loans totalling over $ 1.7 million, a portion of which were still outstanding after preparation of the prospectus. In light of their aggregate, it is not reasonable to assume, without further inquiry, that these loans, while not disclosed, were nevertheless properly accounted for in the financial statements.
Finally, the notes to the financial statements in the May, 1984, prospectus stated that sales to ITG for the year ended November 30, 1983, were $ 13,912,000. In their complaint, plaintiffs allege that revenues for AIA were overstated by the use of false invoices purportedly from ITG in excess of $ 2.5 million, or almost 20 percent of the listed sales to ITG. Again, it is inconceivable that a reasonable person in plaintiffs' shoes would not verify this figure and find such a large discrepancy, particularly in light of the plight of AIA and ITG's large stake in AIA. I find plaintiffs' claim that they could not check this figure because ITG was on a different fiscal year to border on the frivolous. Surely, an accountant, in a very short time, could calculate billings to AIA for December 1, 1982, to November 30, 1983, from ITG's records.
It is clear that had plaintiffs examined the prospectus and the financial statements prepared for AIA by Price Waterhouse, even minimally, they would have been placed on inquiry notice of errors signalling a duty to exercise reasonable diligence. The duty to examine these public statements was heightened because of plaintiffs' significant business relations and their substantial investment position in AIA. Their position, coupled with the rapid decline of AIA and the allegations of fraud at AIA, would have put reasonable investors on notice to examine transactions that were questionable on their face and which could be disproved through an examination of their own records.
Because plaintiffs were on inquiry notice prior to October 29, 1984, their claims are barred if through the exercise of reasonable diligence they should have discovered the factual basis for their claims within the limitations period. It is clear, however, that in any event plaintiffs knew of the basis for their claims within two years. In May, 1985, the trustee demanded payment of over $ 600,000 shown as due from ITG on AIA's books. In September, 1985, plaintiffs were aware that an officer of AIA testified to fraudulent transactions by AIA including a phony $ 2.2 million purchase of airplane engines which were listed as assets by AIA. This money was then used to balance a reduction in receivables, including those of ITG. They also knew, in September, 1985, that a former AIA employee, then working for ITG, claimed to have prepared false AIA invoices to ITG in excess of $ 2.5 million. In November, 1985, Roy Goldberg testified that the trustee advised him that ITG accounts receivables had been overstated. In June, 1986, Roy Goldberg examined the confirmations from ITG used by Price Waterhouse in preparing its audits and testified they were forgeries. Finally on July 3, 1986, a class action complaint was filed against Price Waterhouse raising the same allegations as here.
The parties have directed my attention to additional information of which plaintiffs were not aware and argue as to whether a reasonable investor would have discovered this information. I need not reach this issue. Even assuming plaintiffs exercised reasonable diligence, plaintiff actually knew of the basis of their claims against Price Waterhouse within two years after they were on inquiry notice based upon the facts listed above which plaintiffs concede they knew. For these reasons, I will enter judgment in favor of defendant on both the federal and the state claims as this knowledge clearly satisfies both standards of accrual, which are virtually identical. It is important to remember plaintiffs were not normal investors; rather, they wore several hats with respect to AIA: substantial customer, exclusive agent, major investor, and director. Moreover, they persisted in providing additional financial and business help to AIA well after it faced imminent death. I find it incredulous for plaintiffs, given their interests, to assert blind reliance on the financial statements audited by Price Waterhouse when the most basic examination of the prospectus and cross-check with ITG's own records would have disclosed substantial inconsistencies. As one court has stated, to permit an investor to sit idly by:
would permit the securities acts to be used as havens for speculation and a buffer against any investment loss. When faced with knowledge of a company's serious financial difficulty, an investor cannot be allowed to wait for market increases knowing that if growth does not take place the securities acts will provide the insurance against loss. Instead, the exercise of reasonable diligence requires an investor to be reasonably cognizant of financial developments relating to his investment, and mandates that early steps be taken to appraise those facts which come to the investor's attention.
Cook v. Avien, 573 F.2d at 698 (emphasis added). Plaintiffs by either ignoring clear signals or failing to give even a cursory examination to public information, failed to satisfy this duty requiring me to conclude that their claims are barred.
AND NOW, this 7th day of September, 1988, upon consideration of the motions by plaintiffs and defendant for summary judgment, it is hereby ordered as follows:
1. Defendant's motion for summary judgment is granted.
2. Plaintiffs' motion for summary judgment is denied.
3. Judgment is entered in favor of defendant and against plaintiffs.