Mathews v. Kidder, Peabody & Co.

Opinions of the United
2001 Decisions States Court of Appeals
for the Third Circuit

7-31-2001

Mathews v. Kidder Peabody Co
Precedential or Non-Precedential:

Docket 00-2566

Follow this and additional works at: http://digitalcommons.law.villanova.edu/thirdcircuit_2001

Recommended Citation
"Mathews v. Kidder Peabody Co" (2001). 2001 Decisions. Paper 169.
http://digitalcommons.law.villanova.edu/thirdcircuit_2001/169

This decision is brought to you for free and open access by the Opinions of the United States Court of Appeals for the Third Circuit at Villanova
University School of Law Digital Repository. It has been accepted for inclusion in 2001 Decisions by an authorized administrator of Villanova
University School of Law Digital Repository. For more information, please contact Benjamin.Carlson@law.villanova.edu.
Filed July 31, 2001

UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 00-2566

JOHN W. MATHEWS; CAROLE ANN NUCKTON;
PATRICIA J. LESTER; JORDAN BRODSKY;
THOMAS C. CHESTNEY; DEBORAH W. TROEMNER;
WILLIAM J. WATERMAN, JR.; VERNON L. SCHATZ;
SUSANNE DIANE ANDERSON; LARRY C. ANDERSON;
GEORGE P. ARNOLD; ANN M. ARNOLD,

Appellants

v.

KIDDER, PEABODY & CO., INC., a Delaware corporation;
KP REALTY ADVISERS, INC., a Delaware corporation;
HSM, INC., a Texas corporation; HENRY S. MILLER CO;
HENRY S. MILLER MANAGEMENT CORPORATION;
HENRY S. MILLER APPRAISAL CORPORATION;
HSM REAL ESTATE SECURITIES CORPORATION;
MILLER REAL ESTATE SERVICES CORPORATION, a
Texas corporation

APPEAL FROM THE
UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF PENNSYLVANIA

(D.C. No. 95-cv-00085)
District Judge: The Honorable Donetta W. Ambrose

Argued June 25, 2001

BEFORE: NYGAARD and WEIS, Circuit Judges, and
REAVLEY,* Circuit Judge.
_________________________________________________________________

* Honorable Thomas M. Reavley, Circuit Judge for the United States
Court of Appeals for the Fifth Circuit, sitting by designation.
(Filed: July 31, 2001)

Anthony P. Picadio, Esq. (Argued)
Tybe A. Brett, Esq.
Picadio, McCall, Kane & Norton
600 Grant Street
4710 USX Tower
Pittsburgh, PA 15219
Attorney for Appellants

David L. McClenahan, Esq. (Argued)
Kenneth M. Argentieri, Esq.
Michael J. Lynch, Esq.
Paul E. Del Vecchio, Esq.
Kirkpatrick & Lockhart
535 Smithfield Street
Henry W. Oliver Building
Pittsburgh, PA 15222
Attorneys for Appellees Kidder,
Peabody & Co., Inc and KP Realty
Advisers, Inc.

William M. Wycoff, Esq.
Thorp, Reed & Armstrong
301 Grant Street
One Oxford Centre
Pittsburgh, PA 15219
Attorneys for Appellees HSM, Inc.,
Henry S. Miller Co, Henry S. Miller
Management Corporation, Henry S.
Miller Appraisal Corporation, HSM
Real Estate Securities Corporation
and Miller Real Estate Services
Corporation

OPINION OF THE COURT

NYGAARD, Circuit Judge.

The Appellants in this case are a number of self-
professed conservative, first-time investors who purchased
securities from Kidder Peabody & Co., Inc. and the Henry

2
S. Miller Organization. They claim that Kidder and Miller
fraudulently misrepresented the securities as low-risk
vehicles similar to municipal bonds. Ultimately, the
securities failed and the Appellants brought civil RICO
claims. After extensive discovery, the District Court granted
summary judgment to Kidder and Miller and held that the
Appellants' claims were barred by the applicable four-year
statute of limitations. On appeal, the Appellants contend
that the court erred in three major respects: It incorrectly
concluded that the Appellants were injured at the time they
purchased the securities; it erred in holding that the
Appellants were on inquiry notice of their injuries no later
than early 1990; and, finally, it erred in refusing to
equitably toll the statute of limitations. We will affirm.

I. FACTS

This case involves a securities class action brought
against Kidder, a retail brokerage house, and Miller, "a
multi-faceted real-estate management, appraisal, and
investment organization." App. at 35. In the early 1980s,
brokerage houses began working with real estate
companies, such as Miller, to offer investment
opportunities. They often sought to take advantage of the
booming construction markets in the south and southwest
regions of the United States known as the "Sunbelt." The
companies formed limited partnerships, purchased Sunbelt
commercial real estate, and sold interests to the general
public. They marketed the investments as tax shelters,
long-term capital gain opportunities, and income-producing
plans.

In 1981, Kidder and Miller created three separate
investment funds. The two companies formed wholly owned
subsidiaries to serve as general partners for the funds, and
then sold limited partnerships to the public. The plan was
to acquire commercial real estate properties in the Sunbelt,
collect rental income (thus providing a steady, but modest,
income stream for investors), and eventually sell the
properties six to ten years later and collect substantial
capital gains. The bulk of the return for investors was to
come from appreciation in the properties.

3
Kidder prepared and distributed to its brokers a
prospectus, sales information, a videotape, and other
reference materials describing the first investment fund.1 In
May 1992, Kidder began selling limited partnership units in
that fund. By May 1986, it had sold units in all three funds
to more than six thousand investors and raised
approximately eighty-four million dollars. The funds
purchased properties in Texas, Florida, Georgia, New
Mexico, Arizona, Arkansas, and Illinois.

The crux of the Appellants' claims is that Kidder
fraudulently suggested that the funds were low-risk,
conservative investments suitable for low net-worth
individuals. The Appellants believe that Kidder specifically
targeted unsophisticated investors, intentionally misled
them about the nature of the funds, and charged excessive
fees and commissions. These acts allegedly constituted
violations of the federal securities laws,2 wire fraud, 18
U.S.C. S 1343, mail fraud, 18 U.S.C. S 1341, and RICO
violations.

Furthermore, the Appellants claim that Kidder conducted
inadequate due diligence in choosing commercial real estate
investments. As a result, at least in part, fund properties
lost many of their key tenants, and quarterly distributions
(to limited partners) fell to only a few dollars per unit.
Additional economic factors also weakened the Sunbelt real
estate market as a whole,3 and the value of the funds'
investments plunged. Nonetheless, the Appellants claim
that Kidder intentionally "lulled [them] into a false sense of
_________________________________________________________________

1. There are numerous corporate defendants in this case. See App. at 33.
In order to avoid confusion, we will refer to all the Defendants/Appellees
collectively as "Kidder."

2. Specifically, the Appellants claim that Kidder violated S 17(a) of the
Securities Exchange Act of 1933, 15 U.S.C. S 77q, S 12(2) of the
Securities Exchange Act of 1933, 15 U.S.C. S 77I, and S 10(b) of the
Securities Exchange Act of 1934, 15 U.S.C. S 78j(b).

