Betz v. Trainer Wortham ( 2007 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
HEIDE BETZ, 
Plaintiff-Appellant,
v. No. 05-15704
TRAINER WORTHAM & COMPANY,  D.C. No.
CV-03-03231-SI
INC.; DAVID P. COMO; FIRST
REPUBLIC BANK, a Nevada OPINION
corporation; ROBERT VILE,
Defendants-Appellees.

Appeal from the United States District Court
for the Northern District of California
Susan Yvonne Illston, District Judge, Presiding
Argued and Submitted
February 12, 2007—San Francisco, California
Filed May 11, 2007
Before: John T. Noonan, Jr., Ronald M. Gould, and
Johnnie B. Rawlinson, Circuit Judges.
Opinion by Judge Gould
5543
BETZ v. TRAINER WORTHAM & CO. 5547
COUNSEL
Joseph M. Alioto, San Francisco, California, Theodore F.
Schwartz, St. Louis, Missouri, and Myron Moskovitz, Berke-
ley, California, for the plaintiff-appellant.
Sara B. Brody and Alexander M.R. Lyon, Heller Ehrman,
LLP, San Francisco, California, for the defendants-appellees.
OPINION
GOULD, Circuit Judge:
We must decide whether Heide Betz’s federal securities
fraud claim is barred by the statute of limitations.1 We hold
that Betz’s claim is not time barred, and we reverse the dis-
trict court’s summary judgment for the defendants.
1
In a separately-filed memorandum disposition, we resolve Betz’s
appeal of the district court’s disposition of her state law claims.
5548 BETZ v. TRAINER WORTHAM & CO.
I
On an appeal of summary judgment we, like the district
court, view the evidence in the light most favorable to the
non-moving party and draw all justifiable inferences in the
non-moving party’s favor. Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 255 (1986). Viewed in the light most favorable
to Betz, the facts are as follows:
In 1999, Betz, a retired art dealer, sold her house for $2.2
million. Betz planned to buy a co-op and invest the proceeds
of the sale of her house to provide interest income. An
employee of First Republic Bank named Carmen Castro intro-
duced Betz to David Como, an employee of Trainer
Wortham, an investment subsidiary of First Republic Bank.
Como and Castro recommended that Betz invest the proceeds
from the sale of her house with Trainer Wortham. Como and
Castro assured Betz that, if she invested her $2.2 million with
Trainer Wortham, she could withdraw $15,000 per month
from her portfolio, for living expenses, without touching the
$2.2 million in principal. Betz told Como and Castro that she
knew nothing about stocks and bonds and that she only would
understand the “bottom line,” or total balance, of her account.
According to Betz, on June 7, 1999, Betz entered into an
oral agreement with Como, who was acting on behalf of
Trainer Wortham, giving the defendants control over her $2.2
million. Betz and Como agreed that Como would invest
Betz’s money “in such a fashion that [Betz] would receive
$15,000 a month from the profit of the investment and that
[the defendants] would not touch the principal.” The same
day, Betz and Como, who was again acting on Trainer
Wortham’s behalf, entered into a written “Letter of Under-
standing for Portfolio Management and Administration Ser-
vices” and an “Investment Management Agreement.” These
documents explicitly stated that Betz’s account was subject to
market risk and that “no person has represented to [Betz] that
any particular result can or will be achieved.”
BETZ v. TRAINER WORTHAM & CO. 5549
After Betz opened her account with Trainer Wortham, she
received account statements at least once per month. In Febru-
ary 2000, Betz received a statement reflecting an account
value below her initial investment of $2.2 million. Between
February 2000 and July 2001, Betz received twenty-nine
more account statements, each reflecting an account balance
of less than $2.2 million. In March 2001, Betz’s account bal-
ance had dropped to $848,000. Around that time, Betz spoke
with Robert Vile, a Trainer Wortham employee, to express
concern about the declining value of her account. Vile told
Betz that the declining balance was temporary, that the market
would recover, and that in less than a year her account bal-
ance would be back to $2.2 million.
