Petition — TOUCHE ROSS & CO. v. SEIFFER (Nos. 75-633, 75-574)
Supreme Court brief1975
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IN THE Wino
Supreme Court of the Gnited States
OCTOBER TERM, 1975.
No. 5-833 4
TOUCHE ROSS & CO.,
Petitioner,
vs .
ROBERT SEIFFER, ET AL.,
Respondents.
PETITION FOR A WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS FOR THE
TENTH CIRCUIT.
FRANCIS J. HIGGINS, GEORGE M. WINGER,
135 South LaSalle Street, 1411 Commerce Bank Building,
Chicago, Illinois 60603, Kansas City, Missouri 64106,
Attorneys for Petitioner,
Touche Ross & Co.
Of Counsel:
BELL, BOYD, LLOYD,
HADDAD & BURNS,
Chicago, Illinois,
SMITH, SCHWEGLER,
SWARTZMAN & WINGER,
INCORPORATED,
Kansas City, Missouri.
Gunthorp-Warren Printing Company, Chicago e Financial 6-6565
TABLE OF CONTENTS.
i dae ce CERES IDAO SORE ORNAEaNe een
Nee ee aa eae al
ee ee wes eae awe
Constitutional Provisions, Statutes, and Rules Involved .. .
SIE ES rn ane nee rar eee
Reasons for Granting the Writ ...............0.00055
A.
This Lawsuit Cannot Be Maintained as a Class
Action Against Petitioner Because the Individual
Issues Regarding Each Plaintiff's Due Diligence in
Bringing Suit Against Petitioner Predominate
Over Any Common Issues .................
The District Court’s Objective Standard of Due
Diligence Is Contrary to Substantive Law and
Contravenes Both the Rules Enabling Act and
the Petitioner’s Fifth and Seventh Amendment
Rights Under the Constitution of the United
DE bicndbvendhand ke ceeee ees Kebhaowens
The District Court’s Class Action Certification
Was, as to Petitioner, a Final Determination of
Right and Is Therefore Appealable Under 28
he A ee ar ree
The Courts of Appeal Are in Serious Conflict Re-
garding the Appealability Under 28 U. S. C.
§ 1291 of Orders Certifying Class Actions .....
This Case Should Be Reviewed by This Court
Because the Decisions of the District Court and
the Tenth Circuit, if Left Standing, Would Abro-
gate the Limitations Defense in Class Actions
Without Affording the Class Action Defendant
Any Practical Means of Appellate Review .....
a i Oe 2 ie ole
10
il
Appendix:
A—District Court Opinion ..............00e00e Al
B—District Court Judgment ................205. A9
C—Court of Appeals Order of September 19, 1974.. All
D—Court of Appeals Order of January 8, 1975 .... Al2
E—Court of Appeals Opinion ................. Al4
F—Court of Appeals Order of August 26, 1975 ... A20
G— United States Constitution, Fifth Amendment .. A21
H—United States Constitution, Seventh Amendment A22
Pc Gls We es EEE EE ok ccc ccbcckcvcescs A22
4—-Rules Enabling Act, 28 U. S. C. Section 2072 .. A23
K—Federal Rules of Civil Procedure, Rule 23 ..... A24
L—Opinion of the Court of Appeals for the Ninth
Circuit in Blackie v. Barrack (September 25,
DE ccna to bee eenes eeahaen sees A27
TABLE OF AUTHORITIES.
Cases.
Affiliated Ute Citizens v. United States, 406 U. S. 128
aa ae Oe BE ead od oe ene te 0 648.6 7
Bailey v. Glover, 88 U. S. 342 (1874) ............... 6
Blackie v. Barrack, CCH Fed. Sec. L. Rep. § 95,312 (9th
Ss EY A, ED in Cb bbb coc cevecewcenceses 11
Blue Chip Stamps v. Manor Drug Stores, ............ s '
8 F ef ON ree 11
Campbell v. Haverhill, 155 U.S 610 (1895) .......... 8
Cohen v. Beneficial Industrial Loan Corp., 337 U. S. 541
ce eee oe ek ONS CeOS 4S 68 be oh 00848 8, 10
de Haas v. Empire Petroleum Company, 435 F. 2d 1223
CT GR, TTR) cc cece sicccceccecewcceecccvees 6,7
Eisen v. Carlisle & Jacquelin, 370 F. 2d 119 (2d Cir.
1966), cert. denied, 386 U. S. 1035 (1967)........ 10
Eisen v. Carlisle & Jacquelin, 479 F. 2d 1005 (2d Cir.
1973), vacated, 417 U. S. 156 (1974) ............. 10
Eisen v. Carlisle & Jacquelin, 417 U. S. 156 (1974) 8, 9, 10, 11
Falk v. Dempsey-Tegeler & Co., Inc., 472 F. 2d 142 (9th
Gs BD bn 6 60.n060b de 65 b46b0000 000050002006 10
Gillespie v. United States Steel Corporation, 379 U. S. 148
CRED b66s bh 000009 604660066 006600 con en ceec eee 9
Hackett v. General Host Corporation, 455 F. 2d 618 (3rd
Cir. 1972), cert. denied, 407 U. S. 925 (1972) ...... 10
Herbst v. International Telephone and Telegraph Corpora-
tion, 495 F. 2d 1308 (2d Cir. 1974) ............. 10, 11
iv
Holmberg v. Armbrecht, 327 U. S. 392 (1946) ........ 6
King v. Kansas City Southern Industries, Inc., 479 F. 2d
+. By, fe Be.) ) re ei se he 10
Monarch Asphalt Sales Co., Inc. v. Wilshire Oil Company
of Texas, 511 F. 2d 1073 (10th Cir. 1975) ......... 10
Williams v. Mumford, 511 F. 2d 363 (D.C. Cir. 1975) .. 10
Constitutional Provisions.
United States Constitution, Fifth Amendment ......... >
United States Constitution, Seventh Amendment ....... 2, 7,8
Statutes.
ae U. & C. 8 SBBOEE) occu vcvescesssseeee eee 2
ae U.3. C. O URS ovcncdenceuesseenee 2, 5, 6, 8, 9, 10
ae U.S. C. 8 SAGO coc cncctstéesesseaenneel 5
Rules Enabling Act, 28 U.S.C. § 2072 ............ 2, 7,8
Kansas Statutes Anuotated, § 60-513(3) ............. 4
Securities Act of 1933, Section 17(a) (15 U.S. C.
5S TFER)) .ccccccvecscceeeeeesseenneel 2
Securities Exchange Act of 1934, Section 10(b) (15
U. & C. § TERR)... 0 cencennnn enue 3
Rules.
Securities Exchange Commission, Rule 10b-5 (17 C. F. R.
§ DOD. 1GSS) 2... 0ccseccesetuseee eee 3
Federal Rules of Civil Procedure, Rule 23 ........ oo ae
IN THE
Supreme Court of the Gnited States
OcTOBER TERM, 1975.
TOUCHE ROSS & CO.,
Petitioner,
vs.
ROBERT SEIFFER, ET AL.,
Respondents.
PETITION FOR A WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS FOR THE
TENTH CIRCUIT.
Touche Ross & Co. hereby petitions this Court to issue a writ
of certiorari to review the judgment and the opinion of the
United States Court of Appeals for the Tenth Circuit entered
in this case on July 28, 1975.
OPINIONS BELOW.
The opinion of the United States Court of Appeals for the
Tenth Circuit is not yet officially or unofficially reported; a copy
of the opinion is printed in the Appendix to this petition at
page Al4. The opinion of the United States District Court
for the District of Kansas is officially reported at 64 F. R. D.
714; a copy of that opinion is printed in the Appendix at
page Al.
JURISDICTION.
The order of the Tenth Circuit dismissing Touche Ross’
appeal was entered on July 28, 1975. Touche Ross’ petition
for renearing en banc was denied by the Tenth Circuit in an
order entered on August 26, 1975. (A20) This Court has
jurisdiction to review the decision of the Court of Appeals
pursuant to 28 U. S. C. § 1254(1).
QUESTION PRESENTED.
Whether the District Court’s order certifying this suit as a
class action is, as to petitioner, a final determination of right
immediately appealable under 28 U. S. C. § 1291 because the
District Court, in an attempt to accommodate the suit to the
procedural requirements of Fed. R. Civ. P. 23, modified sub-
stantive law regarding proof of diligence under the federal
tolling doctrine, in violation of both the Rules Enabling Act,
28 U. S. C. § 2072, and petitioner’s Fifth and Seventh Amend-
ment rights.
CONSTITUTIONAL PROVISIONS, STATUTES AND
RULES INVOLVED.
The constitutional provisions, statutes, and rules involved
herein are the Fifth and Seventh Amendments to the United
States Constitution, 28 U. S. C. § 1291, the Rules Enabling
Act (28 U. S. C. § 2072), and Rule 23 of the Federal Rules
of Civil Procedure. The text of each provision is set forth in
the Appendix at pages A21-A26.
STATEMENT OF THE CASE.
The respondents are nine purchasers of the securities of
Topsy’s International, Inc., who allege that Topsy’s and others
violated Section 17(a) of the Securities Act of 1933 [15
3
U. S. C. § 77q(a)], Section 10(b) of the Securities Exchange
Act of 1934 [15 U. S. C. § 78j(b)], and Rule 10b-5 of
the Securities Exchange Commission [17 CFR § 240.10b-5]
in connection with the sale of Topsy’s securities. The appeal
herein was from a judgment of the District Court that Count I
of the complaint, which alleged violations of the federal secur-
ities laws, could proceed as a class action on behalf of all
purchasers of Topsy’s common stock from September 28, 1968
to March 10, 1970 or of Topsy’s debentures from February 4,
1969 to March 10, 1970. (A9)
Respondents’ initial complaint, filed on November 11, 1971,
named Topsy’s and its principal officers, Jerry Berger, James
T. House, and Harry Nuell, as defendants. Topsy’s is a Delaware
corporation with its principal offices in Kansas City, Missouri,
and is engaged in the sale of snack foods from wholly-owned
and franchised facilities in department stores and shopping
centers.
Petitioner Touche Ross & Co. is a firm of independent certi-
fied public accountants which performed audit examinations of
the financial statements prepared by Topsy’s for Topsy’s and its
consolidated subsidiaries for the fiscal years ending in 1968 and
1969, and issued accountant’s reports regarding the results
of each audit examination. Petitioner was not named as a
defendant until October 17, 1973, when respondents filed a
Third Amended Complaint which merely alleged that petitioner
“knew or had reason to know” that “certain” documents or
articles published in 1968 or 1969 regarding Topsy’s contained
false or misleading statements.
Petitioner's Accountant’s Report regarding the Topsy’s finan-
cial statements as of July 31, 1968 was dated October 25, 1968;
this report was included in Topsy’s 1968 Annual Report to
Shareholders, dated October 31, 1968, in a Registration State-
ment filed by Topsy’s with the Securities Exchange Commission
on October 29, 1968, and in a Prospectus which became
effective on February 4, 1969.
4
As a result of its audit examination of the financial statements
prepared by Topsy’s for Topsy’s and its consolidated subsidiaries
as of August 2, 1969, petitioner issued a second Accountant's
Report, dated November 14, 1969, which was included in
Topsy’s 1969 Annual Report to Shareholders, dated November
25, 1969. The latest purchase of Topsy’s securities by any of the
respondents was on August 1, 1969, prior to the publication
of the 1969 Annual Report.
Respondents’ allegations regarding false or misleading state-
ments essentially relate to SaxonS Sandwich Shoppes, Inc.,
a company engaged in the operation and franchising of roast
beef sandwich shops which was acquired by Topsy’s on August
1, 1968. This acquisition was disclosed as a “subsequent event”
in the 1968 financial statements of Topsy’s.
The SaxonS venture was unsuccessful. Topsy’s informed its
shareholders in March 1970 that it was repurchasing SaxonS
franchises and in June 1970 that it was discontinuing the
SaxonS operations and recognizing an extraordinary loss. The
class was certified to include purchasers of Topsy’s stock or
debentures through March 10, 1970. .
Although the applicable limitations period under Kansas law
is two years [KSA 60-513(3)], petitioner was not named a
defendant until October 17, 1973, which was almost five years
after publication of the 1968 Topsy’s Annual Report to Share-
holders (October 31, 1968) and the filing of Topsy’s registra-
tion statement (October 29, 1968); over four years after the
last purchase of Topsy’s securities by one of the respondents
(August 1, 1969); over three years after the public announce-
ment by Topsy’s that its SaxonS subsidiary had discontinued
operations (June 24, 1970); and almost two years after respond-
ents filed their initial complaint (November 11, 1971).
In the judgment decreeing the suit a class action, the District
Court certified that its order involved “controlling questions of
law as to which there is substantial ground for difference of
5
opinion and that an immediate appeal from the order may
materially advance the ultimate termination of the litigation.”
(A10) Petitioner therefore filed with the Court of Appeals a
petition for leave to appeal, pursuant to 28 U. S. C. § 1292(b),
from the class action judgment. In an order dated September i9,
1974, the Court of Appeals denied the petition for leave to ap-
peal. (Ali)
On August 22, 1974, petitioner filed a notice of appeal,
pursuant to 28 U. S. C. § 1291, of the judgment decreeing
the action maintainable as a class action. Respondents moved to
dismiss the appeal on the ground that the Court lacked jurisdic-
tion. The Court of Appeals, in an order dated January 8, 1975,
denied the motion to dismiss (A12) but then, on July 28, 1975,
dismissed the appeal for lack of jurisdiction. Petition for rehear-
ing en banc was denied on August 26, 1975. (A20)
On or about October 3, 1975, respondents and defendants
Topsy’s, Berger, House, and Nuell filed with the District Court a
proposed settlement agreement aid a joint motion for notice to
the alleged class. Touche Ross & Co. is not a party to that pro-
posed settlement and intends to prosecute this Petition even if the
corresponding Petition for Certiorari of Topsy’s, et al., should
be withdrawn because of their separate settlement.
REASONS FOR GRANTING THE WRIT.
This case presents issues of special, immediate, and unique
importance to the federal judicial system and therefore merits
review by this Court. The decision of the District Court certifying
this suit as a class action, which the Tenth Circuit declined to
review on appeal, raises an important question regarding the
subordination of substantive law to the supposed exigencies of
permitting class actions in the federal judicial system. The District
Court, in order to accommodate the case to the requirement of
Rule 23 that class actions present common questions of law and
fact, altered the substantive federal law regarding proof of
6
diligence in complying with the applicable statute of limitations.
The Tenth Circuit’s dismissal of petitioner's appeal under 28
U. S. C. § 1291 is a product of serious conflict among the
federal courts of appeals on questions left open by this Court
concerning the appealability of class action certifications. This
Court should grant the petition and review the class certification
in order to resolve the conflict among the circuits regarding
appealability of class actions and to prevent the District Court's
order from causing irreparable harm to petitioner and others
similarly situated.
A. This Lawsuit Cannot Be Maintained as a Class Action
Against Petitioner Because the Individual Issues Regarding
Each Plaintiffs Due Diligence in Bringing Suit Against
Petitioner Predominate Over Any Common Issues.
Because no member of the class initiated suit against petitioner
within two years after purchasing his securities, as required by
the two-year Kansas statute of limitations for fraud, each
member of the class must establish that the statute of limitations
was tolled as to him. Under the equitable tolling doctrine
developed by the federal courts, the limitations period begins to
run when the claimant in the exercise of due diligence should
have discovered the alleged fraud. Bailey v. Glover, 88 U. S.
342, 347 (1874); Holmberg v. Armbrecht, 327 U. S. 392, 397
(1946); de Haas v. Empire Petroleam Company, 435 F.2d
1223, 1226 (10th Cir. 1970).
