Petition — Skydell v. Ecological Science Corp.

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Supreme Court, U. &

| : i.”

| JAN 29 1976

Iy THE !

Supreme Court of the Wi

Ocroser Term, 1975

No. W5- l 0 v4 6

Harry A. Skype, and Arnotp DuTCHEN,

Petitioners,

—against—

EcotocicaL Science Corporation, et al.,

Respondents.

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

Sruart D. WECHSLER

Dermott G. Foizy

122 East 42nd Street

New York, New York 10017

Attorneys for Petitioners

Harry A. Skydell and

Arnold Dutchen

Of Counsel

MicHae.t P. Fucus

INDEX

PAGE

Opinions Below ..................... 2

Jurisdiction 2

Questions Presented ................... 2

Statutes Involved ; 3

Statement of the Case 6

Reasons FoR GRANTING THE WRIT:

Pornt I

The decision of the Court of Appeals sanctions

private settlements and the sale of rights of appeal

by named plaintiffs in a class, at the expense of

class members, in breach of plaintiffs’ fiduciary

duties and contrary to a decision of this Court .. 9

Pornt II

By refusing to review the district court’s denial of

class action status, the Court of Appeals held that

interlocutory orders which a fect the final determi-

nation are not reviewable upon an appeal from a

final determination, a gross departure from the ac-

cepted and usual course of judicial proceedings .. 13

PAGE

Pornt III

By refusing to consider that the district court ap-

proved a dismissal of a derivative action, in viola-

tion of FRCP 23.1, on the grounds that the issue

haa not been raised in the lower court, the decision

of the Court of Appeals is in conflict with other

circuits and other decisions of the Fifth Circuit,

and creates a miscarriage of justice by its gross

departure from the accepted and usual course of

judicial proceedings ...................----ssssssssssee= 15

Pornt IV

By affirming the stipulation procured through mis-

representations and without the occurrence of a

condition expressed therein, the decision of the

Court of Appeals has decided basic contractual

issues in conflict with state law ~..................-..--0--+ 17

ae aan 18

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TaBLeE oF AUTHORITIES

PAGE

Cases:

Atchison T&SF Railroad Co. v. Jackson, 235 F.2d 390 14

Benson v. U.S., 112 F.2d 422 (5th Cir. 1940) 16

Boire v. Miami Herald Publishing Company, 343 F.2d

17 (5th Cir.), cert. denied 382 U.S. 824 (1965) 000... 16

Boufford v. U.S., 239 F.2d 841 (1st Cir. 1956) 0... 16

Certain-Teed Products Corp. v. Topping, 171 F.2d 241

(2nd Cir. 1948) .............. . 11

Chicago BEQR Co. v. City of North Kansas City Mis-

sourt, 276 F.2d 932 (8th Cir. 1960) ...... ae 16

Craftsman Financial & Mortgage Co. v. Brown, 64 F.

Supp. 168 (§.D.N.Y. 1945) 11

Fleming v. Goodwin, 165 F.2d 334 (Sth Cir. 1948), cert.

EE SE SUID: CI “sn cshrnsinicctcsinsiiditiiiaeesnnansni 16

Gomila v. U.S., 146 F.2d 372 (Sth Cir. 1944) .. 16

Miller v. Steinbach, 268 F.2d 255 (S.D.N.Y. 1967) ........ 11

Mulligan v. Andrews, 211 F.2d 28 (D.C. Cir. 1954) ... 16

Nello v. John B. Kelly, Inc., 283 F.2d 96 (3rd Cir.

I cacti dca lh a eae 15-16

Petty v. Porter, 322 F.2d 308 (6th Cir.), cert. denied,

377 U.S. 849 (1963) _ . 16

Skirvin v. Mesta, 141 F.2d 668 (10th Cir. 1944) 000.0... 14

Trussell v. U.S., 278 F.2d 478 (6th Cir. 1960) ................ 16

In THE

PAGE Ss P 1 ,

U Val. Mineral Water, 247 e @ of the Huited 7

~~” U.S. v. 353 Cases Mountain Val. Miner ater,

F.2d 473 (Sth Cir, 1957) cccccscccscssncscsesnecseeesnsesneeer 16 Ocroses Tzam, 1975

Western Union Telegraph v. United States Mexican &

Trust Co., 221 F. 545 (8th Cir. 1915) 14 —

Harry A. Skypett and Arnotp DutcHeEn,

Other Authorities: Petitioners,

Haudek, Settlement and Dismissal of Stockholders’ Ac- —against—

tions, 22 S.W.L.J. 767 (1968) & 23 S.W.L.J. 765

(1969)... Pe es 10-11 Eco.oaicaL Science Corporation, et al.,

Corbin on Contracts, Section 6 (1 Vol. Ed.) 17 Respondents.

Simpson on Contracts, Section 7 (2nd Edition) ............ 17 <->

PETITION FOR WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

Petitioners pray that a writ of certiorari issue to re-

view the judgment entered on October 31, 1975, by the

United States Court of Appeals for the Fifth Circuit,

which judgment affirmed a judgment of the United States

District Court for the Southern District of Florida dis-

missing a consolidated action which was commenced as a

class action under Rule 23 of the Federal Rules of Civil

Procedure for alleged violations of the federal securities

laws. The dismissal was based on a purported stipulation

of settlement which provided for the voluntary withdrawal

of a petition for certiorari, seeking review of a denial of

class action certification, in return for a pay-off to the

named plaintiffs.

Opinions Below

The opinion of the United States Court of Appeals for

the Fifth Circuit, filed October 31, 1975, has been officially

reported as Carl M. Pearson, et al., plaintiffs v. Harry A.

Skydell and Arnold Dutchen, plaintiffs-appellants v. Eco-

logical Science Corporation, et al., defendants-appellees,

22 F.2d 171. A copy thereof is set forth in Appendix “A”

hereto. There was no opinion of the United States District

Court for the Southern District of Florida upon which its

judgment of dismissal was based, but its findings were set

forth in an order dated March 28, 1974 which is set forth

in Appendix “B” hereto. The district court’s judgment of

dismissal is set forth in Appendix “C” hereto.

Jurisdiction

The judgment of the Court of Appeals was entered on

October 31, 1975. Petitioners herein timely petitioned to

the Court of Appeals for the Fifth Cireuit for a rehearing

en banc, which petition was denied by Order dated Decem-

ber 24, 1975. This Court’s jurisdiction is invoked under 28

U.S.C. §1254(1).

Questions Presented

1. Whether named plaintiffs, in an action brought by

them as a class action, can validly discontinue the action

during a pending appeal from a denial of class action cer-

tification, thereby sacrificing the rights of the class, in ex-

change for a private pay-off.

2. Whether it is necessary to review the propriety of an

interlocutory order denying class action status, upon ap-

pellate review of a final order, dismissing the action, which

could not possibly have been proper if class action status

had been granted because the dismissal did not provide

notice or benefit to the members of the class as required

in class actions by Rule 23(e) of the Federal Rules of Civil

Procedure. .

3. Whether a judgment dismissing a derivative action,

without notice or benefit to the shareholders, in violation of

Rule 23.1 of the Federal Rules of Civil Procedure, may be

permitted ‘to stand upon Apjerilate review merely because

the violation was not brought to the lower court’s attention.

4. Whether a plaintiff’s acceptance of a settlement of

his claims is valid when he was induced to provide such ac-

ceptance by misrepresentations including, inter alia, a

misrepresentation that his attorney was aware of and had

approved of the settlement.

5. Whether a settlement is binding when it provides,

as a condition precedent, that all plaintiffs must accept the

settlement and three of the plaintiffs do not accept.

Statutes Involved

Rule 23(a) of the Federal Rules of Civil Procedure pro-

vides :

“Prerequisites to a Class Action: One or more mem-

bers of a class may sue or be sued as representative

parties on behalf of all only if (1) the class is so numer-

ous 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.”

Rule 23(b)(3) of the Federal Rules of Civil Procedure

provides :

“Class Actions Maintainable: An action may be main-

tained as a class action if the prerequisites of subdivi-

sion (a) are satisfied, and in addition: (3) the court

finds that the questions of law 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 pertinent to the findings include: (A) the in-

terests of members of the class in individually con-

trolling the prosecution or defense of separate actions;

(B) the extent and nature of any litigation concerning

the controversy already commenced by or against mem-

bers of the class; (C) the desirability or undesirability

of concentrating the litigation of the claims in the par-

ticular forum; (D) the difficulties likely to be en-

countered in the management of a class action.”

Rule 23(c)(1) of the Federal Rules of Civil Procedure

provides:

“As soon as practicable after commencement of an ac-

tion brought as a class action, the court shall determine

by order whether it is to be so maintained. An order

° 5

under this subdivision may be conditional, and may

be altered or amended before the decision on the

merits.”

Rule 23(e) of the Federal Rules of Civil Procedure pro-

vides : ,

“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 com-

promise shall be given to all members of the class in

such manner as the court directs.”

Rule 23.1 of the Federal Rules of Civil Procedure pro-

vides in relevant part:

“Derivative Actions Brought by Shareholders .. . The

{derivative} action shall not be dismissed or compro-

mised without the approval of the court, and notice of

the proposed dismissal or compromise shall be given

to shareholders or members in such manner as the

court directs.”