However, a year later, in the spring of 2002, Betz’s account
balance had not recovered. At that time, Castro told Betz that
there was a “serious problem” with the way Betz’s portfolio
had been managed and that the president of Trainer Wortham,
Charles Moore, would “take care of the account because it
was ‘the right thing to do’ and because [Trainer Wortham]
value[d] their client relationships.” After Betz met with
Moore in person, Castro called Betz to tell her that “Moore
was meeting with other principals and attorneys” regarding
her account, and that Betz “should be patient with them and
not take any legal action.” However, in June 2002, Castro
advised Betz that Trainer Wortham was “not going to do any-
thing at all” to remedy the declining value of her account.
Betz filed her complaint in this case on July 11, 2003,
alleging that Como, Vile, Trainer Wortham, and First Repub-
lic Bank (collectively, “Trainer Wortham” or “defendants”)
had committed securities fraud in violation of § 10(b) of the
Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and
Rule 10b-5 of the Securities Exchange Commission, 17
C.F.R. § 240.10b-5. The defendants moved for summary
judgment on the ground that Betz’s federal securities fraud
claim was barred by the statute of limitations. Section 804(a)
of the Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116
5550 BETZ v. TRAINER WORTHAM & CO.
Stat. 745, 801 (codified at 28 U.S.C. § 1658(b)), provides that
a suit for securities fraud under § 10(b) of the Securities
Exchange Act must be filed “not later than the earlier of (1)
2 years after the discovery of the facts constituting the viola-
tion; or (2) 5 years after such violation.” The district court
held that, because Betz had inquiry notice of the defendants’
violations of § 10(b) before July 11, 2001, Betz’s claims were
time barred, and on this ground the district court granted sum-
mary judgment for the defendants.
II
We review de novo the district court’s grant of summary
judgment. Olympic Pipeline Co. v. City of Seattle, 437 F.3d
872, 877 n.11 (9th Cir. 2006). Federal Rule of Civil Procedure
56(c) entitles a party to summary judgment “if the pleadings,
depositions, answers to interrogatories, and admissions on
file, together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that the moving
party is entitled to a judgment as a matter of law.” As we
noted above, in deciding a motion for summary judgment, we
view the evidence in the light most favorable to the non-
moving party. Anderson, 477 U.S. at 255.
III
The defendants contend that Betz’s suit is time barred
because she had both actual and inquiry notice of the facts
giving rise to her claim. Betz contends that she had neither.
[1] We first address actual notice. Betz’s suit is timely only
if she filed it “not later than . . . 2 years after the discovery
of the facts constituting the violation.” 28 U.S.C. § 1658(b).
Viewing the facts in the light most favorable to Betz, there is
a genuine issue of fact about whether Betz actually discovered
that she had a claim against the defendants for securities fraud
more than two years before she filed her suit on July 11, 2003.
For Betz to have a claim under § 10(b), the defendants must
BETZ v. TRAINER WORTHAM & CO. 5551
have had, among other things, scienter, which is the “mental
state embracing intent to deceive, manipulate, or defraud.”
See Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193-94 n.12
(1976); see also Simpson v. AOL Time Warner Inc., 452 F.3d
1040, 1047 (9th Cir. 2006) (listing the elements of a federal
securities fraud claim), petition for cert. filed sub nom. Avis
Budget Group, Inc. v. Cal. State Teachers Ret. Sys., No. 06-
560 (U.S. filed Oct. 19, 2006). In In re Silicon Graphics Inc.
Securities Litigation, 183 F.3d 970, 974 (9th Cir. 1999), we
held that to adequately plead scienter, a § 10(b) plaintiff
“must plead, in great detail, facts that constitute strong cir-
cumstantial evidence of deliberately reckless or conscious
misconduct.”
[2] We cannot say that, as a matter of law, Betz, before July
11, 2001, actually discovered that the defendants consciously
or deliberately and recklessly deceived her. Under the version
of facts presented by Betz, a reasonable factfinder could con-
clude that Betz did not discover that the defendants intention-
ally misled her into believing that she could withdraw
$15,000 per month without depleting her principal until June
2002, when Moore told her that Trainer Wortham was “not
going to do anything” to fix her account.