3. Corporate divisions merged and moved their offices; a gas and oil
decline hit Texas in the mid-80s; Congress passed the 1986 Tax Reform
Act, which discouraged real estate investment; and aggressive
construction eventually caused supply to meet and outstrip demand. See
App. at 39.

4
security that `things would probably work out and
substantial losses would be avoided.' " App. at 39.

Economic conditions did not improve. By August 1991,
Funds I and II had stopped paying quarterly distributions.
In April 1992, Kidder informed investors that conditions
were unlikely to rebound, and therefore it was initiating an
"exit strategy." App. at 40. By 1994, all three funds had
announced their intention to liquidate, which they
accomplished between February and November of 1997.

II. PROCEDURAL HISTORY

John W. Mathews invested $20,000 in Fund II in 1984.
He allegedly relied primarily upon oral representations by a
Kidder broker. As the fund's value deteriorated, Mathews
became understandably frustrated and disappointed. On
January 23, 1995, he filed a class action complaint
contending that Kidder had intentionally misrepresented
the inherent risks associated with the funds and therefore
had fraudulently induced him and others to invest. He
claimed that Kidder had engaged in a pattern of
racketeering activity prohibited by the federal RICO statute,
18 U.S.C. SS 1961 et seq.. Specifically, he claimed that
Kidder had committed the predicate acts of securities fraud,
mail fraud, and wire fraud.4

In response, Kidder filed a motion to dismiss. It claimed
that: (1) Mathews lacked standing to assert claims involving
Funds I and III because he had only invested in Fund II, (2)
Mathews had failed to allege the necessary RICO elements,
and (3) his claims were barred by RICO's four-year statute
of limitations. The District Court denied the motion without
prejudice. The court agreed that Mathews lacked standing
concerning Funds I and III, but held that he could pursue
his claims relating to Fund II. As to Kidder's remaining
objections, the court allowed the case to move forward to
develop a more complete record.

Both parties quickly filed additional motions. Mathews
sought to amend his complaint to include plaintiffs who
_________________________________________________________________

4. He also asserted a number of claims under state law, including breach
of fiduciary duty and negligent misrepresentation.

5
had invested in Funds I and III. Ultimately, he moved for
class certification, including investors in all three funds.
Kidder opposed Mathews' requests on procedural grounds,
and in addition, argued that the Private Securities
Litigation Reform Act of 1995 ("PSLRA") barred Mathews'
RICO action. The PSLRA, which Congress enacted on
December 22, 1995, amended the federal RICO statute and
explicitly eliminated securities fraud as a predicate act. See
Pub. L. No. 104-67, S 107, 109 Stat. 737, 758 (1995),
amending 18 U.S.C. S 1964(c) (1994).

The District Court held that the PSLRA did not bar
Mathews' RICO claim. See Mathews v. Kidder Peabody &
Co., Inc., 947 F.Supp. 180 (W.D. Pa. 1996). In addition, the
court allowed Mathews to amend his complaint to include
investors in Funds I and III, and it certified his requested
class. Kidder filed an interlocutory appeal to this Court
arguing that the PSLRA should apply retroactively to suits
pending when the Act was passed. We rejected that claim.
See Mathews v. Kidder Peabody & Co., Inc., 161 F.3d 156,
170-71 (3d Cir. 1998) ("[W]e are extremely reluctant to
create causes of action that did not previously exist, or --
as in this case -- to destroy causes of action and remedies
that clearly did exist before Congress acted.").

Discovery continued until November 1999. Kidder then
moved for summary judgment, or alternatively to decertify
the plaintiff class. Mathews opposed these motions, and
once again, sought to amend the complaint. In particular,
he wanted to add a new allegation claiming that the Kidder
prospectus itself was fraudulent, because it misrepresented
the inherent risks of the investment. The District Court
denied Mathews' motion to amend. The court cited"undue
prejudice to Defendants, undue delay on the part of the
Movant, the Movant's repeated failure to cure deficiencies
by previous amendments and futility of amendment." App.
at 29. It held that amending the complaint would unduly
prejudice the defendants because it "would necessitate the
taking of significant additional discovery and the difficulties
that would entail is persuasive." App. at 29. Mathews filed
a motion for reconsideration, which was denied.

On August 18, 2000, the District Court issued a
thoughtful and thorough seventy-four page opinion and

6
order granting Kidder's motion for summary judgment. See
App. at 33-106. The court held that Mathews' claims were
barred by the applicable four-year statute of limitations.
Statute of limitations issues surrounding RICO claims
historically have been tricky for two reasons. First,
Congress failed to provide a statutory limitations period in
the RICO statute itself, and second, the Supreme Court has
consistently refused to determine when a RICO action
accrues -- i.e., when the applicable limitations period
begins to run. It is now well settled that RICO actions enjoy
a four-year limitations period; the question of accrual,
however, remains a source of controversy.

In this case, the District Court applied what it termed an
"injury discovery and pattern rule," see App. at 57-61,
under which the statute begins to run once "all of the
elements of a civil RICO cause of action existed, whether or
not discovered, and the plaintiffs knew [or should have
known] of the existence and source of their injury." App. at
60 (quoting Poling v. Hovanian Enters., 99 F.Supp.2d 502,
511 (D.N.J. 2000)). The court assumed, for the sake of
summary judgment, that Mathews' claims had merit and
that Kidder had committed securities, wire, and mail fraud.
Nonetheless, it had to address two questions: When did the
elements of a RICO claim exist, and when did the
Appellants know, or should they have known, of their
injuries?

First, the court held that "all the elements of Plaintiffs'
RICO claim and their injury were in place no later than
May 1986."5 App. at 77. Second, the court reviewed the mix
of information available to the Appellants and concluded
that they should have been aware of their injury"no later
than February 1990." App. at 90. Thus, because both
prongs of the "injury discovery and pattern rule" were
satisfied, the statute of limitations began to run in early
_________________________________________________________________

5. Assuming that Kidder committed the alleged offenses, the court
concluded that the elements of securities fraud"were probably finalized
by May 1986 . . . but certainly no later than December 1986," App. at
68; mail fraud "occurred no later than May 1986," App. at 72, and
interstate wire fraud "occurred in the early 1980s and certainly no later
than March 1985." App. at 73.

7
1990. Mathews did not file his claim until almost five years
later. Therefore, he was barred by RICO's four-year
limitations period. The court also rejected Mathews'
argument that the limitations period should be equitably
tolled by Kidder's fraudulent acts and misrepresentations.
Once again, the court assumed that Mathews' allegations
were true, but nonetheless concluded that the Appellants
had not exercised "reasonable diligence" and therefore
could not benefit from equitable tolling.6 Mathews filed a
timely appeal.

III. Accrual Rule

The statute of limitations for civil RICO claims has
engendered a great deal of controversy. The statute itself
does not contain a limitations period. See Rotella v. Wood,
528 U.S. 549, 552, 120 S.Ct. 1075, 1079-80 (2000). As a
result, in Agency Holding Corp. v. Malley-Duff & Assocs.,
483 U.S. 143, 107 S.Ct. 2759 (1987), the Supreme Court
relied upon the Clayton Act and adopted an analogous four-
year period. However, the Court did not specify when the
period began, and three different interpretations arose.

