Duhaime's Law Dictionary


Storm Warning Definition:

Data available to an ordinary investor that would give rise to a suspicion of fraud.

"Inquiry notice arises in a securities action when circumstances suggest to an investor of ordinary intelligence the possibility that he has been defrauded. In the vernacular of the securities laws,such circumstances are often analogized to storm warnings. Storm warnings may be found whenever there are any financial, legal, or other data, such as public disclosures in the media about the financial condition of the corporation that would tend to alert a reasonable person to the likelihood of fraud.

"Inquiry notice — often called storm warnings in the securities context — gives rise to a duty of inquiry when the circumstances would suggest to an investor of ordinary intelligence the probability that she has been defrauded. In such circumstances, the imputation of knowledge will be timed in one of two ways: (i) if the investor makes no inquiry once the duty arises, knowledge will be imputed as of the date the duty arose; and (ii) if some inquiry is made, we will impute knowledge of what an investor in the exercise of reasonable diligence should have discovered concerning the fraud, and in such cases the limitations period begins to run from the date such inquiry should have revealed the fraud.

"Thus, once placed on inquiry notice by storm warnings, an investor must perform a reasonable investigation into the possibility of fraud. An investor who fails to fulfill this duty of inquiry will be charged with the knowledge of what an investor in the exercise of reasonable diligence would have discovered concerning the fraud, and this knowledge is imputed as of the date a diligent investigation would have turned up evidence sufficient to establish a cause of action."

From the opinion of Justice Thomas Hollenhorst of the California Court of Appeal in Deveny v Entropin.

In Tello v Dean Witter, Justice Birch of the United States Court of Appeals used these words:

"Storm warnings are circumstances creating a duty of inquiry, such that an investor who acquires knowledge of storm warnings and does not investigate whether a securities fraud had occurred will have the available knowledge imputed to him or her. Once inquiry notice occurs, a prospective plaintiff enters a period of reasonable diligence, which is the time necessary, exercising ordinary investigation, to ascertain sufficient facts to file a complaint."

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