If the statute of limitations began running only upon Betz’s
actual discovery of the facts giving rise to her securities fraud
claim, this would end our inquiry. However, the defendants
contend that, even if Betz did not actually discover the facts
underlying her claim before July 11, 2001, Betz was on “in-
quiry notice” of her claim before that date, and that her claim
therefore is still barred by the statute of limitations. We
address that argument in the next section.
5552 BETZ v. TRAINER WORTHAM & CO.
IV
A
[3] We have held that the statute of limitations for a federal
securities fraud claim begins to run when the plaintiff has
either actual or inquiry notice that the defendants have made
a fraudulent misrepresentation. See, e.g., Gray v. First Win-
throp Corp., 82 F.3d 877, 881 (9th Cir. 1996); Volk v. D.A.
Davidson & Co., 816 F.2d 1406, 1412 (9th Cir. 1987). In
more recent cases, however, it has been suggested that under
the United States Supreme Court’s decision in Lampf, Pleva,
Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350
(1991), only actual notice of the facts forming the alleged
fraud, and not inquiry notice of those facts, triggers the run-
ning of the statute of limitations for a § 10(b) claim.2 See
Berry v. Valence Tech., Inc., 175 F.3d 699, 704 (9th Cir.
1999); see also Livid Holdings Ltd. v. Salomon Smith Barney,
Inc., 416 F.3d 940, 951 (9th Cir. 2005). The uncertainty intro-
duced by our opinion in Berry led us to suggest in Livid Hold-
ings that, notwithstanding our unequivocal pre-Lampf case
law, we had “considered, but not made a final determination
on whether actual or inquiry notice of the alleged fraud trig-
gers the running of Rule 10b-5’s statute of limitations.” Livid
Holdings, 416 F.3d at 951.
[4] In Lampf, the Supreme Court resolved a split among the
circuits regarding the statute of limitations applicable to a
§ 10(b) claim. See Lampf, 501 U.S. at 354. Some circuits had
borrowed state statutes of limitations, while others had estab-
lished a unique federal limitations period. See id. at 354 n.1.
The Supreme Court in Lampf held that the statute of limita-
2
Though Gray was decided after the Supreme Court handed down
Lampf, in Gray we applied pre-Lampf statute of limitations principles pur-
suant to 15 U.S.C. § 78aa-1(a), which provides that pre-Lampf limitations
periods apply to suits filed before Lampf was decided. See Gray, 82 F.3d
at 879 n.1, 880-81.
BETZ v. TRAINER WORTHAM & CO. 5553
tions provided in § 9(e) of the Securities Exchange Act, 15
U.S.C. § 78i(e), was the appropriate standard. See Lampf, 501
U.S. at 364 n.9. Section 9(e) provides that “[n]o action shall
be maintained to enforce any liability created under this sec-
tion, unless brought within one year after the discovery of the
facts constituting the violation and within three years after
such violation.”3 No one disputes that “discovery” can occur
when a plaintiff actually discovers facts giving rise to his or
her claim. However, Lampf left it to the lower courts to decide
whether “discovery” occurs only upon actual notice or
whether “discovery” can occur on some form of inquiry
notice.
[5] We hold that either actual or inquiry notice can start the
running of the statute of limitations on a federal securities
fraud claim. While it is unquestioned that actual notice can
mark the beginning of the limitations period, two things hap-
pened in the aftermath of Lampf that convince us that an
inquiry notice standard should also apply to federal securities
fraud claims. First, the courts of appeal in our sister circuits,
along with the district courts in our own circuit, have uni-
formly embraced inquiry notice. In fact, “every circuit to have
addressed the issue since Lampf has held that inquiry notice
is the appropriate standard.” Berry, 175 F.3d at 704; see Fin.
Sec. Assurance, Inc. v. Stephens, Inc., 450 F.3d 1257, 1267-68
(11th Cir. 2006); Shah v. Meeker, 435 F.3d 244, 249 (2d Cir.