A number of Courts of Appeals adopted the "injury
discovery accrual rule," which began the four-year period
once "a plaintiff knew or should have known of his injury."
Rotella, 528 U.S. at 553, 120 S.Ct. at 1080. This approach
did not require any knowledge of the other RICO elements.
All but one of the remaining Courts adopted the"injury and
pattern discovery rule . . . under which a civil RICO claim
accrues only when the claimant discovers, or should
discover, both an injury and a pattern of RICO activity." Id.
We alone adopted a third variant, the "last predicate act"
rule. See Keystone Ins. Co., 863 F.2d 1125 (3d Cir. 1988).
From a plaintiff 's perspective, this was the most lenient
approach: "Under this rule, the period began to run as soon
_________________________________________________________________

6. After dismissing Mathews' federal claims, the District Court declined
to exercise supplemental jurisdiction over the remaining state law
claims. See App. 104 ("In a case such as this, where all the federal
claims brought under the RICO statue have been dismissed, there is
little to gain in the way of convenience or judicial economy in having
this
court hear a case now consisting entirely of state claims.").

8
as the plaintiff knew or should have known of the injury
and the pattern of racketeering activity, but began to run
anew upon each predicate act forming part of the same
pattern." Rotella, 528 U.S. at 554, 120 S.Ct. at 1080.

In 1997, the Supreme Court "cut the possibilities by
one," rejecting our last predicate act rule. Id. (discussing
Klehr v. A.O. Smith Corp., 521 U.S. 179, 117 S.Ct. 1984
(1997)). The Court based its holding on two arguments: (1)
the rule created a limitations period "longer than Congress
could have contemplated," which conflicted "with a basic
objective -- repose -- that underlies limitations periods,"
and (2) it conflicted with the "ordinary Clayton Act rule"
applicable in private antitrust actions. Klehr , 521 U.S. at
187-88, 117 S.Ct. at 1989-90. In 2000, the Court again
narrowed the possible approaches by rejecting the injury
and pattern discovery rule. See Rotella, 528 U.S. at 555-
559, 120 S.Ct. at 1080-83. The Court stressed the"basic
policies of all limitations provisions: repose, elimination of
stale claims, and certainty about a plaintiff 's opportunity
for recovery and a defendant's potential liability." Id. at 555,
120 S.Ct. at 1081. In addition, the Court noted that the
injury discovery rule would encourage plaintiffs to
investigate their claims earlier and with greater vigor. See
id. at 557, 120 S.Ct. at 1082. (noting that the object of civil
RICO is "not merely to compensate victims but to turn
them into prosecutors, `private attorneys general,' dedicated
to eliminating racketeering activity").

In the wake of Rotella, at least two accrual rules remain
possible: an injury discovery rule, where the limitations
period begins to run once a plaintiff discovers her injury, or
an injury occurrence rule, where discovery is irrelevant. See
Rotella, 528 U.S. at 554 n.2, 120 S.Ct. at 1080 n.2
(refusing to "settle upon a final rule"). In Forbes v.
Eagleson, we recently considered these two approaches and
adopted the injury discovery rule. 228 F.3d 471, 484 (3d
Cir. 2000) ("[A] discovery rule applies whenever a federal
statute of limitation is silent on the issue."); see also
Rotella, 528 U.S. at 555, 120 S.Ct. at 1081 ("Federal courts,

9
to be sure, generally apply a discovery accrual rule when a
statute is silent on the issue, as civil RICO is here.").7

IV. Zenith Radio

The Appellants contend that an exception to the standard
RICO accrual rule applies in this case. They claim that the
damages resulting from Kidder's misconduct were unclear
at the time they invested, and "a cause of action does not
accrue until the fact of financial loss becomes predictable,
concrete and non-speculative and damages are provable."
Appellants' Br. at 32. Thus, they argue that their claims did
not accrue until Kidder indicated, in 1993 and 1994, that
the investment funds were unlikely to be profitable. See
Appellants' Br. at 31.

The Appellants rely heavily upon Zenith Radio Corp. v.
Hazeltine Research, Inc., 401 U.S. 321, 338-42, 91 S.Ct.
795, 806-08 (1971),8 a case involving alleged antitrust
_________________________________________________________________

7. The District Court's decision, which preceded our ruling in Forbes by
approximately two months, applied an "injury discovery and pattern
rule." App. at 60. Under this formulation, a RICO claim does not accrue
until a plaintiff discovers he has been injured and all of the elements of
his RICO claim, including a pattern of racketeering activity, exist. The
District Court's test, therefore, poses an important question -- whether
a civil RICO claim must be complete before it accrues. The Supreme
Court expressly declined to provide an answer in Rotella, 528 U.S. at
558 n.4, 120 S.Ct. at 1082 n.4, and we too have been silent on the
issue. See Forbes, 228 F.3d at 484 (addressing only the question of
injury discovery because a pattern of racketeering activity was well
established). We have little doubt that the question eventually will have
to be addressed. However, its resolution is not necessary to the outcome
of this case, because the Appellants have not contested, on appeal, the
existence of a pattern of racketeering activity. Therefore, we leave the
issue for another day.

8. As Kidder recognizes in its brief, Zenith Radio concerned an antitrust
violation. Under the Clayton Act, "a cause of action accrues and the
statute begins to run when a defendant commits an act that injures a
plaintiff 's business." Zenith Radio, 401 U.S. at 338, 91 S.Ct. at 806.
Thus, antitrust claims are subject to the less plaintiff-friendly "injury
occurrence" accrual rule. Because we hold that RICO claims are
governed by a more lenient "injury discovery" rule, it is unclear whether
we need to adopt the Zenith Radio exception (delaying the accrual of
claims when damages are merely speculative) in the RICO context. For
the sake of discussion, however, we will assume without deciding that
the Zenith Radio exception could apply to RICO claims.

10
violations. In Zenith Radio, the defendant raised a statute of
limitations defense, and argued that many of the purported
injuries arose from conduct that occurred more than four
years before the plaintiff filed suit. The Supreme Court
rejected the defendant's argument. The Court held that at
the time of the original misconduct, future damages were
speculative and unclear and therefore unrecoverable. See
id. at 339, 91 S.Ct. at 806. The Court noted that it would
be "contrary to congressional purpose[s]" to foreclose
recovery of those damages. It held that:

[R]efusal to award future profits as too speculative is
equivalent to holding that no cause of action has yet
accrued for any but those damages already suffered. In
these instances, the cause of action for future
damages, if they ever occur, will accrue only on the
date they are suffered; thereafter the plaintiff may sue
to recover them at any time within four years from the
date they were inflicted.