Federal securities laws involved in this case are §§27 and

10b of the Securities Exchange Act of 1934 (15 U.S.C.

78aa and 78 jb); SEC Rule 10b-5 (17 C.F.R. 240.10b-5) ;

§§22(a), 15 and 17(a) of the Securities Act of 1933 (15

U.S.C. 77 v(a), o and q(a)); §§13(a), 14(a) and 20 of the Se-

curities Exchange Act of 1934 (15 U.S.C. 78m(a), n(a) and

t); and SEC Rules 13a-1, 13a-11 and 13a-13 (17 C.F.R.

240.13a-1, -11 and -13). These are set forth in Appendix

“D” hereto.

Statement of the Case

The action is a consolidation of sixteen class aetions com-

menced throughout the United States by purchasers of

common stock of Ecological Science Corporation (“Eco-

logical”), a publicly held corporation. The plaintiffs allege

a conspiracy by the defendants to manipulate and arti-

ficially inflate the price of the common stock of Ecological

in violation of the federal securities laws.* The action

also includes a derivative claim by plaintiffs for violations

of the securities laws* involving misappropriations by the

defendants (other than Ecological) of valuable subsidiaries

of Ecological (A** 76-78). The jurisdiction of the district

court was invoked because federal statutes were involved,

including the Securities Exchange Act of 1934 which pro-

vides for exclusive federal jurisdiction, and diversity was

claimed as to some of the plaintiffs. In addition jurisdic-

tion was based upon thie principles of pendent jurisdiction.

The district court denied class action status even though:

(1) the defendants had admitted in prior proceedings that

“there is no escape from having the [consolidated action]

proceed as a class action” (A 53); (2) the district court

had indicated in prior orders that the litigation would

proceed as a class action (A 4); and (3) at the hearing

on the class action motion, the district court noted that all

defendants had previously agreed to class certification

(A 171). Co-lead counsel for plaintiffs (“co-lead counsel”)

appealed the denial of class status to the United States

Court of Appeals for the Fifth Circuit (the “Court of

Appeals”). That appeal was dismissed solely on the

* The federal securities laws involved are cited on page 5

hereof.

** “A” Refers to the Appendix on Appeal in the Fifth Circuit.

grounds that the denial of class status was not a fimal order,

ana co-lead counsel petitioned for certiorari. Throughout

the litigation on the class action motion, co-lead counsel

vigorously pressed that this is a classic case for granting

class action status.

While the petition for certiorari was pending, co-lead

counsel inexplicably entered into a stipulation of settlement

with the defendants pursuant to which the named plaintiffs

and intervenors would obtain a 100% recovery of their

claims and the unnamed members of the class would re-

ceive nothing.* The stipulation also provided that the peti-

tion for certiorari would be withdrawn, rendering the set-

tlement, in effect, a sale by named plaintiffs of the right

to appeal from an adverse class status decision in con-

sideration of a private settlement for their benefit at the

expense of the class.

Upon the filing of the stipulation, the district court took

an action unparalleled in the history of Federal class ac-

tions: it approved the settlement, dismissing the action

with prejudice, but sealed the stipulation so that no one

but the parties knew its terms. Moreover, the stipulation

itself contained a highly unusual term—it provided for the

removal of most of the documents from the court file, and

for the sealing of the remainder of the file. The district

court provided no notice of the dismissal to the members

of the class, and no notice to shareholders of the dismissal

of the derivative claim as required under FRCP 23.1.

Although the order appointing co-lead counsel required

them to enter into stipulations “subject to consultation by

* While less than 100 claimants were made whole, 16,000 mem-

bers of the class were abandoned by this maneuver.

them with additional counsel representing specific plain-

tiffs,” co-lead counsel wrote directly to the Petitioners for

their consent to the stipulation «* settlement without first

discussing the matter with their attorneys and without their

attorneys’ knowledge. The Petitioners consented to the

stipulation only because they were misled by co-lead coun-

sel into the erroneous belief that their individual attorneys

knew and approved of the settlement, and because of numer-

ous other gross misrepresentations contained in the presen-

tation of the settlement sent to them by co-lead counsel. In

fact, the appellants’ individual attorneys knew nothing of

the settlement until after it was consented to by the appel-

lants, and advised their clients that the settlement was im-

proper promptly after learning of it. Petitioners then

sought to revoke their consents to the stipulation and ap-

pealed to the Court of Appeals from orders of the district

court enforcing the stipulation and dismissing the action

(A 51, A 161-62, A 186, A 185, A 211, A 190).

The stipulation of settlement expressly provided that it

ws subject to the granting of consent thereto by all of the

individual plaintiffs. However, no consent whatsoever was

obtained from three of the plaintiffs (Frederick Marks,

Leonard Shwade and Esther Schwade). Because of co-

lead counsels’ desire to terminate the action, on February

22, 1974 they purported to entirely waive the condition of

obtaining authority, with respect to those plaintiffs, and

thereby materially altered the terms of the stipulation. The

“consents” from the Petitioners, however, had been re-

turned prior to such material alteration and, therefore,

could not have been consents to the stipulation as subse-

quently altered (A 180, A 217).

The Court of Appeals affirmed the judgment of the dis-

trict court. It recognized no wrong in what Petitioners

submit is a private sale of appeal rights from an adverse

class determination, refused to consider that the action

contained a derivative claim which was settled with no

notice to the shareholders and no benefit to the corporation,

refused to review the denial of class status solely because

the dismissal order was affirmed, and honored the stipula-

tion even though the Petitioners consent had been obtained

through misrepresentations and consents of other plain-

tiffs had not been obtained at all.

The issues involved are sufficiently important to have

drawn the Securities and Exchange Commission (“SEC”)

into the case as amicus curiae. The SEC submitted a brief

and a reply brief supporting the Petitioners, and a brief in

support of Petitioners’ motion for a rehearing en bance.

REASONS FOR GRANTING THE WRIT

POINT I

The decision of the Court of Appeals sanctions private

settlements and the sale of rights of appeal by named

plaintiffs in a class, at the expense of class members, in

breach of plaintiffs’ fiduciary duties and contrary to a

decision of this Court.

The panel attempted to explain away the applicable Su-

preme Court decision, Young v. Higbee Co., 324 U.S. 204

(1944). We submit that this was a fundamental error, on

an important question of federal law, which is in conflict

with this Court’s prior decision.

In Young, the Supreme Court outlawed the sale by

named plaintiffs of the right to appeal from what amounted

to an adverse class decision. There, plaintiffs who repre-

sented a class, but who settled for their own benefit and dis-

missed their appeal on behalf of the class, were liable to the

class. The Court held that, by availing themselves of the

privilege of litigating for a class, the named parties had

assumed the duty to represent the rights of the class fairly

and in good faith and to refrain from trading in the rights

of others for their own private benefit.

In Young, the plaintiffs were two preferred shareholders

appealing from the district court’s approval of a bank-

ruptey reorganization plan which failed to subordinate a

debt claim to the rights of the preferred class. The Court

of Appeals, in seeking to distinguish Young, stated that

Young is not applicable to conventional class actions, but

only where the class members are bound to the decision

under the principles of res judicata (522 F.2d at 178) (8a).*

However, this is contrary to what the Supreme Court actu-

ally suggested in Young.

The leading article on settlement of stockholders’ actions,

Haudek, Settlement and Dismissal of Stockholders’ Action,

22 S.W.L.J. 767, 788-9 (1968) and 23 S.W.L.J. 765 (1969),

correctly states that the Supreme Court intended the Young

doctrine to apply to conventional class suits, i.e., where the

dismissal is not res judicata upon the class (235 S.W.L.J.

at 817). In support, Haudek cites footnote 10 of the Young

decision, 324 U.S. at 204, which refers to articles by Me-

Laughlin and Hornstein as dealing with “the same general

topic,” notwithstanding that such articles deal with stock-

* “a” refers to the appendix hereto.

holders’ private settlements in conventional class suits

where res judicata is not a factor. Haudek further states

that this application is now bevond doubt, citing Certain-

Teed Prods. Corp. v. Topping, 171 F.2d 241 (2nd Cir.

1948) ; Miller v. Steinbach, 268 F. Supp. 255, 281-83 (S.D.

N.Y. 1967); Craftsman Fin & Mortgage Co. v. Brown, 64

F, Supp. 168, 178 (S.D.N.Y. 1945) (dictum). Indeed, a find-

ing that the named plaintiffs cannot sell the right to appeal

is even more imperative in the instant action, where the

plaintiffs initiated the action in behalf of a class, than in

Young where the plaintiffs initiated the action only in their

own names.

The Court of Appeals was particularly concerned that

settlement of non-class actions would be hobbled by adop-

tion of appellants’ position; it stated:

“The rule which appellants ask this court to adopt

would require that in every action in which class action

certification is denied by a district court, the named

plaintiffs would be precluded from executing a settle-

ment of their individual claims, and would be required

to litigate through appellate review of the interlocu-

tory order denying class action certification after final

judgment in the trial court” (522 F.2d at 177) (7a).