2006); Glaser v. Enzo Biochem, Inc., 126 Fed. App’x 593,
597 (4th Cir. 2005) (citing Brumbaugh v. Princeton Partners,
985 F.2d 157, 162 (4th Cir. 1993)); New England Health
Care Employees Pension Fund v. Ernst & Young, LLP, 336
F.3d 495, 500 (6th Cir. 2003); In re NAHC, Inc. Sec. Litig.,
306 F.3d 1314, 1325 (3d Cir. 2002); Young v. Lepone, 305
F.3d 1, 8 (1st Cir. 2002); Ritchey v. Horner, 244 F.3d 635,
638-39 (8th Cir. 2001); Sterlin v. Biomune Sys., 154 F.3d
3
The one year/three year limitations period set forth in § 9(e) still
applies to securities fraud suits filed before the enactment date of
Sarbanes-Oxley, July 30, 2002. See Sarbanes-Oxley Act § 804(b).
5554 BETZ v. TRAINER WORTHAM & CO.
1191, 1199-1200 (10th Cir. 1998); Marks v. CDW Computer
Ctrs., Inc., 122 F.3d 363, 367 (7th Cir. 1997); Topalian v.
Ehrman, 954 F.2d 1125, 1134-35 (5th Cir. 1992). Likewise,
the district courts in our circuit regularly apply an inquiry
notice standard to § 10(b) claims. See, e.g., In re Micron
Techs., Inc. Sec. Litig., No. CV-06-085-S-BLW, 2007 WL
576468, at *4 (D. Idaho Feb. 21, 2007); In re Immune
Response Sec. Litig., 375 F. Supp. 2d 983, 1026 (S.D. Cal.
2005); In re Infonet Servs. Corp. Sec. Litig., 310 F. Supp. 2d
1106, 1113 (C.D. Cal. 2003); Getty v. Harmon, 53 F. Supp.
2d 1053, 1055 (W.D. Wash. 1999); Freedman v. La.-Pac.
Corp., 922 F. Supp. 377, 395 (D. Or. 1996); In re Syntex
Corp. Sec. Litig., 855 F. Supp. 1086, 1099 (N.D. Cal. 1994),
aff’d, 95 F.3d 922 (9th Cir. 1996); Aizuss v. Commonwealth
Equity Trust, 847 F. Supp. 1482, 1486 (E.D. Cal. 1993).
While not binding on us, the reasoned opinions of ten of our
sister circuits and the widespread practices of the district
courts in our own circuit weigh heavily in favor of holding
that inquiry notice can trigger the running of the statute of
limitations on a securities fraud claim. The uniformity of the
precedent in this direction sends a signal message that inquiry
notice, and not merely actual notice, can cause the statute of
limitations for securities fraud to begin to run.
[6] The second post-Lampf event that convinces us that an
inquiry notice standard is appropriate is an act of Congress.
In the Sarbanes-Oxley Act of 2002, Congress extended the
limitations period for § 10(b) suits from “one year after the
discovery of the facts constituting the violation,” 15 U.S.C.
§ 78i(e), to “2 years after the discovery of the facts constitut-
ing the violation” for actions commenced after July 30, 2002,
28 U.S.C. § 1658(b); Sarbanes-Oxley Act, § 804(b). In its
new enactment, Congress opted for language identical to the
language previously in effect in § 9(e) of the Securities
Exchange Act, 15 U.S.C. § 78i(e). The Supreme Court has
instructed that we should assume that Congress is aware of
the prevailing case law and legislates in its light. See Cannon
v. Univ. of Chicago, 441 U.S. 677, 696-97 (1979) (“It is
BETZ v. TRAINER WORTHAM & CO. 5555
always appropriate to assume that our elected representatives,
like other citizens, know the law . . . .”); see also Merrill
Lynch, Pierce, Fenner & Smith, Inc. v. Curran, 456 U.S. 353,
379 (1982) (interpreting the Commodity Exchange Act in
light of pre-enactment case law). In 2002, the prevailing case
law in the lower federal courts interpreted the language of
§ 9(e) to mean that the limitations period could be com-
menced upon some form of inquiry notice. By choosing lan-
guage nearly identical to the language of § 9(e), Congress
implicitly approved of that case law. See Cannon, 441 U.S. at
696-99 (interpreting Title IX to provide a private cause of
action because Congress used language identical to that found
in Title VI, which had already been interpreted by the courts
to provide a private cause of action); Abrego v. Dow Chem.