401 U.S. at 339, 91 S.Ct. at 806. The Appellants argue that
this case is factually similar to Zenith Radio , and that RICO
damages were merely speculative at the time of their
investment. For support, they cite a list of cases from the
Second Circuit Court of Appeals and our recent decision in
Maio v. Aetna, Inc., 221 F.3d 472 (3d Cir. 2000).9

The District Court rejected the proposition that the
Appellants were injured when "their investments resulted in
a `catastrophic loss,' that is, loss of capital gains from
appreciation of the properties when they were sold." App. at
_________________________________________________________________

9. In Maio, we held that a plaintiff lacks standing to bring a RICO claim
unless he has suffered a concrete financial loss. See Maio v. Aetna, Inc.,
221 F.3d 472 (3d Cir. 2000). Plaintiffs sued their HMO claiming that
they had received an "inferior health care" product. They alleged neither
a denial of medical benefits nor inferior treatment. Instead, their claim
rested solely upon Aetna's misrepresentation, which allegedly caused
them to pay too much in premiums. We rejected the plaintiffs' theory.
Although we recognized that the diminution in value of tangible property,
"like a plot of land or diamond necklace," can constitute a RICO injury,
the plaintiffs' interest was merely a contractual right. 221 F.3d at 488-
89. In that context, a RICO injury requires "proof that Aetna failed to
perform under the parties' contractual arrangement." Id. at 490.

11
42. Instead, the court ruled that the underlying claim was
for securities fraud, and in such cases, an injury occurs
when an investor purchases overpriced securities. See App.
at 66, 75 ("[I]t is well established that securities fraud in
the sale of limited partnership interests occurs when the
partnership interests are sold.") (citing Volk v. D.A.
Davidson & Co., 816 F.2d 1406, 1412 (9th Cir. 1987)). The
court, however, did not explicitly address Zenith Radio.10
Nonetheless, we agree with the District Court's conclusion
and find the Appellants' reliance upon Zenith Radio
misplaced.

The value of a security is related to its expected return
and its inherent risk. All else being equal, the greater the
expected return and the lower the risk, the more valuable
the security. If we accept the Appellants' allegations as
true, Kidder overstated the expected return of the funds
and downplayed their inherent risks. Thus, Kidder's
misrepresentations exaggerated the value of the funds and
led the Appellants to purchase overpriced securities. We
therefore conclude that the Appellants sustained an injury
when they purchased units in Kidder's investment funds --
the only question is whether their damages, at the time of
their investment, were sufficiently concrete.

We answer in the affirmative for three reasons. First, we
agree with Kidder that the actual value of the securities was
readily calculable at the time of the Appellants' investment.
See Appellant's Br. at 27 ("While this determination may
require some calculation or even expert testimony, the
measure of damages is not speculative."). The raison d'etre
of many investment banks and financial institutions is to
calculate the value of complicated securities, many of which
are far more complex than the funds at issue here.
Certainly, district courts are no strangers to expert
testimony concerning financial valuation. See, e.g., Sowell
v. Butcher & Singer, Inc., 926 F.2d 289, 297 (3d Cir. 1991)
("[D]amages are most commonly calculated as the difference
between the price paid for a security and the security's
_________________________________________________________________

10. The court cited Zenith Radio only once, noting that courts apply a
pure injury occurrence accrual rule for Clayton Act antitrust violations.
See App. at 49 n.12.

12
`true value.' "). In this case, as Kidder contends, "the Funds
could have been valued at any time based, in part, on the
yearly valuations of these properties." Appellant's Br. at 27.
The Appellants' damages, at the time they invested, were
simply the difference between the approximate value of the
Funds, calculated based upon market information free of
Kidder's misrepresentations, and the actual purchase price.

Second, we agree with the reasoning employed by the
only other Circuit Court of Appeals to have addressed this
issue. In a remarkably similar factual setting, the Second
Circuit Court of Appeals held that investors were injured
when they purchased overpriced limited partnership units
based upon the defendant's fraudulent misrepresentations.
See In re Merrill Lynch Ltd. P'ships Litig., 154 F.3d 56, 59
(2d Cir. 1998). Before the Merrill Lynch decision, a number
of Second Circuit cases had suggested that a RICO injury
did not occur at the time of investment. 11 The District Court
in Merrill Lynch summarized those cases as follows:

[They stand] for the proposition that when a creditor
has been defrauded, but contractual or other legal
remedies remain which hold out a `real possibility' that
the debt, and therefore the injury, may be eliminated,
RICO injury is speculative, and a RICO claim is not
ripe until those remedies are exhausted.

In re Merrill Lynch Ltd. P'ships Litig., 7 F.Supp.2d 256, 263
(S.D.N.Y. 1997). Nonetheless, the court drew a critical
distinction between cases involving contractual debt
instruments and those involving "equity investments with
no basis for recovery other than the limited partnerships'
performance." Id. Traditionally, the line between debt and
equity has been well defined.12 Debt contracts promise set
_________________________________________________________________

11. See First Nationwide Bank v. Gelt Funding Corp., 27 F.3d 763, 767-
68 (2d Cir. 1994) (holding that a RICO injury does not occur until a debt
becomes uncollectible and the note holder exhausts his contractual
remedies); Cruden v. Bank of New York, 957 F.2d 961, 977-78 (2d Cir.
1992) (holding that a RICO injury does not occur until a debtor defaults
on promised principal and equity payments); Bankers Trust Co. v.
Rhoades, 859 F.2d 1096, 1103 (2d Cir. 1988) (holding that a RICO
injury does not occur until it becomes clear that a loan will not be
repaid).
12. We recognize that modern financial markets, and the widespread use
of complicated derivative instruments, have blurred the once-sharp

13
future payments of interest and principal. Upon default, an
investor can recover damages through a contract action. In
contrast, an equity investment is traditionally considered
an ownership stake in an underlying asset. There is no
promised return; therefore, an investor has no contractual
remedy if the underlying property, asset, or venture fails.

The District Court in Merrill Lynch recognized that in the
debt context, a RICO injury occurs only when a debtor
defaults on his contractual obligation. 7 F.Supp.2d at 263.
Only at that point can an investor be sure that he will not
receive the benefit of his bargain. We implicitly recognized
the same principle in Maio v. Aetna, Inc., 221 F.3d 472 (3d
Cir. 2000). In that case, the plaintiffs claimed that Aetna's
fraudulent misrepresentations had led them to buy
overpriced health insurance. We held, however, that a RICO
injury did not occur until Aetna failed to perform its
contractual obligations -- i.e., until it failed to provide
health benefits or treatment that it had promised. 221 F.3d
at 488-90. In essence, we characterized the plaintiffs'
property interest as a contractual right to receive certain
benefits, and distinguished it from an ownership interest in
tangible property. See id. at 489-90 ("[T]he property rights
at issue are different from interests in real or personal
property.").

In contrast, the Appellants' interest in this case was an
ownership stake in real property, fundamentally no
different than "a plot of land or a diamond necklace." Maio,
221 F.3d at 488. Although Kidder may have been overly
optimistic in describing its investment funds, it never
_________________________________________________________________

distinction between debt and equity. See Anthony P. Polito, Useful
Fictions: Debt and Equity Classification in Corporate Tax Law, 30 Ariz.
St.
L.J. 761, 790 (1998) ("[F]inance theory cannot identify the true boundary
between debt and equity."). Today, debt contracts are openly traded, are
valued from moment to moment, and often behave like equity, especially
when a company experiences financial difficulty. Thus, any legal test
dependent upon a bright-line distinction between contractual debt and
equity ownership is at best precarious. However, both the Second
Circuit, and possibly the Supreme Court, have apparently adopted this
distinction. Luckily, because this case concerns a clear equity interest
in
real property, we need not explore this potential minefield any further.

