and Gray that he had access to two senior Zitel officers named
King and Harris who provided information to Cohan about the
Cohan also told Gray, Friedman and DeFreitas that announcements
would be made that Zitel had signed contracts with "Manor Care"
and "Chubb" to handle their "year 2000 problem." Cohan told them
that in reaction to this announcement, Zitel stock would increase
in price to between $50 and $80 by the end of 1996, and to $150
According to plaintiffs, Cohan had no basis in fact to make any
of his statements concerning Zitel. Furthermore, he failed to
disclose that a Wheat First trader told him that Wheat First
would cease to be a market maker in Zitel due to the company's
volatility, and because Wheat First had incurred large losses by
investing in Zitel. Cohan also failed to inform plaintiffs that
Wheat First had no securities analysts or senior officers
assigned to cover Zitel. Cohan's only real source of information,
unbeknownst to plaintiffs, was publicly disseminated news letters
and periodicals. Furthermore, Cohan never disclosed negative
information about Zitel appearing in financial periodicals or
Zitel's reports filed with the Securities and Exchange
In reliance on Cohan's statements, Friedman sold shares of
another stock he owned, and purchased 4,000 shares of Zitel on or
about January 2, 1997, through his account at Charles Schwab &
Co., Inc. (the "Schwab Account") at a price of approximately $48
per share. On January 24, 1997, after selling additional shares
of another stock he owned, Friedman purchased another 2,000
shares of Zitel through his Schwab Account at a price of
approximately $43 per share. Friedman continues to own the shares
of Zitel and estimates that he has incurred losses exceeding
Relying on Cohan's statements, DeFreitas purchased 1,000 shares
of Zitel on December 24, 1996 through his account at Charles
Schwab & Co., Inc. DeFreitas initially sold his shares of Zitel
at a profit, but then bought them back based on statements made
by Cohan that the stock would be worth $150 by mid-1997 and that
Zitel was entering into a joint venture with IBM. In April 1997,
Zitel stock suffered a "precipitous decline" in price. As a
result, Schwab liquidated DeFreitas' position in Zitel at a price
of approximately $14 per share when DeFreitas was unable to meet
a margin call. DeFreitas incurred losses of $75,723, exclusive of
margin interest charges.
III. The Arbitration Proceeding
Friedman, DeFreitas and Gray (the "arbitration claimants")
filed a Statement of Claim with the NASD Office of Dispute
Resolution on or about September 17, 1997, alleging fraudulent
misrepresentations and omissions of material fact made by Cohan
about Zitel. See Affidavit of Edwin A. Zipf, Ex. A ("Zipf
Aff."). Wheat First and Cohan filed a joint answer on or about
January 9, 1998. At the same time, Wheat First filed an executed
Submission Agreement which stated, among other things, that the
parties agreed to present the matter to arbitration "in
accordance with the Constitution, By-Laws, Rules, Regulations
and/or Code of arbitration Procedure of the sponsoring
organization." See Zipf Aff. Ex. B.
Wheat First filed a Motion to Dismiss the arbitration action on
or about May 8, 1998. See Zipf Aff. Ex. C. The arbitration
claimants responded to the Motion to Dismiss on or about June 3,
1998. See Zipf Aff. Ex. E. On or about July 20, 1998, during a
pre-hearing conference, the arbitration panel verbally issued its
decision, which was subsequently served on the parties on August
31, 1998, dismissing the claims of Friedman and DeFreitas against
Wheat First and Cohan, "pursuant to rule 10305 of the Code of
Arbitration Procedure as there was no customer agreement which
required arbitration at the NASD."*fn3 See Zipf Aff. Ex. F,
Friedman and DeFreitas filed this action on December 8, 1998.
On March 1, 1999, at the request of this Court and the parties,
the NASD panel issued a further statement which declared,
"[b]ased on the evidence presented to the panel in the initial
pleadings the panel did not find evidence to provide merit to the
case; however, the ruling was based on jurisdiction." See Zipf.
Aff. Ex. G.
