Sample Brief #2 Betz v. Trainer Wortham & Co.

An Appellant's Opening Brief In A Federal Civil Appeal The Concept Behind This Brief An investment company persuaded Heidi Betz to turn over her $2 million savings to them, assuring Betz that they would make it appreciate and generate $15,000 monthly income for her. But they invested her money in high-tech stocks that plummeted. When Betz sued for fraud and related causes of action, defendants moved for summary judgment, claiming that the statute of limitations had run. They argued that once Betz saw the monthly statements showing the value of her portfolio dropping, she had "storm warnings" of her claims and should have then filed suit. Betz submitted evidence that she was unsophisticated in financial matters, and defendants had told her that the stocks would bounce back. The trial court granted the motion. On appeal, I had two problems. The first: the trial judge was a well-respected liberal. The Court of Appeal might well think, "She would tend to favor an injured plaintiff over an investment company, so if she ruled for the company, the plaintiff's case must have been very weak indeed." The second problem was the law. Federal cases held, in general, that the statute of limitations for securities fraud began to run when a "reasonable investor" would realize that the defendants had probably lied to him. But who was a "reasonable investor"? Betz had testified that she didn't know a stock from a bond. Did that make her "unreasonable"? I used the cases that helped me, but the Respondent had some pretty good cases too - ones that held that an investor is supposed to be careful and vigilant. So the Court of Appeal could go either way, depending on what way it wanted to go. So my main job was to persuade the Court to want to go my way - with a "justice" argument. I did that by using facts in the record to paint a picture of the defendants as greedy and exploitive and Betz as an innocent pigeon there for the plucking. While preparing for oral argument, I got an idea for a theme - one that arose from reading the briefs, but which was not explicitly stated in my briefs. The case was assigned to a 3-judge panel of older men. I knew each of them was married. So at oral argument, I said:

Today, most middle-class families have a significant asset: the family home, which is often worth upwards of $1 million. And often the husband handles the family's investments. Usually, he dies before his wife. Do we want investment companies swarming like vultures around these widows, taking advantage of their lack of financial sophistication? When Congress enacted the SEC Act of 1934, did they intend primarily to protect sophisticated investors like Warren Buffet, or sitting ducks like Heidi Betz?

Did this get the judges thinking about their own wives? Don't know, but they reversed the summary judgment. See Betz v. Trainer Wortham & Co., Inc. (9th Cir. 2007) 519 F.3d 863 and 2007 WL 1494018 (9th Cir. 2007).

What To Watch For While Reading This Brief

The Table of Contents

Many judges and law clerks read this first, to get a sense of the issues. So I write the Argument section of the Table of Contents very carefully. There is no natural chronological order to the major headings, i.e., the facts supporting each cause of action are the same. So I put the strongest argument first (which I might have done even if it were out of chronological order). Each major heading is a full sentence, not a fragment (except for the Standard of Review, which also probably should have been a full sentence). Each one incorporates the correct standard of review ("triable issue of fact"). And I didn't try to make the headings do too much. To make them persuasive, I'd have to include so many facts that the headings would become unreadable. So this Table is only a guide, not a persuasive section of the brief. If it's a readable, coherent, logical guide, it will - I hope - get the judge thinking, "This guy knows what he is doing. Maybe the rest of his brief is just as good."

The Jurisdictional Statement and Statement of Issues

Federal Rules require a Jurisdictional Statement and a Statement of Issues at the outset of a federal court of appeal brief, so I comply. If not required, I probably would have omitted both. I would have shown jurisdiction in my Statement of the Case, and I would have explained the issues in my Introduction - in simple prose that would have been clearer than the stilted form of a Statement of Issues.

The Statement of the Case

The Statement of the Case (the procedural facts) summarizes the allegations of the complaint. These are only a lawyer's allegations, and not evidence, so they should not be taken as fact. Nevertheless, they can leave the judge reading them with the feeling, "If this is true, the plaintiff should win."

The Statement of Facts

The Statement of Facts (the real world facts) begins with a very brief discussion of the standard of review. Not many briefs do this, but I often do. It tells the judge where I get the facts in my Statement of Facts. In this case, I get the facts in accordance with the rule for reviewing a summary judgment: the evidence that favors the losing side, which happens to be me. She will read my opponent's brief right after mine. If my opponent states "facts" from contra evidence that favors him - and they usually do - the judge should immediately see that he is

violating the proper standard of review. (Just to make sure, I'll point this out in my Reply Brief.) My Statement of Facts uses short quotations from the witnesses extensively. When I go through a trial court record, I note every juicy quote and save it for exactly this purpose. What do you think of them? Imagine how my Statement of Facts would read if I had used no quotes and had instead substituted my own words. Which is more effective - a lawyer's words or the words of the real people? I include very few exact dates of various events, which are rarely important, clutter up the story, and leave the reader wondering if they are significant. But I do indicate the year and month (or season) of each event, to show the reader that the story is chronological and give her the sense of how long things are taking.

The Summary of Argument

I consider this section one of the most important sections of a brief. Up till now, I've been persuading implicitly in how I present my Statements of procedural and real world facts. Now I get to persuade explicitly. I don't try to do this too early (as lawyers often do in their Introductions). Here, however, I've already told the judge the issues and what the trial court did, and she's just read the facts. So now she knows enough to get the full impact of my precise arguments for reversal. Now is the right time to go to the heart of the case, quickly and succinctly. That's what this Summary does. This is more than a guide. It's a stand-alone, two-page brief. I'm able to do cover four major issues in only two pages because I discuss no cases. Cases are less persuasive than facts and policy arguments, so I focus on those two things here. Cases justify what the judge has already decided to do. Later - in the Argument section - I'll give the judge the cases she needs to write an opinion.

The Argument

The Standard of Review section is very short, because I've already discussed the standard of review at the outset of my Statement of Facts. No need to repeat stuff the judge already knows well, because appellate courts frequently review summary judgments.

The Argument frequently refers to the standard of review, because it is so helpful to my case: "I don't have to convince you, Judge, that Betz was right. You need find only that there's enough here to permit a reasonable jury to find that she was right."

And I focus on what the trial court did and said, because the trial court is my real opponent. It's her ruling that I'm trying to get reversed, and I know that the appellate judge will care more about her reasoning than anything my opposing counsel says.

I included several quotations from reported cases, because I thought they summed up certain justice points quite well. But maybe I used too many - judges often just skim over quotes. (To alleviate this problem, I italicized key sentences in several of the quotes.)

Note my use of a hypothetical example in Section IIB. If carefully constructed, this sort of thing can be very effective. But make sure it is not distinguishable from the facts of your case.

Check out the footnotes: only 3 in a rather complex brief. Judges don't care for footnotes much, so I keep them to a minimum. And none of the 3 deals with anything really important. They just clarify the facts and add a bit to the law. So if the judge doesn't bother to read them, it doesn't cost me much.

While the court allows 14,000 words, this brief comes in at under 10,000 - even though the facts are somewhat complex and I cover six major issues. Like I said, Sculpt the Elephant.

The Conclusion

My Conclusion is weak. I should have added some punch - a strong, short statement re why it was simply unfair to let this case go to trial.

IN THE UNITED STATES COURT OF APPEALS FOR THE NINTH CIRCUIT

NO. 05-15704

D.C. No. CV-03-03231-SI HEIDE BETZ, * *

Appellant * * vs. * * TRAINER WORTHAM & COMPANY, * INC., DAVID P. COMO, FIRST * REPUBLIC BANK, a Nevada Corporation, * and ROBERT VILE * *

Respondents * *

* * * * * * * * * * * * * * * * * * * * * * * * * * * *

APPELLANT’S OPENING BRIEF On Appeal from the United States District Court, Northern District of California, San Francisco

Division The Honorable Susan Illston, District Judge

Myron Moskovitz, Calif. State Bar No. 36476 536 Mission St. San Francisco, Calif. 94105 (510) 384-0354 Attorney for Appellant

TABLE OF CONTENTS Jurisdictional Statement 1 Issues Presented for Review 2 Statement of the Case 4 Statement of Facts 8 Summary of Argument 15 Argument 18

I. Standard of Review 18 II. There Is A Triable Issue of Fact Regarding Whether The Statute of Limitations Had run on Betz’s Federal Claim for Securities Fraud. 18

A. The Test for Discovery 19

B. There Is A Triable Issue of Fact Regarding “Storm Warnings.” 21

C. There Is A Triable Issue of Fact Regarding When Betz Would Have Discovered Facts Showing Fraud. 23

III. There Is A Triable Issue of Fact Regarding Whether The Statute of Limitations Had Run On Betz’s State Law Claim for Breach of Fiduciary Duty. 30

A. The “Gravamen” of Count II Was Breach of Fiduciary Duty, And Therefore A Four-Year Statute of Limitations Applies. 31 B. Alternatively, The Gravamen of Count II Is Fraud, Not Negligence, And Therefore A Three-Year Statute of Limitations Applies. 35

IV. There Is A Triable Issue of Fact Regarding Whether The Statute of Limitations Had Run On Betz’s State Law Claim For Breach of the Implied Covenant of Good Faith And Fair Dealing. 37

V. There Is A Triable Issue of Fact Regarding Whether

The Statute of Limitations Had Run On Betz’s State Law Claim For Negligent Misrepresentation. 40

VI. There Is A Triable Issue of Fact Regarding Whether The Statute of Limitations Had Run On Betz’s State Law Claim For Unfair Business Practices. 42

