Securities fraud: Ninth Circuit clarifies the test for triggering the statute of limitations

Last week in Betz v. Trainer Wortham & Co., the Ninth Circuit clarified that "inquiry notice, and not merely actual notice, can cause the statute of limitations for securities fraud to begin to run."  The court also adopted the "inquiry-plus-reasonable-diligence test."  Under that standard, the court first determines when a plaintiff has "inquiry notice", i.e., has notice of facts "sufficiently probative of fraud - sufficiently advanced beyond the stage of a mere suspicion . . . to incite [him or her] to investigate."  Once a plaintiff has inquiry notice, the court asks when the investor, in the exercise of reasonable diligence, should have discovered the facts constituting the alleged fraud.  The answer to the second question determines when the statute of limitations began to run. 

The Court noted that, under the inquiry-plus-reasonable-diligence test, the defendant bears a "considerable burden" of showing an untimely claim at the summary judgment stage.  This means that a defendant is highly unlikely to obtain dismissal before trial of a securities fraud claim based on the running of the statute of limitations, if the plaintiff claims a delay in discovering the existence of the claim.