However, the rule sought by the Petitioners would not

require litigants in a class action to appeal every denial

of class action status, but would restrain plaintiffs from

discontinuing an appeal they had already commenced, upon

a settlement which provides them a full recovery at the

expense of the class. It is the sale of rights of an appeal

already commenced that was precluded by the Supreme

Court in Young Higbee, and it is the sale of such rights

which the Petitioners sought to prevent herein but which

was sanctioned by the Court of Appeals.

The Court of Appeals also stated that the members of

the class would not be prejudiced because they could com-

mence their own actions despite the dismissals of the in-

stant action (522 F.2d at 178) (Sa). This is simply not cor-

rect. Any party commencing a new action would face the

obstacle of defenses based upon the statute of limitations

and upon laches which, if not absolutely insurmountable,

would at least burden the plaintiff with serious issues not

present in the instant action. Although the Court of Ap-

peals stated that recent decisions by the Supreme Court

indicate that “at least in certain situations” the commence-

ment of a class action tolls the applicable statute of limita-

tions (522 F.2d at 178) (8a), the applicability of such cases

' to the instant situation is far from clear. A plaintiff in a

new action would have the burden of showing that the toll

applies in his situation, and would have to face threshold

litigation pertaining to the statute of limitations. In any

event, these recent cases do not even address the defense

of laches. Moreover, as pointed out by the SEC, in its brief,

the class members are not receiving notice of the dismissal

and many will, therefore, be unaware of the need to com-

mence an action for themselves. In addition, the enor-

mously expensive discovery heretofore had in this action

will have to be repeated in any new action. Finally, the

additional time might permit the dissipation of defendants’

assets and hamper collection of any judgment against them,

and might cause a lapse of any available insurance cover-

age.

If the Court of Appeals’ decision is allowed to stand,

the Fifth Circuit will have paved the way for the frequent

and common occurrence of private settlements between

parties in class actions which would (1) permit corporate

fiduciaries to pay but a relatively nominal sum for viola-

tions of their fiduciary duty, and (2) make a complete

mockery of the requirement that members of a class have

adequate representation. Because of the impact that the

occurrence of such private settlements would have on the

business and investment communities, and because of the

failure to follow the teachings of Young v. Higbee, Peti-

tioners respectfully urge that certiorari be granted.

POINT Il

By refusing to review the district court’s denial of

class action status, the Court of Appeals held that inter-

locutory orders which affect the final determination are

not reviewable upon an appeal from a final determina-

tion, a gross departure from the accepted and usual

course of judicial proceedings.

The Court of Appeals refused to review the denial of

class action status despite the fact that this is an appeal

from a final judgment. It stated that it was “unnecessary

to determine the propriety of the class denial inasmuch as

we affirm the order of the district court enforcing the settle-

ment and dismissing the action” (522 F.2d at 179) (9a).

However, the district court’s denial of class action status

necessarily affected the validity of the judgment dismissing

the action. Had class status been granted, instead of de-

nied, the dismissal judgment would never have been allowed

to stand because it would have dismissed a proper class

action without any notice or benefit to the members of the

class in violation of Rule 23(e) of the Federal Rules of

Civil Procedure. Moreover, upon earlier appeal, immedi-

ately following denial of class action status, the Court of

Appeals had raled the order was interlocutory and not then

appealable. Now, however, it has ruled that the order can-

not be reviewed upon a review of the final determination.

These two refusals to review class status determination

leads to one conclusion: class action status will not be re-

viewed in the Fifth Circuit—a fundamental departure from

the accepted and usual course of proceedings and a viola-

tion of the Federal Rules of Civil Procedure.

Before this decision, it has always been held that inter-

locutory orders, which were not immediately appealable,

and which affected the final determination, were reviewable

upon an appeal from a final decision. Atchison T&SF Ry.

Co. v. Jackson, 235 F.2d 390; Skirvin v. Mesta, 141 F.2d

668, 671 (10th Cir. 1944); Western Union Telegraph v.

United States & Mexican Trust Co., 221 F. 545, 551 (8th

Cir. 1915). The Court of Appeals’ decision, contrary to the

decisions of the other circuits, has made appellate review

of an adverse class status determination impossible to be

had at anytime. It has held that an interlocutory order is

not reviewable immediately or upon an appeal from the

final determination even when the interlocutory order

directly affects the validity of that final determination.

Re ee “-

POINT Ill

By refusing to consider that the district court ap-

proved a dismissal of a derivative action, in violation of

FRCP 23.1, on the grounds that the issue had not been

raised in the lower court, the decision of the Court of

Appeals is in conflict with other circuits and other de-

cisions of the Fifth Circuit, and creates a miscarriage of

justice by its gross departure from the accepted and

usual course of judicial proceedings.

The Court of Appeals refused to recognize that the dis-

trict court approved a dismissal of a derivative action

(which provided no benefit to the corporation) without no-

tice to the corporation’s shareholders in clear violation of

Rule 23.1 of the Federal Rules of Civil Procedure. The

Court of Appeals reasoned that the issue had not been

raised in the court below (522 F.2d at 179) (9a). Yet, the

dismissal involved (1) a gross miscarriage of justice, (2)

a clear error on the face of the pleadings and record, and

(3) no factual dispute. Under these circumstances, the

Court of Appeals has departed from the settled rule of

its Cireuit and other circuits.

By permitting a dismissal of a derivative action with no

benefit to the corporation, and no notice to its public share-

holders, a gross miscarriage of justice was donc in viola-

tion of the policy set forth in the securities laws and in

the notice provision of Rule 23.1 of the Federal Rules of

Civil Procedure. Appellate courts have consistently con-

sidered errors where such gross miscarriages of justice

result, regardless of whether the error was raised in the

court below. Nello v. John B. Kelly, Inc., 283 F.2d 96, 101

(3rd Cir. 1960); Boufford v. U.S., 239 F.2d 841, 842 (1st

Cir. 1956); Mulligan v. Andrews, 211 F.2d 28, 29 (D.C.

Cir. 1954) ; U.S. v. 353 Cases Mountain Val. Mineral Water,

247 F.2d 473, 477 (8th Cir. 1957); Fleming v. Goodwin, 165

F.2d 334, 337 (Sth Cir. 1948), cert. denied, 334 U.S. 828;

Chicago, BEQR. Co. v. City of North Kansas City, Mo.,

276 F.2d 932, 939 (8th Cir. 1960) ; Petty v. Porter, 322 F.2d

308, 311 (6th Cir.), cert. denied, 377 U.S. 948 (1963).

Where the lower court’s error is obvious and clear from

the face of the pleadings or record, appellate courts, includ-

ing the Fifth Circuit, have corrected the error although not

raised below. Benson v. U.S., 112 F.2d 422, 423 (5th Cir.

1940); Boire v. Miami Herald Publishing Company, 343

F.2d 17, 25 (5th Cir.), cert. denied 382 U.S. 824 (1965) ;

Gomila v. U.S., 146 F.2d 372, 376 (5th Cir. 1944); U.S.

v. Kadison, 145 F.2d 525, 526 (7th Cir. 1944); Trussell v.

U.S., 278 F.2d 478, 480 (6th Cir. 1960). In Boire, the Fifth

Cireuit held that where the record did not present ques-

tions involving resolutions of any factual disputes and the

error was clear, the appellate court would examine the

question even though the district court had not considered

it. In the instant action, the error is clear, involves no

factual disputes and is indisputable on the face of the rec-

ord. It is not open to question that notice required by

Rule 23.1 of the Federal Rules of Civil Procedure was not

given, and that a derivative claim was involved.

In refusing to consider the error made by the district

court in dismissing the derivative action in violation of

Rule 23.1, the Fifth Circuit stands alone in the promulga-

tion of a rigid doctrine that issues not raised below will

never be heard upon appeal no matter what the circum-

stances.

POINT IV

By affirming the stipulation procured through mis-

representations and without the occurrence of a condi-

tion expressed therein, the decision of the Court of Ap-

peals has decided basic contractual issues in conflict

with state law.

It is an elementary rule of the law of contracts that any

acceptance of an offer, induced by fraud or misrepresen-

tation in representing the material terms of the offer, is

void or voidable (Corbin on Contracts, §6 (1 Volume ed.) ;

Simpson on Contracts, §7 (2nd Edition). Co-lead counsel

obtained the consents of the petitioners to the stipulation

through blatant misrepresentations by falsely implying

that their attorneys had knowledge of and had approved

the settlement. Letters from co-lead counsel to petitioners,

requesting their consent, stated that their attorneys would

participate in a specifie fee, thereby indicating that they

had previously agreed to such participation and had been

kept abreast of settlement developments (A 185, A 194).

The letters also indicated that carbon copies thereof were

being sent to their attorneys making it appear that they

had been previously consulted (A 195). However, delivery

of the copies to petitioners’ attorneys had been delayed and

were not received until after the consents were procured.

The letters to the petitioners seeking their consent con-

tained further misrepresentations relied upon by the peti-

tioners in granting their consent (A 188-190). In view of

the foregoing, the petitioners’ consents were procured

through material misrepresentations and, thus, their revo-

cations were effective and the stipulation failed.