Conclusion 44 Statement of Compliance With Rule 32(A)(7) 45

TABLE OF AUTHORITIES

CASES Anderson v. Liberty Lobby, 477 U.S. 242 (1986) 8, 43 Berry v. Valence Technology, Inc., 175 F.3d 699 (9th Circuit, 1999) 19, 21 Carruth v. Fritch, 36 Cal.2d 426 (1950) 29 City of Vista v. Robert Thomas Securities, Inc., 84 Cal.App.4th 882 (2000) 34 Davis v. Birr, Wilson & Co., 849 F.2d 1369-1370 (9th Cir. 1988) 27, 28 Davis & Cox v. Summa Corp., 751 F.2d 1507 (9th Cir. 1985) 34 Demarco v. Lehman Brothers, Inc., 309 F.Supp.2d 631 (S.D.N.Y. 2004) 23 Electronic Equipment Express, Inc. v. Donald H. Seiler & Co., 122 Cal.App.3d 834 (1981) 38, 41 Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976) 23 Federal Deposit Ins. Corp. v. McSweeney, 976 F.2d 532 (9th Cir. 1992), certiorari denied, 508 U.S. 950 35 Harm v. Frasher, 181 Cal.App.2d 405, 417 (1960) 37 Hopkins v. Dow Corning Corp., 33 F.3d 1116 (9th Cir. 1994) 40 Hydro-Mill Co. v. Hayward, Tilton and Rolapp Ins. Associates, 115 Cal.App.4th 1145 (2004) 32 Jones v. Union Pacific R.R., 968 F.2d 937 (9th Cir. 1992) 18 Kramas v. Security Gas & Oil Inc., 672 F.2d 766 (9th Cir.1982), cert. denied, 459 U.S. 1035, 103 S.Ct. 444, 74 L.Ed.2d 600 (1982) 20 McCoy v. Goldberg, 748 F.Supp. 146, 158-159 (S.D.N.Y. 1990) 25, 29 Meadows v. Pacific Inland Securities Corp., 36 F.Supp.2d 1240 (S.D. Cal. 1999) 20 Norgart v. Upjohn Co., 21 Cal.4th 383 (1999) 40 Sanchez v. South Hoover Hospital, 18 Cal.3d 93 (1976) 38

S.E.C. v. Seaboard Finance, 677 F.2d 1301 (9th Cir. 1982) 19, 25, 26 Seelenfreund v. Terminix of Northern Cal., Inc., 84 Cal.App.3d 133 (1978) 38 Stalberg v. Western Title Ins. Co., 230 Cal.App.3d 1223 (1991) 31 Sterlin v. Biomune Systems, 154 F.3d 1191 (10th Cir. 1998) 18, 20, 24 Suh v. Yang, 987 F.Supp. 783 (N.D. Cal. 1997) 42 Upingco v. Hong Kong Macau Corp., 935 F.2d 1043, 1045 (9th Cir. 1991) 38 Volk v. D.A. Davidson & Co., 816 F.2d 1406 (9th Cir. 1987) 28 Vucinich v. Paine, Webber, Jackson & Curtis, Inc., 739 F.2d 1434 (9th Cir. 1984) 26 Washington v. Baenziger, 673 F.Supp. 1478 (N.D. Cal. 1987) 20

Young v. Lepone, 305 F.3d 1 (1st Cir. 2002) 20, 23

STATUTES & RULES 28 U.S.C.A. §1291 1 28 U.S.C. §§1331 1 28 U.S.C. §1337 1 28 U.S.C. §1658(b) 18 §10B of the Securities and Exchange Act of 1934 (15 U.S.C. §78j(b)) 1 Calif. Code of Civil Procedure §337(1) 40 California Code of Civil Procedure §338, subsection (d) 35 Calif. Code of Civil Procedure §339, subsection 1 37 Fed.Rules Civ. Proc., Rule 11 23 Rule 10b-5 of the Securities and Exchange Commission (17 C.F.R.§240.10b-5). 1

OTHER AUTHORITIES Witkin, Calif. Procedure, Actions, §139 35

JURISDICTIONAL STATEMENT In this action for securities fraud and related state claims, jurisdiction in the district court

was based on 28 U.S.C. §§1331 and 1337, §10B of the Securities and Exchange Act of 1934 (15

U.S.C. §78j(b)), and Rule 10b-5 of the Securities and Exchange Commission (17

C.F.R.§240.10b-5).

The district court granted Defendants’ motion for summary judgment on April 5, 2005

(Excerpts of Record (ER) 758), and issued judgment on the same day (ER 770). That judgment

is a final judgment disposing of all the parties’ claims.

On April 21, 2005, Plaintiff timely filed notice of appeal from that judgment (ER 771).

This Court has jurisdiction to hear this appeal under 28 U.S.C.A. §1291, which provides that:

“The courts of appeals * * * shall have jurisdiction of appeals from all final decisions of the

district courts * * * *”

ISSUES PRESENTED FOR REVIEW I. Is there a triable issue of fact on the question of whether Betz knew or should have known that

Defendants committed fraud before July 11, 2001, where up to that time Betz had received

account statements showing that Defendants had failed to perform their promise to maintain the

value of her portfolio, but Betz had no information indicating that Defendants’ promise was

based on a deliberate lie?

II. Where a cause of action alleges that Defendants were professional investment managers who

breached their fiduciary duty by promising an unsophisticated, retired art consultant that they

would use their experience and expertise to invest her retirement money in conservative

securities suitable for her needs, but instead invested in speculative high-technology and

communications stocks, is the “gravemen” of this cause of action just what it says it is — breach

of fiduciary duty (which carries a four-year statute of limitations) — or is it something else:

negligence (which carries a two-year statute of limitations), even though this cause of action

makes no mention of negligence?

III. Is there a triable issue of fact on the question of whether Betz should have known that

Defendants breached the implied covenant of good faith and fair dealing before July 11, 2001,

under California law, which holds that “In the presence of a fiduciary relationship, the usual

duty of diligence to discover facts giving rise to a cause of action does not exist”?

IV. Is there a triable issue of fact on the question of whether Betz should have known that

Defendants made negligent misrepresentations before July 11, 2001, under California law,

which holds that “In the presence of a fiduciary relationship, the usual duty of diligence to

discover facts giving rise to a cause of action does not exist”?

V. Where Defendants continuously lied to Betz throughout the entire period from June of 1999

to June of 2002, does the statute of limitations for fraudulent and unfair business practices begin

to run in June of 1999, or in June of 2002?

STATEMENT OF THE CASE The original Complaint in this case was filed in the court below on July 11, 2003. ER 1.

A First Amended Complaint was filed (ER 10), but this was dismissed (ER 25). A Second

Amended Complaint (SAC) was then filed (ER 36), and Defendants’ motion to dismiss this SAC

was denied (ER 60).

The Second Amended Complaint alleges the following facts.

Defendant Trainer Wortham is an investment management company directed and

managed by Defendant First Republic Bank, and Defendants Como and Vile work for Trainer

Wortham. ER 37.

Plaintiff Heide Betz owned an estate of $2.2 million. ER 40. She also owed a large debt

to First Republic Bank. ER 41. Castro worked for First Republic Bank. ER 41.

Como, Vile, and Castro told Betz that if she gave Trainer Wortham control over her

estate, they would invest the money so that she would receive income of $15,000 per month

without depleting her capital. ER 39. This was false, and these people knew that it was

impossible for $2.2 million to generate this much income without depleting capital. ER 39. But

they lied to Betz in order to induce her to give Trainer Wortham control over Betz’s estate, so

they could garner commissions, so they could pay a secret kickback from Trainer Wortham to

First Republic Bank, and so First Republic could obtain repayment of its loan to Betz. ER 39.

Betz was to use $7,500 of the monthly income to pay off the loan to First Republic. ER 40.

She advised these people that the $2.2 million was all the money she had, that she was

completely dependent on income from this money for her support, that she was completely

unsophisticated in investment matters, and that she would be completely dependent on these

people for their expertise and advice. ER 40. They falsely told her that they would invest her

money in accordance with generally accepted investment principles and accepted guidelines

(such as Standard & Poor’s). ER 40-42.

In reliance on these lies, on June 7, 1999, Betz entered into an oral Portfolio Management

Agreement with Trainer Wortham, giving Defendants the power to invest her $2.2 million estate.

ER 39, 43.

Thereafter, in willful violation of industry-accepted guidelines for investments for retired

persons such as Betz, Defendants invested 100% of Betz’s money in stocks, even though

Defendants knew that such heavy investment in stocks was unsuitable for a person in Betz’s

position. ER 44. In addition, instead of buying stocks in blue chip, safe, dividend-paying

companies, Defendants spent 63% of Betz’s money buying stock in high risk technology and

telecommunication companies that paid no dividends and earned no profits, such as Lucent,

QWEST, and MCI/Worldcom. ER 46. Defendants also recommended that Betz purchase more

equities on margin, thereby substantially increasing her risk of depleting her estate, and Betz

followed this recommendation. ER 50.

When the stock market turned downward, the value of Betz’s investments dropped

sharply, and she lost more than $2 million. ER 53. Betz did not discover Defendants’ lies until

March of 2002. ER 52.