14
promised a set return. Therefore, the Appellants have no
contractual remedy for the losses they incurred. Instead,
Kidder offered an equity investment, contingent upon the
appreciation, or lack thereof, of the underlying Sunbelt
properties. The crux of the Appellants' claim is that they
overpaid for that interest. We believe that the most accurate
way to measure that loss, like for any other tangible
property interest, would be to calculate the difference
between what the Appellants paid and the true market
value of what they received. Therefore, we agree with the
Second Circuit Court of Appeals that this case is
distinguishable from those involving contractual
agreements, such as debt contracts. When a defendant
fraudulently misleads individuals into purchasing equity
interests in real property, an injury occurs at the time of
investment.

Finally, caselaw concerning U.S. securities regulations
also supports our conclusion. The Appellants argue that
their losses did not become sufficiently concrete until
Kidder decided to liquidate the funds in 1993. They
presumably believe that the only non-speculative way to
determine damages would be to calculate the difference
between what they originally paid for the fund units and
what they received upon liquidation. In other words, they
believe rescission is the only proper approach. See Pinter v.
Dahl, 486 U.S. 622, 641 n.18, 108 S.Ct. 2063, 2076 n.18
(1988) ("[R]escission [provides] for restoration of the status
quo by requiring the buyer to return what he received from
the seller;" in terms of damages, rescission provides "the
consideration paid for such security with interest thereon,
less the amount of any income received thereon."). Of
course, we need not determine the best method for
calculating damages in the present case. Our task is merely
to decide whether the Appellants' damages could have been
calculated at the time of their injury. If an "out of pocket
measure" of damages (the difference between the purchase
price of a security and its true value) is viable in this case,
we must conclude that the Appellants' injury, at the time of
their investment, was sufficiently concrete.

The Appellants have alleged securities fraud under
S 12(2) of the Securities Exchange Act of 1933. See 15

15
U.S.C. S 77I, App. at 38. Section 12(2) specifically provides
for rescissionary damages. See Bally v. Legg Mason Wood
Walker, Inc., 925 F.2d 682, 693 (3d Cir. 1991). However,
the Appellants also cite S 10(b) of the Securities Exchange
Act of 1934. See 15 U.S.C. S 78j(b), App. at 38. Damages in
S 10(b) securities fraud cases "are most commonly
calculated as the difference between the price paid for a
security and the security's `true value.' " Sowell v. Butcher
& Singer, Inc., 926 F.2d 289, 297 (3d Cir. 1991). Although
we have declined to establish a firm rule for calculating
S 10(b) damages, see Scattergood v. Perelman, 945 F.2d
618, 624 n.2 (3d Cir. 1991), the Fifth Circuit Court of
Appeals has commented at length about the conceptual
shortcomings of rescission:

[T]he rescissional measure permits the defrauded
securities buyer to place upon the defendant the
burden of any decline in the value of the securities
between the date of purchase and the date of sale even
though only a portion of that decline may have been
proximately caused by the defendant's wrong. . . .
Under these circumstances, the rescissional measure is
unjust insofar as it compensates an investor for the
nonspecific risks which he assumes by entering the
market. Losses thus accruing have no relation to either
the benefits derived by the defendants from the fraud
or to the blameworthiness of their conduct.

Huddleston v. Herman & MacClean, 640 F.2d 534, 555 (5th
Cir. 1981), modified on other grounds, 459 U.S. 375, 103
S.Ct. 683 (1983). We have expressed similar sentiments.
See Hoxworth v. Blinder, Robinson & Co., Inc., 903 F.2d
186, 203 n.25 (3d Cir. 1990) ("Although the Supreme Court
has reserved the question whether a rescissionary measure
of damages is ever appropriate for defrauded buyers under
rule 10b-5, this court has expressed clear disapproval of a
damage theory that would insure defrauded buyers against
downside market risk unrelated to the fraud.").

Thus, in most S 10(b) cases, we are extremely hesitant to
award rescissionary damages and instead apply an"out of
pocket measure." In this case, there is nothing in the
record to suggest that the Appellants' injuries were any
more speculative or difficult to calculate than those in a

16
typical S 10(b) claim. Therefore, we reject the Appellants'
argument that their claims require a rescissionary measure
of damages. Instead, we conclude that the Appellants'
damages, at the time they purchased units in Kidder's
investment funds, could have been calculated by an"out of
pocket measure" and thus were sufficiently concrete and
non-speculative.

V. Injury Discovery

The Appellants' second primary objection is that the
District Court erred by holding that they should have
discovered their injury "no later than February 1990." App.
at 90. Because the court granted summary judgment, the
burden of proof is initially on Kidder to demonstrate the
absence of a genuine issue of material fact surrounding the
Appellants' discovery of their injury. See Celotex Corp. v.
Catrett, 477 U.S. 317, 322-24, 106 S.Ct. 2548, 2552-53
(1986). We recognize that this puts Kidder in the
unenviable position of arguing that its fraud was so obvious
that the Appellants should have discovered their injuries. In
addition, the issue is extremely fact-specific. See Davis v.
Grusemeyer, 996 F.2d 617, 623 n.10 (3d Cir. 1993) ("[T]he
applicability of the statute of limitations usually implicates
factual questions as to when plaintiff discovered or should
have discovered the elements of the cause of action;
accordingly, `defendants bear a heavy burden in seeking to
establish as a matter of law that the challenged claims are
barred.' ") (quoting Van Buskirk v. Carey Canadian Mines,
Ltd., 760 F.2d 481, 498 (3d Cir. 1985)). Therefore, Kidder's
task is not an easy one.13
_________________________________________________________________

13. It is not, however, impossible. We quickly reject any suggestion by
the Appellants that summary judgment can never be granted when the
issue of injury discovery is contested by the parties. Instead, we agree
that "[i]f the facts needed in order to determine when `a reasonable
investor of ordinary intelligence' discovered or should have discovered
the fraud can be gleaned from the pleadings, a court may resolve the
issue of the existence of fraud at the summary judgment stage." App. at
78. Thus, at least in the RICO context, we disagree with the Eleventh
Circuit Court of Appeals, which has held that "as a general rule, the
issue of when a plaintiff in the exercise of due diligence should have
known of the basis for his claims is not an appropriate question for
summary judgment." Morton's Market, Inc. v. Gustafson's Dairy, Inc., 198
F.3d 823, 832 (11th Cir. 1999).

17
In Forbes, we adopted an "injury discovery rule" whereby
a RICO claim accrues when "plaintiffs knew or should have
known of their injury." 228 F.3d at 484. By our own plain
language, the rule is both subjective and objective. The
subjective component needs little explanation -- a claim
accrues no later than when the plaintiffs themselves
discover their injuries. However, we offered little insight into
the objective prong of the Forbes test. We take this
opportunity to do so.