I. Standard for Motion to Dismiss
The motion to dismiss the complaint was brought pursuant to
Federal Rule of Civil Procedure 12(b)(6). Rule 12(b)(6) provides
for the dismissal of a complaint for "failure to state a claim
upon which relief can be granted." FED. R. CIV. P. 12(b)(6). In
deciding such a motion, the Court must accept all well-pleaded
facts as true and construe the complaint in the light most
favorable to the nonmoving party. See Hirsch v. Arthur Andersen
& Co., 72 F.3d 1085, 1092 (2d Cir. 1995). A motion to dismiss
under Rule 12 must be denied "unless it appears beyond doubt that
the plaintiff can prove no set of facts in support of his claim
which would entitle him to relief." Scheuer v. Rhodes,
416 U.S. 232, 236, 94 S.Ct. 1683, 40 L.Ed.2d 90 (1974) (quoting Conley v.
Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957));
see also Morales v. New York State Dep't of Corrections,
842 F.2d 27, 30 (2d Cir. 1988) (citations omitted).
Defendant's motion to dismiss is based primarily on statute of
limitations defenses to the complaint. "While a statute of
limitations defense may be raised in a motion to dismiss . . .
such a motion should not be granted unless it appears beyond
doubt that the plaintiff[s] can prove no set of facts in support
of [their] claim which would entitle [them] to relief." Ortiz v.
Cornetta, 867 F.2d 146, 148 (2d Cir. 1989) (quoting Abdul-Alim
Amin v. Universal Life Ins. Co., 706 F.2d 638, 640 (5th Cir.
1983) (internal quotations omitted)); see also Egelston v. State
University College, 535 F.2d 752, 754 (2d Cir. 1976); Banco De
Desarrollo Agropecuario v. Gibbs, 709 F. Supp. 1302, 1309-10
II. Statute of Limitations Defense to Section 10(b)/Rule 10b-5
A. Applicable Limitations Period
The parties agree that plaintiffs' claim is governed by the
"1-and-3-year" structure for Section 10(b) claims first
enunciated in Lampf, Pleva, Lipkind, Prupis & Petigrow v.
Gilbertson, 501 U.S. 350, 111 S.Ct. 2773, 115 L.Ed.2d 321
(1991). In Lampf, the Court borrowed from related sections of
the Exchange Act to determine that claims brought pursuant to
Section 10(b) "must be commenced within one year after the
discovery of the facts constituting the violation and within
three years after such violation." 501 U.S. at 364, 111 S.Ct.
2773; see also Dodds v. Cigna Sec., Inc., 12 F.3d 346, 349 (2d
Cir. 1993), cert. denied, 511 U.S. 1019, 114 S.Ct. 1401, 128
L.Ed.2d 74 (1994); Ceres Partners v. GEL Assoc., 918 F.2d 349,
362 (2d Cir. 1990); Ainbinder v. Kelleher, No. 92 CIV.
7315(SS), 1997 WL 420279, at *4 (S.D.N.Y. July 25, 1997),
aff'd, 152 F.3d 917, 1998 WL 398799 (2d Cir. June 8, 1998);
Komanoff v. Mabon, Nugent & Co., 884 F. Supp. 848, 852-53
(S.D.N.Y. 1995); Falik v. Parker Duryee Rosoff & Haft,
869 F. Supp. 228, 232 (S.D.N.Y. 1994).
The statutory limitations period for claims under Section 10(b)
begins to run "when the claim accrued or upon discovery of the
facts constituting the alleged fraud." Dodds, 12 F.3d at 350.
For the purpose of triggering the limitations period, discovery
includes not only actual notice, but constructive and inquiry
notice as well. Komanoff,
884 F. Supp. at 853; see also Dodds, 12 F.3d at 350 ("A plaintiff
in a federal securities case will be deemed to have discovered
fraud for purposes of triggering the statute of limitations when
a reasonable investor of ordinary intelligence would have
discovered the existence of the fraud.").
In the present case, there appears to be some dispute between
the parties concerning when the limitations period began to run.
Plaintiffs allege that they did not and could not have reasonably
discovered the alleged fraudulent activities of defendant until
September 1997. Defendant counters that it had to have been
apparent to plaintiffs in April 1997 that Cohan's predictions
regarding Zitel were not going to materialize. The Court
construes the complaint in the light most favorable to
plaintiffs, as it must on a Rule 12 motion to dismiss, and
assumes that September 1997 is the correct start date. However,
plaintiffs did not file their complaint until December 9, 1998.
Therefore, even if the Court accepts September 1997 to be the
relevant start date, plaintiffs failed to comply with the
one-year from discovery period for Section 10(b) claims.