The SAC alleges that Defendants thereby committed securities fraud under federal law

(Count 1, ER 37), and alleges the following claims under pendant state law: breach of fiduciary

duty (Count II, ER 53), breach of the implied covenant of good faith and fair dealing implied

into the Portfolio Management Agreement (Count III, ER 55), negligent misrepresentation

(Count IV, ER 56), and fraudulent and unfair business practices (Count V, ER 57).

Defendants filed an answer to the SAC (ER 61). After both parties engaged in discovery,

Plaintiff moved for partial summary judgment (ER 71) and Defendants filed a motion for

summary judgment (ER 237). The district court denied Plaintiff’s motion and granted

Defendants’ motion for summary judgment, holding that all of Betz’s claims were barred by

various statutes of limitations (ER 758).

On April 5, 2005, the court issued judgment (ER 770). On April 21, 2005, Plaintiff filed

notice of appeal from that judgment (ER 771).

STATEMENT OF FACTS This Statement of Facts draws from various declarations and exhibits presented to the

district court on the motion for summary judgment. In accordance with well-established rules, it

focuses on the evidence that supports the party opposing the motion for summary judgment

(Plaintiff Betz) — and all reasonable inferences therefrom. Anderson v. Liberty Lobby, 477 U.S.

242, 255 (1986). This is proper, as the issue here is whether there is one or more triable issue of

fact that should be decided by a jury — and not which side is more believable. “Credibility

determinations, the weighing of the evidence, and the drawing of legitimate inferences from the

facts are jury functions, not those of a judge ruling on a motion for summary judgment.” Id. at

255.

In early 1999, Plaintiff Heide Betz, a retired art consultant and dealer, was selling her

house and buying a co-op to live in. ER 666:6; 675:10-12. Betz was seeking a real estate loan to

purchase the co-op, and she met with Carmen Castro (agent of Defendant First Republic Bank)

for this purpose. ER 705:17-25.

When Castro learned that Betz had obtained $2.2 million from the sale of her house,

Castro suggested that Betz meet with Defendant David Como, an agent for Defendant Trainer

Wortham. ER 705:20-25. First Republic Bank owns Trainer Wortham. ER 705:11. Up to this

time, Betz had no plan to invest any money with Trainer Wortham. ER 705:20-21.

In May or June of 1999, Betz met with Como. ER 705:26-27. Betz told Como and Castro

that the $2.2 million was all the cash she had and that she had no regular income, and that she

had sold her home in order to generate enough income to live on. ER 705:27-706:3; ER 670:9-

18.

“I told David Como that I knew absolutely nothing about the stock market or financial

markets and I repeated that many times over the next months that this was all the cash that I had

and I could not afford to lose it.” ER 706:3-6. Castro admitted that Betz “had repeatedly told us

that she knew nothing about the stock market or bond market.” ER 713:21-23.

Castro and Como recommended that she invest her money with Trainer Wortham. ER

671:4-7.

During subsequent meetings, Como and Castro told Betz that she would need about

$15,000 per month for her support. ER 706:12-16. They told Betz that she could withdraw the

$15,000 each month without having to touch the growth of her portfolio. ER 300:21-25. This

$15,000 would be in addition to growth in the value of the investment, which would grow to

about $2.7 million on one year and to $4 million in 5 years. ER 668:11-17.

On June 7, 1999, Betz entered into an oral Portfolio Management Agreement, giving

Defendants control over her $2.2 million. ER 705:16-19. They agreed that “David Como would

invest my 2.2 million dollars cash in such a fashion that I would receive $15,000 a month from

the profit of the investment and that he would not touch the principal.” ER 677:17-20.1

In November of 1999, Betz needed to pay a tax bill on the sale of her house. ER 706:20-

24. Como and Castro suggested that she borrow money on margin instead of selling some

securities. ER 706:20-24. Betz did not understand “margin.” ER 706:24-25. Como explained it

to her, but “I still did not understand either what that really meant or the logic of it.” ER 325:10-

17. Betz initially wanted simply to take the money out of her portfolio to pay the tax bill, but

Como said “No, you must go on margin. This is not how we do business.” ER 680:4-21. Castro

told Betz to follow Trainer Wortham’s advice to go on margin, because “They’re the experts.”

ER 681:3-10. Betz followed their advice, because “I didn’t think I had a choice.” ER 706:25-27;

680:9; 326:8-9. Castro later admitted that “maybe we shouldn’t have borrowed on margin.” ER

1 Betz and Trainer Wortham also entered into a written agreement on June 7, 1999. ER 380-384. That agreement contains no “integration” or “merger” clause. It provides that Trainer Wortham “will remit .25% of the gross investment advisory fee to First Republic Bank (the ‘bank’) for its referral services.” ER 380.

715:5-8.

Betz received monthly reports from Defendants. ER 691:1-2. She understood only the

“bottom line” — the total value of her portfolio. ER 691:5-6. She did not know whether she

had invested in stocks or bonds, and never discussed investing in bonds with Como, because

“Mr. Como told me that he was completely in charge and knew what he was doing. And I

trusted that he knew what he was doing, so I did not discuss that, no.” ER 691:13-18. Betz

could not explain what a “stock” is, nor what a “bond” is. ER 691:7-9; 299:24-300:10.

Betz relied solely on Como and Castro for financial advice. ER 298:18-24. “I trusted

everything that David Como said to me. I was never, ever consulted on purchase of the type of

stock or the specific investment portfolio that David Como planned to invest my $2.2 million

cash in. I continually advised David Como and Carmen Castro that I was not familiar with the

stock market nor investment strategies and that I would rely on them for their investment

advice.” ER 706:15-20.

In March or April of 2001, Betz spoke with Defendant Robert Vile, another Trainer

Wortham agent, to express her dismay that the value of her portfolio had dropped below $2.2

million. ER 706:27-707:4. “Robert Vile assured me that this was temporary and stated that

within a year or less the market would recover and my account would be back to $2.2 million.”

ER 707:4-6. Vile “assured me that he knew exactly what he was doing to bring this back up to at

least 2.2, if not more, in no time.” ER 694:20-695:1. Vile also told Betz that the portfolio’s

value was dropping because of Betz’s monthly withdrawals — even though the withdrawals

were part of the original agreement. ER 681:18-22. But Vile nevertheless told Betz that “we

know what we are doing. This is temporary. We’re going to – we’re watching your account.

And it’s temporary. We’re taking care of everything. Don’t worry about it.” ER 696:16-24.

And even in March of 2001, when the value of Betz’s portfolio had dropped to $848,000,

Vile assured Betz that the drop “was temporary” and promised her that the value “within no time

it would be back up [to $2 million] and that they knew what they were doing.” ER 697:20-25;

698:14-20; 699:2-8.

David Como “continually advised me that there was nothing wrong with the portfolio and

that the value would be back up very soon.” ER 707:13-14; 693:8-11. And Carmen Castro

“always reassured me that Robert Vile and David Como knew what they were doing and that I

should not worry about my portfolio,” that “things are going great,” and that “I do not need to do

anything with my account, that nothing is wrong with the account, and that Charles Moore, the

president of defendant Trainer Wortham & Company would meet with me and see that my

account is replenished.” ER 709:19-26; 700:4-11.

In March, April, or May of 20012, Castro told Betz that “we have a serious problem with

the way this portfolio has been managed”, but the president of Trainer Wortham (Charles Moore)

would take care of the problem because it was the right thing to do and because they valued

client relations. ER 707:6-12. There was no evidence that Castro ever advised Betz that Como or

Vile had deliberately lied to Betz.

In late May of 2002, Mr. Moore sent word to Betz that Betz should “be patient with them

and not take any legal action and respect their time frame.” ER 707:18-21. Betz agreed to do so.

ER 707:21.

In June of 2002, however, Moore (through Castro) told Betz that Trainer Wortham and

First Republic Bank “were not going to do anything at all.” ER 707:21-24. Betz then realized

that Defendants’ representations and promises had been false and merely attempts to induce her

not to take legal action. ER 707:24-26.

2 Betz’s Declaration, at ER 707:14-18, says that this meeting occurred in 2002, but this appears to be in error. At her deposition, Betz testified that the meeting took place in 2001 (ER 350:7-355:7), and the District Court accepted 2001 as the correct year (ER 760:27).

Charles Moore, President of Trainer Wortham, later testified that a portfolio of about $2

million invested in equities would earn about two percent in 1999 — about $40,000 per year.

ER 717:14-20. Moore admitted that there was no way $2 million could earn $15,000 a month:

“This doesn’t make sense.” ER 717:14-20. Como made a similar admission. ER 719:17-24,

723:4-23.

SUMMARY OF ARGUMENT The District Court erred in holding that there is no triable issue of fact regarding Count I,

Betz’s federal claim for securities fraud. A reasonable jury could find that Betz did not know

and should not have known of Defendants’ fraud more than two years prior to the filing of the

complaint. The District Court ruled that the account statements Betz received in February of

2000 and thereafter were “storm warnings” of fraud. But those account statements told Betz only

that Defendants had failed to fulfill their promise to keep the value of her portfolio from falling

below $2.2 million. Those account statements gave Betz no indication that Defendants had

deliberately lied when they made that promise. Therefore, these account statements were not

“storm warnings” of fraud. And even if they were, Betz reasonably investigated this possibility

by making inquiries to the very experts that Defendants themselves had told her to trust.

The law does not require an unsophisticated investor to immediately file a lawsuit for

fraud against a sophisticated financial advisor as soon as the value of her account declines. Such

a policy would increase meritless litigation rather than encourage parties to work out their

differences amicably.