The District Court recognized that if the trier of fact were
required to determine that every member of the class—estimated
at 4700 persons—had exercised due diligence, individual
questions would predominate over common questions and the
suit could not proceed as a class action. The District Court
resolved this difficulty by holding that an “objective standard”
of due diligence was applicable and that the trier of fact need
only determine whether a reasonable investor would have acted
differently. 64 F. R. D. at 719. (A6)
7
In so holding, the District Court misapplied this Court's
decision in Affiliated Ute Citizens v. United States, 406 U. S.
128 (1972),' and ignored the subjective standard of due
diligence formulated by the Tenth Circuit itself in de Haas v.
Empire Petroleam Company, 435 F. 2d 1223, 1226 (10th
Cir. 1970).
B. The District Court’s Objective Standard of Due Diligence
Is Contrary to Substantive Law and Contravenes Both the
Rules Enabling Act and the Petitioner’s Fifth and Seventh
Amendment Rights Under the Constitution of the United
States.
The District Court, when confronted with the tension between
the requirement of the federal common law that every plaintiff
prove his diligence in discovering fraud and the requirement of
Rule 23(b)(3) that common questions in a class action pre-
dominate over individual ones, changed the law to accommodate
the suit to Rule 23. 64 F. R. D. at 719. (A6)
This holding is in direct contravention of the Rules Enabling
Act, 28 U. S. C. § 2072, which, in granting this Court authority
to promulgate the Federal Rules of Civil Procedure, expressly
provides that such rules shall not abridge or modify a substan-
tive right and shall preserve the right to trial by jury
provided by the Seventh Amendment. Rule 23 is thus merely
a procedural device aad does not allow a federal court to modify
the substantive law to make a class action viable.
If an individual plaintiff had sued petitioner, the individual
could be deposed and later cross-examined at trial and his
testimony would be subject to impeachment and rebuttal.
The trier of fact could then, on the basis of demeanor and all
other traditional factors, assess the credibility of the individual's
1. Affiliated Ute dealt with the standard to be used in deter-
raining the element of reliance in a securities fraud action (406
U. S. at 153-4); it did not involve a limitations problem or the
question of an investor’s due diligence in initiating suit.
8
claim of due diligence. To hold, as the District Court did, that
this individual assessment of due diligence does not apply where
it will defeat the viability of the suit as a class action is to disre-
gard openly the limitations of the Rules Enabling Act to the
detriment of petitioner's right to cross-examination under the
due process clause of the Fifth Amendment and its right to a
jury trial under the Seventh Amendment.
The mandate of Rule 23 does not empower the District Court
to create a privileged class of plaintiffs who can collectively
recover against petitioner in circumstances where their claims
would have been barred by the statute of limitations if they had
sued individually. See Campbell v. Haverhill, 155 U. S. 610,
616 (1895). Yet the District Court, in order to permit a case
with pervasive limitations problems to proceed as a class action,
adopted a double standard of diligence, thereby creating a
privileged class of claims subject to no effective limitations
period.
The ruling of the District Court, if unreviewed, will compel
the conclusion that the statute of limitations is virtually mean- °
ingless in any alleged class action under the federal securities
laws. Moreover, the decision of the Court of Appeals, if allowed
to stand, wil! effectively deny this petitioner and other similarly
situated class action defendants any appeal of a class certification.
C. The District Court’s Class Action Certification Was, as to
Petitioner, a Final Determination of Right and Is There-
fore Appealable Under 28 U. S. C. § 1291.
The test of appealability outlined by this Court in Cohen v.
Beneficial Loan Corp., 337 U. S. 541 (1949) and Eisen v.
Carlisle & Jacquelin, 417 U. S. 156 (1974) (Eisen III), if
properly applied to this case, would require appellate review of
the District Court’s decision that this suit should proceed as a
class action as to petitioner. In Eisen, this Court reaffirmed the
conclusions reached in Cohen, 337 U. S. at 546, that the require-
ment of finality in 28 U. S. C. § 1291 should be given a
9
“practical rather than a technical construction” and that there
exists a small class of orders which, although not finally ter-
minating an action, are final determinations of right, are collateral
to the merits of the action, and are too important to be denied
appellate review until after termination of the litigation. 417
U. S. at 171-172. See also Gillespie v. United States Steel Corp.,
379 U. S. 148, 152 (1964).
This appeal satisfies the requirements set by this Court for
finality under § 1291: the District Court’s decision that an
objective standard of diligence was applicable in determining
when the limitations period began to run, with the result that no
member of the class need prove his diligence, was a conclusive
determination on a question of right collateral to respondents’
substantive claims of fraud. Eisen I/I], 417 U. S. at 171. That
holding of the District Court, unlike the procedural elements of
the class action certification, which are subject to modification
under Fed. R. Civ. P. 23(c)(1), is a final determination of a
substantive right and is now the law of the case.
The District Court's decision is fundamental to the further
conduct of this suit and causes irreparable harm to petitioner
because it is unlikely that this action could proceed against peti-
tioner except as a class action, given the limitations hurdle each
claimant would face in individual actions and the failure of any
of the respondents, when deposed, to identify any substantive
claim against petitioner. The Court’s order, moreover, deprives
petitioner of its constitutional rights to examine at trial each
class member regarding his diligence in raising his claim against
petitioner within the limitations period. The District Court’s
modification of substantive law is so egregious and the conse-
quent harm to petitioner so serious that appellate review cannot
be further delayed.
The District Court’s order is in this respect similar to the
allocation of notice costs in Eisen III, which might have been
subsequently modified by the District Court or appealed after a
10
trial on the merits, but only after irreparable harm had been
done to the defendants.
D. The Courts of Appeals Are in Serious Conflict Regarding
the Appealability Under 28 U. S. C. § 1291 of Orders
Certifying Class Actions.
Despite this Court’s decisions in Eisen II] and Cohen, the
Courts of Appeals have rendered confusing and conflicting deci-
sions regarding the circumstances under which orders allowing
Suits to proceed as class actions would be considered final
decisions appealable under 28 U. S. C. § 1291.
Several federal courts of appeals permit appeal of an or er
denying a class certification under circumstances in which the
order sounds the “death knell” for the suit. Eisen v. Carlisle &
Jacquelin, 370 F. 2d 119 (2d Cir. 1966), cert. denied, 386
U. S. 1035 (1967) (Eisen 1); Falk vy. Dempsey-Tegeler & Co.,
Inc., 472 F. 2d 142 (9th Cir. 1972); Williams v. Mumford,
511 F. 2d 363 (D. C. Cir. 1975); Monarch Asphalt Sales Co.,
Inc. v. Wilshire Oil Company of Texas, 511 F. 2d 1073 (10th
Cir. 1975); contra, King v. Kansas City Southern Industries,
Inc., 479 F. 2d 1259 (7th Cir. 1973); Hackett v. General Host
Corporation, 455 F. 2d 618 (3rd Cir. 1972), cert. denied, 407
U. S. 925 (1972).
Significant disagreement nonetheless persists among the cir-
cuits as to the appealability of decisions granting certification of
a class. The Court of Appeals for the Second Circuit has con-
strued Cohen as allowing appeal under § 1291 when an order
granting class action status is fundamental to the further con-
duct of the case, is separable from the merits, and will result in
irreparable harm to the defendant. Herbst v. International Tele-
phone and Telegraph Corp., 495 F. 2d 1308, 1312 (2d Cir.
1974); Eisen v. Carlisle & Jacquelin, 479 F. 2d 1005, 1007
n. 1 (2d Cir. 1973) (Eisen 111). However, the Court of Appeals
for the Ninth Circuit in a very recent decision explicitly rejected
11
the approach of the Second Circuit and refused to allow appeal
of any decision certifying a class. Blackie v. Barrack, CCH Fed.
Sec. L. Rep. § 95,312 (9th Cir. September 25, 1975) (the
Court's opinion is printed in the Appendix at A27).
In the present action, the Court of Appeals for the Tenth
Circuit, while properly adopting the “three-pronged” test devel-
oped by the Second Circuit, applied that approach in such a
manner as to effectively limit appeal of class action certifications
to the specific facts in Eisen I/I, even though this Court did not
decide in that case the appealability of other issues raised by
the class certification. 417 U. S. at 172, n. 10. The Tenth
Circuit distinguished this appeal from the appeals granted in
Eisen and Herbst in technical rather than practical ways, effec-
tively precluding satisfactory relief from the District Court's
error, not only for this petitioner but also for thousands of
actual or potential litigants in that circuit.
E. This Case Should Be Reviewed by This Court Because the
Decisions of the District Court and the Tenth Circuit,
If Left Standing, Would Abrogate the Limitations Defense
in Class Actions Without Affording the Class Action De-
fendant Any Practical Means of Appellate Review.
The District Court’s abrogation of the requirement that every
claimant prove his diligence in complying with the statute of
limitations, compounded by the Court of Appeals’ refusal to
review the question until after trial on the merits, can only
encourage the bringing of groundless and stale claims as class
actions, while heightening the pressure upon defendants to dis-
pose of such suits without any resolution on the merits. See
Blue Chip Stamps v. Manor Drug Stores, ........... Gea , 95
S. Ct. 1917, 1927-1929 (1975).
The differences among the circuits are irreconcilable, are
causing confusion and disparate treatment, and are leading to a
discriminatory system of justice demanding definitive resolu-
12
tion. It is essential that this Court accept this appeal, resolve
the conflict among the circuits, and reverse the District Court’s
abrogation of substantive rights.
CONCLUSION.
For the foregoing reasons, it is respectfully submitted that this
Court should grant the Petition for a Writ of Certiorari to
review the decision of the Court of Appeals for the Tenth
Circuit.
Respectfully submitted,
FRANCIS J. HIGGINS, GEORGE M. WINGER,
135 South LaSalle Street, 1411 Commerce Bank Building,
Chicago, Illinois 60603, Kansas City, Missouri 64106,
Attorneys for Petitioner,
Touche Ross & Co.
Of Counsel:
BELL, BOYD, LLOYD,
HADDAD & BURNS,
Chicago, Illinois,
SMITH, SCHWEGLER,
SWARTZMAN & WINGER,
INCORPORATED,
Kansas City, Missouri.
Al
APPENDIX A
IN THE UNITED STATES DISTRICT COURT
For the District of Kansas
RoBERT SEIFFER, et al., :
Plaintiffs,
vs. Civil Action
No. KC-3435
Topsy’s INTERNATIONAL, INC., et al.,
Defendants. |
MEMORANDUM AND ORDER
Plaintiffs filed their original complaint alleging certain secur-
ities act violations, both fedcral and state, on November
11, 1971. Since that time, plaintiffs have filed several amended
complaints, additional parties defendant have been added, cross-
claims and third-party complaints have been filed, and extensive
discovery has been conducted. All of this is by way of prefacing
the issue we reach here: whether or not the plaintiffs should
be allowed to maintain this action as a class action pursuant to
Rule 23 of the Federal Rules of Civil Procedure.
The court has already denied a motion for an order declaring
this action not a class action. (Memorandum and Order of
October 2, 1972, p. 8.) Our ruling was conditioned upon (1) a
showing that plaintiffs’ discovery of the alleged fraud is con-
sistent with the requisite diligence; and (2) assuming such a
showing is made, that plaintiffs amend their complaint to define
clearly and with particularity the class of plaintiffs they seek
to represent. We believe that the amendments to plaintiffs’
complaint have satisfied the second condition; hence, we now
turn to consider the due diligence issue.
A2
Plaintiffs essentially allege that defendants participated in a
scheme to defraud the class they seek to represent in violation of
§ 17(a) of the Securities Act of 1933 [15 U. S. C. § 77q(a)]
and of § 10(b) of the Securities Exchange Act of 1934 [15
U. S. C. § 78j(b)] and Rule 10b-5 promulgated thereunder (17
C. F. R. § 240.10b-5). We have already determined that the
statute of limitations in this private suit for damages under Rule
10b-5 is the Kansas statute of limitations for fraud, K. S. A.
60-513(3), which provides for a two-year period from the date
of discovery of the fraud. (Memorandum and Order of October
2, 1972, p. 7.) But the federal tolling doctrine applies in the
determination of when plaintiffs, in the exercise of due diligence
should have discovered the alleged fraud. Esplin v. Hirschi, 402
F. 2d 94 (10th Cir. 1968); deHaas v. Empire Petroleum Com-
pany, 435 F. 2d 1223 (10th Cir. 1970). It requires no restate-
ment of the alleged facts of this case and of the relationship of
the parties for this court to determine that this is an issue for the
trier of fact. Seldom is it possible for such an issue to be
determined summarily. Dzenitz v. Merrill Lynch, Pierce, Fenner
& Smith, Inc., 494 F. 2d 168 (10th Cir. 1974). The court is
therefore satisfied that the conditions previously imposed have
been met insofar as is possible at this time. Our ruling in this
regard is applicable to defendant Touche, Ross & Company even
though it was not joined as a defendant until October 17, 1973,
when plaintiffs’ third amended complaint was filed.
In addition to the conditions imposed by the court, Rule 23
establishes several prerequisites for the maintenance of a class
action. Firstly, the alleged class of defrauded purchasers must
be so numerous that joinder of all members is impracticable.
Here the number of persons who purchased Topsy’s securities,
both common stock and debentures, in the February 4, 1969,
offering alone, while difficult to determine with any degree of
certainty, may well exceed 1,000. Thus the court believes that
this first prerequisite has been satisfied.
A3
Secondly, there must be questions of law or fact common
to the class. Inasmuch as the alleged scheme to defraud was
designed to inflate the price of Topsy’s securities, all of the
class members who purchased those securities during the relevant
period of time would presumably have been affected, albeit in
varying degrees. We will consider later in this memorandum
whether the common issues relating to the alleged fraud pre-
dominate over individual ones. For now, we conclude that there
are common questions of law and fact.
Thirdly, the claims or defenses of the representative parties
must be typical of the claims or defenses of the class. This re-
quirement appears to duplicate other provisions of the rule, i.e.,
the common questions and representative party provisions. 3B
Moore’s Federal Practice § 23.06-2. In view of our rulings on
these other provisions, we hold that the claims of the plaintiffs
are typical of those of the class of purchasers who have allegedly
been defrauded by defendants’ scheme.
Finally, the representative parties must fairly and adequately
protect the interests of the class. Plaintiffs seek to represent a
class of purchasers of the common stock of defendant Topsy’s
International from September 28, 1968, to March 10, 1970,
and purchasers of the debentures of Topsy’s from February 4,
1969 (when they were first offered), to March 10, 1970. These
dates roughly coincide with when Topsy’s shareholders would
have received letters from the company’s management an-
nouncing the acquisition of SaxonS Sandwich Shoppes, Inc., in
September 1968, and announcing the losses from the repurchase
of SaxonS units in March 1970. It was during this period of
time that defendants are alleged to have maintained an inflated
price for Topsy’s securities through a fraudulent scheme whereby
defendants’ public statements painted an overly optimistic picture
of the SaxonS operation, when in truth there was no reasonable
basis for making such statements. Since the named plaintiffs
purchased stock and debentures during this period, we see no
reason why they cannot fairly and adequately protect the interests
A4
of all those who purchased in that span of time. Even though
defendants contend these plaintiffs’ purchases were not exactly
coextensive with the proposed class, we are of the opinion
that there is no inconsistency with the interests of other members
of the class who purchased at other times during the relevant
period which would prevent the named plaintiffs from represent-
ing the whole class. Defendants also specifically challenge the
willingness and ability of certain of the named plaintiffs to repre-
sent the class, and, further, the ability of the plaintiffs’ attorneys
to represent the class because of an alleged conflict of interest
with a third party defendant. We do not believe these matters
of sufficient import to deny certification of the class. We hold that
plaintiffs have met all the prerequisites of Rule 23(a).
In addition to the prerequisites of subdivision (a) of Rule 23,
plaintiffs must satisfy one of the sections of subdivision (b).