In order to determine whether the Appellants were on
"inquiry notice" of their injuries, the District Court relied
heavily upon caselaw in other Circuits concerning
securities fraud. Without a doubt, the Appellants' claim is
greatly dependent upon their allegations of securities fraud.
However, it is important to note that "[t]he focus of accrual
in a RICO action is different from that for a fraud claim
where the focus is on the acts of the defendants." Landy v.
Mitchell Petroleum Tech. Corp., 734 F.Supp. 608, 625
(S.D.N.Y. 1990). More specifically, a RICO claim accrues
when the plaintiffs should have discovered their injuries. In
contrast, a securities fraud claim accrues when the
plaintiffs should have discovered the misrepresentations
and wrong-doing of the defendants. The difference is subtle,
but in some circumstances, it can be dispositive. 14 In this
case, however, it is insignificant because the fraud and
injury occurred at approximately the same time -- when
the Appellants purchased Kidder's securities. Furthermore,
in most securities fraud actions, the plaintiffs' injuries are
inextricably intertwined with the defendant's
misrepresentations. Discovery of one leads almost
immediately to discovery of the other. Therefore, we believe
that the District Court did not err by relying upon
securities fraud precedent to determine whether the
Appellants were on "inquiry notice" of their injuries.

It would be an understatement to characterize the body
of caselaw concerning what constitutes "inquiry notice" in
_________________________________________________________________

14. In Landy, 734 F.Supp. at 625, the District Court held that the
defendant's fraud occurred approximately three years before the
plaintiffs were injured. Thus, the plaintiffs' securities fraud claim
accrued three years before their RICO action accrued.

18
a federal securities fraud action as extensive. See, e.g.,
Lawrence Kaplan, Annotation, What Constitutes"Inquiry
Notice" Sufficient to Commence Running of Statute of
Limitations in Securities Fraud Action -- Post-Lampf Cases,
148 A.L.R. Fed. 629 (1998). The general articulation of the
inquiry notice standard, however, is fairly consistent.15 In
the context of a RICO action predicated upon a securities
fraud claim, we hold that a plaintiff is on inquiry notice
whenever circumstances exist that would lead a reasonable
investor of ordinary intelligence, through the exercise of
reasonable due diligence, to discover his or her injury.

Some courts have further refined the inquiry notice test
into a multi-step analysis. See, e.g., Havenick v. Network
Express, 981 F.Supp. 480 (E.D. Mich. 1997); Addeo v.
Braver, 956 F.Supp. 443 (S.D.N.Y. 1997). The District
Court in this case applied a two-part test: "(1) whether the
plaintiffs knew or should have known of the possibility of
fraud (`storm warnings') and, once that possibility arose, (2)
whether plaintiffs exercised due diligence to determine the
origin and extent of the fraud. The first part of the test is
objective, the second subjective." App. at 80 (citations
omitted). In other words, the court asked whether there
were sufficient storm warnings on the horizon, and if so,
whether the Appellants exercised due diligence to recognize
them.
_________________________________________________________________

15. See Great Rivers Coop. of Southeastern Iowa v. Farmland Indus., Inc.,
120 F.3d 893, 896 (8th Cir. 1997) ("[I]nquiry notice exists when there are
`storm warnings' that would alert a reasonable person of the possibility
of misleading information, relayed either by an act or by omission.");
Gray v. First Winthrop Corp., 82 F.3d 877, 881 (9th Cir. 1996) ("[I]f a
prudent person would have become suspicious from the knowledge
obtained through the initial prudent inquiry and would have investigated
further, a plaintiff will be deemed to have knowledge of facts which
would have been disclosed in a more extensive investigation."); Dodds v.
Cigna Sec., Inc., 12 F.3d 346, 350 (2d Cir. 1993) (Plaintiff is on inquiry
notice "when a reasonable investor of ordinary intelligence would have
discovered the existence of the fraud."); Caviness v. Derand Res. Corp.,
983 F.2d 1295, 1303 (4th Cir. 1993) (Inquiry notice exists when plaintiff
"has such knowledge as would put a reasonably prudent purchaser on
notice to inquire, so long as that inquiry would reveal the facts on which
a claim is ultimately based.").

19
We hold that inquiry notice should be analyzed in two
steps. First, the burden is on the defendant to show the
existence of "storm warnings." As the District Court noted,
storm warnings may take numerous forms, and we will not
attempt to provide an exhaustive list. They may include,
however, "substantial conflicts between oral representations
of the brokers and the text of the prospectus, . . . the
accumulation of information over a period of time that
conflicts with representations that were made when the
securities were originally purchased," or "any financial,
legal or other data that would alert a reasonable person to
the probability that misleading statements or significant
omissions had been made." App. at 80-81.

The existence of storm warnings is a totally objective
inquiry. Plaintiffs need not be aware of the suspicious
circumstances or understand their import. It is enough that
a reasonable investor of ordinary intelligence would have
discovered the information and recognized it as a storm
warning. Thus, investors are presumed to have read
prospectuses, quarterly reports, and other information
relating to their investments. This comports with the
general purpose of civil RICO to encourage plaintiffs to
actively investigate potential criminal activity, to become
"prosecutors, `private attorneys general,' dedicated to
eliminating racketeering activity." Rotella , 528 U.S. at 557,
120 S.Ct. at 1082.

Second, if the defendants establish the existence of storm
warnings, the burden shifts to the plaintiffs to show that
they exercised reasonable due diligence and yet were
unable to discover their injuries. This inquiry is both
subjective and objective. The plaintiffs must first show that
they investigated the suspicious circumstances. 16 Then, we
must determine whether their efforts were adequate-- i.e.,
whether they exercised the due diligence expected of
_________________________________________________________________

16. We are reluctant to excuse Appellants' lack of inquiry because, in
retrospect, reasonable diligence would not have uncovered their injury.
Such a holding would, in effect, discourage investigation of potential
racketeering activity. See Rotella, 528 U.S. at 557, 120 S.Ct. at 1082.
Therefore, if storm warnings existed, and the Appellants chose not to
investigate, we will deem them on inquiry notice of their claims.

20
reasonable investors of ordinary intelligence. Because the
stated goal of civil RICO is to encourage active investigation
of potential racketeering activity, see Rotella , 528 U.S. at
557, 120 S.Ct. at 1082, we reject the proposition that
unsophisticated investors should be held to a lower
standard of due diligence.

In this case, the District Court found that Kidder had
established the existence of storm warnings. In particular,
our review of the record, in addition to the District Court's
findings, indicates four areas of potential concern-- the
initial prospectus, the "paltry" annual distributions of
rental income, the falling net asset value of each
partnership unit, and Kidder's periodic assessment of the
funds' economic health. While it is true that the"mix of
information" may constitute a storm warning in the
aggregate, we will address the prospectus and the
subsequent financial updates separately.