The District Court erred in finding no triable issue of fact on Count II, Betz’s state law

claim for breach of fiduciary duty, which carries a four-year statute of limitations. The District

Court ruled that a two-year statute of limitations applies to this claim, because the “gravamen” of

Count II was really negligence, not breach of fiduciary duty. But nowhere does Count II allege

negligence. Instead, Count II alleges that Defendants induced Betz to place her confidence in

their experience and expertise to manage her assets, thereby creating a fiduciary duty under

California law, and that Defendants breached this duty by investing her assets in speculative

stocks that were unsuitable for Betz’s stated needs. The fact that Defendants might also have

been negligent in doing so does not change the gravamen of Count II.

And even if the gravemen of Count II is something other than what it explicitly states

(breach of fiduciary duty), that something would be fraud, not negligence, because Count II

expressly alleges that Defendants lied to Betz. As fraud carries a three-year statute of

limitations, Count II is not time-barred.

The District Court erred in finding no triable issue of fact regarding Count III (breach of

implied covenant of good faith and fair dealing) and Court IV (negligent misrepresentation), both

of which carry a two-year statute of limitations. The court overlooked the California rule that

“In the presence of a fiduciary relationship, the usual duty of diligence to discover facts giving

rise to a cause of action does not exist.”

The District Court erred in finding no triable issue of fact regarding Count V, for unfair

and fraudulent business practices, which carries a four-year statute of limitations. The court

assumed that the statute began running in February of 1999, when Defendants made their false

promises. But in fact Defendants made false promises and reassurances to Betz continuously

from 1999 to June of 2002, which is well within the four years before the complaint was filed.

ARGUMENT

I. STANDARD OF REVIEW An appeal from a summary judgment is reviewed de novo. Jones v. Union Pacific R.R.,

968 Fed.2d 937, 940 (9th Cir. 1992).

II. THERE IS A TRIABLE ISSUE OF FACT REGARDING WHETHER THE STATUTE OF LIMITATIONS HAD RUN ON BETZ’S FEDERAL CLAIM FOR SECURITIES

FRAUD. The statute of limitations for Betz’s federal §10(b) claim for securities fraud is five years

after the fraud or two years after the “discovery” of the fraud, whichever is earlier. 28 U.S.C.

§1658(b). In their motion for summary judgment, Defendants argued that the “discovery” period

applies here. Because the original complaint was filed on July 11, 2003, the two-year statute of

limitations would bar Betz’s suit only if Defendants prove that Betz “discovered” Defendants’

fraud before July 11, 2001.

Betz in fact “discovered” the fraud in June of 2002, when Moore (through Castro) told

Betz that Trainer Wortham would not deliver on its promises to make her account whole. ER

707:21-24.

Defendants invoked the rule that the statute of limitations began to run “once the

investor, in the exercise of reasonable diligence, should have discovered the facts underlying the

alleged fraud.” Sterlin v. Biomune Systems, 154 F.3d 1191, 1201 (10th Cir. 1998); Berry v.

Valence Technology, Inc., 175 F.3d 699, 704 (9th Circuit, 1999). Defendants argued that Betz

should have discovered their fraud before July 11, 2001.

This Court has held that “the question of when fraud is discovered is for the trier of fact,”

that because of this “the party seeking summary disposition has an extremely difficult burden to

show that there exists no issue of material fact regarding notice,” and that “summary disposition

of this issue is discouraged.” S.E.C. v. Seaboard Finance, 677 F.2d 1301, 1309 (9th Cir. 1982)

(emphasis added).

Nevertheless, the District Court found that there is no triable issue of fact as to whether

Betz should have discovered Defendants’ fraud before July 11, 2001. ER 764-766. This, we

contend, was error.

A. The Test for Discovery

Defendants made no claim that Betz actually discovered their fraud before July 11, 2001.

They claimed only that she should have discovered their fraud by then, whereupon Betz could

then have filed a lawsuit for fraud.

This issue may be determined as a matter of law “only when the uncontroverted evidence

irrefutably demonstrates that the plaintiff discovered or should have discovered” the fraud at a

particular point in time. Kramas v. Security Gas & Oil Inc., 672 F.2d 766, 770 (9th Cir.1982),

cert. denied, 459 U.S. 1035 (1982); Meadows v. Pacific Inland Securities Corp., 36 F.Supp.2d

1240, 1246 (S.D. Cal. 1999); Washington v. Baenziger, 673 F.Supp. 1478, 1485 (N.D. Cal.

1987).

According to the cases, the statute of limitations began to run when Betz had sufficient

information to file a lawsuit against Defendants for fraud. This would occur only when both (1)

there were “storm warnings” that should have alerted Betz to the possibility of fraud, and (2) she

then had time to investigate these “storm warnings” and acquire sufficient evidence to prove that

fraud had indeed occurred. “We hold, therefore, that following the receipt of sufficient storm

warnings, a plaintiff’s cause of action is deemed to accrue when, exercising reasonable diligence,

she would have unearthed the fraud.” Young v. Lepone, 305 F.3d 1, 9-10 (1st Cir. 2002).

This two-part rule is designed to ensure that “the applicable statute of limitations should

not precipitate groundless or premature suits by requiring plaintiffs to file suit before they can

discover with the exercise of reasonable diligence the necessary facts to support their claims.”

Sterlin v. Biomune Systems, supra, 154 F.3d at 1202. The Ninth Circuit Court of Appeals has

said that it would adopt this two-part test. Berry v. Valence Technology, Inc., supra, 175 F.3d at

704.

In the present case, the District Court purported to apply these two parts, but we

respectfully submit that its application was erroneous.

B. There Is A Triable Issue of Fact Regarding “Storm Warnings.”

The District Court found that Betz received “storm warnings” of Defendants’ fraud “in

February of 2000, when plaintiff received the first of thirty account statements between that

month and July 2001 showing that her portfolio had declined below the value of her original $2.2

million investment. These accounts directly contradicted the alleged oral representation made by

defendants.” ER 765:5-8.

True, the accounts did appear to show that Defendants had failed to perform their

promise to keep the principal intact, but they do not show that Defendants committed fraud, i.e.,

that Defendants had intentionally lied about their intentions to perform this promise.

Suppose A lends B $1,000 on B’s promise: “I’ll pay you back on March 1.” B’s failure

to pay the $1,000 on March would subject him to a suit for breach of contract, but without more

evidence, this would not subject him to a suit for fraud. B’s failure to pay would not even be a

“storm warning” of potential fraud. An attorney who filed a suit for fraud on these facts would

be subject to Rule 11 sanctions. Breaches of contract are common and ordinary, and the

overwhelming majority of such breaches are not based any fraudulent intent ab initio.

Betz was naturally disappointed and disturbed that the “bottom lines” on her accounts

had dropped, but this gave her no reason to believe that the Defendants had lied to her. Financial

experts such as Moore and Como might have known that it was impossible for her $2.2 million

to generate $15,000 a month without investing in risky stocks that might well decrease in value,

but Betz had no reason to know this. To hold her to this knowledge would simply reward

Defendants for their fraud.

Defendants have therefore failed to sustain their “extremely difficult burden” of

presenting evidence showing — “irrefutably”— that these accounts were “storm warnings” of

fraud.

Similarly, when Castro told Betz in March of 2001 that “we have a serious problem with

the way this portfolio has been managed” (ER 707:6-12), this gave Betz no reason to believe that

Defendants had lied to her back at the beginning, in June of 1999, when Defendants set up her

account. Castro’s statement indicated mismanagement, perhaps a breach of contract, perhaps

negligence — but not fraud.

At a minimum, there was a triable issue of fact on the issue of “storm warnings.” The

District Court’s ruling to the contrary was erroneous.

C. There Is A Triable Issue of Fact Regarding When Betz Would Have Discovered Facts

Showing Fraud.

“Storm warnings” alone, of course, cannot trigger the statute of limitations, because one

cannot file a federal lawsuit based on mere “storm warnings.” Without evidence of scienter, no

suit for fraud may be brought. Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 (1976); Demarco

v. Lehman Brothers, Inc., 309 F.Supp.2d 631, 637 (S.D.N.Y. 2004). Indeed, filing such a suit

would be unethical, subjecting her attorney to severe sanctions. See Fed.Rules Civ. Proc., Rule

11.

Even assuming that the monthly accounts gave Betz “storm warnings” of fraud, the

statute of limitations would not begin to run until the expiration of sufficient time to enable a

reasonable investor to investigate these “storm warnings” and uncover enough evidence of fraud

to file a lawsuit for fraud. Young v. Lepone, supra, 305 F.3d at 9-10.

What was this time? While the District Court purported to address this issue, it really did

not. The Court noted that Como, Vile, Castro, and Moore had given Betz assurances that her

account would recover, but held that these assurances “did not toll the statute of limitations.” ER

765:19-766:22. With respect, we submit that the District Court misunderstood the second half of

the two-part test.

The District Court assumed that “storm warnings” trigger the statute of limitations, and

that “reasonably diligent investigation” tolls the statute. This is not correct. “Storm warnings”

alone do not trigger the statute. Only “storm warnings” plus passage of a reasonable time to

investigate trigger the statute — because only an investigation that uncovers firm evidence of

fraud will permit the filing of a lawsuit for fraud. Otherwise, application of the statute of

limitations would “precipitate groundless or premature suits by requiring plaintiffs to file suit

before they can discover with the exercise of reasonable diligence the necessary facts to support

their claims.” Sterlin v. Biomune Systems, supra, 154 F.3d at1202.