Plaintiffs contend that this action falls within (b) (3):
“the court finds that the questions of Jaw or fact common
to the members of the class predominate over any questions
affecting only individual members, and that a class action
is superior to other available methods for the fair and
efficient adjudication of the controversy. The matters perti-
nent to the findings include: (A) the interest of members of
the class in individually controlling the prosecution or
defense of separate actions; (B) the extent and nature of
any litigation concerning the controversy already com-
menced by or against members of the class; (C) the desir-
ability or undesirability of concentrating the litigation of the
claims in the particular forum; (D) the difficulties likely to
be encountered in the management of a class action.”
Defendants voice strenuous objections to certification of a
(b)(3) type class. Because the list of matters pertinent to the
court’s findings under (b)(3) is non-exhaustive (Notes of the
Advisory Committee Regarding the 1966 Amendment to Rule
23), defendants raise issues which, for the most part, are unique
to this kind of 10b-5 action.
Defendants first contend that reliance is a necessary element
in a 10b-5 action and that this issue is primarily an individual
A5
one, citing in particular Financial Industrial Fund, Inc. v. Mc-
Donnell Douglas Corp., 474 F. 2d 514 (10th Cir. 1973).
The element of reliance in 10b-5 cases is usually considered part
of the larger issue of causation. Thus, in a case very similar
to this, the United States Supreme Court held:
“Under the circumstances of this case, involving primarily
a failure to disclose, positive proof of reliance is not a
prerequisite to recovery. All that is necessary is that the
facts withheld be material in the sense that a reasonable
investor might have considered them important in the
making of this decision. (Citations omitted.) This obliga-
tion to disclose and this withholding of a material fact
establish the requisite element of causation in fact. (Cita-
tion omitted.)” Affiliated Ute Citizens v. United States, 406
U. S. 128, 153-54, 31 L. Ed. 2d 741, 92 S. C. 1456
(1972).
We regard the Affiliated Ute case as controlling here. See Rochez
Bros., Inc. v. Rhoades, 491 F. 2d 402 (3rd Cir. 1974); Shapiro
v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 42 L. W.
2544, April 23, 1974 (2nd Cir.); Dorfman v. First Boston
Corp., 42 L. W. 2552, April 30, 1974 (E. D. Pa.); Werfel v.
Kramarsky, 61 F. R. D. 674 (S. D. N. Y. 1974). Defendants
err in thinking that the Tenth Circuit in the Financial Industrial
Fund case implied any different standard than that set forth in
Affiliated Ute, where the Supreme Court overruled the Tenth
Circuit's restrictive interpretation of the reliance issue in a
10b-5 case. We therefore conclude that reliance is not a bar
to plaintiffs’ maintenance of a class action.
Defendants next contend that there are material differences in
the alleged misrepresentations which preclude class action treat-
ment of this suit. On the other hand, it has been suggested that
a fraud perpetrated on numerous persons by the use of similar
misrepresentations is an appealing situation for a class action.
(Notes of the Advisory Committee Regarding the 1966 Amend-
ment to Rule 23.) Despite the fact that the alleged misrepre-
sentations regarding the SaxonS operation appeared in different
A6
publications at different times, they all emanated from the
defendants as part of the alleged fraudulent scheme to maintain
an inflated price for Topsy’s securities, and in the opinion of
the court they are interrelated and cumulative. Moreover,
plaintiffs are primarily alleging a complete failure to disclose
material facts—which default was necessarily common to all
members of the proposed class. Esplin v. Hirschi, supra. Thus
we believe the common issues predominate over individual ones
insofar as the alleged misrepresentations and omissions are con-
cerned. Parenthetically, we would observe that cases, which the
defendants have cited such as Simon v. Merrill Lynch, Pierce,
Fenner & Smith, Inc., 482 F.2d 880 (Sth Cir. 1973), are in-
apposite because they involve oral misrepresentations.
Defendants further contend that the limitations issue makes
this case unsuitable for class action designation. The court has
previously expressed some misgivings about the propriety of
maintaining a class action because of this very issue. Though
plaintiffs have convinced the court that their due diligence in
discovering the alleged fraud is an issue for the trier of fact
(supra, p. 2), we must now inquire whether there must be an
individual determination of the due diligence issue which would
predominate over questions common to the class. If each of the
members of the prospective class were required to prove his or
her due diligence in discovering the alleged fraud, the individual
questions would indeed predominate over the common ones.
But we believe a more objective standard could and should be
applied; otherwise a class action would never be feasible in a
case such as this. The standard should be whether a reasonable
investor, in light of the facts existing at the time of the non-
disclosure and in the exercise of due care, would have been
entitled to receive full disclosure from the party charged and
would have acted differently had the alleged nondisclosure not
occurred. City National Bank of Fort Smith, Ark. v. Vander-
boom, 422 F. 2d 221 (8th Cir. 1970). Thus the due diligence
issue, which in a case such as this is really an extension of the
A7
issue of causation in fact, can be determined by resorting to the
same “reasonable investor” test employed by the Supreme Court
in the Affiliated Ute case, supra. It is only by using such an
approach that the court is freed from the overwhelming task of
examining the subjective intent of each class member. Grad v.
Memorex Corporation, CCH Fed. Sec. L. Rep. § 94,029 (N. D.
Cal. 1973). We conclude that plaintiffs have satisfied the
requirement that the common issues predominate over individual
ones.
Finally, we must decide whether a class action is superior to
other available methods for the fair and efficient adjudication
of the controversy. It has been our view that the class action ap-
pears particularly suitable for this kind of shareholder suit.
(Memorandum and Order of October 2, 1972, p. 8.) While we
are well aware of the potential burden upon the court and jury
posed by the maintenance of a class action, our primary task is
to see that the securities laws are enforced to protect investors
from fraud of whatever magnitude as intended by Congress.
Securities and Exchange Commission v. International Chemical
Development Corp., 469 F. 2d 20 (10th Cir. 1972). Further-
more, it has been said that “the ultimate effectiveness of [the
security anti-fraud laws] may depend on the applicability of the
class action device.” Loss, Securities Regulation, 2d Ed. 1961,
p. 1819. Following Judge Hill’s directive in Esplin v. Hirschi,
supra, that if there is to be any error it should be committed in
favor of allowing the class action, we hold that the class action is
superior to other available methods for the fair and efficient
adjudication of this controversy.
The plaintiffs’ motion to strike defendants’ supplemental brief
has been rendered moot by the court’s order herein. The issue of
the possible liability of defendant Touche, Ross is not, in our
view, properly raised in connection with the class action issue
and will not be treated here.
A8
CONCLUSION
she court finds that the requirements of Rule 23 have been
met and that this action should proceed as a class action. The
court hereby certifies a class of purchasers who bought Topsy’s
common stock from September 28, 1968, to March 10, 1970,
and who bought Topsy’s debentures from February 4, 1969, to
March 10, 1970, and who suffered a loss as a result of the
defendants’ alleged misrepresentations and omissions. Notice
shall be given to the class pursuant to Rule 23(c)(2), with
costs to be borne by plaintiffs. Eisen v. Carlisle & Jacquelin,
sladiadan U. S. , 42 L. W. 4804 (May 28, 1974). Our ruling
applies only to Count I of plaintiffs’ third amended complaint;
Count II, the Kansas claims which have not been discussed in
this memorandum, shall proceed individually. Plaintiffs’ counsel
are directed to prepare and submit a journal entry of judgment
reflecting the conclusion reached here.
IT IS SO ORDERED.
Dated this 27th day of June, 1974, at Kansas City, Kansas.
/s/ Ear E. O'CONNOR
United States District Judge
A9
APPENDIX B
UNITED STATES DISTRICT COURT
District of Kansas
ROBERT SEIFFER, et al., ‘
Plaintiffs,
vs. Civil Action
No. KC 3435
Topsy’s INTERNATIONAL, INC., et al.,
Defendants. |
JUDGMENT DECREEING THE ACTION
MAINTAINABLE AS A CLASS ACTION
This matter having been fully briefed by the parties including
designations of deposition testimony and documents, on plain-
tiffs’ motion for an order declaring the instant action main-
tainable as a class action pursuant to Rule 23(c)(1) of the
Federal Rules of Civil Procedure, with oral argument being
held on June 13, 1974; and,
The court having entered a Memorandum and Order on
June 27, 1974, determining that all requirements of Rule 23
have been met by plaintiffs and that Count I of plaintiffs’ Third
Amended Complaint is to be maintained as a class action under
Rule 23(b)(3) for and on behalf of plaintiffs and all pur-
chasers of the common stock of Topsys’ International, Inc. from
September 28, 1968, to March 10, 1970, and all purchasers of
Topsy’s Convertible Subordinated Debentures due 1984, from
February 4, 1969, to March 10, 1970, who suffered a loss
as a result of defendants’ alleged misrepresentations and omis-
sions, against all of the defendants; it is hereby
Al0
ORDERED that Count I of plaintiffs’ Third Amended Com-
plaint is to be maintained as a class action under Rule 23(b) (3)
of the Federal Rules of Civil Procedure on behalf of a class
comprised of plaintiffs and all other purchasers of (1) Topsy’s
common stock from September 28, 1968, to March 10, 1970,
and (2) Topsy’s debentures from February 4, 1969, to March
10, 1970, who suffered a loss as a result of defendants’ alleged
misrepresentations and omissions.
It is further
ORDERED that notice shall be given to the class members
pursuant to Rule 23(c)(2) with costs to be borne by plaintiffs.
It is further
ORDERED that the Memorandum and Order of June 27,
1974 involves controlling questions of law as to which there is
substantial ground for difference of opinion and that an immedi-
ate appeal from the order may materially advance the ultimate
termination of the litigation.
IT IS SO ORDERED.
/s/ Eart E. O'CONNOR
United States District Judge
Date: July 26, 1974
All
APPENDIX C
UNITED STATES COURT OF APPEALS
Tenth Circuit
September Term—September 19, 1974
Before HONORABLE OLIVER SETH, HONORABLE WILLIAM J.
HoL.Loway, Jr., and HONORABLE WILLIAM E. DOYLE,
Circuit Judges
y
ROBERT SEIFFER, et al.,
Respondents,
” . No, 74-8091
Topsy’s INTERNATIONAL, INC., et al.,
Petitioners. |
ToucHE Ross & Co., )
Petitioner,
vs.
‘ No. 74-8094
ROBERT SEIFFER, et al.,
Respondents. ,
This matter comes on for consideration of petitions for leave
to appeal under § 1292(b) of Title 28, U. S. C.
Upon consideration whereof, it is ordered that the petitions
for leave to appeal are denied.
/s/ Howarp K. PHILLIPS
Howard K. Phillips
Clerk
Al2
APPENDIX D
UNITED STATES COURT OF APPEALS
Tenth Circuit
November Term—January 8, 1975
Before HONORABLE OLIVER SETH, HONORABLE ROBERT H.
McWILLIAMS, and HONORABLE JAMES E. BARRETT,
Circuit Judges.
ROBERT SEIFFER, et al.,
Plaintiffs-A ppellees,
vs.
Topsy’s INTERNATIONAL, INC., JERRY | = Nos, 74-1711
D. BERGER, JAMES T. House and 74-1712
HARRY NUELL,
Defendants-A ppellants,
BEAR, STEARNS & Co., et al.,
Defendants. ?
ROBERT SEIFFER, et al., )
Plaintiffs-A ppellees,
vs.
Topsy’s INTERNATIONAL, INC., ETAL.,
Detendants,\ wy 94.1713
JOHN D. Croucn, et al.,
d‘b, a ToucHe Ross & Co..,
Defendants-A ppellants,
RALPH J. TUCKER, et al.,
Defendants. |
This matter comes on for consideration of motions filed in the
captioned appeals seeking dismissal of the captioned appeals.
Al3
The Court, upon its own motion, had assigned the appeals to
Calendar D for consideration pursuant to Rule 8 of the Local
Rules of the Tenth Circuit. The parties filed memoranda in
support of and in opposition to summary dismissal which were
considered by the Court.
Upon consideration whereof, it is the order of the Court
as follows:
1. The motions to dismiss summarily are denied in all
appeals.
2. The cases are reassigned to Calendar B for briefing and
submission to the Court.
3. The cases are companioned and may, if the parties so
elect, be briefed as a single appeal.
Despite the provisions of Local Rules 9 and 10 of the Tenth
Circuit, the appellants and appellees may prepare a joint
appendix in connection with the record on appeal in lieu of
reproducing the record in its entirety. The parties are permitted
to prepare and file their joint appendix or the reproduced record
on or before February 18, 1975. The appellants shall file their
brief or briefs on or before March 11, 1975. The appellees may
file their brief or briefs on or before April 1, 1975. The appel-
lants shall file their reply brief or briefs, if any, on or before
April 16, 1975.
The Court instructs the parties that they should, in addition
to other issues on appeal, address in their briefs the question
whether the orders sought to be appealed from are final appeal-
able orders within the terms of 28 U. S. C. § 1291.
/s/ Howarp K. PHILLIPS
Howard K. Phillips
Clerk
Al4
APPENDIX E
UNITED STATES COURT OF APPEALS
Tenth Circuit
Nos. 74-1711, 74-1712, 74-1713
ROBERT SEIFFER, et al.,
Plaintiffs-A ppellees, iv * wal =
VS. trict Court for the
> District of Kansas
(D. C. No. KC-
3435)
Topsy’s INTERNATIONAL, INC.,
et al.,
Defendants-A ppellants. |
Before MuRRAH, BARRETT and Doy_e, Circuit Judges.
Murrah, Circuit Judge.
Topsy’s International, Inc., and its accountants Touche Ross
& Co. bring this § 1291 appeal from a judgment certifying a
class action in a federal’ securities fraud suit against them and
two other defendants not parties to this appeal.? The trial
court held and all the parties apparently acknowledge that the
Kansas two-year statute of limitations is applicable as a de-
fense to the action, unless it can be shown under the federal
———
l. Only federal claims under 15 U. S. Cc. “§§ 77q(a), 78)(b) and
17 C. F. R. § 240.10b-5 were certified to be maintainable in the class
action. The complaint also contained allegations under Kansas state
securitics laws, which are to proceed individually and are not com-
ponents of the case being reviewed here.
2. Topsy’s underwriters and lawyers are also named as defend-
ants, but they do not join this appeal of the certification of the class.
Al5
tolling doctrine* that the action was brought within two years
of the time when plaintiffs by due diligence would discover
or should have discovered the alleged fraud. In holding that
the plaintiffs and the defined class meet all the requirements of
Fed. R. Civ. P. 23(b)(3), the trial judge concluded that
neither the federal securities laws nor the federal tolling doc-
trine require each class member to prove individual due dili-
gence in discovering the fraud; that, instead, the applicable test
is the “objective standard” of whether and when a “reasonable
investor” would have discovered the fraud; and that common
questions of law and fact thus predominate. Appellants contend
that such an objective standard is not the law; that due dili-
gence must be proved individually, making a class action un-
manageable; and that we should therefore reverse the order
certifying the class. We have previously held that the same
order was not appealable under § 1292(b). (Order of Sep-
tember 19, 1974; petition for rehearing en banc denied by
Order of October 18, 1974.) We now hold that the order is
not appealable under § 1291. This means that, as the record
presently stands, the case will be tried as structured by the
order certifying the class and that the error in that order, if
any, must await review until final decision on the merits.
According to the plaintiffs’ allegations, the defendants main-
tained an artificially inflated price for Topsy’s securities by
means of misieading annual reports, letters to shareholders,
newspaper releases, and purportedly independent research re-
ports, regarding Topsy’s financial status and prospects, partic-
ularly as to its acquisition of Saxons Sandwich Shoppes, Inc.
