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A securities fraud suit by investors against Dean Witter Reynolds can go forward if the investors can prove they did not have enough information to file the case until after the Sarbanes-Oxley corporate responsibility law went into effect in 2002. That is the effect of a June 1 ruling by the 11th U.S. Circuit Court of Appeals in its first interpretation of the landmark law passed in response to scandals at Enron Corp. and other companies accused of defrauding investors. Conor R. Crowley, who argued the investors’ case at the 11th Circuit in 2003, said the court had issued “a very strong opinion for the plaintiffs.” Given how hard Crowley was questioned by the 11th Circuit panel at oral argument 18 months ago, the decision could be considered something of a surprise. One by one, Chief Judge J.L. Edmondson, Judge Stanley F. Birch Jr. and visiting 9th Circuit Senior Judge Joseph Jerome Farris pressed Crowley to point specifically to where the Sarbanes-Oxley law allowed suits such as the one against Dean Witter, now known as Morgan Stanley DW Inc., to be brought after a statute of limitations appeared to have run. “You’re going to have to show me something with neon light and underlined by Congress,” Edmondson had demanded. “Congress has to be explicit,” Birch had told Crowley. Farris had noted that Congress knew how to use the word “revive” if it wanted to revive time-barred suits. REJECTING DEAN WITTER But the 43-page decision authored by Birch declared that he and Farris were satisfied Congress had said enough to reject Dean Witter’s argument that the suit should be tossed out as too late. Following a practice he has used in other cases, Edmondson issued a one-sentence statement saying he concurred only “in the result” of the case, suggesting he did not agree with Birch and Farris’ reasoning. Referring to the congressional debate over the Sarbanes-Oxley Act, Birch noted that the law was passed “in the wake of Enron to expand the period for unknowing victims of fraudulent conduct … to seek recourse and remedies in federal court.” “Given this clear Congressional purpose of the SOA,” Birch added later, “we want to be cautious and certain before denying the plaintiff class an opportunity to have the facts revealed in discovery and, potentially, a decision following trial.” Birch’s decision shifted the important question from the statute of limitations to when the investors knew enough about the unauthorized trades to consider filing suit, which Birch called being on “inquiry notice.” The trades, for which a Dean Witter broker, Mark Rodgers of Belleair, Fla., used investors’ accounts to manipulate the price of e-Net stock, occurred between January and August of 1998. ‘SHORT SQUEEZE’ TACTIC According to the 11th Circuit decision and an order of the U.S. Securities and Exchange Commission, Rodgers engaged in a “short squeeze,” in which prices of a stock move up sharply, and traders, betting the price will go down, are forced to buy the stock to cover their losses, leading to even higher prices. Rodgers executed this move by purchasing large numbers of e-Net shares without the permission of his clients, who wanted conservative investments. Rodgers purchased many of the shares on margin and falsified documents to hide his actions, the SEC order said. When Rodgers left Dean Witter for another company, he stopped the activity that caused the e-Net stock price to rise — and the stock fell from $17.875 to $2.718 in less than a month. The investors, many of whom had borrowed to pay for their investing, lost as much as $15 million, according to the SEC. In 1998, securities law required suits to be filed by one year after discovery of the questionable conduct and three years after the conduct took place, Birch wrote. In July 2002, President Bush signed into law the Sarbanes-Oxley Act, which allows investors to bring suits within two years of the discovery of questionable conduct, or five years from the conduct. 2002 SETTLEMENT On Oct. 1, 2002, the SEC, Dean Witter, a branch office manager and Rodgers settled the matter. The SEC censured Dean Witter, fined it $500,000, barred Rodgers from the securities business and ordered him to pay $631,000 — an amount the order said he could not pay. Six weeks later, the investors brought their suit. According to Birch, the November 2002 filing fell outside the old statute of limitations, but may very well be alive under the new law. Addressing arguments that the investors waited too long to file the case, Birch suggested, “With considerable financial losses at stake, it seems illogical that they would have neglected to file if they had known of Dean Witter’s securities fraud, particularly given the alacrity with which the suit was filed upon issuance of the SEC Order” censuring the company. The court sent the case back to a federal trial judge in Florida. If the judge decides the investors were on “inquiry notice” before the effective date of Sarbanes-Oxley, the case is time-barred, Birch wrote in a footnote. But he added that if the judge determines that the SEC order constitutes inquiry notice, the case is viable. Tello v. Dean Witter Reynolds, No. 03-12545 (11th Cir., June 1, 2005). Crowley no longer represents the potential class of investors because he has switched firms, from Washington’s Finkelstein, Thompson & Loughran to Chicago’s Much Shelist. A current lawyer for the investors, Burton H. Finkelstein, could not be reached. William H. Pratt and Eric F. Leon, Kirkland & Ellis lawyers who represented Dean Witter Reynolds, now known as Morgan Stanley DW Inc., also could not be reached. A listing for Mark Rodgers could not be found.

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