New Time Limit On Fraud Cases Used to Dismiss Colorado Suit
WASHINGTON - A federal judge in Colorado has dismissed a fraud suit filed by special-district bond-holders in one of the first municipal bond cases to be thrown out of court following the Supreme Court's decision to limit the amount of time investors have to file anti-fraud suits.
U.S. District Court Judge Lewis Babcock dismissed a class action lawsuit brought by the Bank of Denver and others who invested in $4.5 million of bonds issued by the Will-O-Wisp Metropolitan District to finance the construction of water systems and other infrastructure projects in preparation for future housing development.
Will-O-Wisp is among dozens of special districts in the state that have drawn national attention after running into financial trouble in the wake of a downturn in the Colorado real estate market.
Judge Babcock threw out the August 1990 case because it was filed more than three years after the fraud alleged by the bondholders occurred. The Will-O-Wisp official statement - which bondholders said contained gross misstatements of the net worth of the guarantor of the bonds - was issued in August 1986.
Thus, according to Judge Babcock, it violated the Supreme Court's June 20 decision, Lampf v. Gilbertson, which said any litigation brought by a private investor under the antifraud provisions of the federal securities laws must be initiated within one year of the discovery of the violation and no more than three years after the violation occurred.
The Lampf decision, which most attorneys believe applies retroactively to cases pending at the time of the ruling, has triggered an avalanche of motions by defendants in securities fraud cases across the country to have their cases dismissed.
Among the hardest hit are municipal bond cases where investors have filed millions of dollars in class action suits against underwriters and developers of deals that have gone belly up, including the much publicized challenge to nursing home operator, First Humanics Corp. Lawyers in that case have filed a position paper with a federal court in Ohio urging it not to apply the decision retroactively to their case.
Lawyers and advocacy groups representing municipal bond investors say many tax-exempt deals are structured so that investors may not detect problems with their bonds until three years after their purchase.
"Investment frauds are time bombs," said Philip Feigin, Colorado securities commissioner and a backer of legislation now pending in both houses of Congress to overturn the Supreme Court ruling. "They don't go off for a long time."
The Supreme Court decision basically says an investor's complaints must be resolved "long before the bomb even goes off," said Mr. Feigin, a member of the North American Securities Administrators Association, which has charged that the Lampf decision is too narrow.
Battle lines are forming over the legislation to overturn Lampf, passed by the Senate Banking Committee in August and introduced recently in the House. Investors would have up to three years after discovery of potential fraud to file lawsuits in federal court under the House bill introduced by Rep. Edward Markey, D-Mass., and up to two years under the Senate bill, offered by Sen. Richard Bryan, D-Nev. Both bills would give investors an outer limit of five years after the violation occurred to bring suit.
Strong opponents of the bills include the Securities Industry Association and the American Institute of Certified Public Accountants.
Joseph Meyer, an attorney for the Bank of Denver, which bought about $100,000 of the Will-O-Wisp special-district bonds, said the bank has refiled the case in state court. "Our case was clearly outside of the three-year period" spelled out in Lampf, he said.
"Lampf knocked out all kinds of cases in Colorado," said Walter Emery, former chairman of the board of the Bank of Denver. Before Lampf, everyone thought of the statute of limitations as going on for five years.