We submit that a reasonable jury could find that Betz conducted a reasonably diligent

investigation by making inquiries to Como and Vile, the “experts,” according to what Castro had

told Betz. “They’re the experts.” ER 327:10. Indeed, Como himself had told Betz, “that he was

completely in charge and knew what he was doing.” ER 299:13-18. And Vile too had told Betz

that “we know what we are doing.” ER 332:16-24. See S.E.C. v. Seaboard Finance, supra, 677

F.2d at 1310 (where plaintiff questioned defendants and received assurances, “whether this

constituted reasonable diligence is uncertain,” so summary judgment improper).

In addition, a naïve investor such as Betz may rely on assurances that are meant to

supplant rather than supplement the written reports. In McCoy v. Goldberg, 748 F.Supp. 146,

158-159 (S.D.N.Y. 1990), the court held:

While defendants are correct in asserting that an investor cannot rely on "reassuring comments" made by an investment advisor in lieu of examining the furnished prospectus, Zola v. Gordon, 685 F.Supp. 354, 366 (S.D.N.Y.1988) (citing Volk v. D.A. Davidson & Co., 816 F.2d 1406 (9th Cir.1987)), such is not the case here. Defendants' statements to plaintiff regarding the content of the prospectuses were intended to supplant, rather than to supplement, the reading of the offering documents.

A reasonable jury could find that Castro, Como, and Vile intended to induce Betz to rely

on their assurances instead of the written reports, thereby supplanting them rather than

supplementing them.

But even assuming the District Court were correct in ruling that Betz’s reliance on the

assurances of the experts (the very experts who had persuaded her to trust them) was not a

sufficient investigation, the District Court failed to follow this determination with an answer to

the relevant questions: what should Betz have done, and how long would this have taken?

Should she have asked federal or state law enforcement agencies to investigate? If so, how long

would it have taken to get a response from these agencies? Should she have consulted a lawyer?

But a lawyer could not have filed a lawsuit based on mere “storm warnings,” and without a

lawsuit and its attendant discovery devices, how could the lawyer uncover evidence of fraud, and

how long would this have taken?

The District Court failed to address these vital issues. And if it had done so, it would

have had to have found a triable issue of fact. Indeed, the very difficulty of these issues is why

this Court has held that “the question of when fraud is discovered is for the trier of fact” and that

“summary disposition of this issue is discouraged.” S.E.C. v. Seaboard Finance, supra, 677 F.2d

at 1309.

The District Court noted this Court’s opinion in Vucinich v. Paine, Webber, Jackson &

Curtis, Inc., 739 F.2d 1434 (9th Cir. 1984). There, the district court granted summary judgment

based on the statute of limitations, but this Court reversed:

Vucinich filed suit in June 1982. More than three years prior to this date, she had become aware that the market was running against her. Additionally, she had been receiving monthly statements which, had she been able to interpret them, would have indicated that the value of her account was declining. She claims, however, that she could not decipher the statements and that she relied on Moore's continuing reassurance that a longer time was needed to realize gains from his strategy. By June 1980 Vucinich had received several margin calls, requiring her to liquidate certain stocks. Also by this date, she had been independently told by a friend that short positions were speculative.

The statutes of limitations begin to run when one should have been put on notice of the fraud or misrepresentation. Under California law, the statute of limitations may be tolled by a broker reassuring his client on concerns relevant to the possible misrepresentation. See Twomey v. Mitchum, Jones and Templeton, Inc., 262 Cal.App.2d 690, 723-29, 69 Cal.Rptr. 222 (1968). Whether the events existing as of June 1979 and June 1980 were sufficient to put Vucinich on notice and whether the reassuring statements of defendant reasonably affected that notice is a disputed question of fact requiring determination by the district court.

Reversed and remanded. [Id. at 1436-1437; emphasis added.]

Vucinich was an unsophisticated investor who could not read financial statements and

relied on defendants’ assurances — just like Betz.

The case is indistinguishable from the present case, but the District Court nevertheless

purported to distinguish Vucinich with a single sentence: “The Court of Appeals has expressly

held, however, that Vucinich does not compel denial of summary judgment where a plaintiff is a

sophisticated investor who monitors his or her monthly statements. See Davis v. Birr, Wilson &

Co., 849 F.2d 1369-1370 (9th Cir. 1988).” ER 766:10-14. This sentence is baffling. What is the

relevance of a case (Davis) in which the plaintiff was a “sophisticated investor”? Castro

admitted that Betz “had repeatedly told us that she knew nothing about the stock market or bond

market.” ER 713:21-23. And Betz “monitored” her monthly statements by looking only at the

“bottom line” — the total value of her account — because she did not understand the nature of

the investments that made up that account. ER 691:5-6. Betz did not even know the difference

between a stock and a bond. ER 691:7-9; 299:24-300:10. This is a far cry from the

“sophisticated investor” whose suit was barred in Davis:

In this case Davis was well-educated and had recently invested large sums of money with other brokers. He received monthly statements of his account, followed his investments, and made suggestions concerning them. In connection with one of his investments, Davis acknowledged that he was "an experienced and sophisticated investor." This is not a case like Vucinich v. Paine, Webber, Jackson & Curtis, Inc., 803 F.2d 454 (9th Cir.1986), in which we held there were questions of fact concerning the tolling of a statute for a naive investor who claimed that she was lulled into inaction by the defendant. [Davis v. Birr, Wilson & Co., 849 F.2d 1369, 1370 (9th Cir. 1988); emphasis added.]

The District Court also relied on several other cases, but only one of these was decided

by this Court: Volk v. D.A. Davidson & Co., 816 F.2d 1406 (9th Cir. 1987). But there is no

indication in the Volk opinion that the investors were unsophisticated, as were Vucinich and

Betz. And as McCoy, supra, noted, there was no indication in Volk of assurances that were

intended to supplant, rather than supplement, the written reports.

This Court’s approach in Vucinich makes perfect sense. A sophisticated investor might

select his own stocks and bonds, adjuring the services of financial experts and avoiding the fees

they charge. Firms such as Trainer Wortham are set up primarily to assist investors who feel

that they are not able to make these decisions by themselves and are willing to pay the firm’s

fees to fill in this knowledge gap.

Indeed, Trainer Wortham promotes itself to investors by lauding its “Experience”

(“continuity of investment professionals”), “Accountability” (“sole business is investment

management”) and “Integrity” (“commitment to meeting the financial needs and goals of our

clients”). ER 400. Trainer Wortham and similar firms send the message to financially

unsophisticated clients: “You are not financial experts, but we are — so trust us to invest your

money safely and profitably in ways that you do not understand.” Vucinich believed the

message, and so did Betz, and neither one should be penalized by the very naiveté that

defendants deliberately sought to exploit.

As the court stated in McCoy v. Goldberg, supra, 748 F.Supp. at 152, “After luring

plaintiff into ignorant reliance, defendants cannot now avail themselves of the doctrine of

constructive knowledge.” And in Carruth v. Fritch, 36 Cal.2d 426 (1950), the California

Supreme Court held: “The purpose of the statute of limitations is to protect a defendant from the

prosecution of a stale claim; it may never be used to assure the success of his fraud.” [Id. at 433-

434]

The District Court erred in ruling that there was no triable issue of fact on the issue of

when Betz would have discovered facts showing fraud.

III. THERE IS A TRIABLE ISSUE OF FACT REGARDING WHETHER THE STATUTE OF LIMITATIONS HAD RUN ON BETZ’S STATE LAW CLAIM FOR

BREACH OF FIDUCIARY DUTY.

Count II of the SAC alleges that the oral Management Agreement imposed a fiduciary

relationship on Defendants to Betz, and that Defendants breached their fiduciary duty to Betz by

failing to place her money in suitable investments, by recommending that she trade on an

unsuitable margin account, and by not disclosing to her that Trainer Wortham was going to kick

back a secret referral fee to First Republic. ER 53-55.

In California, the statute of limitations on breach of fiduciary duty is four years. Calif.

Code of Civil Procedure §343. The District Court held, however, that the “gravamen” of this

count is negligence, and not breach of fiduciary duty, and therefore California’s two-year statute

of limitations for negligence claims applies, so this claim is time-barred. ER 768:6-19.

There are two independent reasons why this ruling was erroneous: (1) the “gravamen” of

Count II is exactly what it says it is — breach of fiduciary duty — and therefore California’s

four-year statute of limitations applies, and (2) if the gravamen of Count II is not breach of

fiduciary duty, then the gravamen is fraud, which carries a three-year statute of limitations.

A. The “Gravamen” of Count II Was Breach of Fiduciary Duty, And Therefore A Four-Year Statute of Limitations Applies.

In California, the statute of limitations on a claim for breach of fiduciary duty is four

years (Calif. Code of Civil Procedure §343), and this four years begins to run when the plaintiff

“discovered, or in the exercise of reasonable diligence could have discovered, that facts have

been concealed.” Stalberg v. Western Title Ins. Co., 230 Cal.App.3d 1223, 1230 (1991).