Although it was not contested that three plaintiffs besides

the petitioners had not consented to the stipulation, and

that the stipulation expressly required that all of the plain-

tiffs consent as a condition precedent thereto, co-lead

counsel purported to waive the requirement of obtaining

the consent of those plaintiffs whose consents had not been

obtained. However, if by this unilateral act, co-lead counsel

did effectively waive the necessity of obtaining three miss-

ing consents, they materially altered the terms of the stip-

ulation, i.e., by changing the requirement that consent from

all of the plaintiffs and intervenors be obtained. The con-

sents from petitioners, however, were procured prior to

such waiver and, therefore, were to the unaltered stipula-

tion and could not have been effective as an acceptance of

the subsequently altered version that did not require all

consents.

CONCLUSION

For the reasons set forth above, petitioners pray that

a writ of certiorari issue to review the judgment of the

Court of Appeals for the Fifth Circuit.

Dated: January 28, 1976

Respectfully submitted,

Sruart D. WEcHSLER

Dermott G. Foizy

122 East 42nd Street

New York, New York 10017

Attorneys for Petitioners

Harry A. Skydell and

Arnold Dutchen

Of Counsel

Micuaet P. Fucus

APPENODICE S§S

APPENDIX A

PEARSON vy. ECOLOGICAL SCIENCE CORP. 5

etd 12) WTS)

Cite asin

Cari M. PEARSO™M et ab, Plia‘i ifs,

Harry A. S’sdell and Arnold Pet chen,

Plaintifis-Appellan‘<

ECOLOGICAL SCIENCE “+ 2P. et al,

Defendarts-Appelk os

No. 74-2175.

United States Court of Appeals,

Fifth Circuit.

Oct. 31, 1975.

Two of 99 original and interveniny

plaintiffs in 16 consolidated securitics

fraud actions soucht to overiurn os'ccs

enforcing a stipulation of sett!ciment en-

tered by the United States District

Court for the Southern District of Flori-

da, at Miami, Peter T. Fay, J., ard to

have the settlement declared void. The

Court of Appeals, Simpron, Circuit

Judge, held that (1) the district court's

findings of fact in support of its order

enforcing the terms of the scttlement

were not clearly crroncous, (2) where a

court has ruled that 2n action cannot

properly be maintained as a class action,

the notice requirements of the federal

class action rule do not apply, at least

where the dismissal and settlement of

the action do not directly affect adverse-

ly the rights of individuals not before

the court, (3) the named original plain-

tiffs and intervenors breached no fiduci-

ary duty to absent members of the al-

leged class in consummating the settle-

ment agreement in exchange for the vol-

untary dismissal of a petition for writ of

certiorari contesting the denial of class

action certification, and (4) since individ-

uals who were not parties to the litiga-

tion were not directly affected by the

dismissal of the certiorari petition, appel-

lants’ reliance on the Supreme Court’s

“Young” decision was misplaced.

Affirmed.

1. Compromise and Settlement o=2

Settlement agreements are highly

favored in the law and will be upheld

‘

whenever possible Leeaus: they are 4

moins of amicably resolving doubis ai. !

preventing lawsuits.

2. Courts & 196.3(21)

In considering the validity of district

court’s findings of fact contained in or-

der enforcing the terms of ©tipulation of

settlement, Court of Appeals was gov-

erned by the “clearly erroneous” stan-

dard; the applicabic test was not siuply

whether the Court would have found

otherwise but whether the district court

could permissibly find as it did. Feel.

Rules Civ.Proc. rule 52/a), 28 U.S.A.

3. Courts > 106.3(24)

District court's fruiings of fact in

support of its order enforcing the terms

of stipulation of settlement were not

“clearly erroneous.” Fed. Rules Civ.Proc.

rule 52(a), 23 U.S.C.A.

4. Cormpromise ard Settlement 21

Since material facets concerring the

existence of an agreement to settle were

in disput, the district corrt followed ap-

proved procedure in holding a plenary

hearing to determine the enforceability

of the settlement agrcement, rather than

summarily enforcing it.

5. Federal Civil Procedure @=1698

The special prophylactic function of

subdivision of the federal class action

rule pertaining to court approval of dis-

missal and compromise is to assure that

any person whose rights would be affect-

ed by a dismissal or compromise has th2

opportunity to contest the proposed cc-

tion. Fed.RKules Civ.Proc. rule 23(e), 28

US.C.A.

6. Federal Civil Procedure = 1698

Where a court has ruled, under the

federal class action rule, that an action

cannot properly be maintained as a class

action, the notice requirement of the

rule's dismissal or compromise provision

do nct apply, at least where the dismiss-

al and settlement of the action do not

directly affect adversely the rights of

individuals not before the court. Fed:

Rules Civ.Proc. rule 23(¢X1), (e), 28 U.S.

C.A.

172 §$22 FEDUNAL REPORTER, 2d SERIES

7. Federal Civil Proceture ©>1€99

Nained original pleintifYs and inter-

venors breached no fiduciary duty to ab-

sent members of allewed elsss in consum-

mating, settlement ayreement in ex-

change for the voluntary dismissal of pe-

tition for writ of certiorari contesting

the denial of class action certification.

Fed.Rules Civ.Proc. rule 23, 28 U.S.C.A.

8. Limitation of Actions 126

At least in certain situations, the

commencement cf a class action tolls the

applicable statute of limitations as to ail

members of the class, until the deterini-

nation of the propriety of maintaining

the action as 2 class action is made by

the teicl court; ferthormoce, in the in-

efvr.t eros, bar seen se eb.ts aurtion

certiiication was denied on March ld,

1875, and the stipulation of settlement

was centered inio on February 22, 1974,

raeaning that any party who failed to

seek intervention between those dates

could blarne no one but himself if his

action was now barred. Fed.Rules Civ.

Proc. rule 23, 28 U.S.C.A.

9. Federal Civil Procedure 161

Where individuals who were not

parties to the litigation were not directly

affected by the dismissal, pursuant to

settlement agreement, of petition for

certiorari challenging the denial of class

action certification, any reliance on the

Supreme Court's “Young” decision was

misplaced.

10. Appeal and Error ¢172(1)

Courts #522

Appellants’ failure to raise the dis-

missal of derivative claim as a ground

for invalidating settlement agreement in

the district court precluded them from

raising it in the Court of Appeals; fur-

thermore, an action had been commenced

in the Southern District of New York

containing a derivative claim identical to

the one alleged in the consolidated com-

plaint in the instant action, and that new

action would thus protect the rights, if

any, of the corporation. Fed.Rules Civ.

Proc. rule 23.1, 28 U.S.C.A.

Michael P. Fuchs, Stuart D. Weel Jer,

New York City, for Skydell.

Dermot G. Foley, New York City, for

Dutchen.

James H. Schropp, David Ferber, Rich-

ard FE. Nathan, Securities and Exchanyre

Commission, Washington, D. C., for ami-

cus curiae.

Stuart A. Summit, Gerard A. Dupuis,

New York City, Miller Walton, Roy B.

Gonas, Gaston, Snow, Motley & Holt,

Boston, Mass., Metzenbaum, Gaines, Fin-

ley & Stern, Cleveland, Chio, Koenpel,

Stark, Marks & Newmark, Miami, [ia.,

for Ecological.

Sidney M. Aronovitz, Paige & Catlin,

H. James Catlin, Jr.. Miami, Fia., for

4versach and others.

Them: s H. Seymocr, Miami, ole, for

Co-Lead Counsel.

James W. Beasley, Jr., Miami, Fla., for

Fabian, Grosh & Vollbrecht.

Reginald L. Wil'iams, Miami, Fla, Mi-

chael A. Cooper, Richard G. Lyon, New

York City, for Haskins & Sells.

Aubrey V. Kendall, Miami, Fla., for

Essex Fund, Inc. & Salem Fund Inc.

Russo, Dubin & Goldberg, Michael H.

Goldberg, New York City, for Cantor &

Carter.

Appeals from the United States Dis-

trict Court for the Southern District of

Florida.

Before BELL, DYER and SIMPSON,

Circuit Judges.

SIMPSON, Circuit Judge:

Appellants Harry Skydell and Arnold

Dutchen, two of ninety-nine original and

intervening plaintiffs in sixteen consoli--

dated actions, seck to overturn two or-

ders enforcing a stipulation of scttle-

ment entered by the district court, and

to have the settlement declared void.

We affirm, finding no error in the ac-

tions or orders of the district court.

The basis of this litigation consists of

sixteen actions commenced in 1971 and

1972, against Ecological Science Corpora-

tion (Ecological), and certain of its offi-

SS et 6 tte ee ree ek so enna che ae

OO it a I es ee

ee ee ee ee ee ery

PEAKSON v, ECOLOGICAL SCIENCE CORP. 173

Cite ascc2 Fold 171 41075)

cers, directors, subsidiaries, und its ac-

countants Haskins & Sells. Five of

these actions were cc.nmenced in the

Southern District of Florida, and eleven

were transferred to that district pur-

suant to Title 28, U.S.C., See. 1404a).