Co., 443 F.3d 676, 684 (9th Cir. 2006) (per curiam) (holding
that the silence of the Class Action Fairness Act regarding the
burden of proving removal jurisdiction indicated Congressio-
nal intent to leave intact the common law rule placing the bur-
den on the defendant); United States v. Male Juvenile, 280
F.3d 1008, 1016 (9th Cir. 2002) (noting that “[i]n construing
statutes, we presume Congress legislated with awareness of
relevant judicial decisions” and holding that Congress’s fail-
ure to explicitly include “tribal governments” within the Fed-
eral Juvenile Delinquency Act’s definition of “State,” when
amending other parts of the Act, “may be interpreted as an
endorsement of the judicial decisions excluding tribes from
the definition of ‘State’ ”).
[7] We recognize that the pragmatic effects of applying an
inquiry notice standard to § 10(b) are both positive and nega-
tive for individual litigants. As was suggested in Berry, a case
decided under the old one-year limitations period, such a stan-
dard may compel plaintiffs to file a suit based on “skimpy
facts.” See Berry, 175 F.3d at 704 n.6 (quoting Charles Benja-
min Nutley, Comment, Triggering One-Year Limitations on
Section 10(b) and Rule 10b-5 Actions: Actual or Inquiry Dis-
covery?, 30 San Diego L. Rev. 917, 948 (1993)). However,
Congress’s extension of the relevant limitations period from
5556 BETZ v. TRAINER WORTHAM & CO.
one to two years alleviates this concern and allows us to con-
clude that an inquiry notice standard strikes an acceptable bal-
ance between the interest in requiring plaintiffs promptly to
file suit and the competing interest in avoiding the encourage-
ment of baseless or premature suits by requiring plaintiffs to
sue before they can discover the facts underlying their claims.
See New England Health Care Employees Pension Fund, 336
F.3d at 501; Young, 305 F.3d at 9; Sterlin, 154 F.3d at 1202.
B
[8] We have previously stated that, if we were to adopt an
inquiry notice standard for § 10(b) suits, we would apply a
standard similar to that applied by the Tenth Circuit. See Livid
Holdings, 416 F.3d at 951; Berry, 175 F.3d at 704. Today we
adopt the inquiry-plus-reasonable-diligence test used by the
Tenth Circuit. Under that standard, to determine when the
statute of limitations begins running, we first determine when
the plaintiff had inquiry notice of the facts giving rise to his
or her securities fraud claim. A plaintiff is on inquiry notice
when there exists sufficient suspicion of fraud to cause a rea-
sonable investor to investigate the matter further. Like our sis-
ter circuits, we caution that inquiry notice should not be
construed so broadly that the particular plaintiff cannot bring
his or her suit within the limitations period. The facts consti-
tuting inquiry notice “must be sufficiently probative of fraud
—sufficiently advanced beyond the stage of a mere suspicion
. . . to incite the victim to investigate.” Fujisawa Pharm. Co.
v. Kapoor, 115 F.3d 1332, 1335 (7th Cir. 1997), quoted in
Tello v. Dean Witter Reynolds, Inc., 410 F.3d 1275, 1284
(11th Cir. 2005). Once a plaintiff has inquiry notice, we ask
when the investor, in the exercise of reasonable diligence,
should have discovered the facts constituting the alleged
fraud. The answer to that second question tells us when the
statute of limitations began to run.
[9] The question of whether inquiry notice exists is objec-
tive. See, e.g., Mathews v. Kidder, Peabody & Co., 260 F.3d
BETZ v. TRAINER WORTHAM & CO. 5557
239, 252 (3d Cir. 2001); Great Rivers Coop. of S.E. Iowa v.
Farmland Indus., Inc., 120 F.3d 893, 896 (8th Cir. 1997).
However, we would be remiss if we ignored the particular cir-
cumstances of the plaintiff in the limited cases where equita-
ble considerations properly affect our view of limitations. For
that reason, we have held that the running of the statute of
limitations is tolled for a naive investor who is lulled into
inaction by those that the investor alleges were defrauding
him or her. For example, in Vucinich v. Paine, Webber, Jack-
son & Curtis, Inc., 739 F.2d 1434, 1436 (9th Cir. 1984) (per
curiam), the defendant argued that Vucinich’s securities
fraud, common law fraud, negligence, and breach of fiduciary
duty claims were barred by the statute of limitations. Id.