These reports of Saxons actual and potential profitability were
allegedly disseminated, even though Saxons wis declining and
3. “{Whhere the party injured by the fraud remains in ignorance
of it without any fault or want of diligence or care on his part, the
bar of the statute does not begin to run until the fraud is dis-
covered. .. .” Bailey v. Glover, 88 U. S. 342 (1874), quoted in
deHaas v. Empire Petroleum Co., 435 F. 2d 1223, 1226 (10th Cir.
1970).
Al6
was ultimately closed by Topsy’s at a great loss. The trial
court's order gave the named plaintiffs the right to represent a
class defined as all the damaged purchasers of Topsy’s common
stock from September 28, 1968, when each shareholder re-
ceived the same letter from Topsy’s favorably announcing its
acquisition of Saxons, and all damaged purchasers of Topsy’s
debentures from February 4, 1969, until March 10, 1970,
when the losses from the Saxons operation were revealed in a
letter to all shareholders.
Generally, appealability under § 1291 is limited to final
judgments reached after trial on the merits. An order allow-
ing or disallowing a class action may be assigned as error at
that time. Esplin v. Hirschi, 402 F. 2d 94 (10th Cir. 1968).
We have expressed reluctance to grant immediate review of
orders granting or denying class status, in view of the fact
that such an order is subject to amendment as the trial pro-
ceeds. Fed. R. Civ. P. 23(c)(1) and the Notes thereto. In
Gerstle v. Continental Airlines, Inc., 466 F. 2d 1374, 1377
(10th Cir. 1972), we held that an order disallowing the class
Status previously granted was nonappealable under § 1291,
since the trial court had expressed its openness to further con-
sideration and modification of the order. See also Gold Strike
Stamp Co. v. Christensen, 436 F. 2d 791, 792 n. 2 (10th Cir.
1970). Cf., Wilcox v. Commerce Bank of Kansas City, 474
F. 2d 336 (10th Cir. 1973) (granting § 1292 appealability of
an order denying class status).
These cases preceded Eisen v. Carlisle & Jacquelin, 417 U. S.
156, 171 (1973). In that case, the Supreme Court, giving
§ 1291 “a practical rather than a technical construction,”
granted appeal from “collateral orders” in a class action before
final judgment on the merits. See also Cohen v. Beneficial In-
dustrial Loan Corp., 337 U. S. 541, 546 (1949). In doing so,
the Court observed that the determination of finality for pur-
poses of § 1291 may pose a close question and should be
guided by balancing “the inconvenience and costs of piece-
Al7
meal review on the one hand and the danger of denying
justice by delay on the other.” It affirmed the Court of Ap-
peals’ jurisdiction to review the district court's order allowing
a class action with the condition that the defendants bear 90%
of the cost of notice to the class. Expressly declining to decide
jurisdiction over the issues of manageability and fluid-class
recovery, the Court held that the order was appealable because
the allocation of notice costs was a “final disposition of a
claimed right which is not an ingredient of the cause of action
and does not require consideration with it.” See generally,
Manual for Complex Litigation, pp. 17-51 (1973). In our
case, no claim is made as to the propriety of the allocation of.
notice costs to the plaintiffs. Rather, the ultimate issue sought
to be appealed is whether the class action authorized by the
order is appropriately manageable.
Following Eisen III, the Courts of Appeals have under-
taken to articulate the guidelines governing the § 1291 appeal-
ability of a class action order. In denying the appealability of
an order granting class standing, in General Motors Corp. v.
City of New York, 501 F. 2d 639, 644 (2d Cir. 1974), Chief
Judge Kaufman reviewed and reaffirmed the Second Circuit's
pre-Eisen three-prong test for § 1291 appealability: (1) whether
the class action determination is fundamental to the further
conduct of the case; (2) whether review of that order is
separable from the merits; and (3) whether that order will
cause irreparable harm to the defendant in terms of time and
money spent in defending a huge class action. The General
Motors case distii ,vished Herbst v. International Telephone
and Telegraph Corp., 495 F. 2d 1308 (2d Cir. 1974), where
§ 1291 appeal from an order certifying a class action was
allowed because the practical viability of the action as well as
the defense costs were vastly altered by the order. In that
case, the order granting class standing converted the plaintiff
from a single individual holding 100 shares to a class of 16,000
shareholders. Cf., Green v. Wolf Corp., 406 F. 2d 291 (2d
Als
Cir. 1968), cert. denied, 395 U. S. 977 (1969) (granting
§ 1291 appealability of an order denying class status on
“death knell” primciple).
In Rodgers v. United States Steel Corp., 508 F. 2d 152, 159
(3rd Cir. 1975) (opinion by Judge Gibbons), the court dis-
allowed § 1291 appeal from an order postponing class action
determination and restricting communications with potential
class members by plaintiffs or their attorneys. In this case, the
Third Circuit formulated a similar three-prong appealability
test: (1) the order must be a final rather than a provisional
disposition of an issue; (2) it must not merely be a step toward
final disposition of the merits; and (3) the rights asserted
would be irreparably lost if review is postponed until final
judgment. See also In re Cessna Aircraft Distributorship Anti-
trust Litigation, White Industries, Inc. v. The Cessna Aircraft
Co., No. 74-1563 (8th Cir. June 23, 1975) (denying § 1291
appealability of an order granting class status); Williams v.
Mumford, 511 F. 2d 363 (D. C. Cir. 1975) (denying § 1291
appealability of an order denying class status).
In our case, the “fundamental conduct” or viability of the
suit does not turn on the class certification. The inclusion of
the estimated 4,700 potential class members will indeed en-
large the stakes in the litigation, but it is not a sine qua non for
the further conduct of the suit by the plaintiffs. There is prob-
ative evidence on the record that the nine named plaintiffs
have substantial personal assets and a total potential recovery
of $200,000, and they have manifest an intent to pursue the
suit even if denied class status. The order thus does no “irrepar-
able harm” to the defendants. They will be faced with a large
and persistent lawsuit whether the class action is allowed or
not. Cf. Herbst v. International Telephone and Telegraph,
supra, and Eisen III, supra.
Furthermore, the determination of class here is not collateral
to the final adjudication of the issues; rather it is an essential
Al9
“ingredient of the cause of action” and “require[s] considera-
tion with it.” The objective standard for proving plaintiff's due
diligence was necessarily established by the order; and proof
of due diligence is an integral part of the cause of action
whether brought individually or as a class because it involves
both the right to bring the suit under the statute of limitations
and the ultimate right to recover under the securities laws. See
note 1, supra; Affiliated Ute Citizens v. United States, 406
U. S. 128, 153-154 (1972).
Both quantitative and qualitative analysis convince us that
it would be improper to review this order until the case has
proceeded to a final disposition on the merits. Of course, the
order remains subject to reappraisal and modification by the
trial court during the course of its proceedings, and nothing
herein expressed is intended to hinder or limit that process. We
hold that at this juncture review of the order certifying the
class is jurisdictionally inappropriate.
The appeal is dismissed.
July 28, 1975.
Geena Te i ST wr es: seme
A20
APPENDIX F
UNITED STATES COURT OF APPEALS
Tenth Circuit
July Term—August 26, 1975
Before THE HONORABLE Davip T. Lewis, Chief Judge, THE
HONORABLE ALFRED P. MURRAH, THE HONORABLE DELMAS
C. HILL, THE HONORABLE OLIVER SETH, THE HONORABLE
WILLIAM J. HOLLOWAy, JR., THE HONORABLE ROBERT H.
MCWILLIAMS, THE HONORABLE JAMES E. BARRETT and THE
HONORABLE WILLIAM E. DoyLe, Circuit Judges
ROBERT SEIFFER, et al.,
Plaintiffs-A llees,
atten Nos. 74-1711
vs. . 74-1712
74-1713
Topsy’s INTERNATIONAL, INC.,
Defendants-A ppellants. J
This matter comes on for consideration of the apellants’
petitions for rehearing, and suggestions for rehearing en banc
filed with the Court on August 8, 1975 and August 11, 1975.
Upon consideration whereof, the petitions for rehearing are
denied by Circuit Judges Murrah, Barrett and Doyle to whom
the cases were argued and submitted.
The petitions for rehearing having been denied by the original
panel to whom the cases were argued and submitted and no
member of the panel nor judge in reguiar active service on the
Court having requested that the Court be polled on rehearing
en banc, Rule 35, Federal Rules of Appellate procedure, the
suggestions for rehearing en banc are denied.
/s/ Howarp K. PHILLIPs
Howard K. Phillips
Clerk
APPENDIX G
Fifth Amendment to the Constitution
of the United States
No person shall be held to answer for a capital. or otherwise
infamous crime, unless on a presentment or indictment of a
Grand Jury, except in cases arising in the land or naval forces,
or in the Militia, when in actual service in time of War or
public danger; nor shall any person be subject for the same
offence to be twice put in jeopardy of life or limb, nor shall be
compelled in any criminal case to be a witness against himself,
nor be deprived of life, liberty, or property, without due process
of law; nor shall private property be taken for public use without
just compensation.
A22
APPENDIX H
Seventh Amendment to the Constitution
of the United States
In Suits at common law, where the value in controversy shall
exceed twenty dollars, the right of trial by jury shall be preserved,
and no fact tried by a jury, shall be otherwise reexamined in any
Court of the United States, than according to the rules of the
common law.
APPENDIX I
28 U.S.C. § 1291
The courts of appeals shall have jurisdiction of appeals from
all final decisions of the district courts of the United States,
the United States District Court for the D-irict of the Canal
Zone, the District Court of Guam, and the District Court of the
Virgin Islands, except where a direct review iaay be had in the
Supreme Court.
A23
APPENDIX J
Rules Enabling Act, 28 U. S. C. § 2072
The Supreme Court shall have the power to prescribe by gen-
eral rules, the forms of process, writs, pleadings, and motions,
and the practice and procedure of the district courts and courts
of appeals of the United States in civil actions, including ad-
miralty and maritime cases, and appeals therein, and the prac-
tice and procedure in proceedings for the review by the courts
of appeals of decisions of the Tax Court of the United States and
for the judicial review or enforcement of orders of administra-
tive agencies, boards, commissions, and officers.
Such rules shall not abridge, enlarge or modify any sub-
stantive right and shall preserve the right of trial by jury as at
common law and as declared by the Seventh Amendment to the
Constitution.
Such rules shall not take effect until they have been reported
to Congress by the Chief Justice at or after the beginning of a
regular session thereof but not later than the first day of May,
and until the expiration of ninety days after they have been
thus reported.
All laws in conflict with such rules shall be of no further force
or effect after such rules have taken effect. Nothing in this title,
anything therein to the contrary notwithstanding, shall in any
way limit, supersede, or repeal any such rules heretofore pre- ©
scribed by the Supreme Court.
} -
APPENDIX K
Rule 23, Federal Rules of Civil Procedure
(a) Prerequisites to a Class Action. One or more members
of a class may sue or be sued as representative parties on behalf
of all only if (1) the class is so numerous that joinder of all
members is impracticable, (2) there are questions of law or
fact common to the class, (3) the claims or defenses of the
representative parties are typical of the claims or defenses of
the class, and (4) the representative parties will fairly and
adequately protect the interests of the class.
(b) Class Actions Maintainable. An action may be main-
tained as a class action if the prerequisites of subdivision (a)
are satisfied, and in addition:
(1) the prosecution of separate actions by or against in-
dividual members of the class would create a risk of
(A) inconsistent or varying adjudications with respect to
individual members of the class which would establish incom-
patible standards of conduct for the party opposing the class, or
(B) adjudications with respect to individual members of
the class which would as a practical matter be dispositive of the
interests of the other members not parties to the adjudications or
substantially impair or impede their ability to protect their in-
terests; OF
(2) the party opposing the class has acted or refused to
act on grounds generally applicable to the class, thereby making
appropriate final injunctive relief or corresponding declaratory
relief with respect to the class as a whole; or
(3) the court finds that the questions of law or fact com-
mon to the members of the class predominate over any ques-
tions affecting only individual members, and that a class action
A25
is superior to other available methods for the fair and efficient
adjudication of the controversy. The matters pertinent to the
findings include: (A) the interest of members of the class in
individually controlling the prosecution or defense of separate
actions; (B) the extent and nature of any litigation concern-
ing the controversy already commenced by or against members
of the class; (C) the desirability or undesirability of concentrat-
ing the litigation of the claims in the particular forum; (D) the
difficulties likely to be encountered in the management of a
class action.
(c) Determination by Order Whether Class Action to be
Maintained; Notice; Judgment; Actions Conducted Partially as
Class Actions.
(1) As soon as practicable after the commencement of an
action brought as a class action, the court shall determine by
order whether it is to be so maintained. An order under this
subdivision may be conditional, and may be altered or amended
before the decision on the merits.
(2) In any class action maintained under subdivision (b)
(3), the court shall direct to the members of the class the best
notice practicable under the circumstances, including individual
notice to all members who can be identified through reasonable
effort. The notice shall advise each member that (A) the court
will exclude him from the class if he so requests by a specified
date; (B) the judgment, whether favorable or not, will include
all members who do not request exclusion; and (C) any member
who does not request exclusion may, if he desires, enter an
appearance through his counsel.
(3) The judgment in an action maintained as a class action
under subdivisions (b)(1) or (b) (2), whether or not favorable
to the class, shall include and describe those whom the court
finds to be members of the class. The judgment in an action
maintained as a class action under subdivision (b) (3), whether
or not favorable to the class, shall include and specify or describe
A26
those to whom the notice provided in subdivision (c)(2) was
directed, and who have not requested exclusion, and whom the
court finds to be members of the class.
(4) When appropriate (A) an action may be brought or
maintained as a class action with respect to particular issues,
or (B) a class may be divided into subclasses and each sub-
class treated as a class, and the provisions of this rule shall then
be construed and applied accordingly.
(d) Orders in Conduct of Actions. In the conduct of actions
to which this rule applies, the court may make appropriate orders:
(1) determining the course of proceedings or prescribing meas-
ures to prevent undue repetition or complication in the presen-
tation of evidence or argument; (2) requiring, for the protection
of the members of the class or otherwise for the fair conduct of
the action, that notice be given in such manner as the court may
direct to some or all of the members of any step in the action,
or of the proposed extent of the judgment, or of the opportunity
of members to signify whether they consider the representation
fair and adequate, to intervene and present claims or defenses,
or otherwise to come into the action; (3) imposing conditions
on the representative parties or on intervenors; (4) requiring
that the pleadings be amended to eliminate therefrom allega-
tions as to representation of absent persons, and that the action
proceed accordingly; (5) dealing with similar procedural matters.
The orders may be combined with an order under Rule 16,
and may be altered or amended as may be desirable from time to
time.
(e) Dismissal or Compromise. A class action shall not be
dismissed or compromised without the approval of the court,
and notice of the proposed dismissal or compromise shall be
given to all members of the class in such manner as the court
directs.
+ en cciaaialilal
————— —
A27
APPENDIX L
BLACKIE, ET AL. V. BARRACK, ET AL.; ROBERTS, ET AL. V.
KUSHNER, ET AL.; AMPEX CORPORATION V. KUSHNER; TOUCHE
Ross & Co. Vv. BARRACK, ET AL.
United States Court of Appeals, Ninth Circuit, No.74-2141,
No. 74-2341, No. 74-2167, and No. 74-2466. September 25,
1975. Appeal from the United States District Court for the
Northern District of California.
Before: TUTTLE,* KOELSCH and BROWNING, Circuit Judges.
KoeE.tscu, Circuit Judge: These are appeals from an order
conditionally certifying a class in consolidated actions for vio-
lation of Section 10(b) of the Securities and Exchange Act of
1934, 15 U. S. C. § 78j(b), and Rule 10b-5 promulgated there-
under, 17 C. F. R. § 240.10(b)-5.