Fifteen of the actions alleged individual

and class action claims against some or

all of the defendants. On March 20,

1972, the district court consolicated the

sixteen actions, appointed the firms of

Kelly, Black, Black & Kenny and Koep-

pel, Stark, Marks & Newmark as co-lead

counsel (hereinafter co-lead counsel),'

and directed that a consolidated amend-

ed complaint be filed by co-lead counsel

setting forth all claims possessed by all

plaintiffs in “whatever capacity”. In de-

lineating the authority of co-lead counsel

to act on behalf of all plaintiffs the

March 20, 1972, order provided:

“All other pleadings, including but not

limited to clinulations and the making

of all oppozition to any motion, shall

likewise be initiated and conducted by

co-lead counsel on behalf of all plain-

tiffs subject to consultation by them

with additional counsel representing

specific plaintiffs.”

The March 20 consolidation order also

enjoined all present and former stock-

holders of Ecolugical from instituting or

prosecuting any action based on any

claims alleged in the consolidated com-

plaint except through intervention in the

consolidated case.

1. On February 17, 1972, the district court noti-

fied all counsel of record of a proposed order

consolidating the sixteen actions, and appoint-

ing the Kelly firm and another Miami firm as

co-lead counsel. Appellants, Skydell and

Dutchen, through their New York counsel filed

with the district court a motion supported by

affidavits claiming that their interests would

not be adequately protected unless their Miami

counsel, the Koeppel firm, were appointed one

of co-lead counsel. In its March 20, 1972, or-

der the district court honored this request by

appointing the Koeppel firm with the Kelly

firm as co-lead counsel.

2. The first and primary count of the complaint

alleged that the defendants had from Novem-

ber 1967 to May 1971, engaged in an unlawful

The consolidated complaint pleaded

eight separate claims on behalf of thirty-

two named plaintiffs. Five of the eight

claims were also asserted on behaif of

the class of individuals who “purchased

said [Ecological] stock during the period

of November 27, 1967, to approximately

May 26, 1971"; two of the other counts

were asserted on behalf of differently

described classes of Ecological stockhold-

ers?

The district court on March 13, 1973,

after oral argument and the filing of

briefs by the parties, entered an order

denying the plaintiffs’ motion that their

cause be certified as a class action. The

plaintiffs appealed that order to this

court, and on May 29, 1973, we granted

the defendants’ motion to dismiss the ap-

peal for luck of jurisdiction. Plaintiffs

then filed a petition for a writ of certio-

rari in the Supreme Court requesting

that Court to review the jurisdiction of

an appellate court to review an interloc-

utory denial of class action certification.

The petition for certiorari did not and

could not raise the merits of the district

court’s order denying class action status.

During the course of this interlocutory

appeal extensive discovery was conduct-

ed in the district court, and that court

granted motions to intervene in the con-

solidated action filed on behalf of sixty-

seven individuals. The district court on

November 16, 1973, set March 18, 1974

as the date for trial of the consolidated

action. In setting the trial date the dis-

conspiracy to manipulate and artificially in-

flate the price of the common stock of Ecologi-

cal in violation of Section 10(b) of the Secunties

Exchange Act of 1934 and S.E.C. Rule 10b-—5.

Counts 2 through 5 pleaded claims under

§§ 15 and 17(a) of the Securities Act of 1933;

§§ 13(a), 14, and 20 of the Securities Exchange

Act of 1934; and S.E.C. Rules 13a-1, i3a-11,

and 133-13. Count 6 asserted a common law

negligence claim against Haskins & Sells, Eco-

logical’s auditors; Count 7 alleged a cause of

action based on common law fraud against

Ecological and two of its directors; and Count

8 alieged a derivative claim on behalf of Eco-

logical against two of the corporaticn's di-

rectors and officers and two foreign affiliates

of Ecological.

4a 5a

174 22 FEDERAL REPORTER, 2d SERIES

trict court made it clear to all parties

that it intended to proceed with the trial

on the scheduled trial date despite ihe

pending petition for a writ of certiorari.

At that point, and continuing for two

months afterwards, co-lead counsel on

behalf of the named plaintiffs and inter-

venors entered negotiations with defense

counsel with the purpose of settling the

litigation without the necessity of trial.

These negotiations bore fruit on January

31, 1974, in the form of a stipulation of

settlement which encompassed the claims

of and was subject to ratification by the

ninety-nine original and_ intervening

plaintiffs. The stipulation of settlement

dealt only with the claims of the ninety-

nine named plaintiffs and did not pur-

port to affect in any wey the claims of

other Ecolopical stoenhe'ders not in-

volved in tie litivation. Ce-lead counsel

wrote to cach named plaintiff on Febru-

ary 9, 1974, setting out what in their

opinion were the essential terms of the

settlement, recommending approval of

the settlement, and requesting that ap-

proval of the settlement be signified by

each named plaintiff by signing and re-

turning to co-lead counsel a copy of the

letter? On February 11, 1974, appel-

Ignts, Skydell and Dutchen, both signi-

fied their ratification of the stipulation

of settlement by signing and returning

to co-lead counsel the copies of the letter

sent to them. On February 22, 1974,

co-lead counsel advised defense counsel

in writing that they had been unable to

contact three plaintiffs, whom they had

represented both individually and as co-

lead counsel throughout the litigation,

and therefore had not obtained their

consents. However, co-lead counsel sug-

gested that they be permitted to accept

the stipulation of settlement on behalf of

these three individuals, since they knew

of no reason why the three plaintiffs

would deny them the authority to exe-

cute a definitive settlement agreement

3. These letters were mailed speci2! ‘elivery to

the individual plainuffs and intervenors, and

copies were sent by air mail to individual

counsel.

on their behalf.4 Defense counsel arreed

to this precedure with the result that on

February 22, 1974, the approval of the

stipulation of settlement had been

obtained from all the original plains [fs

and intervenors.

However, two attempts were made to

prevent the consummation of the settle-

ment and the dismissal of the litijration.

First, on February 22, 1974, Thomas G.

Jenny, a member of the alleged class of

purchasers of Ecological stock, filed a

motion to intervene in the litigation with

the district court, for the stated purpose

of preventing the consummation of the

stipulation of settlement. Simultaneous

with the filing of the intervention mo-

tion with the district court, Jenny peti-

tioned the Supreme Court fur poriaission

to iutervene in the pending peticion for a

writ of certiorari, which was stipul:ted

to be voluntarily dismissed by the narned

plaintiffs pursuant to the terms of the

settlement. In support of allowing his

intervention in both actions Jenny ar-

gued that the consummation of the pro-

posed settlement, with the resultant dis-

missal of both the action in the district

court and the petition for certiorari in

the Supreme Court, would breach fiduci-

ary duties owed by the named plaintiffs

to other class members and, in addition,

would constitute a sale of the appeal

rights of class members under Young v.

Higbee, 1945, 324 U.S. 204, 65 S.Ct. 594,

89 L.Ed. 890. On March 1, 1974, the

district court denied Jenny’s motion to

intervene on the grounds that it was not

timely made and that “the stipulation of

settlement in no way affects his rights”.

This court subsequently denied Jenny's

request for an interlocutory injunction to

stay the consummation of the scttlesnent

below. On April 10, 1974, Jenny filed

with the Supreme Court a petition seck-

ing an injunction to stay the proceeding:

in the district court and to prevent the

4. Appelices’ brief filed with this court states

that the consent of the three plainiitfs was

obtained by co-lead counsel subsequent to thc

court order enforcing the terms of the stipulz-

tion of settlement.

ee eee ee eae

eS eee ee ee ee

Ce Ae ee

plate ma

PEARSON vy. ECOLOGICAL SCIENCE CORP. 175

Cite as SI2 Pld U1 ebro

partics from consummating the settle-

ment. The Supreme Court, on April 15,

1974, denied both Jenny's application for

an injunction and kis motion to inter-

vene in the petition for a writ of certio-

Tari.

The second attempt to prevent the

consummation of the settlement, and the

basis of this appeal, relates to the at-

tempted revocation by Skydell and

Dutchen of their ratification of the stip-

ulation of settlement. On February 26,

1974, and February 28, 1974, Skydell and

Dutchen, respectively, sent telegrams to

co-lead counsel and to Chief Judge Ful-

ton of the Southern District of Florida,

in the absence of Judge Pay who han-

Wed the case Lelow throuchout, which

purported to rowowe tere neeeptunees of

the sottleraent prosesel “fils light of id-

viee from my wliorney 2 2. rte

garding avendonment of cluss and my

possible duties as class representative

. . .” Beeause of these telegrams

Judge Fay held a hearing on M:rch 14,

1974, to “clarify the stutus of the case”,

and to determine the objections of Sky-

dell and Dutchen to the settlement

agreement. At that hearing it was

agreed that an enforcement hearing

should be held to determine whether the

stipulation of settlement was enforce-

able. The enforcement hearing was held

on March 27, 1974. At that time Skydell

and Dutchen, through counsel, argued

that their ratification of the stipulation

of settlement was void or voidab!e due

to the following actions and omissions on

the part of co-lead counsel: (i) that the

letter from co-lead counsel purporting to

state the material terms of the settle-

ment omitted and misrepresented certain

material terms; (ii) that Skydell and

Dutchen were misled into believing that

their individual counsel were aware of

and had approved the terms of the stipu-

lation; and (iii) that co-lead counsel

failed to obtain the consent of all named

plaintiffs, and did not have the authority

to accept the stipulation on behalf of

those plaintiffs whose consent had not

been secured. Skydell and Dutchen in

addition urgued that the named plain-

tiffs would breach fiduciary duties owed

io members of the originally eloped

classes both by dismissing the auction in

the district court and the petitica for

certiorari in the Supreme Cuurt, and

that such actions amounted to a ssle of

elvss rights, citing and relying upon

Young v. Higbee, supra.