Accordingly, plaintiffs' complaint must be dismissed unless it is
saved by some tolling or estoppel theory.
B. Tolling the Limitations Period
Plaintiffs rely on Rule 10307(a) (formerly Section 18(a)) of
the NASD Code of Arbitration Procedure to support their tolling
theory. Rule 10307(a) states:
Where permitted by applicable law, the time
limitations which would otherwise run or accrue for
the institution of legal proceedings shall be tolled
where a duly executed Submission Agreement is filed
by the Claimant(s). The tolling shall continue for
such period as the Association shall retain
jurisdiction upon the matter submitted.
[Amended eff. Oct. 1, 1984] (emphasis added).
Plaintiffs assert that pursuant to Rule 10307(a), filing an
arbitration claim is, for statute of limitations purposes, the
functional equivalent of filing a complaint in court. However, by
its plain language Rule 10307(a) does not toll the statute of
limitations unless such tolling is "permitted by applicable
law."*fn4 The Court must therefore determine whether the law
applicable to Section 10(b) claims permits tolling of the
1. Applicable Law
Plaintiffs contend that the "applicable law" is Section 204(b)
of the New York Civil Practice Law and Rules ("New York
C.P.L.R."), which operates to toll the statute of limitations
during the pendency of an arbitration that results in a
determination that there was no obligation to arbitrate. See
N YC.P.L.R. 204(b) (McKinney
1990).*fn5 Plaintiffs reason that New York is where the NASD is
located, where the arbitration claim was filed and where the
arbitration proceeding was held. In addition, plaintiffs point
out that any application to confirm or vacate the arbitration
award would have to be brought before a federal court sitting in
In further support of their position, plaintiffs cite
Individual Sec. v. Ross, 152 F.3d 918, 1998 WL 385835 (2d Cir.
May 11, 1998), in which the court determined that the "applicable
law" under Rule 10307(a) was New York C.P.L.R. 1998 WL 385835, at
*1-2. However, Ross is distinguishable from the present case
because it involved a diversity action premised on a
state-created right, and therefore, the court was compelled to
apply New York State's statute of limitations and tolling
principles. Id. at *1 ("In this diversity action, we apply the
forum state's statute of limitations.") (citing Iacobelli
Constr., Inc. v. County of Monroe, 32 F.3d 19, 27 (2d Cir.
In the present case, where jurisdiction is based on the
assertion of rights under Section 10(b) of the Exchange Act, the
"applicable law" is determined by looking to federal tolling
principles. Even federal courts borrowing state statutes of
limitations for Section 10(b) claims prior to the Lampf
decision recognized that federal tolling principles applied.
See, e.g., Anixter v. Home-Stake Prod. Co., 977 F.2d 1549, 1551
(10th Cir. 1992) ("Federal law determines what circumstances will
toll a state statute of limitations applied to private actions
under § 10(b)."), cert. denied, 507 U.S. 1029, 113 S.Ct. 1841,
123 L.Ed.2d 467 (1993) (citations omitted); Morin v. Trupin,
799 F. Supp. 342, 347 (S.D.N.Y. 1992) ("Although federal courts
look to state law for the applicable limitations period, they
look to federal law for guidance as to the appropriate accrual
and equitable tolling principles.") (citing IIT v. Cornfeld,
619 F.2d 909, 929 (2d Cir. 1980); Baskin v. Hawley,
807 F.2d 1120, 1130-31 (2d Cir. 1986)); Mittendorf v. J.R. Williston &
Beane Inc., 372 F. Supp. 821, 833 (S.D.N.Y. 1974) (stating that
the federal equitable tolling doctrine applies to Section 10(b)
claims even though the court borrowed the state statute of
After the Lampf Court established a uniform federal statute
of limitations period for Section 10(b) claims, it follows a
fortiori that federal tolling principles govern plaintiffs'
Section 10(b) claims in this case. Any confusion concerning this
issue was settled by the Lampf Court itself. The Court
expressly rejected the application of state statutes of
limitations to federal Exchange Act claims. See generally
Lampf, 501 U.S. at 354-62, 111 S.Ct. 2773. Therefore, it is this
Court's task to determine if federal law permits tolling of the
limitations period for Section 10(b) claims under the doctrine of
equitable tolling or some other tolling principle.