We begin with the prospectus. The District Court focused
much of its attention upon the descriptions of risks
provided in the prospectus. See App. at 49-53; 2443-2525.
We do not dispute that the language cited by the court is
present, or that "the specific risks discussed in the
[prospectus] are most of the events on which Plaintiffs base
their allegations of fraud." App. at 82. Nonetheless, we
agree with the spirit of the Appellants' position, that there
is nothing in the document to suggest the magnitude of the
many enumerated risks. In fact, in reading through the
numerous cautionary provisions, we are reminded of the
laundry lists of possible side-effects that accompany most
prescription medications. Just because there are risks,
even if they are numerous, does not mean that a drug is
unsafe. Similarly, there is nothing in the prospectus to
suggest that the funds are especially risky or inappropriate
for conservative investors.17

Like the Seventh Circuit Court of Appeals, we are mindful
of the dangers in adopting too broad an interpretation of
_________________________________________________________________

17. We agree with the District Court, however, that a reasonable investor
of ordinary intelligence would have read the prospectus. Therefore, we
reject any argument based upon the Appellants' ignorance of its
contents.

21
inquiry notice. See Law v. Medco Research, Inc. , 113 F.3d
781, 786 (7th Cir. 1997) ("[T]oo much emphasis on the
statute of limitations can precipitate premature and
groundless suits, as plaintiffs rush to beat the deadline
without being able to obtain good evidence of fraud");
Fujisawa Pharm. Co., Ltd. v. Kapoor, 115 F.3d 1332, 1335
(7th Cir. 1997) ("Inquiry notice . . . must not be construed
so broadly that the statute of limitations starts running too
soon for the victim of the fraud to be able to bring suit.").
If a relatively generic enumeration of possible risks, without
any meaningful discussion of their magnitude, can be
enough to establish inquiry notice at the summary
judgment stage, we would encourage a flood of untimely
litigation. Therefore, we hold that the prospectus, by itself,
does not constitute a storm warning.

Kidder's numerous financial updates, however, are a
different matter.18 Based upon the correspondence
concerning Funds I and II, we conclude that the District
Court, if anything, was overly generous to the Appellants in
holding that they should have discovered their injuries by
early 1990. Sufficient storm warnings existed for investors
in Funds I and II no later than April of 1989. On August
18, 1988, Kidder informed investors in Fund I that their
quarterly distribution had fallen to $3.00 per unit. 19 This
represented over a 66% decrease in the initial fund
distributions, which ranged from $9.07 (Q3, 1983) to $9.40
(Q1, 1985). On that same date, Kidder informed investors
in Fund II that their quarterly distributions had fallen to
$1.50 per unit. This represented over a 75% decrease in the
initial fund distributions, which ranged from $6.00 (Q2,
_________________________________________________________________

18. Because reasonable investors of ordinary intelligence read
correspondence describing the economic health of their investments, we
presume that the Appellants read the documents that Kidder sent them.

19. There are implications in both the parties' briefs and the District
Court's opinion that the total amount of distributions was "paltry" or
excessively low. We find this argument puzzling. A $9.00 quarterly
distribution, if consistent, would result in an approximate annual yield
of 7.2% ($36.00 per $500 unit). This rate of return is generally
consistent with a conservative, low risk investment vehicle. Contrary to
the suggestions of the parties, a higher return would arouse suspicion
that the securities were actually high-risk, speculative investments.

22
1985) to $7.00 (Q4, 1986). Even if the distributions had
returned to their original levels at some later time, this sort
of volatility is simply inconsistent with a conservative
investment vehicle similar to municipal bonds.

Furthermore, Kidder also sent the Appellants annual
updates on the total net asset value of the individual units.20
As of December 31, 1985, Fund I units had a total net
asset value of $532. On April 8, 1989, Kidder sent a letter
to Fund I investors indicating that total net asset value had
fallen to $337. See App. at 1204. This represented a 36%
decrease from 1985. As of December 31, 1985, Fund II
units had a total net asset value of $509. On April 8, 1989,
Kidder sent a letter to Fund II investors indicating that total
net asset value had fallen to $351. See App. at 1872. This
represented a 31% decrease from 1985.

The Appellants' only response is that "there was ample
evidence from which a jury could conclude that it was
entirely reasonable for [them] to wait and see how things
developed." Appellants' Br. at 40. The Appellants
fundamentally misunderstand their own argument. They
contend that Kidder fraudulently misrepresented the
inherent risk of the investment funds. According to modern
finance, risk is best understood as a security's volatility.
Therefore, regardless of whether the funds recovered, the
large swings in their distributions and net asset values are
inconsistent with low-risk, conservative investments.21 After
the funds' net asset values fell over 30% and their
distributions fell by over 60%, the Appellants should have
recognized that they were not the safe, conservative vehicles
_________________________________________________________________

20. We agree with the District Court that these values were, at the very
least, "a good indicator . . . of [the fund units'] market value." App. at
86.

21. Even if the Appellants' argument was on-point, courts have
consistently discouraged a "wait and see" strategy. For example, in
Tregenza v. Great Am. Communications Co., 12 F.3d 717, 722 (7th Cir.
1993), "plaintiffs waited patiently to sue. If the stock rebounded from
the
cellar they would have investment profits, and if it stayed in the cellar
they would have legal damages. Heads I win, tails you lose." The court
held that the plaintiffs were on inquiry notice. See also Sterlin v.
Biomune
Sys., 154 F.3d 1191, 1202 (10th Cir. 1998) ("The purpose behind
commencing the . . . limitations period upon inquiry notice is to
discourage investors from adopting a wait-and-see approach.").

23
promised by Kidder. Based upon the financial information
received by the Appellants, we have no problem concluding
that ominous storm warnings, concerning Funds I and II,
were present no later than April 1989.

As the Appellants point out, however, Fund III is a closer
question. By April of 1990, the Fund's net asset value had
fallen only 14%, see App. at 2629, and its distributions
were still consistent. See App. at 2947-48. In fact, a
noticeable decrease in the Fund's distributions did not
occur until the first quarter of 1992, and the Appellants
were not informed until May 15, 1992. See App. at 981.
Even when viewed in combination with Kidder's prospectus
and the cautionary language in its quarterly updates, we
would be hard-pressed to find no genuine issue of material
fact as to whether Fund III investors were on inquiry notice
of their injuries prior to 1992. However, the Appellants did
not allege a separate cause of action based solely upon
Fund III. Instead, they sought and were granted
certification of a class that included investors in all three
funds, and they alleged a common, overarching pattern of
racketeering activity. See Mathews v. Kidder Peabody &
Co., No 95-85, 1996 WL 665729, at *4 (W.D. Pa. Sept. 26,
1996) ("Plaintiffs have alleged a large, unitary scheme, a
common course of conduct."). As we previously concluded,
the storm warnings pertaining to Funds I and II were
overwhelming. Thus, we conclude that sufficient storm
warnings existed for the entire class certified by the
Appellants.

Because storm warnings were present, we must next
determine whether the Appellants exercised due diligence
expected of reasonable investors of ordinary intelligence. We
conclude that they did not. Based upon the record, the
parties' briefs, and the District Court's opinion, the only
action that might be termed due diligence is a single letter
from Attorney Robert Wolf inquiring into the status of Fund
I.22 See App. at 68-69. According to the District Court,
_________________________________________________________________

22. According to the District Court's opinion, a small number of
plaintiffs
testified as to having asked their brokers about the status of their
investment, but they quickly "dropped the matter" after being assured
that everything was all right. See App. at 69-70 & n.62. A few cursory
inquiries cannot amount to reasonable due diligence.