Vucinich, like Betz in this case, “had been receiving monthly
statements which, had she been able to interpret them, would
have indicated that the value of her account was declining.”
Id. Vucinich, again like Betz, claimed that “she could not
decipher the statements and that she relied on [the defen-
dant’s] continuing reassurance that a longer time was needed
to realize gains from [the defendant’s] strategy.” Id. Outside
the limitations period, Vucinich had received several margin
calls and been told by a friend that the investments the defen-
dant had made for her were speculative. Id. At this point, one
could argue that a hypothetical “reasonable investor” would
have inquired as to whether her broker had been intentionally
deceiving her. But we considered Vucinich’s inexperience
with investments, lack of financial sophistication, and reliance
on the defendant’s expertise and reversed the district court’s
grant of summary judgment to the defendant. Id. at 1436-37.
We held that “[w]hether the events existing as of [the com-
mencement of the limitations period] were sufficient to put
Vucinich on notice and whether the reassuring statements of
defendant reasonably affected that notice is a disputed ques-
tion of fact requiring determination by the district court.” Id.
at 1437.
We have held that a primary purpose of the federal securi-
ties laws, and in particular § 10(b), “ ‘is to protect the inno-
5558 BETZ v. TRAINER WORTHAM & CO.
cent investor, not one who loses his innocence and then waits
to see how his investment turns out before he decides to
invoke the provisions of the Act.’ ” Volk, 816 F.2d at 1413
(quoting Stull v. Bayard, 561 F.2d 429, 433 n.4 (2d Cir.
1977)). Ignoring the particular circumstances of the plaintiff
and gauging the plaintiff’s conduct entirely against that of an
abstract “reasonable investor” would undermine this policy in
cases where the plaintiff is an unsophisticated investor and the
defendants by their words and conduct encourage inaction or
delay.
Under the notice-plus-reasonable-diligence standard we
apply to securities fraud claims, the defendant bears a consid-
erable burden in demonstrating, at the summary judgment
stage, that the plaintiff’s claim is time barred. See SEC v. Sea-
board Corp., 677 F.2d 1301, 1309-10 (9th Cir. 1982) (noting
that “the question of notice of fraud is for the trier of fact” and
that “the party seeking summary disposition has an extremely
difficult burden to show that there exists no issue of material
fact regarding notice”). “Summary judgment is appropriate
only when uncontroverted evidence irrefutably demonstrates
plaintiff discovered or should have discovered the fraudulent
conduct.” Gray, 82 F.3d at 881 (internal quotations omitted);
see also Mosesian v. Peat, Marwick, Mitchell & Co., 727 F.2d
873, 879 (9th Cir. 1984) (“The question of what a reasonably
prudent investor should have known is particularly suited to
a jury determination.”). Our hesitation to approve summary
judgment in securities fraud cases is especially pronounced
where the plaintiff alleges that the defendants’ reassurances
convinced the plaintiff to postpone his or her legal action. See
Vucinich, 739 F.2d at 1436.
We now turn to the facts of this case. Under our inquiry
notice standard outlined above, and keeping in mind that this
case is before us on summary judgment, we ask whether there
is a genuine dispute about whether there existed facts suffi-
ciently probative of fraud to cause a reasonable investor to
conduct a further investigation. Viewing the facts in the light
BETZ v. TRAINER WORTHAM & CO. 5559
most favorable to Betz, a rational jury could conclude that a
reasonable investor in Betz’s shoes would not have initiated
further inquiry before July 11, 2001.
[10] The defendants contend that the account statements
Betz received would have spurred a reasonable investor to
inquire further whether Trainer Wortham had defrauded her.
However, the account statements indicated, at most, that the
defendants had broken their promise that Betz could withdraw
$15,000 per month from her account without depleting the
principal. As a matter of law, we cannot say that a declining
account balance, in and of itself, would have spurred a reason-
able investor to further inquire whether he or she had been
defrauded. See Gray, 82 F.3d at 881 (“It is well settled that
poor financial performance, standing alone, does not neces-
sarily suggest securities fraud . . . , but could also be
explained by poor management, general market conditions, or
other events unrelated to fraud, creating a jury question on
inquiry notice.”); see also Livid Holdings, 416 F.3d at 951
(“This court has held that financial problems alone are gener-
ally insufficient to suggest fraud.”).
