February 2001 and January 2005. Defendants moved to dismiss, arguing that the statute of limitations had long ago expired.

The Court first noted that, in 2001, the applicable statute of limitations was either one year from the date of discovery or three years from the date of the fraud. The Court then addressed whether, as defendants argued, the one year prong applied because plaintiffs had been placed on “inquiry notice.”

The court ruled that a plaintiff is charged with the duty to exercise reasonable diligence in determining whether a potential claim exists “[w]hen the circumstances would suggest to an investor of ordinary intelligence the probability that she has been defrauded.” Defendants argued that several such circumstances, known as “storm warnings,” existed. Defendants first argued that the company’s announcement on February 15, 2001 that its growth would be less robust than projected and the widespread media reporting of that announcement were “storm warnings.”

The Court disagreed, noting that neither the announcements nor the media reports suggested any fraud. However, the Court agreed that plaintiffs’ duty of inquiry – and, thus, the one year statute of limitations prong – was triggered by the filing of securities fraud class actions against the defendant company in February 2001. Although the class periods in those actions commenced two months after plaintiffs received their stock in the merger, the fraud allegations asserted by the plaintiffs and in the class actions were so similar as to put plaintiffs on inquiry notice. (Domenikos v. Roth, 2007 WL 221418 (S.D.N.Y. Jan. 26, 2007))