The litigation is a product of the financial troubles of Ampex
Corporation. The annual report issued May 2, 1970, for fiscal
1970, reported a profit of $12 million. By January 1972, the
company was predicting an estimated $40 million loss for fiscal
1972 (ending April 30, 1972). Two months later the company
disclosed the loss would be much larger, in the $80 to $90 mil-
lion range; finally, in the annual report for fiscal 1972, filed
August 3, 1972, the company reported a loss of $90 million,
and the company’s independent auditors withdrew certifica-
tion of the 1971 financial statements, and declined to certify
those for 1972, because of doubts that the loss reported for
1972 was in fact suffered in that year.
Several suits were filed following the 1972 disclosures of
Ampex’s losses. They were consolidated for pre-trial purposes.
* The Honorable Elbert P. Tuttle, United States Court of Appeals
Senior Circuit Judge for the Fifth Circuit, sitting by designation.
A28
The named plaintiffs in the various complaints involved in
these appeals’ purchased Ampex securities during the 27 month
period between the release of the 1970 and 1972 annual reports,
and seek to represent all purchasers of Ampex securities during
the period. The corporation, its principal officers during the
period,” and the company’s independent auditor are named as
defendants. The gravamen of all the claims is the misrepresen-
tation by reason of annual and interim reports, press releases
and SEC filings of the financial condition of Ampex from the
date of the 1970 report until the true condition was disclosed
by the announcement of losses in August of 1972.
The plaintiffs moved for class certification shortly after filing
their complaints in 1972; after extensive briefing and argument
the district judge entered an order on April 11, 1974, con-
ditionally certifying as a class all those who purchased Ampex
securities during the 27 month period. The defendants filed
notices of appeal from the order of certification on May 9 and
10, 1974.8
Additionally, the district judge, in an order entered July 1,
1974, denying a motion made by defendants Roberts and
Buchan, and defendants Blackie, et al., for reconsideration of the
class certification, permitted those defendants to seek an inter-
locutory appeal from that order under 28 UV. S. C. § 1292(»). ’
1. The lead action here, the so-called Molder action, was origi-
nally filed in the Eastern District of Pennsylvania in January of
1972, and transferred to the Northern District of California, where
it was consolidated for pretrial with seven other actions. Twelve
parties have been allowed to intervene as plaintiffs in the Molder
action.
2. Appellants Roberts and Buchan terminated their relation-
ship with Ampex during the class period; the remaining individual
defendants were in office throughout the period.
3. The direct appeals are designated Nos. 74-2141, 74-2341,
74-2167, and 74-2466.
4. The district court did not grant permission to appellants
Touche and Ampex to seek interlocutory review, as they had not
joined in the motion for reconsideration filed before the filing of
A29
We granted the petition for interlocutory review.° That appeal
was designated No. 74-2648, and consolidated with the direct
appeals.
In December of 1974, plaintiffs filed a motion to dismiss
the various appeals—the purportedly direct appeals on the
ground that the certification order is not appealable under 28
U. S. C. § 1291, and the § 1292(b) appeal on the ground that
it has been prosecuted in a dilatory manner.
The appeals having now been heard and submitted, we face
three issues: 1) whether the order certifying the class is a final
order appealable under § 1291; 2) whether the interlocutory
appeal should be dismissed; and (if any of the appeals are
properly before us) 3) whether the district court order certify-
ing the class was proper under the standards set out in Fed.
R. Civ. P. 23(a) and (b)(3). To summarize our decision, we
hold the certification order non-appealable and dismiss the
direct appeals; we deny the motion to dismiss the § 1292(b)
certified appeals; and, on the merits, hold that the suit may
properly be maintained as a class action.
I. Appealibility under § 129] of an order granting class action
status.
The courts of appeals have jurisdiction over appeals of right
under 28 U. S. C. §1291 only from “final decisions” of the
district courts. The statutory limitation is the product of a two-
their notices of appeal. The court assumed that the filing of the
notices divested him of jurisdiction over those defendants. We re-
ject Ampex’s argument that it is here under § 1292(b) by virtue of
its codefendant’s interlocutory appeal and its own filing of a notice
of appeal under Fed. R. App. P. 4. The taking of an interlocutory
appeal requires a discretionary judgment by both the district court
and court of appeals—that judgment is exercised with respect to
particular parties. As a result, Fed. R. App. P. 5 does not provide,
as decs Rule 4, for parties to join in others’ appeals.
5. Thus, whether the standards for certification of such an ap-
peal set out in § 1292(b) were met has been decided, and is not
now before us.
A30
fold policy judgment about judicial administration which was
written into the first Judiciary Act and adhered to ever since.
See Cobbledick v. United States, 309 U. S. 323, 324-325
(1940). The requirement saves judicial time by eliminating review
of rulings adverse to an eventually successful litigant. But more
importantly, the uniform imposition of finality as a condition
of review improves the quality of justice administered by the
judicial system. On balance, the rule shortens the time needed
for resolution of controversies, saving litigants both time and
money; “[requiring finality avoids] the obstruction to just claims
that would come from permitting the harassment and cost of a
succession of separate appeals from the various rulings to which
a litigation may give rise, from its initiation to entry of judg-
ment.” Cobbledick, supra, at 325. In short, the rule is one of
the primary bars against Bleak House Judicial administration;°
as such, its rationale applies equally to an order certifying a class.
Nevertheless, in some circumstances deferring an appeal
practically operates to deny effective review, as the right
threatened by an adverse ruling will have been lost in the
interim before final disposition of the other aspects of the
controversy. The Court therefore has given the § 1291 final
decision requirement a “practical rather than a technical con-
struction.” Cohen v. Beneficial Industrial Loan Corp., 337
U. S. 341, 348 (1949), and allowed interlocutory appeal from
a “small class [of orders] which finally determine claims of
6. A system of judicial administration, fortunately unknown in
this country.
“which has its ruined suitor, with his slipshtod heels and thread-
bare dress, borrowing and begging through the round of every
man’s acquaintance; which gives to monied might, the means
abundantly of wearying out the right; which so exhausts
finances, patience, courage, hope; so overthrows the brain and
breaks the heart; that there is not an honorable man among
its practitioners who would not give—who does not often give
—the warning. ‘Suffer any wrong that can be done you, rather
than come here!’”
Dickens, Bleak House, quoted in The World of Law—I, The Law
in Literature 42 (E. London ed. 1960).
A31
right separable from, and collateral to, rights asserted in the
action, too important to be denied review and too independent
of the cause itself to require that appellate consideration be
deferred until the whole case is adjudicated.” Cohen, at 546,
See Eisen v. Carlisle & Jacquelin, 417 U. S. 156, 170-172
(1974) (Eisen IV); Note, Class Action Certication Orders:
An Argument for the Defendant's Right to Appeal, 42 Geo.
Wash. L. Rev. 621, 625-628 (1974). Two of the three cir-
cuits which have faced the issue have nevertheless held a class
certification order non-appealable under Cohen. Thill Securities
Corp. v. New York Stock Exchange, 469 F. 2d 14 (7th Cir.
1972); Walsh v. City of Detroit, 412 F. 2d 226 (6th Cir.
1969). Accord, 9 J. Moore, Federal Practice § 110.13[9], at
184-187 (2d ed. 1970).
The Second Circuit, however, has permitted appeal in cer-
tain limited circumstances. In Eisen v. Carlisle & Jacquelin,
370 F. 2d 119 (2d Cir. 1966), cert. denied, 386 U. S. 1035
(1967) (Eisen 1), that court recognized that an order denying
class action status effectively sounded the “death knell” of the
plaintiff's suit. As “no lawyer of competence is going to under-
take this complex and costly case to recover $70 for Mr. Eisen,”
the individual claim could not be adjudicated, and as a prac-
tical matter the class question could never be appealed. The
court therefore concluded the order was appealable under
Cohen. We have adopted the death knell doctrine. Falk v.
Dempsey-Tegeler & Co., Inc., 472 F. 2d 142 (9th Cir. 1972);
Weingartner V. Union Oil Company of California, 431 F. 2d
26 (9th Cir. 1970).
From that springboard the Second Circuit developed a
“reverse death knell” doctrine with respect to a defendant and
his rights to foreclose an ostensible class suit against him. In-
fluenced by the suggestion that it consider a rule which would
“afford equality of treatment as between plaintiffs and defend-
ants” (Korn v. Franchard Corp., 443 F. 2d 1301, 1307 (2d
A32
Cir. 1971) (Friendly, J., concurring)), a panel of the circuit
held in Eisen v. Carlisle & Jacquelin, 479 F. 2d 1005, 1007
n.1 (2d Cir. 1973) (Eisen 111), that defendants could appeal
an order granting class status under three specified conditions.
As explicated in Herbst v. International Telephone and Tele-
graph Corp., 495 F. 2d 1308, 1312 (2d Cir. 1974), such an
order is appealable when the class determination is “funda-
mental to the further conduct of the case’” (i.e., when, were
the class determination reversed, the individual claims pre-
sented would be too small to continue the suit, thus effectively
terminating it—the reverse death knell situation) ;’ when the
order is “ ‘separable from the merits;’” and when it will result
in “ ‘irreparable harm to the defendant in terms of time and
money spent in defending a huge class action.’” Herbst, at
1312, quoting from Eisen III, at 1007 n. 1. We are asked, the
issue being novel in this circuit, to adopt the Second Circuit's
position.*
We decline to do so, because we believe that the Second
Circuit's rule impermissably® disregards the conditions placed
7. See General Motors Corp. v. City of New York, 501 F. 2d
639, 645 (2d Cir. 1974): Kohn v. Royall, Koegal and Weils, 496
F. 2d 1094, 1099 (2d Cir. 1974). But see General Motors Corp.,
supra, at 656-657.
8. Wholly aside from our disagreement with the Second Circuit
rule, we doubt that the order involved here would be appealable
under that rule. Including intervenors, the named plaintiffs pur-
chased 10,000 shares during the class period and damages would
appear to be such that the action would proceed were the order re-
versed. Thus, criteria | may not be satisfied. See, e.g.. Falk, supra,
(holding individual claim of $14,125 too large to invoke death knell
doctrine); Shayne v. Madison Square Garden Corp., 491 F. 2d 397
(2d Cir. 1974) (individual claim of $7,482 too large); Milberg v.
Western Pacific R. R., 443 F. 2d 1301 (2d Cir. 1971) ($8,500
claim too large). Moreover, in this case the second criteria is prob-
ably not met either. See Kohn, supra, at 1099; General Motors
Corp., supra, at 646, 659.
9. We recognize that it is not altogether certain that the Cohen
standards represent the outer parameters of appealability, in light of
the Court’s admonition in that case to give the final decision rule a
A33
on appealability by Cohen. The rule of finality is a statutorily
imposed restraint on our jurisdiction; as noted, it imposes a
legislative judgment that on balance time and money will be
saved if appeal is deferred until the conclusion of a suit. We
are not free to disregard that judgment; exceptions to uniform
application undermine the rule’s purpose by fostering litigation
about whether an order is exceptional and appealable. And
with the proliferation of narrow and peculiar exceptions, the
more doubtful and difficult it becomes to determine appeal-
ability, at district and appellate court levels, increasingly in-
viting supposedly foreclosed interlocutory litigation.
In this view, and while recognizing that it is nevertheless
such an exception, we think the Cohen “collateral order” stand-
ards should be restrictively construed. The Cohen rule is an
effort to prevent the inevitable injustices to litigants which
result from application of a prophylactic rule which operates
“on balance,” but only in those limited situations where it can
be accomplished with a minimum intrusion on the statutory
policy. Thus, Cohen requires not only that denial of immediate
review results in loss of a right which cannot be sustained by
later review, but also that the order appealed from be final
and collateral. Thus, even when an injustice may result, im-
mediate review is available only when the appellate court will
not be required to duplicate efforts entailed in a later review
on the merits, or to review a decision whose tentative nature
will render the appellate court’s decision fruitless later in the
lawsuit.
We are clear that a class certification order does not fall
within Cohen. The finality condition is not met, as such an
practical rather than technical construction, and its later observation
in Eisen IV, at 170, that “[nJo verbal formula yet devised can ex-
piain prior finality decisions with unerring accuracy or provide an
utterly reliable guide for the future.” However, we think those
standards were so intended and should be so read, for the same
reasons that we think the Cohen exception was intended to be nar-
rowly construed, which we set out below.
A34
order is not a final determination of the propriety of a class.
Under Fed. R. Civ. P. 23(c)(1), a class must be certified as
soon as practicable after commencement of the action, and is
made conditional and subject to alteration, to the creation of
sub-classes, Rule 23(c)(4)(B), or indeed to decertification
as the suit progresses and newly discovered facts warrant.’
Nor is the class issue separable from the merits in all cases
(including this one). The common questions, typicality, con-
flicts and adequacy of representation, Fed. R. Civ. P. 23(a),
and predominance tests, Fed. R. Civ. P. 23(b)(3), are determi-
nations (unlike, for example, the notice question involved in
Eisen IV) which may require review of the same facts and the
same law presented by review of the merits."
Nor, for that matter, does the order threaten the defendant
with any irreparable harm cognizable under Cohen. The de-
fendant does not lose any legal rights or entitlement in the
interim between certification and appeal—appeal after the
litigation fully protects from a judgment for an improper class.
See Geo. Wash. Note, supra, at 628-630.
The Second Circuit found the requisite injury in the in-
creased, and generally irrecoverable, costs of defending the
class action. With deference, we disagree. The final decision
rule itself often increases the time and cost of litigation. Denial
of immediate review from orders denying motions to dismiss,
Fed. R. Civ. P. 12(b)(6), or for summary judgment, Fed. R.
10. “But we do not mean that every order fixing security is sub-
ject to appeal. Here it is the right to security that presents a serious
and unsettled question. If the right were admitted or clear and the
order involved only an exercise of discretion as to the amount of
security, a matter the statute makes subject to reconsideration from
time to time, appealability would present a different question.”
Cohen, at 547.
11. See Kohn, supra at 1099; General Motors Corp., supra, at
659. In fact, as a ruling on class certification must be made soon
after commencement of the action, the facts governing the class de-
termination will inevitably be less clear than after the case has gone
to judgment.
A35
Civ. P. 56, may subject a defendant in particular cases to de-
fense costs equivalent to those incurred in defending a class
action. Geo. Wash. Note, supra, at 629-630; Kohn v. Royall,
Koegel & Wells, 496 F. 2d 1094, 1098-1099 (2d Cir. 1974).
Such litigants must bear those costs because of the legislative
judgment that a final decision rule will most benefit all litigants,
statutorily foreclosing reliance on litigation costs as a justifica-
tion for departure from the final decision rule.”
It strikes us that the Second Circuit rule is the product of
three policy considerations, urged on us here as well, which
we conclude are insufficient to justify departure from the
Cohen gloss on the rule.
The first is that litigation costs will be reduced by allowing
appeal and thus avoiding the substantial costs of litigating an
improperly certified class. While perhaps true in a particular
suit, we suspect that the savings envisioned may well prove
illusory. Applied to all class actions, the Second Circuit’s rule
saves time and money only when the appellate court determines
the particular class certification order is appealable, when the
order would not have been otherwise appealable under the
narrower Cohen exception, when the district judge would have
refused to certify a § 1292(b) appeal, where the district judge
would not later decertify the class, and where, on the merits,
the order is reversed. Even then later developments in the suit
may lead to reinstatement of the class. To be balanced against
Savings is the loss of time and money resulting from appeal in
which the order is held non-appealable, or the order is affirmed.
Neither we nor (we suggest) the Second Circuit have any way
of striking that balance. We can only speculate concerning the
various costs, time spans, and percentages which must neces-
sarily be appraised to determine whether the Second Circuit's
12. Neither Cohen nor Eisen 1V support the Second Circuit in
this regard. In both cases the defendant was threatened with costs
which the applicable statute placed on the plaintiff. In neither case
did the Court rely on general litigation expense to justify appeal-
ability.