After hearing oral argument and re-

cciving briefs from the partics on these

points, the district court rejected these

arguments, and on March 22, 1914, en-

iered an order enforcing the terms of

the stipulation of settlement. In support

of the March 28 order the district court

made the following findings of fuct:

“1. The materia! terms of the s'ivala-

tion of setilement were properly, Soh:

ly, ord acuguately eormmunionted fy

ce-lcvd counsel fue plaintiffs .o ail

plaintiffs, including plaintiffs Dutrecer.

and Skydell, by letter dated February

9, 1974.”

“2. All plaintiffs except [the three

whom co-lead counsel had beea wnubie

to reach) had knowledgealhly accepted

and ratificd the terms of the stipula-

tion of settlement by February 22,

1974.”

3. That co-lead counsel “were a'itho-

rized to accept the terms of the stipu-

lation of settlement on behaif of” the

three unavailavle plaintiffs, whom co-

lead counsci had represented “through-

out ‘the litigation.”

“4. The stipulation of settlement was

binding on all plaintiffs on February

22, 1974.”

On April 4, 1974, the district court or-

dered the dismissal of the litigation with

prejudice to the named plaintiffs and in-

tervenors, except as provided in the Sct-

tlement Agreement. Subsequently, the

pending petition for a writ of certiorari

was voluntarily dismissed by the partics

pursuant to Rule 60(1) of the Supreme

Court Rules.

{1} Appellants, Skydell and Dutchen,

seek to have us declare the settlement

agreement unenforceable and/or void.

In support of this request they first: set

176 522 FEDERAL REPORTER, 2d SERIES

forth the same objections to the settle-

ment agreement they presented at the

March 27, 1974, enforcement hearing in

the district court, supra. Initially we ob-

serve that the appellants make no aru-

ment that the settlement agreement is

unfair to them or to any of the other

original named plaintiffs or intervenors.

See Cia Venezolana De Navegacion v.

Harris, 5 Cir. 1967, 374 F.2d 33. Fur-

ther, we are guided throughout our deci-

sion by the principle that “[s]ettlement

agreements are highly favored in the

jaw and will be upheld whenever possible

because they are a means of amicably

resolving doubts and preventing law-

suits”. D. H. Overmyer Co. v. Loflin, 5

Cir. 1971, 440 F.2d 1213, 1215; W. J.

Perrvinan & €o. v. Penn Mutaal Fire

Insvronee Co. 5 Cie. 8, 324 F.2d 791,

193.

{2—4] In considering the validity of

the district court's findings of fact con-

tained in the March 28, 1974 orcer, we

are governed by the “clearly erroncous”

standard. F-.R.Civ.P. 52(a); McAllister

v. United States, 1954, 348 U.S. 19, 75

S.Ct. 6, 99 L.Ed. 20. The test we apply

to the findings below “is not simply

whether the reviewing court would have

found otherwise but whether the trial

court could permissibly find as it did”.

Movible Offshore, Inc. v. The M/V Wilk-

en A. Falgout, 5 Cir. 1973, 471 F.2d 268,

271; Guardian Life Insurance Co. of

America v. Eagle, 5 Cir. 1973, 484 F.2d

382, 334. The record of the March 27

enforcement hearing, of the March 14

status conference, and the documents

and affidavits submitted to the district

court by the parties prior to and at those

hearings contain ample evidence to sup-

port the lower court's findings. After

carcfully reviewing all of the evidence

5. Additionally, since material facts concerning

the existence of an agreement to settle were in

dispute the district court followed procedure

approved by this court by holding a plenary

hearing to determine the enforceability of the

settlement rather than summarily enforcing it.

Massachusetts Casualty insurance Co. v. For-

man, 5 Cir. 1972, 469 F.2d 259, 260. Accord

Autera v. Robinson, 1969, 136 U.S.App.D.C.

216, 419 F.2d 1197. ,

before the district court we are not con-

vinced that “on the whole record that

the finding[s] [of the district court do]

not reflect the truth and right of the

case”. Wright, Federal Courts § 96, at

432 (1970); Glapion v. MS Journalist, 5

Cir. 1973, 487 F.2d 1252, 1254. This is

not a case requiring reversal under the

“clearly erroneous” standard.$

Appellants contend however that the

trial court erred in enforcing the stipula-

tion of settlement because the settle-

ment was void as a matter of 'aw as

constituting a sale of ciass rights by the

named plaintiffs. More particularly, the

appellants claim that the voluntary dis-

missal of the petition for a writ of cer-

tiorari, as required by the terms of the

settiement, was a breach of a fiduciary

duty owed by the named plaintifis and

intervenors to nonparty class memiLers

In support of the appellants, the Sccuri-

ties Commission filed an amicus curiae

brief in which it argues that the district

court erred by failing to require that

notice under Rule 23(e), F.R.Civ.P., be

given to members of the asserted class

of the proposed settlement. The argu-

ments of the appellants and the S.E.C.

ignore the difference between a class ac-

tion and a non-class action. They place

undeserved emphasis upon mere aillega-

tions of class action status by individual

plaintiffs, rather than upon a judicial de-

termination that a cause of action does

not meet the requirements of subdivi-

sions (a) and (b) of Rule 23 and, thcere-

fore, may not be maintained as a ciass

action.

[5,6] The special prophylactic func-

tion that subdivision (e) of Rule 23 was

designed for is to “assure that any pcr-

son whose rights would be affected by a

6. Subdivision (e) of Rule 23 provides:

“(e) Dismissal or Compromise. A class ac-

tion 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.”

ee es

OR Reh le A EE tN th GC i Be

PEARSON v. ECOLOGICAL SCLENCE CORP. 177

° Cite as S22 F 2d 171 1975)

dismissal or compromise has the opportu-

nity to contest the proposed action”. TA

Wright & Miller, Federal Practice &

Procedure § 1797, at 234 (1972); Adviso-

ry Committee's Notes to Proposed Rules

of Civil Procedure, Rule 23, 1966, 39

F.R.D. 69, 104. In order to protect the

rights of absent class members during

“the interim between filing and the

23(ch1) determination by the court”, oth-

er courts have required that for purposes

of the notice provisions of subdivision (ec)

that the action be presumed proper for

class action determination. Philadelphia

Electric Co. v. Anaconda American

Brass, E.D.Pa.1967, 42 F.R.D. 324, 326.

See, e. g., Katz v. Carte Blanche Corpo-

ration, 3 Cir. 1974, 496 F.2d 747; Kahan

v. Rosentiel, 3 Cir. 1970, 424 F.2d 161,

cert. denied, 598 U.S. 959, 90 S.Ct. 1870,

26 L.Ed.2d 200; Rothman v. Gould, 8.D.

N.Y.1971, 52 F.R.D. 494; Yaffee v. De-

troit Steel Corporation, N.D.111.1970, 50

F.R.D. 481. Appellants and the S.E.C.

ask this court to extend the judicial gloss

on subdivision (ce) of Rule 23 to encom-

pass the situation where as here the trial

court has determined rior to the execu-

tion of a settlement agreement that the

action may not be maintained as a class

action under Rule 23. This we decline to

do. As stated by the Advisory Commit-

tee’s Notes tu Rule 23, “a negative deter-

mination (of class action status] means

that the action should be stripped of its

character as a class action”. Advisory

Committee Notes, supra, 39 F.R.D. at

104 (emphasis added). Hence, where a

court has ruled under Rule 23(c\1) that

an action cannot properly be maintained

as a class action the notice requirements

of Rule 23(e) do not apply, at least

where the dismissal and settlement of

the action do not directly affect adverse-

7. In the circumstances here present, we cannot

discern how the holding which appellants seek

will have any effect on the alleged fiduciary

duty which—under appellants’ theory—has al-

ready been breached. First, the appellants fail

te show any damage to them from the volun-

tary dismissal of the petition for certiorari.

No member of the class to whom the alleged

fiduciary duty was owed has joined the appel-

lants in prosecuting this appeal, nor has any

member of the alleged class cominenced an

$22 F 26—12

ly the rights of individuals not before

the court. Beaver Associates v. Cannon,

S.D.N.Y.1973, 59 F.R.D. 508, 512; Pola-

koff v. Delaware Steeplechase and Race

Association, D.Decl.1966, 264 F.Supp. 915,

916; Berger v. Purolator Products, Inc.,

S.D.N.Y.1966, 41 F.R.D. 542, 545.