24
Kidder responded with a four and one-half page letter,
reiterating financial information provided in quarterly
reports. The only positive sentiment in the letter was
Kidder's statement that the General Partners "remain
confident in the underlying value of the Partnership's real
estate assets and believe this value will be realized once
these markets turnaround." App. at 101 n.61. There is no
evidence that Wolf followed-up in any fashion. We agree
with the District Court that if anything, this evidences a
lack of due diligence.

Furthermore, to determine what constitutes "reasonable"
due diligence, we must consider the magnitude of the
existing storm warnings. The more ominous the warnings,
the more extensive the expected inquiry. In this case, the
warnings, at least for investors in Fund I and II, were
massive and extremely threatening. For "conservative first-
time investors," they must have appeared like funnel
clouds. That none of them pressed Kidder for an
explanation defies comprehension.

This case stands in stark contrast to Forbes, 228 F.3d at
479, where the plaintiffs hired an investigator, who made
numerous inquiries and requested financial documents not
only from the defendant, but also from other related
parties. He continued to pursue his investigation in spite of
continued opposition. Reasonable due diligence does not
require a plaintiff to exhaust all possible avenues of
inquiry. Nor does it require the plaintiff to actually discover
his injury. At the very least, however, due diligence does
require plaintiffs to do something more than send a single
letter to the defendant. If we were to hold that the
Appellants exercised reasonable due diligence in this case,
it would strip the requirement of any meaningful
significance. Therefore, because by early 1990, there were
numerous storm warnings that the Appellants failed to
adequately investigate, their claims accrued, and the
limitations period began to run, on that date.23
_________________________________________________________________

23. Because we agree that the Appellants should have discovered their
injuries no later than early 1990, we need not consider whether the
District Court erred in denying leave to amend their complaint. Even if
the Appellants were allowed to include allegations that the prospectus
itself was fraudulent, it would not change the outcome of the case. See
App. at 44 n.7. Because the Appellants should have discovered Kidder's
misrepresentations, whether within or outside the prospectus, more than
four years before they filed suit, their claims are barred.

25
VI. Fraudulent Concealment / Equitable Tolling

Finally, the Appellants argue that even if their claims
accrued in 1990, the statute of limitations should be tolled
due to Kidder's fraudulent concealment of its racketeering
activity. "Fraudulent concealment is an `equitable doctrine
[that] is read into every federal statute of limitations.' "
Davis v. Grusemeyer, 996 F.2d 617, 624 (3d Cir. 1993).

In Rotella, the Supreme Court indicated that RICO's
limitation period could be tolled "where a pattern remains
obscure in the face of a plaintiff 's diligence in seeking to
identify it." 120 S.Ct. at 1084, 528 S.Ct. at 561. We
adopted this holding in Forbes, 228 F.3d at 486-88, and
held that the plaintiff has the burden of proving the three
necessary elements of a fraudulent concealment claim-- (1)
"active misleading" by the defendant, (2) which prevents the
plaintiff from recognizing the validity of her claim within the
limitations period, (3) where the plaintiff 's ignorance is not
attributable to her lack of "reasonable due diligence in
attempting to uncover the relevant facts." See also Klehr v.
A.O. Smith Corp., 521 U.S. 179, 195-96, 117 S.Ct. 1984,
1993 (1997) ("[W]e conclude that `fraudulent concealment'
in the context of civil RICO embodies a `due diligence'
requirement."). However, when a plaintiff merely seeks to
survive summary judgment, there need only be a genuine
issue of material fact that the doctrine applies. Thus, a
court must determine:

(1) whether there is sufficient evidence to support a
finding that defendants engaged in affirmative acts of
concealment designed to mislead the plaintiffs
regarding facts supporting their Count I claim, (2)
whether there is sufficient evidence to support a
finding that plaintiffs exercised reasonable diligence,
and (3) whether there is sufficient evidence to support
a finding that plaintiffs were not aware, nor should
they have been aware, of the facts supporting their
claim until a time within the limitations period
measured backwards from when the plaintiffs filed
their complaint. Absent evidence to support these
findings there is no genuine dispute of material fact on
the issue and the defendants are entitled to summary
judgment.

26
Forbes, 228 F.3d at 487 (citing Northview Motors, Inc. v.
Chrysler Motors Corp., 227 F.3d 78, 87-88 (3d Cir. 2000)).
Here, we will assume that Kidder actively misled the
Appellants.24 Therefore, we must determine whether they
exercised "reasonable diligence" in attempting to uncover
the facts necessary to support a claim.25

Although a fraudulent concealment defense can offer a
tremendous advantage to plaintiffs,26 it is of little practical
utility here. In order to avoid summary judgment, there
must be a genuine issue of material fact as to whether the
Appellants exercised reasonable due diligence in
investigating their claim. We have already answered that
_________________________________________________________________

24. The Appellants rely primarily upon "optimistic statements" that
Kidder included in its quarterly newsletters. See Appellants' Br. at 46.
We have carefully reviewed these statements and are skeptical that they
amount to active misleading. Nonetheless, because we must draw all
reasonable factual inferences in favor of the plaintiffs at the summary
judgment stage, see Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255,
106 S.Ct. 2505, 2513 (1986), we will assume that they have satisfied the
first prong of the fraudulent concealment test.

25. The Appellants claim that they "need not demonstrate due diligence
to survive summary judgment." Appellants' Br. at 47. This position is
squarely foreclosed by Forbes, 228 F.3d at 487.

26. Upon first inspection, the utility of a fraudulent concealment defense
may not be readily apparent. In a civil RICO case where all the requisite
elements are present, a claim accrues immediately upon the plaintiff 's
discovery of her injury. See Forbes, 228 F.3d at 484. Absent equitable
tolling doctrines, ignorance of the remaining elements of her claim,
including the pattern required by RICO, is immaterial. A plaintiff has
four years from the time she discovers her injury to investigate, gather
evidence, and bring suit. At the end of the four years, her claim expires.
However, if the defendant misleads the plaintiff to believe that she does
not have a claim, fraudulent concealment doctrine tolls the limitations
period. Thus, if the defendant conceals any element of the offense,
including, but not limited to, the injury itself, the four-year period
will be
tolled. For this reason, an injury discovery rule that includes equitable
tolling approaches an injury and pattern discovery rule. The primary
difference is that under an equitable tolling regime, the decision whether
to toll the limitations period for lack of pattern discovery is left to
the
court's discretion. Nonetheless, fraudulent concealment doctrine
provides an extremely generous "out" from the potentially harsh injury
discovery rule of Forbes.

27
question in the negative. Therefore, we reject the
Appellants' fraudulent concealment claim.

VII. Conclusion

For the foregoing reasons, we will affirm the District
Court's grant of summary judgment in favor Kidder
Peabody & Co., Inc. and the Henry S. Miller Organization.

A True Copy:
Teste:

Clerk of the United States Court of Appeals
for the Third Circuit

28