A36
exception could pay its way; it is ultimately a question which
is best suited to legislative investigation and judgment.
Moreover, we would suggest that the number of suits in
which a rule of appealability would be worthwhile may be
relatively small. The standard of review is abuse of discretion.
A number of the criteria set out in Rule 23 relate to matters,
such as manageability, adequacy of representation, feasibility
of joinder, superiority to other available methods of adjudica-
tion, and the like, which are much more within the knowledge
of the district court in touch with the litigation than in ours;
our review is unlikely to add any superior wisdom, or to re-
verse on those grounds. In those cases which turn on a question
of law, the district judge may certify an interlocutory appeal.’**
The number of cases in which massive litigation costs are
threatened, in which a district judge declines to certify an ap-
peal, and which thereafter results in reversal of the class certi-
fication, may prove small indeed.
The second consideration is that, because the “death knell”
doctrine allows plaintiffs to appeal orders denying class status,
parity of treatment requires that defendants be allowed to
appeal orders granting such status. We disagree. Precisely the
same disparity exists between plaintiffs and defendants with
regard to summary judgment or motion to dismiss orders. So
long as they are differently situated in a manner relevant to
the purposes of the final decision rule, plaintiffs and defend-
ants may be treated differently. Suffice it here to say that they
are differently situated with respect to the finality of the class
order—an order denying in the “death knell” situation effec-
tively terminates the suit and precludes presentation of the
merits; an order granting does not end the suit, or preclude
12a. Generally an order granting class action status does not
involve a controlling question of law when entered because it has no
significant effect on the litigation until issues not pertaining to the
personal claims of the class representative have to be decided. Note,
Interlocutory Appeals in the Federal Courts Under 28 U. S. C.
§1292(b), 88 Harv. L. Rev. 607, 630-631 n. 97 (1975).
oe
A37
presentation of the defense, and is subject to reevaluation as
well. See Geo. Wash. Note, supra, at 631-632.
The final consideration relied on by the Second Circuit, see
Herbst, supra, at 1313, strenuously urged here, is that a class
certification order in a large-class, small-claim class action
threatens such ruinous liability that the defendant inevitably
must settle even frivolous claims, thereby effectively preclud-
ing review of the crucial class certification order unless inter-
locutory review is allowed. Again, we are unpersuaded. In
large part the argument is an attack on the decision reflected
in Rule 23 to allow integration of numerous small individual
claims into a single powerful unit, rather than to an attack
peculiarly germane to the operation of the final decision rule
in the class action context. Precisely the same power to coerce
a settlement (and defeat review of potentially erroneous pre-
vious orders) is wielded by any plaintiff with a substantial
claim—that fact alone does not generally confer appealability
on an order which effectively requires a defense to a large
claim. The fairness of the pressure—i.e., the sociological merits
of the small claims class action—is not a question for us to
decide. The fact is that Congress, by authorizing and approv-
ing Rule 23(b)(3), created a vehicle to put small claimants
in an economically feasible litigating posture. In that light, we
doubt the propriety of an attendant judicial alteration of the
final decision rule which immediately (and uniquely) subjects
redress of class plaintiffs’ claims to the delay and cost of an
appeal.
We recognize, of course, that it is the class certification order
itself which, if erroneous, creates the improper coercive effect.
That is a distinction without a difference unless class certifica-
tion orders have unique effects specially implicating the policy
of the final decision rule. It may well be that a higher percent-
age of class certification orders are erroneous than others which
subject a defendant to the coercion of a large potential liability;
or that a higher percentage of frivolous claims are presented
A38
in class actions than in others; or that the magnitude of the
potential liability in class actions is leading to settlement of
more frivolous claims and abandonment of more meritorious
appeals, than occurs in other litigation. If such is not the case,
there is no reason to treat a class certification order differently
than any other interlocutory order. If so, an exception may or
may not be justified.”*
In either event, however, the argument is again properly
addressed to Congress. We have no reliable knowledge,’* and
no good means of acquiring any, about the present nature and
number of class action settlements, and of how that experience
compares with individual lawsuits of the same type, or pressing
claims of similar magnitude. Thus, we have no means of decid-
ding whether the present hue and cry of “blackmail” in fact
reflects an abnormally high incidence of unfairly coerced settle-
ments, or is rather the pained outcry of defendants whose pre-
viously advantaged litigating position has been undermined,
13. We note that the supposed in terrorem effect of the class cer-
tification will persist despite a right of immediate appeal—the claim
may be frivolous and the class proper. Immediate appeal will elimi-
nate only the improperly certified coercive class action, at the ex-
pense of both frivolous and non-frivolous, property certified classes.
It may well be better to attack the “blackmail” problem directly with
appropriate safeguards rather than collaterally undermining the final
decision rule.
14. Both sides have cited extensive commentary, by courts and
critics alike, on the supposed in ferrorem effect of class actions. Al-
most inevitably those opinions are supported by highly inconclusive,
or no, empirical evidence; most of the debate is founded on specula-
tion, primarily dictated by the writer's personal experience and feel-
ines for or against class actions. The empirical evidence on the sub-
ject is very limited, and not particularly helpful because it provides
no basis for comparison of class actions with other suits. For what it
is worth, however, the empirical evidence indicates that a relatively
high proportion of class actions are not settled, but disposed of in
defendant's favor on preliminary motions. See Committee on Com-
merce, United States Senate, Class Action Study, 93d Cong., 2d Sess.
‘ (1974), Committee Print at 9-10. On the basis of the evidence
before it, the Commerce Committee concluded that the class action
was not a particularly effective vehicle for coercing settlements.
8 NOL ow Met Ie et ON
A an ete A i a ra
ee ee
A39
and who must now confront small claimants (who have been
given the capacity to exert pressure proportionate to the mag-
nitude of the total injury occasioned by defendant's alleged
violation of the law) on more equal grounds. Without such
knowledge, there is no justification for departure from the “final
decision” rule in this context, and we decline to do so.
Consequently, the § 1291 appeals designated Nos. 74-2141,
74-2167, 74-2341 and 74-2466 are dismissed.
Il. The § 1292(b) interlocutory appeals.
We deny the motion to dismiss the § 1292(b) appeals.
The prosecution of these appeals has not been a model of
diligence. Defendants were granted an extension of the time
to transmit the record, and three extensions in the briefing
schedule. Some of those delays could have been avoided; while
the issues involved are somewhat complex, we note that much
of the material in the appellate briefs was presented to the
trial court, and that the lawyers did not start from scratch here.
However, the motion to dismiss is addressed to our discre-
tion, and we think dismissal is not mandated in this case. From
the somewhat conflicting representations before us it appears
that appellees may have agreed to the extensions, although
that acquiescence may have been induced by a now disclaimed
representation that plaintiffs could continue with discovery while
the case was on appeal. Because the record is hazy, because we
have granted the extensions, and because the issues have now
been briefed and argued and are ripe for decision, we think
the preferable course is for us to decide the appeal and provide
guidance to the trial court. However, we do note that one pur-
pose of interlocutory appeals is to hasten the conclusion of a
lawsuit, that briefing extensions defeat that purpose, and that
in appropriate circumstances we can deny unwarranted exten-
sions and dismiss appeals to prevent an interlocutory appeal
from being misused as a dilatory tactic.
A40
We turn to the merits of defendants’ Buchan and Roberts,
and Blackie, et al., § 1292(b) appeals. :
III. Compliance with the Requirements of
Fed. R. Civ. P. 23(a) and (bX3).
A. The court’s approach to class certification.
As a preliminary matter, we face the contention that the
district judge certified the class in an inappropriate manner.
Relying on our opinion in In re Hotel Telephone Charges, 500
F. 2d 86, 90 (9th Cir. 1974) defendants argue that he improp-
erly engaged in speculation when determining whether a com-
mon question exists, and whether conflicts make class represen-
tation inadequate, rather than determining, before certifying
the class, that the requirements of the Rule were in fact met.
We disagree.
From a thorough review of the district judge’s opinion, we
think it apparent that he analyzed the allegations of the com-
plaint'® and the other material befure him (material sufficient
to form a reasonable judgment on each requirement), considered
the nature and range of proof necessary to establish those alle-
gations, determined as best he was able the future course of
the litigation and then determined that the requirements were
met at that time.’® That is all that is required.
15. In large part appellants’ attack on the district judge’s ap-
proach is a reiteration of their disagreement with his legal conclu-
sions. The speculative language seized upon in the opinion simply
conditions the conclusion that a common question exists on plain-
tiffs’ proof of the allegations—i.e., if plaintiffs prove their allegation
of X, X will be a question of fact or law common to the class. Such
speculation is entirely proper and necessary. Likewise, the court
ruled that any conflicts at present did not appear to defeat adequacy
of representation, but that if any unforeseen difficulties arose, they
could be cured by sub-classes—again a proper application of the
Rule.
16. The court is bound to take the substantive allegations of the
complaint as true, thus necessarily making the class order speculative
in the sense that the plaintiff may be altogether unable to prove his
allegations. While the court may not put the plaintiff to preliminary
A4l
Defendants misconceive the showing required to establish
a class under Hotel Telephone Charges. We indicated there
that the judge may not conditionally certify an improper class
on the basis of a speculative possibility that it may later meet
the requirements. 500 F. 2d at 90. However, neither the pos-
sibility that a plaintiff will be unable to prove his allegations,
nor the possibility that the later course of the suit might unfore-
seeably prove the original decision to certify the class wrong,
1s 4 basis for declining to certify a class which apparently satis-
fies the Rule. The district judge is required by Fed. R. Civ. P.
23(c)(1) to determine “as soon as practicable after tne com-
mencement of an action brought as a class action . . . whether it
is to be so maintained.” The Court made clear in Eisen IV that
the determination does not permit or require a preliminary
inquiry into the merits, 417 U. S. at 177-178; thus, the district
judge is necessarily bound to some degree of speculation by the
uncertain state of the record on which he must rule. An exten-
sive evidentiary showing of the sort requested by defendants
is not required. So long as he has sufficient material before
him to determine the nature of the allegations, and rule on com-
pliance with the Rule’s requirements, and he bases his ruling
on that material, his approach cannot be faulted because plain-
tiffs’ proof may fail at trial. Of course, whether he applied cor-
rect legal principles in making the ruling, and whether the ruling
was within the permissible boundaries of the discretion vested in
him, is another question, to which we now turn.
proof of his claim, it does require sufficient information to form a rea-
sonable judgment. Lacking that, the court may request the parties to
suppiement the pleadings with sufficient material to allow an in-
formed judgment on each of the Rule’s requirements.
A42
B. The merits of class certification.
Defendants question this suit’s compliance with each of the
various requirements of Rule 23(a) and (b)(3)** except nu-
merosity (understandably, as it appears that the class period
of 27 months will encompass the purchasers involved in about
120,000 transactions involving some 21,000,000 shares). How-
ever, all of defendants’ contentions can be resolved by address-
ing 3 underlying questions: 1) whether a common question
of law or fact unites the class; 2) whether direct individual
proof of subjective reliance by each member is necessary
to establish 10b-5 liability in this situation; and 3) whether
proof of liability or damages will create conflicts among class
members and with named plaintiffs sufficient to make represen-
tation inadequate? We turn to the first issue.
47. Rule 23 provides in part:
“(a) Prerequisites to a Class Action. One or more members
of a class may sue or be sued as representative parties on behalf
of all only if (1) the class is so numerous that joinder of all
members is impracticable, (2) there are questions of law or
fact common to the class, (3) the claims or defenses of the
representative parties are typical of the claims or defenses of the
class, and (4) the representative parties will fairly and ade-
quately protect the interests of the class.
“(b) Class Actions Maintainable. An action may be main-
tained as a class action if the prerequisites of subdivision (a)
are satisfied, and in addition:
+ * * *
“(3) the court finds that the questions of law or fact com-
mon to the members of the class predominate over any questions
affecting only individual members, and that a class action is
superior to other available methods for the fair and efficient ad-
judication of the controversy. The matters pertinent to the find-
ings include: (A) the interest of members of the class in in-
dividually controlling the prosecution or defense of separate
actions; (B) the extent and nature of any litigation concerning
the controversy already commenced by or against members of
the class; (C) the desirability or undesirability of concentrating
the litigation of the claims in the particular forum; (D) the
difficulties likely to be encountered in the management of a class
action.”
A43
1. Common questions of law or fact.
The class certified runs from the date Ampex issued its 1970
annual report until the company released its 1972 report 27
months later. Plaintiffs’ complaint alleges that the price of the
company’s stock was artificially inflated because:
“the annual reports of Armpex for fiscal years 1970 and
1971, various interim reports, press releases and other docu-
ments (a) overstated earnings, (b) overstated the value
of inventories and other assets, (c) buried expense items
and other costs incurred for research and development in
inventory, (d) misrepresented the companies’ current
ratio, (e) failed to establish adequate reserves for receiv-
ables, (f) failed to write off certain assets, (g) failed to
account for the proposed discontinuation of certain prod-
uct lines, (h) misrepresented Ampex’s prospects for future
earnings.”
The plaintiffs estimate that there are some 45 documents issued
during the period containing the financial reporting complained
of, including two annual reports, six quarterly reports, and
various press release and SEC filings.
Because the alleged misrepresentations are contained in a
number of different documents, each pertaining to a different
period of Ampex’s operation, the defendants argue that purchas-
ers throughout the class period do not present common issues
of law or fact. They reason that proof of 10b-5 liability will
require inspection of the underlying set of facts to determine
the falsity of the impression given by any particular accounting
item presented; that the underlying facts fluctuate as the busi-
Ness operates (i.e., inventory is bought and sold, accounts are
paid off and created); thus, proof of the actionability of a cur-
rent accounting representation or omission will apply only to
those who purchased while a financial report was current; from
which they conclude no common question is presented and a
class is improper.
A44
We disagree. The overwhelming weight of authority holds
that repeated misrepresentations of the sort alleged here satisfy
the “common question” requirement. Confronted with a class
of purchasers allegedly defrauded over a period of time by
similar misrepresentations, courts have taken the common
sense approach that the class is united by a common interest in
determining whether a defendant’s course of conduct is in its
broad outlines actionable, which is not defeated by slight differ-
ences in class members’ positions, and that the issue may profit-
ably be tried in one suit. See Green v. Wolf Corporation, 460
F. 2d 291, 298 (2d Cir. 1968); Esplin v. Hirschi, 402 F. 2d
94 (10th Cir. 1968); Harris Vv. Palm Springs Alpine Estates,
329 F. 2d 909 (9th Cir. 1964); U. S. Financial Securities Liti-
gation, 64 F. R. D. 433 (S. D. Cal. 1974); Aboudi v. Daroff,
65 F. R. D. 388 (S. D. N. Y. 1974); Werfel v Kramarsky,
61 F. R. D. 674 (S. D. N. Y. 1974); In re Memorex Security
Cases, 61 F. R. D. 88 (N. D. Cal. 1973); Siegel v. Realty
Equities Corporation of New York, 54 F. R. D. 420 (S. D.
N. Y. 1972); Herbst v. Able, 47 F. R. D. 11 (S. DLN. Y.
1969); Dolgow v. Anderson, 43 F. R. D. 472 (E. D.N. Y.
1968); Siegel v. Chicken Delight, Inc., 271 F. Supp. 722 (N. D.
Cal. 1967); Fischer v. Kletz, 41 F. R. D. 377, 381 (S. D.N. Y.
1966); Kronenberg v. Hotel Governor Clinton, Inc., 41 F. R.