{7] Similarly lacking in merit is ap-

pellants’ contention that the named orig-

inal plaintiffs and intervenors breached

a fiduciary duty to absent members of

an alleged class in consummating the

settlement agreement in exchange for

the voluntary dismissal of the petition

for writ of certiorari. The rule which

appellants ask this court to adopt would

require that in every action in which

class action certification is denied by a

district court, the named plaintiffs would

be precluded from executing a szttle-

ment of their individual claims, and

would be required to litigate through ap-

pellate review of the interlocutory order

denying class action certification after a

final judgment in the trial court.?’ The

district court order dismissing the litiya-

tion, pursuant to the terms of the stipu-

lation, did not prejudice the rights of

individuals who were not partics to the

litigation at the time of the dismissal.

See Eisen v. Carlisle & Jacquclin, 1974,

417 U.S. 156, 94 S.Ct. 2140, 40 L.bd.2d

732; Greenfield v. Villager Industries,

Inc., 3 Cir. 1973, 483 F.2d 824, 832.

Nothing prevents other purchasers of

Ecological stock from filing suit against

the defendants in this litigation to recov-

er their individual losses. In fact, three

suits have been commenced, subsequent

to the dismissal of this suit, alleging

claims almost identical in substance to

those that formed the basis of this iitiga-

tion!

action against the appellants or any other of

the named plaintiffs for the alleged breach.

Secondly, a finding by this court that the set.

tlement agreement is void will not cure the

alleged breach of duty of which the appellants

complain, since, obviously, this court does not

possess the power to order the reinstatement

in the Supreme Court of the petition for a writ

of certiorari.

8. Robert C. Troup v. Peter Adolph, et al., S.D.

N.Y., 75 Civ. 380, Eli Frankel v. Peter Adolph,

178 522 FEDERAL REPORTER. 24 SERIES

{8} The appellants have not only

failed to show any prejudice to nonpurly

members of the allesred chiss by tro set-

tlement and dismissal of this action, they

have also been unable to show that any

of those individuals were relying on the

petition for a writ of certiorari to exon-

erate their rights? We fail to under-

stand how individuals could have relied

on the possibility that some day a court

might determine that the suit was prop-

er for class action determination because

a petition for a writ of certiorari sceking

review of the jurisdiction of this court to

review an interlocutory order denying

class action certification might have

been granted.’ Further, since no Rule

2(cV3) notice of the maintenance of this

litigation was ever given or reqtired to

be piven te nonparty mumrbors of the

originally alleged class, reliance by those

individuals on this action to recover their

losses would be particularly misplaced.

Appellants point out that the claims of

nonpartics may now be barred by the

statute of limitations. But recent deci-

sions by the Supreme Court indicate

that, at least in certain situations, the

commencement of a class action tolls the

applicable statute of limitations as to all

members of the class, until a determina-

tion of the propricty of maintaining the

action as a class action is made by the

tria! court. Eisen v. Carlisle & Jacque-

lin, 1974, 417 U.S. 156, 177, n. 13, 94

S.Ct. 2140, 2152, 40 L.Ed.2d 732, 748;

American Pipe & Construction Co. v.

Utah, 1974, 414 U.S. 538, 94 S.Ct. 756, 38

L.Ed.2d 713. We note further that the

motion for class action certification was

et al, E.D.N_Y., 75 Civ. 159; Thomas G. Jenny

v. Haskins & Sells, et al., S.D.N.Y., 75 Civ.

1423. The latter two complaints contain class

action allegations.

9. It appears that the stockholders of Ecological

were apprised of the district court order deny-

ing the motion for class action certification in

a proxy statement mailed to them in Septem-

ber, 1973, which stated:

“The effect of the determination of the dis-

trict court is that only those plaintiffs who

are suing in their own names or those per-

mitted to intervene in the action will be enti-

tled to recover damages ay

denied iby the district court on March 13,

1973, and the stipulation of settlement

was entered into on February 22, 1974;

thus, any party who failed to seck inter-

vention in the consolidated action be-

tween those two dates can blame no one

but himself if his action is now barred:

“If such a bar does exist, it is the

result of their lethargy and indiffer-

ence and not the breach of any duty,

moral or otherwise, on the part of the

jaintiffs or the Court to awaken them

from their slumber.”

Polakoff v. Delaware Stecplechase and

Race Association, D.Del.1966, 264 F.Supp.

915,916.

{9} Since on the record before us, we

find thot indivicuais who were not per-

ties to the litigation were not dir-etiy

affected by the dismissal of the petition

for certiorari, the appellants’ reliance on

Young v. Higbee Co., 1945, 324 U.S. 204,

65 S.Ct. 594, 89 L.Ed. £90, is misplaced.

Essential to the Supreme Court’s opinion

in Young was the finding that the aban-

donment of the appeal in that case by

named plaintiffs had a direct adverse ef-

fect on the “inseparable” inte ests of

others not parties to the litigation, who

were bound by the judgment of the low-

er court with no further opportunity to

appeal. Young, supra, at 210-14, 65

S.Ct. at 598-99, 89 L.Ed. at 896-98. The

holding in Young is inapposite here

where the dismissal of the action as pre-

viously noted has no res judicata effect

on the rights of individuals not parties to

the litigation."

10. It appears that at the time during which the

petition for a writ of certiorari which is the

focus of this appeal was pending another peti-

tion was pending in the Supreme Court raising

the same issue, and certiorari was subsequent-

ly denied or the latter petition. See Lupia v.

Stella d'Oro Biscuit Co., 42 U.S.L.W. 3156,

cert. denied 1974, 417 U.S. 930, 94 S.Ct. 2639.

41 L.Ed2d 232.

il. We think that our holding that no fiduciary

duty was breached by the voluntary dismissal

of the petition for certiorari is inferentially

supported by the Supreme Court's denial of

Jenny's motion to intervene in the petition for

PEARSON v. ECOLOGICAL SCIENCE CORP. 179

° Cite as S22 F 20 171 (1975)

(10) The appellants’ fiaal eons. ptiea

is that the stipulation of settlement is

invalid boeouse it Giemsa ce an derivative

action, Count § of Che consolidated com-

plaini, wigheut netics to the sharcholders

of Keological ¢s required by Rule 23.1,

F.R-Civ.P." In response the appellees

argue that the derivative count was ren-

dered judicially moot in other litigation,

S.E.C. v. Harold P. Koenig, ct al., $.D.N.

Y.1973, 71 Civ. 5916, and because the

shareholders of Tcoloieal voted on Feb-

ruary 15, 1973, to release the corpora-

tion’s former president, the primary de-

fendant in the derivative count, from

and against all corporate claims then

known. We do not reach the question of

whether the derivative count was moot.

Cd, since we fad thet the condlunt dd

aot erise the diemissal of the ao dvative

claim as a grounds for lavaliuating the

settlement agreement in the district

court. Further, an action has been com-

menced in the Southern District of New

York which contains a derivative claim

identical to the one alleged in the consol-

idated complaint in this action, and this

new action will protect the rizhts, if any,

of the corporation. Thomas G. Jenny v.

— & Sells, et al, S.D.N.Y., 75 Civ.

Inasmuch as we affirm the order of

the district court enforcing the scttle-

ment and dismissing the action, we find

it unnecessary to determine whet) ¢ the

district court erred in denying ciuss ac-

tion certification.

_ Affirmed.

10a

APPENDIX B

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF FLORIDA

CARL M. PEARSON, et al.,

Plaintiffs,

-~against- CASE NO. 71-Civ-1058-PF

ECOLOGICAL SCIENCE CORPORATION, ;

et al., :

Defendants. : cicea

MAR 2 8 1974

ORDER CLERK U. & DIST CT,

SOUTHERN DIST. OF FLA

ram! FLA

This cause came on for plenary hearing on March 27, 1974,

at 8:30 a.m., pursuant to this Court's Order of March 15, 1974,

that any party in this action desiring so to do show cause why

tine LOCMS CL tc SlapusGiacus C2 Seciicitehs APpiOVer ait AGOpicu

as the Order of this Court by Order dated January 31, 1974,

should not be enforced.

The Order of March 15, 1974 was entered following a

conference held by the Court to clarify the status of the cause

on March 14, 1974. In addition to co-lead counsel for plain-

tiffs and counsel for various defendants, Dermot G. Foley,

appearing on behalf of plaintiff Arnold Dutchen, attended that

conference and presented argument to the Court.

At the plenary hearing only plaintiffs A. Harry Skydell

and Arnold Dutchen attempted to show cause why the Stipulation

of Settlement should not be enforced.

Plaintiff Skydell submitted his affidavit "in opposition

to the enforcement of” the Stipulation of Settlement.

wee

estas S— >

ee eee

lla

Plaintiff Dutchen submitted the affidavit of his counsel,

Mr. Foley, “to urge the Court to deny enforcement of" the

Stipulation of Settlement, and also submitted his own affidavit.

Mr. Foiey appeared at the hearing and orally argued that

the Stipulation of Settlement should not be enforced.

The Court also received and considered the affidavit

of Thomas H. Seymour, a member of the law firm of Kelly, Black,

Black & Kenny, P.A., co-lead counsel for plaintiffs, and the

affidavit of Aubrey V. Kendall, a member of the law firm of

Mershon, Sawyer, Johnston, Dunwody & Cole, counsel for plaintiff-

intervenors Essex Fund, Inc. and Salem Fund, Inc., both of whom

offered themselves for examination on the subject matter of

their affidavits.

