## Facts

- An investor filed a putative securities-fraud class action against a pharmaceutical company in April 2005 under Exchange Act § 10(b) and SEC Rule 10b-5.
- The complaint asserted four theories of misstatements and omissions affecting the company’s stock price:
  - Misstatements and omissions about the viability of patents for two drugs and related litigation conduct.
  - Suppression of information about a drug’s addictive qualities and withdrawal effects.
  - Overcharging Medicaid and Medicare in violation of the False Claims Act, leading to multiple lawsuits.
  - Misstatements about the safety and efficacy of the drug’s pediatric use.
- For the withdrawal theory, lawsuits and related publicity occurred in 2001; the company referenced such matters in SEC filings and updated labeling in 2001 to warn of discontinuation effects.
- For the patent theory, the company publicly reported adverse patent-litigation outcomes in 2002, and the Federal Trade Commission publicly criticized the company’s conduct concerning one patent.
- For the overcharge theory, multiple suits between 2001 and 2003 alleged overcharging of government healthcare programs; these matters were publicly reported and/or referenced in corporate disclosures.
- The alleged corrective information was linked to stock-price declines as the events became public.

## Issues

1. Whether the patent, withdrawal, and overcharge theories were barred by the two-year limitations period because a reasonable investor was on inquiry notice of the probability of fraud more than two years before the April 2005 filing.
2. Whether prior lawsuits and regulatory activity, even if not pleading securities fraud, can trigger inquiry notice by disclosing facts that would alert a reasonable investor to probable § 10(b)/Rule 10b-5 violations.

## Decision

- The Second Circuit affirmed dismissal of the patent, withdrawal, and overcharge theories as untimely under the two-year limitations period.
- The court held that public lawsuits, regulatory actions, and the company’s disclosures provided sufficient “storm warnings” to place a reasonable investor on inquiry notice well before April 2003.
- The court agreed that the pediatric-use theory was treated differently on limitations grounds and left that claim undisturbed as not time-barred.

## Legal Principles

- A § 10(b)/Rule 10b-5 action must be filed within two years of discovering the facts constituting the violation (and no more than five years after the violation).
- Inquiry notice arises when publicly available circumstances would suggest to an investor of ordinary intelligence the probability of fraud, triggering a duty to investigate.
- Once storm warnings exist, the limitations clock runs if a reasonably diligent investigation would have uncovered the facts constituting the violation; a plaintiff cannot delay by waiting to sue.
- Inquiry notice may be triggered by the factual allegations revealed through non-securities litigation, regulatory actions, news coverage, and issuer disclosures, even if the earlier proceedings did not assert securities-fraud causes of action.

## Conclusion

The court held that widely publicized litigation, regulatory criticism, and issuer disclosures provided sufficient storm warnings to trigger inquiry notice on three theories of alleged fraud more than two years before suit, rendering those theories time-barred, while leaving the pediatric-use theory to proceed on timeliness grounds.


Masters v. GlaxoSmithKline, 271 F. App’x 46 (2d Cir. 2008)