2. Equitable Tolling
Under the doctrine of equitable tolling, "`a statute of
limitations does not run against a plaintiff who is unaware of
his cause of action'" due to the fraudulent acts of the
defendant. Cerbone v. International Ladies' Garment Workers'
Union, 768 F.2d 45, 48 (2d Cir. 1985) (quoting Long v. Abbott
Mortgage Corp., 459 F. Supp. 108, 113 (D.Conn. 1978)).
As the Supreme Court has made clear, equitable tolling is not
available to a claimant asserting a Section 10(b) claim. In
Lampf, the Court concluded that "the equitable tolling doctrine
is fundamentally inconsistent with the 1-and-3-year structure"
applicable to Section 10(b) claims.
501 U.S. at 363, 111 S.Ct. 2773; see also Ainbinder, 1997 WL
420279, at *6 n. 3; In re Integrated Resources, Inc. Real Estate
Ltd. Partnerships Sec. Lit., 851 F. Supp. 556, 567 (S.D.N Y
The Court reasoned that tolling does not apply to the one-year
from discovery period because, by its terms, the one-year period
"begins after discovery of the facts constituting the violation,
making tolling unnecessary." 501 U.S. at 363, 111 S.Ct. 2773.
Furthermore, the three-year period of repose was deemed
inconsistent with equitable tolling "[b]ecause the purpose of the
3-year limitation is clearly to serve as a cutoff," id., and it
would have no significance as an outside limit if it could be
Moreover, even if equitable tolling was a viable theory for
Section 10(b) claimants, it would not be available for plaintiffs
in the present case. Plaintiffs were clearly aware that they had
a cause of action, as evidenced by their decision to file an
arbitration claim with the NASD in September 1997. Therefore,
plaintiffs cannot and, in fact, do not claim that any action by
the defendant, fraudulent or otherwise, prevented them from
knowing that they had a cause of action. Thus, equitable tolling
is not available to plaintiffs because it is not permitted by
applicable law,*fn6 and in any event, plaintiffs have not met
the requirements necessary to invoke its operation. Plaintiffs
have not cited, and the Court is not aware of, any other doctrine
applicable to Section 10(b) claims that will toll plaintiffs'
3. Contractual Tolling
In order to avoid the effect of the Lampf decision,
plaintiffs argue that the limitations period should be tolled in
this case because by entering into the Submission Agreement, and
thereby agreeing to be bound by Rule 10307(a), the parties
expressly agreed to toll the limitations period. Plaintiffs cite
ESI Montgomery County, Inc. v. Montenay Int'l Corp.,
899 F. Supp. 1061 (S.D.N.Y. 1995) in which the court determined that
the Lampf decision does not apply to other types of tolling,
such as an express waiver of the statute of limitations. Id. at
1066. However, ESI Montgomery is inapposite to the present
case. In determining that the Section 10(b) claim was not clearly
barred by the statute of limitations, the court relied on a
letter agreement in which the parties had expressly agreed to
waive the statute of limitations defense. Id. In the present
case, the parties merely agreed to be bound by the NASD Code of
Arbitration Procedure, which, as discussed above, only tolls the
statute of limitations if the applicable law expressly permits
such tolling. There is nothing additional in defendant's conduct
or in the language of the Submission Agreement to suggest that
defendant expressly agreed to waive the statute of limitations
defense or the "[w]here permitted by applicable law" requirement
of Rule 10307(a).
C. Equitable Estoppel
Plaintiffs also attempt to avoid dismissal by arguing that
equitable estoppel precludes defendant from raising the statute
of limitations defense.*fn7 Equitable
estoppel is available if plaintiffs were aware that they had a
cause of action, but actions by defendant caused plaintiffs to
delay in bringing their lawsuit. Cerbone, 768 F.2d at 49-50. It
operates to toll the statute of limitations "when a party
claiming to benefit from the statute carries on in such a way as
to lull the other party into delay or misrepresent the situation
in such a manner that equity requires tolling of the statute."
Meridien Int'l Bank, Ltd. v. Government of the Republic of
Liberia, 23 F. Supp.2d 439, 447 (S.D.N.Y. 1998). In order to
invoke equitable estoppel, plaintiffs must show that: "(1) the
defendant made a definite misrepresentation of fact, and had
reason to believe that the plaintiff[s] would rely on it; and (2)
the plaintiff[s] reasonably relied on that misrepresentation to
[their] detriment." Buttry v. General Signal Corp.,
68 F.3d 1488, 1493 (2d Cir. 1995) (citing Heckler v. Community Health
Serv., 467 U.S. 51, 59, 104 S.Ct. 2218, 81 L.Ed.2d 42 (1984)).
