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In a suit that directly stemmed from the spectacular demise of Enron Inc., a federal appeals court has upheld the dismissal of securities claims brought by investors in a mutual fund that lost $900 million by waiting to sell its Enron holdings until just two days before the company’s bankruptcy. In Benak v. Alliance Capital Management, a unanimous three-judge panel of the 3rd U.S. Circuit Court of Appeals concluded that the mutual fund investors themselves had waited too long before going to court. The court said it recognized that an investor in a mutual fund ordinarily has “less reason to monitor the health of companies in which he or she is invested” and is “less likely to have accurate, contemporaneous information regarding where his or her money is invested.” But that “knowledge gap” was bridged for investors of Alliance Capital Management, the court said, by media accounts around the time of Enron’s bankruptcy that specifically noted Alliance’s holdings in Enron. As a result, the 3rd Circuit said, the one-year statute of limitations had already run when the Alliance investors filed suit more than a year after Enron’s bankruptcy. “Although we cannot say that inquiry notice was triggered as a matter of law prior to Enron’s bankruptcy, [the investors] were surely on notice shortly thereafter,” Circuit Judge Maryanne Trump Barry wrote. “The combination of [the investors'] knowledge that Alliance had Enron holdings as of the prior summer, the news reports regarding Enron in the fall of 2001, the company’s highly publicized bankruptcy, the publicity in the immediate aftermath of the bankruptcy referencing Alliance’s Enron-related losses, and the filing of [a derivative suit] placed appellants on inquiry notice prior to Dec. 13, 2001,” Barry wrote. Barry’s 15-page opinion was joined by Circuit Judge Thomas Ambro and visiting U.S. District Judge Louis Pollak of the Eastern District of Pennsylvania. The ruling continues a winning streak for Alliance and its lead lawyer, Mark Kirsch of Clifford Chance in New York. Last year a Florida state court jury exonerated Alliance in a $280 million suit brought by the state’s pension fund. The jury also awarded Alliance more than $1 million in fees for its services that the pension fund had refused to pay. Kirsch, along with attorney Barry Richard of Greenberg Traurig’s Tallahassee, Fla., office, argued that Alliance’s fund manager, Al Harrison, had established a solid track record of sound investments that had helped to swell the Florida pension fund’s investments through Alliance from $344 million in 1984 to more than $3.5 billion in 2001. Although Harrison’s investment decisions led to the Florida pension fund’s loss of more than $280 million, the defense team noted that the loss was only about one-third of 1 percent of the $100 billion pension fund. The defense team also noted that Harrison’s trades were consistent with the language of Alliance’s contract with the pension fund and that Alliance had met the contract’s performance goal. The 3rd Circuit ruling upholds a decision handed down last year by U.S. District Judge Jose Linares of the District of New Jersey, who dismissed the class action securities suit against Alliance brought by individual investors. Linares reviewed newspaper accounts and public information cited in the complaint as well as additional newspaper articles submitted by Alliance, and concluded that the information — along with the knowledge that the Alliance mutual fund held Enron shares before the bankruptcy filing — was more than sufficient to place the investors on “inquiry notice” prior to Dec. 13, 2001. In his opinion dismissing the suit, Linares noted that articles in the Wall Street Journal, the Houston Chronicle, the San Francisco Chronicle, and the New York Post reported that the Alliance fund had incurred paper losses ranging from $445 million to more than $1 billion. The 3rd Circuit agreed, finding that Linares was correct to apply an “inquiry notice” standard when deciding the statute-of-limitations issue and that the “storm warnings” in the news accounts were sufficient to put the Alliance investors on notice immediately after Enron’s bankruptcy. “We have been careful not to look at the articles from the perspective of what we now know about Enron,” Barry wrote. “Enron, after all, had yet to become Enron. What we have since learned should not obscure the fact that many persons were surprised by Enron’s fall.” Barry said she recognized that mutual fund investors are in a different position from that of a direct investor because a mutual fund investor has less information about the fund’s specific holdings. “By its very nature, a mutual fund permits an investor to pass along the responsibility for maintaining consistent knowledge of the condition of different companies. Fund investors may have little idea at any one time in what securities their money is invested, a benefit for which they have paid,” Barry wrote. Plaintiffs’ lawyers noted that Alliance investors received reports only twice a year and could not receive information on the fund’s holdings between such reports. But Barry found that Alliance had successfully shown that its investors didn’t need to wait for the next semiannual report because the media accounts had disclosed the extent of Alliance’s losses. “There is a difference, in our view, between storm warnings showing that a company is in trouble and public reports regarding a fund’s holdings that would enable one to know whether he or she is invested in the troubled company (a fact a direct investor always would be deemed to know),” Barry wrote.
Shannon P. Duffy is a reporter for The Legal Intelligencer , the Philadelphia-based ALM publication where this article first appeared.

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