Therefore, even if the District Court were correct in its ruling that Betz should have

discovered Defendants’ fraud as early as February of 2000, this was less than four years prior to

the filing of her complaint (on July 11, 2003). February of 2000 was when Betz received her

first account statement showing that the value of her portfolio had dropped below $2.2 million,

and there was no earlier date on which it might reasonably be argued that she should have known

of Defendants’ breach of fiduciary duty.

Therefore, it would seem that Count II was filed well within California’s statute of

limitations for breach of fiduciary duty.

But the District Court held that Count II is in fact not what it purports to be, but is

something else: a claim for negligence. This was error.

The District Court correctly noted that under California law, the statute of limitations is

determined by the “gravamen” of the cause of action rather than its form — at least where the

form is used to disguise the true gravamen of the cause of action. See Hydro-Mill Co. v.

Hayward, Tilton and Rolapp Ins. Associates, 115 Cal.App.4th 1145, 1154 (2004).

The gravamen of Count II is exactly what it says it is: breach of fiduciary duty.

In Hydro-Mill Co. v. Hayward, Tilton and Rolapp Ins. Associates, supra, 115 Cal.App.4th

at 1156-1157 (2004), the court explained when a fiduciary duty exists under California law:

A fiduciary relationship has been defined as "any relation existing between parties to a transaction wherein one of the parties is ... duty bound to act with the utmost good faith for the benefit of the other party. Such a relation ordinarily arises where a

confidence is reposed by one person in the integrity of another, and in such a relation the party in whom the confidence is reposed, if he voluntarily accepts or assumes to accept the confidence, can take no advantage from his acts relating to the interest of the other party without the latter's knowledge or consent.”

Count II alleges just such a relationship. ¶28 of Count II incorporates the prior

allegations of the SAC, and ¶30 alleges:

That by reason of the Management Agreement, a fiduciary relationship was created between plaintiff and defendants whereby defendants owed to plaintiff a fiduciary duty to act in plaintiff’s best interests, that this fiduciary duty imposed upon defendants a duty to manage plaintiff’s account in a manner that was consistent with plaintiff’s financial data, financial needs and plaintiff’s long-term objectives and, further, consistent with plaintiff’s age, her future retirement date and her total assets; and further, a duty to disclose to plaintiff the risk of any unsuitable investments and to keep plaintiff properly appraised of the status of her account. [ER 54].

And then ¶31 of the SAC alleges “That the defendants breached their fiduciary duty to

plaintiff by not fully investigating their suggested plan of investments to ensure its suitability for

plaintiff, by not allocating her investment in a manner that was consistent with recognized

guidelines for a investor of plaintiff’s age, financial condition, financial needs and plaintiff’s

inexperience in investment decisions. . . .” ER 54.

Thus, Count II alleges that Defendants owed Betz a fiduciary duty in certain specific

ways, and then alleges that they breached that duty by failing to perform in those same ways.

This breach was also negligent, probably — as most breaches of fiduciary duty are. But the fact

that a claim may state a cause of action under more than one theory of law does not mean that the

“gravamen” of the cause of action is not what it asserts itself to be. Negligence and breach of

fiduciary duty naturally overlap, but neither the District Court nor Defendants cited any authority

for the notion that this overlap changes the gravamen of a claim of breach of fiduciary duty.

California cases holding that the gravamen of a claim for breach of fiduciary duty was

some other claim usually involve a plaintiff’s attempt to present a weak or non-existent claim for

breach of fiduciary duty as a disguise for some other claim with a shorter statute of limitations.

For example, in City of Vista v. Robert Thomas Securities, Inc., 84 Cal.App.4th 882 (2000),

plaintiff purchased securities through defendant broker, and then plaintiff claimed that defendant

had defrauded plaintiff by engaging in price collusion with other brokers. The court reversed the

trial court’s grant of summary judgment against the fraud claim, but held that a claim for breach

of fiduciary duty was barred by the statute of limitations, because the gravamen of the complaint

was fraud. Id. at 889. There seemed to be no serious argument that there was any fiduciary

relationship between the broker and the plaintiff, and this cause of action was probably added

solely in an effort to take advantage of a longer statute of limitations.

Here, by contrast, the fiduciary relationship not just the gravamen of Count II — it was

its essence. Trainer Wortham had continuously urged Betz to place her trust in Trainer

Wortham’s expertise and reliability, and then they violated this trust. This breach of fiduciary

duty was real, substantial, and the very essence of Count II of the SAC.

Indeed, this case is quite similar to Davis & Cox v. Summa Corp., 751 F.2d 1507 (9th Cir.

1985), where a counterclaim asserted that a corporate director had acted negligently, but framed

this as a cause of action for breach of fiduciary duty. This was proper, according to this Court, as

“The gravamen of Summa’s counterclaim was Davis’ breach of fiduciary duties as a director,

rather than his professional malpractice.” Id. at 1520. In Federal Deposit Ins. Corp. v.

McSweeney, 976 F.2d 532 (9th Cir. 1992), certiorari denied, 508 U.S. 950, this Court followed

Davis & Cox.

The fact that this breach might also have constituted negligence does not bar Betz from

claiming breach of fiduciary duty. “A breach of contract is of course actionable regardless of

whether the act is independently wrongful as a tort.” Witkin, Calif. Procedure, Actions, §139.

Because the statute of limitations on Count II was four years, not two, the District Court

erred in ruling that there was no triable issue of fact on Count II.

B. Alternatively, The Gravamen of Count II Is Fraud, Not Negligence, And Therefore A Three-Year Statute of Limitations Applies.

If the gravamen of Count II is something other than what it purports to be — breach of

fiduciary duty — that something would be fraud, not negligence, because Count II expressly

incorporates ¶10 of the SAC, which alleges that Defendants lied to Betz. ER 39-40. There is no

paragraph alleging negligence in Count II or in any part of the SAC that is incorporated into

Count II.

California Code of Civil Procedure §338, subsection (d), provides that the statute of

limitations for fraud is three years from “the discovery, by the aggrieved party, of the facts

constituting the fraud. . . .”

Let us assume that this Court finds that Betz should have learned of Defendants’ fraud

earlier than the date on which she says she learned of it (June of 2002, when Castro told Betz that

Trainer Wortham and First Republic Bank “were not going to do anything at all.” ER 707:21-

24.) If so, then the proper date should not be February of 2000, when Betz began to receive

account statements showing that the value of her portfolio had fallen below $2.2 million. That

does not show that Defendants committed fraud by intentionally lying to Betz. No, the earliest

possible date on which this Court might conceivably find notice of fraud was March of 2001,

when Castro told Betz that “we have a serious problem with the way this portfolio has been

managed”, but the president of Trainer Wortham (Charles Moore) would take care of the

problem because it was the right thing to do and because they valued client relations. ER 707:6-

12.

March of 2001 was within three years of the date the complaint was filed: July 11, 2003.

Therefore, Count II was timely filed, and the District Court erred in ruling that it was time-

barred.

IV. THERE IS A TRIABLE ISSUE OF FACT REGARDING WHETHER THE STATUTE OF LIMITATIONS HAD RUN ON BETZ’S STATE LAW CLAIM FOR BREACH OF THE IMPLIED COVENANT OF GOOD FAITH AND FAIR DEALING.

Count III of the SAC alleges that inherent in the Management Agreement is an implied

covenant of good faith and fair dealing,3 and Defendants breached this covenant by failing to

place her money in suitable investments, by recommending that she trade on an unsuitable

margin account, and by not disclosing to her that Trainer Wortham was going to kick back a

secret referral fee to First Republic. ER 55-56.

The District Court held that this is a claim for breach of an oral agreement, carrying a two

year statute of limitations under California law (Calif. Code of Civil Procedure §339, subsection

1), which therefore bars this claim. ER 767:15-20.

But California law provides for a “discovery” rule for breach of a covenant in an oral

contract, at least where the breach is based on a claim of negligence, as is the case here. In

Seelenfreund v. Terminix of Northern Cal., Inc., 84 Cal.App.3d 133, 136 (1978), the court held

that “the statute of limitations began to run when appellant knew or should have known that the

contract had been negligently breached.”

As this Court has recognized, in California, “where a fiduciary relationship exists, ‘facts

which would ordinarily require investigation may not excite suspicion, and ... the same degree of

diligence is not required.’" Upingco v. Hong Kong Macau Corp., 935 F.2d 1043, 1045 (9th Cir.

1991).

3 Under California’s implied covenant of good faith and fair dealing,

There is implied in every contract a covenant by each party not to do anything which will deprive the other parties thereto of the benefits of the contract. . . . [T]his covenant not only imposes upon each contracting party the duty to refrain from doing anything which would render performance of the contract impossible by any act of his own, but also the duty to do everything that the contract presupposes that he will do to accomplish its purpose. [Harm v. Frasher, 181 Cal.App.2d 405, 417 (1960)]

In Electronic Equipment Express, Inc. v. Donald H. Seiler & Co., 122 Cal.App.3d 834

(1981), the court held that under California law, “the same degree of diligence is not required

where a fiduciary relationship exists between the parties at the time the alleged acts of

negligence occur.” Id. at 855. The court upheld a jury instruction that stated:

In the presence of a fiduciary relationship, the usual duty of diligence to discover facts giving rise to a cause of action does not exist. Since a fiduciary has a duty to make a full disclosure of the facts which might materially affect the rights of the parties, the party to whom the fiduciary duty is owed is entitled to rely on the fiduciary making a full disclosure, and cannot be penalized by failure to investigate circumstances which, in the absence of a fiduciary relationship, might cause a reasonable man to investigate. [Id. at 855]

The same theme was noted in Sanchez v. South Hoover Hospital, 18 Cal.3d 93 (1976),

where the court held:

[T]he patient is fully entitled to rely upon the physician's professional skill and judgment while under his care, and has little choice but to do so. It follows, accordingly, that during the continuance of this professional relationship, which is fiduciary in nature, the degree of diligence required of a patient in ferreting out and learning of the negligent causes of his condition is diminished. This principle is not confined to the physician-patient relationship alone but exists in other contexts as well, in which it is generally held that existence of the trust relationship limits the duty of inquiry. [Id. at 102; internal citations omitted.]