In the present case, equitable estoppel is not available to
plaintiffs. Plaintiffs argue that by virtue of defendant's NASD
membership and by executing the Submission Agreement, defendant
implicitly led plaintiffs to believe they could rely on the
arbitration process to toll the limitations period. Plaintiffs
have not alleged any definite misrepresentation on the part of
defendant that caused them to delay in filing their complaint. It
is insufficient that defendant's actions implicitly led
plaintiffs to believe that they could forbear from bringing their
claim. See Ainbinder, 1997 WL 420279, at *8 (rejecting
plaintiff's equitable estoppel argument where "plaintiff [made]
no allegation that defendants made any assurances to him which
lulled him into allowing the statute of limitations to expire").
In Pfister v. Allied Corp., 539 F. Supp. 224 (S.D.N.Y. 1982),
plaintiff claimed that defendant should be precluded from
asserting the statute of limitations defense for the period of
time during which defendant participated in settlement
discussions because such discussions indirectly caused
plaintiff's delay. Id. at 227. The court rejected the argument
because plaintiff did not allege that defendant acted in bad
faith or deceitfully lured plaintiff into settlement discussions
or acted in any way to cause plaintiff to miss the filing
deadline. Id. Indeed, it was plaintiff who requested that
defendant engage in settlement discussions. Id. The present
case is analogous. It was plaintiffs' choice to file their claim
in arbitration and defendant merely agreed to take part in that
process.*fn8 Defendant did not make any misrepresentation or
engage in any action that caused plaintiffs to miss the September
1998 filing deadline.
In any event, equitable estoppel is not available to plaintiffs
because it is an equitable doctrine, employed to avoid injustice
in a particular case, and plaintiffs invoke it in a case where no
injustice will result. Heckler, 467 U.S. at 59, 104 S.Ct. 2218;
see also In re Ionosphere Clubs, Inc., 85 F.3d 992, 999 (2d
Cir. 1996) ("Equitable estoppel is grounded on notions of fair
dealing and good conscience and is
designed to aid the law in the administration of justice where
injustice would otherwise result.") (citing Readco, Inc. v.
Marine Midland Bank, 81 F.3d 295, 301 (2d Cir. 1996); Marine
Transp. Serv. Sea-Barge Group, Inc. v. Python High Performance
Marine Corp., 16 F.3d 1133, 1138 (11th Cir. 1994)). As defendant
correctly points out, plaintiffs knew that their arbitration
claim was going to be dismissed as early as July 20, 1998 when
the arbitration panel verbally issued its decision. At that
point, there was still time remaining on the limitations period,
which, assuming plaintiffs' discovery date is correct, expired in
September 1998. Plaintiffs nevertheless delayed filing their
complaint in this Court until December 9, 1998. Plaintiffs do not
allege any set of facts to explain this lack of diligence on
their part. Therefore, the Court finds that dismissal will not be
unfair to plaintiffs and no injustice will result.
III. Plaintiffs' Section 20(a) Claims
Having determined that plaintiffs' Section 10(b) claims should
be dismissed on statute of limitations grounds, the Court
dismisses plaintiffs' Section 20(a) claim as well. "Because
Section 20 merely creates a derivative liability for violations
of other sections of the Act, claims under Section 20 are
governed by the limitations periods for those other sections."
Dodds, 12 F.3d at 350 n. 2 (citation omitted). Therefore, the
Court's decision to dismiss plaintiffs' Section 10(b) claim
applies with equal force to plaintiffs' Section 20(a) claim.
IV. Plaintiffs' State Law Claims
Having dismissed all federal claims brought by plaintiffs, the
Court declines to exercise supplemental jurisdiction over
plaintiffs' state law claims and dismisses those claims pursuant
to 28 U.S.C. § 1367(c)(3). See Shahzad v. H.J. Meyers & Co.,
Inc., 923 F. Supp. 57, 60-61 (S.D.N.Y. 1996); Falik, 869
F. Supp. at 236.
For the foregoing reasons, defendant's motion to dismiss the
complaint is granted and the complaint is dismissed with
prejudice and costs.
It is so ordered.