D. 42 (S. D. N. Y. 1966). As we stated in Harris, supra:
“Appellees assert that the various investors made pay-
ments on the securities at different times and stand in
different positions . . . [S]ince the complaint alleges a com-
mon course of conduct over the entire period, directed
against all investors, generally relied upon, and violating
common statutory provisions, it sufficiently appears that the
questions common to all investors will be relatively sub-
stantial.” 329 F. 2d at 914.
Those views are consistent with the views of the Advisory
Committee on the Rule: “[A] fraud perpetrated on numerous
persons by the use of similar misrepresentations may be an
appealing situation for a class action . . .” Advisory Committee
A45
on Rule 23, Proposed Amendments to the Rules of Civil Pro-
cedure, 39 F. R. D. 69, 103 (1966). The availability of the
class action to redress such frauds has been consistently up-
held, see In re Caesars Palace Securities Litigation, 360 F.
Supp. 366, 395-96 (S. D. N. Y. 1973), in large part because
of the substantial role that the deterrent effect of class actions
plays in accomplishing the objectives of the securities laws. See
III Loss, Securities Regulation 1819 (2d ed. 1961) (“the ulti-
mate effectiveness of [the security antifraud laws] may depend
on the applicability of the class action device”).
While the nature of the interrelationship and the degree of
similarity which must obtain between different representations
in order to come within the outer boundaries of the “common
course of conduct” test is somewhat unclear,'® the test is more
18. Because plaintiffs have alleged specific strands of misrep-
resentation running throughout financial statements of the class
period, they are well within whatever the outer boundaries might be,
and we need not resolve the issue. We note, however, that a num-
ber of courts have apparently held that allegations simply that earn-
ings and stock price have been inflated over a period of time by a
defendant’s misrepresentations is sufficient to satisfy the common
question requirement (although the cases are somewhat unclear
because they fail to specify the precise misrepresentations which al-
legedly inflated earnings). See Fischer v. Kletz, supra; Kronenberg,
supra; Werfel v. Kramarsky, supra. See Feldman vy. Lifton, 64
F. R. D. 539, at 544-545 (S. D. N. Y. 1974). Appellants point out
that allegation of inflation of earnings or price is conclusionary, and
may derive from altogether unrelated misrepresentations. In their
view the common question requirement is met only if all purchasers
are injured by the same misrepresentation, or, in a “course of con-
duct” case, by identical repeated misrepresentations, and if defend-
ant’s liability can be established by proof both of the same set of
facts and same legal principle. We think that is far too restrictive
a view of the common question requirement in the securities fraud
context. Rule 10b-5 liability is not restricted solely to isolated mis-
representations or omissions; it may also be predicated on a “‘practice,
or course of business which operates . . . as a fraud. . .” Under that
section class members may well be united in establishing liability for
fraudulently creating an illusion of prosperity and false expectations.
Moreover, even when misrepresentations are unrelated, class mem-
bers may share a common question of law or fact. Of course, if an
early misrepresentation is undissipated, a later purchaser will present
(Footnote continued on next page)
A46
than satisfied when a series of financial reports uniformly mis-
represent a particular item in the financial statement. In that
situation, the misrepresentations are “interrelated, interdepend-
ent, and cumulative;”’ [L]ike standing dominoes . . . one mis-
representation . . . cause[s] subsequent statements, to fall into
inaccuracy and distortion when considered by themselves or
compared with previous misstatements.” Fischer v. Kletz, supra,
at 381.
Precisely such a situation is alleged here in at least three
respects—the failure to create adequate reserves for uncollec-
tible accounts receivable and for contractually guaranteed
royalty payments, and the over-statement of inventory. The
1972 Annual Reports shows writedowns of $31.9 million as
provision for royalty guarantees, $11.8 million for uncollectible
accounts receivable, and $15 million for inventory. Plaintiffs
allege that the writedowns had roots tracing back to the begin-
—-_ —_ -_ __
a common question even if another misrepresentation has intervened.
But even if the effect of the earlier misrepresentation is dissipated,
proof of the earlier misrepresentation may be relevant to the latter
purchaser's case. Proof of the earlier fraud and its effects might be
relevant circumstantially to establish duty standards, culpability, or
damages regarding the later fraud; it would establish background in-
formation about the defendant common to both suits. Thus, even
when unrelated misrepresentations are alleged as part of a common
scheme, class members may share common factual questions, and
trial in the same forum avoids duplicative proof. That is a major
purpose of a class action; the “common question” requirement should
be interpreted to obtain that objective. Naturally, when the com-
ponent misrepresentations of a “course of conduct” fraud are un-
related, a great many more non-common questions exist. In that situa-
tion no representative’s claim may be typical of the rest of the class,
Rule 23(a)(3), although that depends on how broadly that require-
ment is construed. See text at note 25, infra, and note 25 infra. We
think it is for the predominance and other requirements of Rule
23(b)(3), rather than the common question requirement, to function
to keep the balance between the economies attained and lost by
allowing a class action. The common question requirement should
not be restrictively interpreted to attain that objective, particularly as
to do so would eliminate the class action deterrent for those who
engage in complicated and imaginative rather than straightforward
schemes to inflate stock prices.
A47
ning of the class period, an allegation somewhat borne out by
the auditors’ withdrawal of certification of the 1971 report
because of uncertainty that the huge losses reported in 1972
were the product of 1972 business operations, and not attribu-
table to earlier years. Plaintiffs contend that the company’s
financial reports throughout the period uniformly and fraud-
ulently failed to establish reserves in amounts adequate to satisfy
accepted accounting principles, injuring all purchasers of the
consequently inflated stock.
In this aspect, plaintiffs allege a source of inflation common
to every purchaser. The creation of a reserve is of course simply
an adjustment made to the balance sheet and income statement
to provide a more realistic view of the business and its opera-
tions. Failure in any particular period to recognize that a portion
of the accounts receivable generated in that period are uncollect-
ible, and to create or adjust a reserve, will have the effect of
inflating the balance sheet assets and surplus, and overstating
the income for the period; likewise failure to recognize accrued
liabilities for royalty payments will inflate surplus by understat-
ing liabilities, and will overstate income. Naturally, any inflation
in the stock price due to inadequate reserves will persist until
the reserves become adequate or until the losses are in fact
written off.
Defendants nevertheless contend that a class is improper
because each purchaser must depend on proof of a different set
of accounting facts to establish the inadequacy of the reserves
at the time he bought. Defendants misconceive the requirement
for a class action; all that is required is a common issue of law
or fact. Even were we to assume that the reserves were at some
points during the period adequate, the class members still would
be united by a common interest in the application to their unique
situation of the accounting and legal principles requiring ade-
quate reserves—i.e., by a common question of law.’® Here, how-
19. Appellants make much of the distinction between an ac-
counting principle and estimate, arguing that the exercise of judg-
(Footnote continued on next page)
A48
ever, in light of the progressive deterioration of Ampex’s finan-
cial position and the magnitude of the losses at the end of the
period, even the fact that reserves were in reality inadequate
throughout much if not all of the period may not be in serious
dispute; rather, the question will be whether the inadequacy was
in some sense culpable because the contingencies which proved
them inadequate were foreseen or foreseeable.
The alleged inventory overvaluation likewise presents com-
mon issues. Defendants again contend it does not because the
valuation of any particular period’s closing inventory involves
a process of physical estimation based on that inventory’s
characteristics, and that overstatement of one period's closing
inventory, while overstating that period’s income, will have an
opposite effect on the next period’s income by overstating open-
ing inventory, deflating rather than inflating stock price. While
true in abstract, appellants’ position disregards the real sub-
stance of the plaintiffs’ complaint which is again highlighted by
the 1972 Report. In explaining the $15 million writedown, the
company stated: “Inventories of stereo tapes more than six
months old and more than one year old were written down 50%
and 100% respectively . . . No significant writedowns of this
nature were made in the prior year.”
Plaintiffs thus are complaining of the balance sheet effect of
inventory over-valuation. They are alleging that by failing
ment involved in an estimate depends on analysis of facts which
change, making legal evaluation of different estimates distinct legal
and factual problems. The distinction makes little sense in this con-
text. The judgment necessary to make an estimate must be controlled
by the accounting principle. Thus, even when only detached, un-
connected incidents of incorrect estimates are alleged, the jury must
nevertheless be apprised of the common standard of law by which
to judge the estimates—the accounting principle—and a common
question is presented. Insofar as a class action is involved, the situa-
tion is the same as where a consistent misapplication of an account-
ing principle as part of a course of conduct to inflate the stock price
is alleged. And, moreover, it appears to us, contrary to appellants’
contentions, that plaintiffs are complaining of abuses of accounting
principles, not estimates.
A49
throughout the class period to recognize and account for in-
ventory obsolescence each time the inventory was valued, the
company consistently inflated the value at which it carried in-
ventory on the balance sheet.* In effect, plaintiffs are complain-
ing of a consistent disregard of the accounting principle that
inventory be valued at “lower of cost or market.” Again, com-
mon questions of law and facts are presented.
The class members also share an interest in establishing the
standard of care required of the various defendants under the
White v. Abrams, 495 F. 2d 724 (9th Cir. 1974), flexible
duty standard. The flexible duty of any defendant, while de-
pending on his particular relationship to Ampex and to the
financial reporting involved, will be owed identically to all
market purchasers, who are for practical purposes identically
situated. The culpability of each defendant’s conduct is to be
measured against the statutorily imposed duty not to mani-
pulate the market. Differences in sophistication, etc., among pur-
chasers have no bearing in the impersonal market fraud context,
because dissemination of false information necessarily translates
through market mechanisms into price inflation which harms
each purchaser identically. See U. S. Financial Securities Litiga-
tion, supra, at 451-452.
Moreover, because of the relative similarity of the various
documents involved, the duty owed by a defendant with respect
to such documents will probably be uniform or nearly so, further
uniting the positions of all class purchasers.
2. Predominance and reliance.
Defendants contend that any common questions which may
exist do not predominate over individual questions of reliance
and damages.
The amount of damages is invariably an individual question
and does not defeat class action treatment. E.g., U. §. Financial
20. Whether inflation of assets rather than earnings is material to
the stock price is for the jury, not us, to decide.
ASO
Securities Litigation, supra, at 448 n. 5, and cases there cited.
Moreover, in this situation we are confident that should the
class prevail the amount of price inflation during the period can
be charted and the process of computing individual damages will
be virtually a mechanical task. See n. 24 infra.
Individual questions of reliance are likewise not an impedi-
ment—subjective reliance is not a distinct element of proof of
10b-5 claims of the type involved in this case.
The class members substantive claims either are, or can be,
cast in omission or non-disclosure terms—the company’s finan-
cial reporting failed to disclose the need for reserves, conditions
reflecting on the value of the inventory, or other facts necessary
to make the reported figures not misleading. The Court has
recognized that under such circumstances
“involving primarily a failure to disclose, positive proof of
reliance is not a pre-requisite to recovery. All thgt is neces-
sary is that the facts withheld be material in the sense that
a reasonable investor might have considered them im-
portant in the making of this decision. This obligation to
disclose and this withholding of a material fact establish
the requisite element of causation in fact.” (citations
omitted )
Affiliated Ute Citizens of Utah v. United States, 406 U. S. 128,
153-154 (1972). See U. S. Financial Securities Litigation,
supra, at 451; Caesars Palace Securities Litigation, supra, at
supra, at 339; In re Penn Central Securities Litigation, 347 F.
Supp. 1327, 1344 (E. D. Penn. 1972).
Moreover, proof of subjective reliance on particular misrep-
resentations is unnecessary to establish a 10b-5 claim for a decep-
tion inflating the price of stock traded in the open market. See
Herbst v. 1. T. T., supra, at 1315-1316; Chris-Craft Industries,
Inc. v. Piper Aircraft Corp., 480 F. 2d 341, 373-374 (2d Cir.
1973): Tucker v. Arthur Andersen & Co., CCH Fed. Sec. L.
Rep. € 95,107, at 97,934-97,935 (S. D. N. Y. 1975); U. S.
Financial Securities Litigation, supra, at 449-451; Werfel v.
a ee
A51
Kramarsky, supra, at 681; In re Memorex Security Cases, supra,
at 100-101; Siegel v. Realty Equities Corporation of New York,
supra, at 424-425; Herbst v. Able, supra, at 20. Proof of reliance
is adduced to demonstrate the causal connection between the
defendant’s wrongdoing and the plaintiff's loss. We think causa-
tion is adequately established in the impersonal stock exchange
context by proof of purchase and of the materiality of misrepre-
sentations, without direct proof of reliance. Materiality circum-
stantially establishes the reliance of some market traders and
hence the inflation in the stock price—when the purchase is made
the causational chain between defendant’s conduct and plaintiffs
loss is sufficiently established to make out a prima facie case.
See In re Memorex Security Cases, supra, at 101: Note,
The Reliance Requirement in Private Actions Under SEC Rule
10b-5, 88 Harv. L. Rev. 584, 593 (1975).
Defendants argue that proof of causation solely by proof of
materiality is inconsistent with the requirement of the traditional
fraud action that a plaintiff prove directly both that the reason-
able man would have acted on the misrepresentation (material-
ity), and that he himself acted on it, in order to establish the
defendant’s responsibility for his loss, which justifies the
compensatory recovery.
We disagree. The 10b-5 action remains compensatory; it is
not predicated solely on a showing of economic damage (loss
causation). We merely recognize that individual “transactional
causation” can in these circumstances be inferred from the
materiality of the misrepresentation, see Tucker v. Arthur
Andersen & Co., supra, at 97,933; Schlick v. Penn-Dixie Cement
Corp., 507 F. 2d 374, 381-382 (2d Cir. 1974), and shift to
defendant the burden of disproving a prima facie case of causa-
tion. Defendants may do so in at least 2 ways: 1) by disproving
materiality or by proving that, despite materiality, an insuffi-
cient number of traders relied to inflate the price; and 2) by
proving that an individual plaintiff purchased despite knowledge
A52
of the falsity of a representation, or that he would have, had
he known of it.”
That the prima facie case each class member must establish
differs from the traditional fraud action, and may, unlike the fraud
21. A number of cases indicate that proof of materiality raises a
“presumption” of reliance. The Court did not speak of a presumption
in Mills or Affiliated Ute; we prefer to recognize that materiality
directly establishes causation more likely than not, and that reliance
as a separate requirement is simply a milepost on the road to causa
tion. The net result is in either view the same: the validity of either
view turns on the assumption that the particular investor is more
likely to act like the reasonable investor than not.
There is some debate as to whether the “presumption” of reliance
may be rebutted; the general view is that it may be, see Harvard
Note, supra, at 600 and 600 n. 75, and cases there cited, although
sound contrary opinion exists. See Herbst v. IIT, supra, at 1316 n.
14; Chris-Craft Industries, Inc., supra, at 400 (Mansfield, J., con-
curring and dissenting). The 10b-5 private suit serves a public pur-
pose, but has done so since its judicial creation in the framework of a
private damage suit. We doubt the right to disprove causation will
substantially reduce a defendant's liability in the open market fraud
context, as we doubt that a defendant would be able to prove in
many instances to a jury’s satisfaction that a plaintiff was indifferent
to a material fraud. Nevertheless, we think the public purpose can be
adequately served within the traditional compensatory suit frame-
work by limiting recoveries to those who are in fact injured, and
excluding those whom a defendant proves have not been injured, and
that 10b-5 suits should continue in that mold until a contrary need
appears or until the Court directs otherwise.
The right of rebuttal, however, does not preclude the predomi-
nance of common questions. Causation as to each class member is
commonly proved more likely than not by materiality. That showing
will undoubtedly be conclusive as to most of the class. The fact
that a defendant may be able to defeat the showing of causation
as to a few individual class members does not transform the
comfhmon question into a multitude of individual ones; plaintiffs
satisfy their burden of showing causation as to each by showing
materiality as to all.