[11] Likewise, Castro’s March 2002 statement that there
was a “serious problem” with Betz’s portfolio did nothing
more than indicate to Betz that the defendants had not been
able to make good on their promise of at least $15,000 per
month in interest income. Because such a statement provided
no evidence that the defendants had intentionally or deliber-
ately and recklessly misled Betz as Silicon Graphics requires
to state a claim for securities fraud, see Silicon Graphics, 183
F.3d at 974, a rational jury could conclude that, upon hearing
such a statement, a reasonable investor would not have initi-
ated further inquiry into the existence of fraud. See Fujisawa
Pharm., 115 F.3d at 1335 (noting that “[t]he facts constituting
[inquiry] notice must be sufficiently probative of fraud”
(emphasis added)).
5560 BETZ v. TRAINER WORTHAM & CO.
Even if a reasonable investor would have initiated inquiry
into the possibility of fraud, the assurances Betz received
from the defendants tolled the statute of limitations on her
securities fraud claim. When a defendant reassures a plaintiff
that the defendant has not deceived the plaintiff and encour-
ages the plaintiff to defer legal action, and the result is that the
plaintiff postpones filing suit, we should be reluctant to grant
summary judgment in favor of the defendant on statute of lim-
itations grounds. See Vucinich, 739 F.2d at 1436. This holds
especially true when the plaintiff is a naive investor, like Betz,4
who enlists investment professionals and relies on those pro-
fessionals’ expertise, like Betz did. The case is entirely differ-
ent for a sophisticated investor who would not normally be
entitled to any equitable tolling of the limitations period. See
Davis v. Birr, Wilson & Co., Inc., 839 F.2d 1369, 1370 (9th
Cir. 1988).
Moreover, even if Betz was on inquiry notice of fraud,
under the second prong of our inquiry notice standard, we
cannot say that, as a matter of law, Betz, in the exercise of
reasonable diligence, should have discovered the facts consti-
tuting the alleged fraud. In this case, Betz questioned the
defendants about her account and the defendants assured her
that they would take care of any problems and asked her not
to file suit. We have held that, when a plaintiff questions a
defendant about possible fraud and receives reassurances
4
No person with any degree of investment and financial sophistication
could have believed that it was possible to receive $15,000 per month, or
$180,000 per year, on a portfolio with capital value of $2.2 million, with-
out some significant degree of market risk. Sophisticated investors know
that a return exceeding 8% per year cannot be gained without a substantial
risk, and the safest investments, in government notes, would likely return
not more than half of that rate. When the facts are determined by trial,
Betz’s factual premises might be rejected, but in this case coming before
us after a grant of summary judgment, we must accept as true Betz’s testi-
mony that she was told she could gain this level of monthly income with
defendants managing her investments and without risking the capital she
had gained on the sale of her house.
BETZ v. TRAINER WORTHAM & CO. 5561
from the defendant, whether the statute of limitations began
running is a question for the trier of fact. See Seaboard Corp.,
677 F.2d at 1310. In this case, “the question of what a reason-
able investor would have done is not so certain as to allow a
determination as a matter of law.” Id.
V
[12] In summary, we hold that, once there exists sufficient
indicia of fraud to cause a reasonable investor to inquire into
whether he or she has been defrauded, the statute of limita-
tions on a claim under § 10(b) of the Securities Exchange Act
begins running when the investor, in the exercise of reason-
able diligence, should have discovered the facts giving rise to
his or her claim. In this case, we cannot say that, as a matter
of law, a reasonable investor in Betz’s position should have
discovered the facts giving rise to her claim before July 11,
2001. Moreover, the defendants’ express assurances that they
would remedy the problems with Betz’s account lulled Betz,
who was not a sophisticated investor, into inaction and thus
tolled the statute of limitations on her securities fraud claim.
We reverse the district court’s judgment in favor of the defen-
dants and remand this case for further proceedings consistent
with our opinion.
REVERSED AND REMANDED.