In this situation, there is at least a triable issue of fact regarding whether Betz should have

believed that Defendants negligently breached their implied covenant of good faith and fair

dealing before June of 2002, when Castro finally told Betz that Trainer Wortham and First

Republic Bank “were not going to do anything at all.” (ER 707:21-24), and Betz then realized

that Defendants’ representations and promises had been false and merely attempts to induce her

not to take legal action. ER 707:24-26.

Alternatively, the implied covenant of good faith and fair dealing is also implied into the

written agreement entered into by Betz and Trainer Wortham on June 7, 1999. See ER 380-384.

A four-year statute of limitations applies to breach of written agreements (California Code of

Civil Procedure §337), and Defendants breached that covenant within four years of the filing of

the complaint.

V. THERE IS A TRIABLE ISSUE OF FACT REGARDING WHETHER THE STATUTE OF LIMITATIONS HAD RUN ON BETZ’S STATE LAW CLAIM FOR NEGLIGENT

MISREPRESENTATION.

Count IV of the SAC alleges that Defendants negligently and falsely represented to Betz

that her $2.2 million could be invested in conservative securities while still enabling her to

withdraw $15,000 each month. ER 56-57.

The District Court held that California Code of Civil Procedure §337(1) imposes a two-

year statute of limitations on this claim, and therefore the claim is untimely. ER 767:22-768:4.

The statute of limitations for negligence in California is two years. Calif. Code of Civil

Procedure §337(1). But, “Under California's discovery rule, the accrual date of a cause of action

is delayed until the plaintiff is aware of her injury and its negligent cause.” Hopkins v. Dow

Corning Corp., 33 F.3d 1116, 1120 (9th Cir. 1994). See also Norgart v. Upjohn Co., 21 Cal.4th

383, 389 (1999).

As discussed above, the District Court applied the federal discovery rule improperly. If

the Court agrees with the argument above, then it should hold that the District Court also ruled

erroneously on Count IV, because under California law, “the same degree of diligence is not

required where a fiduciary relationship exists between the parties at the time the alleged acts of

negligence occur.” Electronic Equipment Express, Inc. v. Donald H. Seiler & Co., supra, 122

Cal.App.3d at 855.

In this situation, there is at least a triable issue of fact regarding whether Betz should have

known that Defendants were negligent before June of 2002, when Castro finally told Betz that

Trainer Wortham and First Republic Bank “were not going to do anything at all” (ER 707:21-

24), and Betz then realized that Defendants’ representations and promises had been false and

merely attempts to induce her not to take legal action. ER 707:24-26.

VI. THERE IS A TRIABLE ISSUE OF FACT REGARDING WHETHER THE STATUTE OF LIMITATIONS HAD RUN ON BETZ’S STATE LAW CLAIM FOR

UNFAIR BUSINESS PRACTICES.

Count V of the SAC alleges that Defendants engaged in unfair and fraudulent business

practices by making the false promises to Betz previously alleged and by paying the secret

kickback to First Republic Bank. ER 57-59.

The District Court held that California Business & Professions Code §17208 imposes a

four-year statute of limitations on this claim, which accrued in June of 1999, so it too is time-

barred. ER 768:21-769:11. This was error.

Defendants’ misrepresentations to Betz occurred not just at the outset of their

relationship, but continuously throughout the entire time they held her money. See ER 707:24-

708:2. Therefore, under California law, the statute of limitations did not begin to run until the

last of these continuous misrepresentations occurred (in June of 2002, when Castro told Betz

that Trainer Wortham and First Republic Bank “were not going to do anything at all.” ER

707:21-24. In Suh v. Yang, 987 F.Supp. 783, 795 (N.D. Cal. 1997), the court interpreted

California’s unfair competition law, holding that “Plaintiff's claim for unfair competition would

not be barred by the four year statute of limitations since the alleged wrongs (i.e., the wrongful

use and dilution of Suh's service marks) are multiple, continuous acts, and some of these acts

have occurred within the limitations period.”

The payment of the secret kickback was, presumably, not continuous, but a one-time

payment. The District Court assumed that this occurred in June of 1999, when Betz signed a

written agreement with Trainer Wortham that mentions a “referral fee.” But this agreement

states that Trainer Wortham “will remit” such a fee to First Republic, not that Trainer Wortham

“has remitted” the fee (ER 380), and there is nothing in the record that indicates when this

payment was in fact made. As payments are normally made about 30 days after billing, it may

reasonably be inferred that this payment was made in the middle of July of 1999, which would

be within four years before the complaint was filed on July 11, 2003. See Anderson v. Liberty

Lobby, supra, 477 U.S. at 242, 255 (1986) (on motion for summary judgment, court considers

evidence that supports the party opposing the motion for summary judgment — and all

reasonable inferences therefrom).

In sum, the District Court erred in ruling that there is no triable issue of fact on Count V.

CONCLUSION The District Court’s grant of summary judgment should be reversed.

Respectfully submitted, Myron Moskovitz Joseph M. Alioto Theodore F. Schwartz Attorneys for Appellant Heide Betz By:_______________________ Myron Moskovitz

Date: ____________________

STATEMENT OF COMPLIANCE WITH RULE 32(A)(7) This brief is 9,047 words long, which is less than the 14,000 word limit imposed by Rule

32(A)(7).

This brief complies with the typeface requirements of Fed. R. App. P. 32(a)(5) and the

type style requirements of Fed. R. App. P. 32(a)(6) because: This brief has been prepared in a

proportionally spaced typeface using Microsoft Word in Times New Roman, size 14.

____________________

Myron Moskovitz Attorney for Appellant

Sample Brief #3 Betz v. Trainer Wortham & Co.

A Reply Brief In A Federal Civil Appeal The Concept Behind This Brief What To Watch For While Reading This Brief

Betz Reply Brief

I. RESPONDENTS’ “FACTS” FAIL TO COMPLY WITH THE RULES ON SUMMARY JUDGMENT.

Respondents’ (“Appellees’”) brief is built upon a false foundation of “facts,” because

Respondents ignore the most important rule of summary judgment law. Respondents present

only their version of what happened, just as if Respondents were presenting a closing argument

to a jury. But this case is now before a court, not a jury, and the court’s function is to determine

whether, under the conflicting evidence in the record, a reasonable jury could (not should) rule

for Appellant.

A court considering a motion for summary judgment focuses on the evidence that

supports the party opposing the motion for summary judgment— and all reasonable inferences

therefrom. Anderson v. Liberty Lobby, 477 U.S. 317, 242, 255 (1986). This cardinal rule stems

from the very purpose of the motion: to determine whether there is one or more triable issues of

fact that should be decided by a jury — and not which side is more believable. “Credibility

determinations, the weighing of the evidence, and the drawing of legitimate inferences from the

facts are jury functions, not those of a judge ruling on a motion for summary judgment.” Id. at

255.

Respondents’ Brief makes no mention of this rule (even though at page 17 Respondents

purport to summarize the rules on summary judgment). Instead, Respondents rely on evidence

that supports their version of the facts, ignore evidence supporting Betz, and draw inferences that

support Respondents when the same evidence might support a different inference.

Respondents act as if certain evidence did not exist. Respondents’ “Statement of Facts,”

for example, makes no mention of the fact that Betz knew nothing about the stock market and

told this to Respondents (ER 706:3-6; 713:21-23). And Respondents fail to acknowledge that

Castro told Betz to follow Trainer Wortham’s advice because “They’re the experts” (ER 681:3-

10), and that Betz did so because “I didn’t think I had a choice” (ER 706:25-27; 680:9; 326:8-9).

Respondents make no mention of the facts that Robert Vile assured Betz that the decline in the

value of her portfolio “was temporary,” that Vile told Betz that “he knew exactly what he was

doing to bring this back up to at least 2.2, if not more, in no time,” and that Vile told Betz that

“We’re taking care of everything. Don’t worry about it.” ER 707:4-6; 681:18-22; 696:16-24.

Nor do Respondents acknowledge that David Como “continually advised” Betz that “there was

nothing wrong with the portfolio and that the value would be back up very soon.” ER 707:13-

14; 693-8-11. And Respondents include no mention of the fact that Carmen Castro “always”

told Betz that “Robert Vile and David Como knew what they were doing and that I should not

worry about my portfolio.” ER 709: 19-26; 700:4-11.

Respondents are free to ignore or deny this evidence when arguing to the jury, but before

this Court this evidence must be treated as established fact, and cannot simply be swept under a

rug.

In addition to ignoring facts unfavorable to them, Respondents also draw inferences

favorable to them when the same evidence is susceptible to contrary inferences.