The right to disprove causation will not render the action un-
manageable. A defendant does not have unlimited rights to discovery
against unnamed class members; the suit remains a representative
one. See Clark v. Universal Builders, Inc., 501 F. 2d 324 (7th Cir.
1974); Gardner vy. Awards Marketing Corporation, 55 F. R. D. 460
(D. Utah 1972); Fischer v. Wolfinbarger, 55 F. R. D. 129 (W. D.
A53
action, be established by common proof, is irrelevant; although
derived from it, the 10b-5 action is not conterminous with a
common law fraud action. As we recently recognized in White v.
Abrams, the fraud action must be and has been flexibly adopted
to the overriding purpose of enforcing the Federal securities laws.
495 F. 2d at 731. See Affiliated Ute, supra, at 151; Superin-
tendent of Insurance v. Bankers Life & Casualty Co., 404 U. S.
6, 12 (1971); Mills v. Electric Auto-Lite Co., 396 U. S. 375
(1970); SEC v. Capital Gains Research Bureau, 375 U. S. 180,
186, 195 (1963).
Here, we eliminate the requirement that plaintiffs prove reli-
ance directly in this context because the requirement imposes
an unreasonable and irrelevant evidentiary burden. A_pur-
chaser on the stock exchanges may be either unaware of a
specific false representation, or may not directly rely on it,
he may purchase because of a favorable price trend, price
earnings ratio, or some other factor. Nevertheless, he relies gen-
erally on the supposition that the market price is validly set and
that no unsuspected manipulation has artificially inflated the
price, and thus indirectly on the truth of the representations un-
derlying the stock price—whether he is aware of it or not, the
Ky. 1971). The district jydge may reasonably control discovery to
keep the suit within manageable bounds, and to prevent fruitless fish-
ing expeditions with little promise of success. He may also exercise
discretion in the conduct of the trial, to prevent a time-consuming
series of mini-trials on causation, by limiting introduction of repeti-
tive evidence, or by limiting evidence to instances where causation is
in doubt; he may also postpone trial of the rebuttal of individual
causation_until the damage stage of the trial; indeed, he has extensive
powers to expedite the suit with procedural innovations. See Rule
23(d). We think procedures can be found and used which will pro-
vide fairness to the defendants and a genuine resolution of disputed
issues while obviating the danger of subverting the class action with
delaying and harassing tactics. If not, we may have to reconsider
whether to make proof of causation from materiality conclusive,
keeping in mind that the Court has directed that the statute be
liberally construed to effectuate its remedial purposes, and that that
purpose may be served only by allowing an overinclusive recovery to
a defrauded class if the unavailability of the class device renders the
alternative a grossly underinclusive recovery.
A54
price he pays reflects material misrepresentations. Requiring direct
proof from each purchaser that he relied on a particular repre-
sentation when purchasing would defeat recovery by those whose
reliance was indirect, despite the fact that the causational chain
is broken only if the purchaser would have purchased the stock
even had he known of the misrepresentation. We decline to leave
such open market purchasers unprotected. The statute and rule
are designed to foster an expectation that securities markets are
free from fraud—an expectation on which purchasers should
be able to rely.
Thus, in this context we think proof of reliance means at
most a requirement that plaintiff prove directly that he would
have acted differently had he known the true facts. That is a
requirement of proof of a speculative negative (I would not
have bought had I known) precisely parallel to that held un-
necessary in Affiliated Ute and Mills (1 would not have sold
had I known). We reject it here for the same reasons. Direct
proof would inevitably be somewhat pro-forma, and impose a
difficult evidentiary burden, because addressed to a speculative
possibility in an area where motivations are complex and difficult
to determine. That difficulty threatens to defeat valid claims—
implicit in Affiliated Ute is a rejection of the burden because it
leads to underinclusive recoveries and thereby threatens the
enforcement of the securities laws. See Harv. Note, supra, at
590-91. Here, the requirement is redundant—the same causal
nexus can be adequately established indirectly, by proof of
materiality coupled with the common sense that a stock pur-
chaser does not ordinarily seek to purchase a loss in the form of
artificially inflated stock.** Under those circumstances we think
it appropriate to eliminate the burden.
22. Raschio v. Sinclair, 486 F. 2d 1029 (9th Cir. 1973), is in
no way inconsistent with our present position. There we dealt with
the statutory “in connection with” requirement, and held that it could
not be met as a matter of law when the stock was purchased two
months before the allegedly fraudulent representation was made.
Here we do not retreat from that position, or from the implicit re-
AS55
Defendants contend that elimination of individual proof of
subjective reliance alters and abridges their substantive rights in
violation of the Rules Enabling Act, 28 U. S. C. § 2072.
The obvious answer is that the standards of proof of causation we
have set out apply to all fraud on the market cases, individual as
well as class actions. No interpretation of Rule 23 is involved,
and the Rules Enabling Act limitation is not implicated.”
C. Conflicts
Defendants’ final major argument is that conflicts among class
members preclude class certification. They contend that the
interests of class members in proving damages from price in-
flation (and hence the existence and materiality of misrepre-
sentations subsumed in proving inflation) irreconcilably conflict,
because some class members will desire to maximize the inflation
existing on a given date while others will desire to minimize it.
For example, they posit that a purchaser early in the class period
who later sells will desire to maximize the deflation due to an
intervening corrective disclosure in order to maximize his out
of pocket damages, but in so doing will conflict with his pur-
chaser, who is interested in maximizing the inflation in the
price he pays. We agree that class members might at some point
during this litigation have differing interests. We altogether
disagree, for a spate of reasons, that such potential conflicts
afford a valid reason at this time for refusing to certify the class.
Defendants’ position depends entirely on adoption of the out
of pocket loss measure of damages, rather than a rescissory
quirement set out there that there be a reasonable transactional nexus
between the fraud and the loss—we simply amplify on the manner
in which that nexus may be proved.
23. Indeed, we could, in the exercise of our Article III jurisdic-
tion, transform the 10b-5 suit from its present private compensatory
mold by predicating liability to purchasers solely on the materiality
of a misrepresentation (i.e., economic damage) regardless of trans-
actional causation, without implicating the Enabling Act limitation.
A56
measure. Under the out of pocket standard each purchaser re-
covers the difference between the inflated price paid and the
value received, plus interest on the difference. If the stock is
resold at an inflated price, the purchaser-seller’s damages, limited
by § 28(a) of the Act, 15 U. S. C. § 78bb(a) to “actual dam-
ages,” must be diminished by the inflation he recovers from his
purchaser. Thus, he is interested in proving that some inter-
vening event, such as a corrective release, had diminished the
inflation persisting in the stock price when he sold.”
While out of pocket loss is the ordinary standard in a 10b-5
suit. Foster v. Financial Technology, Inc., ............ > :
No. 73-3203 (9th Cir., April 30, 1975), slip opinion at 3;
Janigan v. Taylor, 344 F. 2d 781, 786 (1st Cir. 1965);
Estate Counseling Service, Inc. v. Merrill Lynch, Pierce, Fenner
& Smith, Inc., 303 F. 2d 527 (10th Cir. 1962); Abrahamson
v. Fleschner, 392 F. Supp. 740, at 746 (S. D. N. Y. 1975); see
Sigafus Vv. Porter, 179 U. S. 116, 123 (1900); Smith v. Bolles,
132 U. S. 125 (1889); Note, The Measure of Damages in
24. Appellants contend that the inflation paid must be measured
by the change in price after a corrective release. That drop is of
course circumstantial evidence of the inflation when purchased, but
it is not the exclusive method of measuring inflation. The fact finder
may rely on other methods of determining actual value on the date
of purchase, including expert testimony on actual value derived from
capitalization of earnings techniques or testimony on book value.
Particularly where, as here, the amount of inflation due to absence or
insufficiency of reserves may fluctuate, such evidence is necessary
in the absence of corrective releases. In any event, the drop after
a corrective disclosure will not be conclusive of the amount of
original inflation, both because the correction may be only partial
(as is alleged of the major corrections involved here), and because
the prolonged nature of the fraud introduces other market variables
which may affect the amount the market reacted to disclosures at
different times during the class period. Stanford Note, infra, at 384-
385; Tucker v. Arthur Andersen & Co., supra, at 97,935. However,
from an appropriate mix of the various methods we are confident
that the jury will be able to trace a graph delineating the actual value
of the stock throughout the class period. When compared with a
comparable graph of the price the stock sold at, the determination of
damage will be a mechanical task for each class member.
A57
Rule 10b-5 Cases Involving Actively Traded Securities, 26 Stan.
L. Rev. 371, 383-384 (1974); 3 A. Bromberg, Securities Law,
Fraud—Rule 10b-5, § 9.1, at 226-227 (1974), it is within
the discretion of the district judge in appropriate circumstances
to apply a rescissory measure. Chasins v. Smith, Barney & Co.,
438 F. 2d 1167, 1173 (2d Cir. 1970); Abrahamson v. Flesch-
ner, supra, at 746; see Stanfcrd Note, supra, at 374-376; A.
Bromberg, supra, at 226, or to allow consequential damages.
Foster, supra, at 3; Zeller v. Bogue Elec. Mfg. Co., 476 F. 2d
795, 802-803 (2d Cir. 1973). It is for the district judge, after
becoming aware of the nature of the case, to determine the
appropriate measure of damages in the first instance; the possible
creation of potential conflicts by that decision does not render
the class inappropriate now. The Rule provides the mechanism
of subsequent creation of subclasses, Rule 23(c)(4), to deal
with latent conflicts which may surface as the suit progresses.
Green v. Wolf Corporation, supra, at. 299; Tucker v. Arthur
Andersen & Co., supra, at 97,936-97,937; Handwerger Vv.
Ginsberg, CCH Fed. Sec. L. Rep. 4 94,934, at 97,241 (S. D.
N. Y. 1975); Caesars Palace Securities Litigation, supra, at 398;
Sol S. Turnoff v. N. V. Nederlandsche Combinatie Voor
Chemische Industrie, 51 F. R. D. 227, 233 (E. D. Pa. 1970).
As a result, courts have generally deciined to consider conflicts,
particularly as they regard damages, sufficient to defeat class
action status at the outset unless the conflict is apparent,
imminent, and on an issue at the very heart of the suit. See Hawk
Industries, Inc. v. Bausch & Lomb, Inc., 59 F. R. D. 619 (S. D.
N. Y. 1973); Siegel v. Realty Equities Corporation of New York,
supra, at 426.
Here, the conflict, if any, is peripheral, and substantially out-
weighed by the class members’ common interests. Even assum-
ing arguendo that the out of pocket standard applies, the class is
proper. Every class member shares an overriding common interest
in establishing the existence and materiality of misrepresenta-
tions. The major portion of the inflation alleged is attributed
AS58
to causes which allegedly persisted throughout the class period.
It will be in the interest of each class member to maximize the
inflation from those causes at every point in the class period, both
to demonstrate the sine qua non—liability—and to maximize
his own potential damages—the more the stock is inflated, the
more every class member stands to recover. Moreover, because
the major portion of the inflation is attributed to causes persisting
throughout the period, interim corrective disclosures (of which
there appear to have been only two or three) do not necessarily
bring predisclosure purchasers into conflict with post-disclosure
purchasers. Because both share an interest in maximizing overail
inflation, the latter purchaser will no doubt strive to show a
substantial market effect from disclosure of the lesser (or partial)
causes of inflation to maximize the inflation attributable to more
serious Causes persisting when he bought—a showing which will
increase the recovery of the earlier purchaser. In that light, any
conflicting interests in tracing fluctuations in inflation during the
class period are secondary, and do not bar class litigation to
advance predominantly common interests. Courts faced with the
same situation have repeatedly, either explicitly or implicitly,
rejected defendants’ position, for the potential conflict is present
in most prolonged classes involving a series of misrepresentations.
See Green Vv. Wolf Corporation, supra; Tucker v. Arthur Ander-
sen & Co., at 97,931-97,932 and 97,932 n. 14, and cases there
cited, and at 97,936; Aboudi v. Daroff, supra, at 391-392; U. S.
Financial Securities Litigation, supra, at 452; In re Memorex
Security Cases, supra; Caesars Palace Equities Litigation, supra;
Siegel v. Realty Equities Corporation of New York, supra, at
426: Dolgow v. Anderson, supra; Fischer v. Kletz, supra, at
381-383; Kronenberg, supra.
In support of that conclusion, we note that Rule 23 makes
no mention of conflicts. The Rule’s requirements are that the
representative’s claims be “typical” and that the class be “fairly
and adequately” represented—claims need not be coextensive.
Caesars Palace Securities Litigation, supra, at 397. Those re-
AS9
quirements are in part constitutionally dictated, as due process
requires, in order to give collateral res judicata effect to a
judgment against class members, that their interests have been
adequately represented in the class action. Hansberry v. Lee,
311 U. S. 32 (1940).
Hansberry does not, however, as defendants seem to assume,
dictate that any divergence of interest among class members
violates due process (thereby necessarily requiring an identity
of interests to satisfy Rule 23’s adequacy or representation and
typicality requirements). Neither the Rule’s requirements nor
those of due process are so inflexible. The due process touch-
stone of adequacy and fairness of representation (see In re
Four Seasons Securities Laws Litigation; 502 F. 2d 834, 842
(10th Cir. 1974); Eisen IV, at 177) must be judged in light
of the seriousness and extent of conflicts involved compared to
the importance of issues uniting the class; the alternatives to
class representation available;” the procedures available to limit
and prevent unfairness; and any other facts bearing on the fair-
ness with which the absent class member is represented.
Hansberry is not controlling here—in Hansherry there was
nothing to satisfy due process. Not only were the members of
the purported class of property owners diametrically opposed on
the central issue—the validity of racial covenants restricting
their property—but the state class action procedure provided
absent class members no notice. Here, on the other hand, under
25. The rule requires adequate representation. The alternative
may be none at all.
“The basic concept of commonality, a requirement which is pre-
valent throughout Rule 23 and is premised upon a fundamental
recognition that representatives of a class must have interests
which are not in opposition to the members of that class, must
be interpreted to best effectuate the primary purposes of the
class action device, i.e., to give small investors a reasonable
opportunity to vindicate their claims in a manner which will not
place an undue burden upon them. It is in this light that we
must approach the defendants’ objections to the instant class
actions under Rule 23(a)(3).” Caesars Palace Securities Liti-
gation, supra, at 397-398.
A60
the notice and opt-out procedure of Rule 23(b)(3) and
23(c)(2), an absent class member may evaluate his position
in the class and decide for himself whether to avail himself
of the representation offered. See, e.g., Four Seasons Securities
Laws Litigation, supra, at 842-844; Herbst v. Able, supra, at
15. The potential conflicts are at most peripheral. And the ¢is-
trict judge will retain constant supervision, through his powers
under Rule 23(d) and (e), and through his ability to decertify
or create sub-classes, to assure fairness of representation. See
Dolgow v. Anderson, supra, at 496. Finally, and unlike nu-
merous cases in which even one representative has been held
adequate to represent a prolonged class, the class members here
will be represented by numerous named representatives, with
substantial personal stakes, who purchased throughout the class
period, and who thus will probably represent whatever con-
flicting interests there are in the development of plaintiffs’ trial
strategies. In light of those various factors, we agree with the
district judge that the class representatives are typical and
will adequately and fairly represent the class.**
AFFIRMED.
_ 26. We likewise reject the contention that conflicts between
debenture holders and shareholders require decertification at this
time; see Handswerger v. Ginsberg, supra, at 97,240-97,241;
Caesars Palace Securities Litigation, supra, at 398-399; Fischer v.
Kletz, supra, at 384; or that present shareholders and those pur-
chasers who have sold their shares irreconcilably conflict. See Hans-
werger, supra, at 97,240 n. 3; Herbst v. ITT, supra, at 1314;
Herbst v. Able, supra, at 15.
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