Prospectus and subsequently filed documents could not have failed to alert an investor of ordinary intelligence to the probability of fraud and the advisability of inquiry. Even assuming that the information contained in the documents filed by the Company and disseminated to investors in connection with the Offering was materially misleading in several respects--and that material information was omitted from those documents and withheld from actual and potential investors in violation of common and/or federal law--it appears to this Court beyond cavil that no reasonable adult reader of the 1988 Prospectus and later filed documents could have remained in ignorance of the likelihood that something was severely amiss at GDC. This conclusion is altered neither by the Company's reiteration, throughout its SEC filings, of formulaic disclaimers down-playing the significance of the lawsuits filed against it and asserting its intention to defend itself vigorously in both civil and criminal proceedings, nor by the consistency of Bond trading prices throughout the period following the publication of the 1988 Prospectus. Assuming--in the context of their opposition to the motions to dismiss--the truth of Plaintiffs' contention that Bond trading prices remained relatively steady during the months following dissemination of the 1988 Prospectus and through most of 1989, Plaintiffs were not entitled to rely upon that fact in the face of the volume of information available to them that suggested the likelihood of fraud.
Plaintiffs' evocation of the doctrine of equitable tolling to redeem their otherwise untimely federal securities claims is unavailing. The tolling of a statute of limitations based on allegations that a plaintiff's cause of action has been fraudulently concealed during the limitations period has been described as involving three elements: "(1) the wrongful concealment by the defendant of its actions, (2) the failure by plaintiff to discover the operative facts underlying the action within the limitations period, and (3) plaintiff's due diligence in trying to discover the facts." Dymm v. Cahill, 730 F. Supp. 1245, 1255-56 (S.D.N.Y. 1990) (citations omitted). Although a plaintiff's allegation that the concealment of a fraud was active and purposeful will relieve him of the obligation to establish his diligence in discovering the basis for his cause of action, Farr v. Shearson Lehman Hutton, Inc., 755 F. Supp. 1219, 1228 (S.D.N.Y. 1991), such allegation must include specific details of activities undertaken by the defendant to keep an already completed fraud from being discovered. Friedman v. Arizona World Nurseries Ltd., 730 F. Supp. 521, 544 (S.D.N.Y. 1990), aff'd, 927 F.2d 594 (2d Cir. 1991). Thus, for example,
if plaintiffs allege that discovery of the fraud was delayed by the actions of a particular defendant, they must set forth in the complaint the essential facts supporting such allegations[,] . . . [and] the complaint must show that a particular defendant "took positive steps after the commission of the initial fraud to keep it concealed."
Id. (citing Krome v. Merrill Lynch and Co., 637 F. Supp. 910, 914 (S.D.N.Y. 1986) (emphasis added)).
In the instant case, Plaintiffs assert that GDC and the Individual Defendants actively concealed the fraudulent activities underlying Plaintiffs' cause of action by repeatedly emphasizing the superior acumen of GDC sales representatives, by denying the merits of pending litigation against the Company, and by omitting from the 1988 Prospectus paragraphs included in a previously issued prospectus (the "1985 Prospectus") that would have been necessary to make the 1988 Prospectus not materially misleading. In reliance on the rule previously stated, Plaintiffs make no effort to allege diligence in the discovery of the purported fraud: "because the active concealment through blatant written denials of fraudulent behavior occurred throughout the 1988 Prospectus, [the 1988] 10-K, and [the] 1989 10-Q's," they say, "Plaintiffs are relieved of having to demonstrate any due diligence in uncovering the fraud." (Pls.' Mem. in Opp'n at 102.)
The problem with Plaintiffs' equitable tolling argument is that it refers to no allegations of the Complaint detailing activities engaged in by the Defendants to disguise their wrongdoing after the completion of the purported fraud. Instead of pointing to "positive steps [undertaken] after the commission of the initial fraud to keep it concealed," Friedman, 730 F. Supp. at 544, Plaintiffs purport to demonstrate active concealment through a reiteration of the same list of representations and omissions--including the absence from the 1988 Prospectus of information included in the 1985 Prospectus, the misrepresentations about the sources of certain financial successes, and the inadequate disclosures and misleading assurances concerning the merits of pending litigation and investigations--that is alleged to constitute the fraud itself. Equitable tolling, however, applies only where the fraud constituting the basis of a plaintiff's cause of action is undiscoverable by him during the statutory period because of steps undertaken by the defendant actively to conceal it. Plaintiffs' misunderstanding of this standard is manifest in their argument that "the Complaint in this case is replete with allegations of conduct . . . which clearly constitute [sic] affirmative actions to conceal GDC's pervasively wrongful business practices . . . ." (Pls.' Mem. in Opp'n at 100) (emphasis omitted): It is of course not the concealment of GDC's business practices, but rather the concealment of the fraud purportedly contained in the 1988 Prospectus and other GDC filings, that would support Plaintiffs' invocation of the equitable tolling doctrine and entitle them to relief.
For all of the foregoing reasons, the motions to dismiss of all Defendants are granted on grounds that Plaintiffs' claims pursuant to the federal securities laws are untimely, the Complaint in this action having been filed after the expiration of the applicable statutory limitations periods.
There being no independent basis of federal subject matter jurisdiction to support the non-federal claims asserted in the Complaint, the Court declines, pursuant to 28 U.S.C. § 1367(c) (Supp. 1991) (effective Dec. 1, 1990) to exercise supplemental jurisdiction over those claims, and the Complaint is dismissed in its entirety.
LAWRENCE M. McKENNA
Dated: New York, New York
July 8, 1992