On page 5, for example, Respondents list several pieces of evidence relating to Betz’s

experience as an art dealer and real estate investor – implying that Betz was in fact a

sophisticated securities investor – when a jury might reasonably reject this inference and instead

find that the time she spent on these activities left her no time to gain expertise in the more

specialized field of securities investments.

And at page 7, Respondents quote paragraph 4.5 of the written agreement Betz signed,

stating that success was not guaranteed. From this, Respondents would have this Court infer that

Betz knew of the risks and therefore was not defrauded. Indeed, Respondents stress this point at

pages 15 and 36. But it is at least as reasonable to draw a contrary inference favorable to Betz:

assuming Betz had read the written agreement, this language induced her to assume that the

subsequent decline in the value of her portfolio was not so unusual as to suggest that

Respondents had lied to her from the outset (even though Respondents had breached their

promise to her). Both inferences might be reasonable, but Respondents present only the one that

tends to support summary judgment. This is not proper, under the law.

At page 36, Respondents claim that the purpose of the Securities Exchange Act is to

protect the “innocent” investor, and not one “who loses his innocence and then waits to see how

his investment turns out . . . .” And then, at pages 36-37, Respondents assert as established fact:

Betz was not an “innocent” investor, because she “waited more than three years to file suit,

waiting to see how her investments would fare following the stock market crash.” Respondents

provide no citation to the record to support this assertion — because there is no evidence in the

record supporting it. Perhaps one might infer such deviousness, but one might equally infer that

Betz is just what she claims she is: a naïve investor who trusted the experts Respondents told her

to trust. The rules on summary judgment direct us to employ the latter inference, not the former.

If this Court reverses the summary judgment, this case will go to trial, where Respondents will

then be free to ask the jury to infer that Betz was speculating at Respondents’ expense. But that

possible inference has no place in this appeal.

And finally, Respondents’ Statement of Facts introduces almost every fact supporting

Appellant’s case with “Betz claims” or “Betz says” - a clever way of implying that Betz is lying.

Credibility issues, of course, are for the jury, not the court.

Betz’s Statement of Facts complies with the rules on summary judgment. Each stated

fact is supported by a citation to evidence in the record on appeal, and Respondents make no

contention that any of our stated facts is unsupported or that any inference we draw from those

facts is unreasonable. Therefore, those facts — and not the “facts” asserted by Respondents —

are the facts relevant to this appeal.

II. RESPONDENTS’ POSITION DOES NOT COMPORT WITH “COMMON SENSE.”

At pages 29-30, Respondents invoke “common sense.” They contend that when an

unsophisticated investor learns that the value of her portfolio is dropping, “common sense” says

that she should realize that her financial advisors deliberated lied when they told her it would not

drop.

We disagree. “Common sense” holds that when an established financial institution such

as Trainer Wortham solicits the business of naïve, inexperienced investors and offers them — for

a fee — the expert advice of experienced financial advisors and persuades those investors to rely

on the expertise of these advisors in the arcane, complex field of securities markets, an investor

who trusts such advice is behaving normally and rationally. When something goes wrong,

“common sense” would indicate to such a novice that there was a mistake, perhaps negligence,

but not deliberate fraud.

When a doctor promises but fails to cure an illness, a reasonable patient might blame fate

or perhaps suspect negligence, but almost never suspect fraud or a conscious desire to harm the

patient. When a lawyer promises but fails to win a case, a reasonable client would not suspect

that the lawyer deliberately planned to lose the case. And when Castro suggested that Betz’s

account had been “mishandled,” “common sense” would point Betz towards negligence, but not

deliberate fraud from the very beginning of their relationship. At a minimum, a reasonable jury

could so find, and that is all that is needed to defeat summary judgment.

Respondents rely — over and over — on a trio of scattered cases to support their notion

of “common sense.” Two of the cited cases are district court opinions (one not even published)

and two are from a different circuit: Bull v. Chandler, No. C-86-5710, 1992 WL 103686 (N.D.

Cal. 3/12/92); Addeo v. Braver, 956 F.Supp. 443 (S.D.N.Y. 1997); and Dodds v. Cigna Sec., Inc.,

12 F.3d 346 (2nd Cir. 1993).

Respondents assert at page 19 that “Those cases have consistently held that the statute of

limitations begins to run for purposes of summary judgment when the plaintiff receives written

materials that directly contradict a material part of the defendant investment advisor’s alleged

misrepresentations.” But those cases cannot be reconciled with the quite different approach

taken by this Court in Vucinich v. Paine, Webber, Jackson & Curtis, Inc., 739 F.2d 1434 (9th Cir.

1984), and Davis v. Birr, Wilson & Co., 849 F.2d 1369-1370 (9th Cir. 1988), where this Court

recognized the distinction between a sophisticated investor (Davis) and an unsophisticated

investor (Vucinich). Respondents attempt to distinguish these cases on their particular facts, but

that misses the point. In both cases, this Court – unlike the courts that decided Bull, Addeo, and

Dodds – recognized the real world fact that unsophisticated investors are not as able as

sophisticated investors to decipher sophisticated prospectuses and other investment materials, or

to infer fraud from declining stock values.

This Court’s approach, we submit, is the preferable one. It conforms to the most

important purpose of our securities laws: protecting unsophisticated people from the predations

of clever con men who promise the sun and the moon. To bar Betz’s claim on the ground that

she should have inferred fraud would employ the statute of limitations to “assure the success of

[Respondents’] fraud.” Carruth v. Fritch, 36 Cal.2d 426 (1950).

Like most naïve investors, Betz did not read her account statements carefully, because

she lacked the training and experience to do so intelligently. She understood only the “bottom

line,” and she did not even know whether she had invested in stocks or bonds. She reasonably

believed that she did not need to, because “Mr. Como told me that he was completely in charge

and knew what he was doing. ER 691:5-18.

If, as Respondents contend, written materials are sufficient to put naïve investors on

notice of fraud, we can expect con men to routinely send voluminous technical written materials

to their victims, secure in the knowledge that this will trigger the statute of limitations for fraud

while raising no substantial risk of actually triggering a lawsuit for fraud. This cannot be the

law.

At pages 24-25, Respondents contend that Betz could have sued them for fraud in

February of 2000, immediately after she received the first written monthly statement showing

that the value of her portfolio had dropped below its original value. Respondents cite this

Court’s opinion in In re Silicon Graphics Sec. Litig., 183 F.3d 970, 974 (9th Cir. 1999), for the

proposition that “strong circumstantial evidence” of fraud may suffice. But as this Court well

knows, “strong” means very strong — a barrier so high that securities fraud complaints of 100+

pages detailing circumstantial evidence of alleged fraud have been rejected time and again by

this Court and by district courts in this Circuit. The notion that a promise that the price would

not drop, followed by a price drop, constitutes fraud defies the “common sense” that

Respondents invoke.

III. THERE IS A TRIABLE ISSUE OF FACT REGARDING WHETHER THE STATUTE OF LIMITATIONS HAD RUN ON BETZ’S STATE LAW CLAIM FOR

BREACH OF FIDUCIARY DUTY.

At page 38-39 of their brief, Respondents claim that the “gravamen” of Count II of the

SAC is really negligence, not breach of fiduciary duty, because ¶14 of the SAC alleges (at ER

44) that Respondents failed to adhere to industry guidelines for retirement portfolios. But

Respondents omit the allegations that immediately follow the portion of ¶14 that they quote:

Defendant’s willful and intentional failure to follow industry accepted guidelines for a person in plaintiff’s position resulted in defendants allocating 100% of plaintiff’s investments in equities inviolation of the aforesaid accepted guidelines for retirement for persons in plaintiff’s position of those equities purchased by defendants for plaintiff’s retirement account, defendants willfully and intentionally failed to purchase dividend paying, blue chip stocks and Dow rated stocks but purchased unsuitable high-risk stocks in the volatile technology and telecommunications industry, none of which were paying any dividends nor were Dow components.” [ER 44-46; emphasis added.]

This, we submit, is no allegation of negligence, but of “willful and deliberate”

misconduct. It supports a claim for breach of fiduciary duty or fraud, either of which is not

barred by the statute of limitations.

IV. THERE IS A TRIABLE ISSUE OF FACT ON BETZ’S CLAIM FOR UNFAIR BUSINESS PRACTICES.

At page 47 of Respondents’ Brief, they claim that Bowen v. Ziasun Technologies, Inc.,

116 Cal.App.4th 777 (2004), bars this claim. Not so.

Bowen held that California’s unfair competition statute does not apply to lawsuits for

fraudulent sale of securities. This is not what happened here. Betz makes no claim that

Respondents sold securities to her. She contends only that Respondents lied to her about how

they would handle the $2.2 million she entrusted to them, and later mishandled that money.

CONCLUSION The District Court’s grant of summary judgment should be reversed.

Respectfully submitted, Myron Moskovitz Joseph M. Alioto Theodore Schwartz Attorneys for Appellant Heide Betz By:_______________________ Myron Moskovitz

Date: ____________________

STATEMENT OF COMPLIANCE WITH RULE 32(A)(7) This brief is 2,181 words long, which is less than the word limit imposed by Rule

32(A)(7).

This brief complies with the typeface requirements of Fed. R. App. P. 32(a)(5) and the

type style requirements of Fed. R. App. P. 32(a)(6) because: This brief has been prepared in a

proportionally spaced typeface using Microsoft Word in Times New Roman, size 14.

____________________

Myron Moskovitz Attorney for Appellant

Date: ______________