The Court also admitted in evidence without objection

and considered the following four copies of letters:

(i) From co-lead Counsel iv piusulifi Sayceil,

dated February 9, 1974, countersigned by

plaintiff Skydell, dated February 1l, 1974,

accepting the proposed settlement.

(2) From co-lead counsel to plaintiff Dutchen,

dated February 92, 1974, countersigned by

plaintiff Dutchen, dated February ll, 1974,

accepting the proposed settlement.

(3) From Stuart D. Wechsler, counsel for

plaintiff Skydell, dated February 26, 1974,

to co-lead counsel, quoting a telegram of

that date from plaintiff Skydell to co-lead

counsel purporting to revoke his acceptance.

ime 13a

4 F Mr. F °

(4) rom Oley, dated February 28, 1974, ! plaintiffs on February 22, 1974.

ee ek

to co-lead counsel, quoting a telegram of that

q ng eg 5. No party to this cause has shown any reason, in

date from plaintiff Dutchen to co-lead counsel ;

fact or in law, why the Stipulation of Settlement and this

u rting to revoke his acceptance.

purpo g ep Court's Order of January 31, 1974, should not be enforced.

Th ourt f i d f °

e Cour urther received and considered Defendants IT IS THEREFORE ORDERED that:

Memorandum in Support of Enforcement of Settlement, ard heard

PP ° ; (1) the Stipulation of Settlement dated

argument of defendants' counsel. January 31, 1974 is binding upon all

! parties to these consolidated actions

The Court makes the following findings: —_ enforceable by and against them;

1. The material terms of the Stipulation of Settlement :

(2) all parties and their counsel are

directed to take all steps necessary

and appropriate to close the settlement

as contemplated by the Stipulation of

were properly, fairly, and adequately communicated by co-lead

counsel for plaintiffs to all plaintiffs, including plaintiffs

Settlement. $—

Dutchen and Skydell, by letter dated Februa 9, 1974.

y y ~~ DONE AND ORDERED at Miami, Florida, this 2 & fay of

2. All plaintiffs except plaintiffs Frederick C. Marcks March, 1974.

and Leonard and Ester Schwade had knowledgeably accepted and

ratified the terms of the Stipulation of Settlement by February a ~<a

- Yay —

UNITED STATES DISTRI UDGE

22, 1974. Plaintiffs A. Harry Skydell and Arnold Dutchen accepted

and ratified the terms of the Stipulation of Settlement on

February 11, 1974 by countersigning the February 9, 1974 letters

from co-lead counsel.

3. On February 22, 1974, co-lead counsel for plaintiffs

accepted the terms of the Stipulation of Settlement on behalf

of plaintiffs Frederick C. Marcks and Leonard and Ester Schwade,

whom they had been unable to contact despite diligent effort.

Under the circumstances, co-lead counsel, who had represented

plaintiffs Marcks and the Schwades throughout the litigation,

were authorized to accept the terms of the Stipulation of

Settlement on behalf of those plaintiffs.

4. The Stipulation of Settlement was binding on all

_, MICROFILMED OB |

l4a OS Be

APPENDIX C

IN THE UNITED STATES DISTRICT 15a

COURT FOR THE SOUTHERN DISTRICT

OF FLORIDA - MIAMI DIVISION

APPENDIX D

NO. 71-1058-Civ-PF :

: RELEVANT PORTIONS OF THE SECURITIES EXCHANGE ACT

| F

CARL M PEARSON, et al., : OF 4238

Plaintiff, :

¥ : | SEC. 10. It shall be unlawful for any person,

ECOLOGICAL SCIENCE : FILED | were

CORPORATION, et al., directly or indirectly, by the use of any means

Def da ts. 2 nod A 7 . - .

endants apr a Wl | Or instrumentality of interstate commerce or of the

Ose Oe CT .

K U. S. CIS. CT. . oe ‘

SHUTMERA DIS, OF FL | mails, or of any facility of any national securities

ORDER OF DISMISSAL

exchange--

The Court by order filed January 31, 1974, having (b) To use or employ, in connection with the

approved and adopted the Stipulation of Settlement dated January

purchase or sale of any security registered on a

31, 1974, and by order filed March 28, 1974 having, among other

things, directed all parties and their counsel to take all steps national securities exchange or any security not

necessary and appropriate to close the settlement as contemplated | sO registered, any manipulative or deceptive

by the Stipulation of Settlement. and it appearing + the Conrt da , ‘ ,

| evice or contrivance in contravention of such

that a Settlement Agreement dated April UL 1974 and a Stipu-

rules and regulations as the Commission may pre-

lation of Dismissal have been executed by all parties to this

cause, it is therefore . scribe as necessary or appropriate in the public

ORDERED that these actions be dismissed, without costs interest or for the protection of investors

Norge enmeew ewes

to any party and with prejudice except as provided in the Settle-

(15 U.S.C. 784b)

ment Agreement, and it is further

ORDERED that, following the withdrawal of documents as

SEC. 13. (a) Every issuer of a security

provided in the Stipulation of Settlement and Settlement Agreement,

registered pursuant to section 12 of this title

shall file with the Commission, in accordance

the Clerk is hereby directed to seal the Court file. hE

DONE AND ORDERED at Miami, Florida this Y Gay of ;

ril, 1974.

Ap with such rules and regulations as the Commission

16a

may prescribe as necessary or appropriate for the

proper protection of investors and to insure

fair dealing in the security--

(1) such information and documents (and

such copies thereof) as the Commission shall re-

quire to keep reasonably current the information

and documents required to be included in or filed

with an application or registration statement

filed pursuant to section 12, except that the

Commission may not require the filing of any

material contract wholly executed before July l,

1962.

(2) such annual reports (and such

copies thereof), certified if required by the

rules and’regulations of the Commission by in-

dependent public accountants, and such quarterly

reports (and such copies thereof), as the Commis-

sion may prescribe.

Every issuer of a security registered on a

national securities exchange shall also file

a duplicate original of such information,

(15

documents, and reports with the exchange.

U.S.C. 78m(a) )

Ae As A a RL i CO lt AE eth MP ce orm soe

2. ene

17a

SEC. 14. (a) It shall be unlawful for

any person, by the use of the mails or by any

means or instrumentality of interstate commerce

or of any facility of a national securities

exchange or otherwise, in contravention of

such rules and regulations as the Commission

may prescribe as necessary or appropriate in

the public interest or for the protection of

investors, to solicit or to permit the use

of his name to solicit any proxy or consent

or authorization in respect of any security

(other than an exempted security) registered

pursuant to section 12 of this title.

(15 U.S.C. n(a))

SEC. 20. (a) Every person who, directly

or indirectly, controls any person liable under

any provision of this title or of any rule or

regulation thereunder shall also be liable

jointly and severally with and to the same

extent as such controlled person to any person

to whom such controlled person is liable unless

the controlling person acted in good faith and |

18a

did not directly or indirectly induce the act

or acts constituting the violation or cause

of action.

(b) It shall be unlawful for any person,

directly or indirectly, to do any act or thing

which it would be unlawful for such person to

do under the provisions of this title or any

rule or regulation thereunder through or by

means of any other person.

director or officer of, or any owner of any

securities issued by, any issuer required to file

any document, report, or information under

this title or any rule or regulation there-

under without just cause to hinder, delay, or

obstruct the making or filing of any such

document, report, or information.

(15 U.S.C. t)

SEC. 27. The district courts of the

United States, the District Court of the

United States for the District of Columbia,

and the United States courts of any Territory

LD A AOI te eS te tat tens ea we

woe

19a

or other place subject to the jurisdiction

of the United States shall have exclusive jur-

isdiction of violations of this title or the

rules and regulations thereunder, and of all

suits in equity and actions at law brought to

enforce any liability or duty created by this

title or the rules and regulations thereunder.

Any criminal proceeding may be brought in

the district wherein any act or transaction

constituting the violation occurred. Any

Suit or action to enforce any liability or

duty created by this title or rules and

regulations thereunder, or to enjoin any

violation of such title or rules and regula-

tions, may be brought in any such district

or in the district wherein the defendant

is found or is an inhabitant or transacts

business, and process in such cases may

be served in any other district of which the

defendant is an inhabitant or wherever the

defendant may be found. Judgment and de-

crees so rendered shall be subject to review

20a

as provided in sections 128 and 240 of the

Judicial Code, as amended (U.S.C., title 28,

secs. 225 and 347. No costs shall be

assessed for or against the Commission in

any proceeding under this title brought by or

against it in the Supreme Court or such other

courts. (15 U.S.C. 78aa)

a ee ee ae Ores

AO nee ats Yi ae | lsat te Ne a TO AN 8G Pk ee la eS a LS el tan etl ns

2la

RELEVANT SEC RULES AND REGULATIONS UNDER THE

SECURITIES EXCHANGE ACT OF 1934

Rule 10b-5. Employment of Manipulative

and Deceptive Devices.

It shall be unlawful for any person,

directly or indirectly, by the use of any

means or instrumentality of interstate

commerce, or of the mails, or of any facility

of any national securities exchange

(1) to employ any device, scheme, or

artifice to defraud,

(2) to make any untrue statement of a

material fact or to omit to state

a material fact necessary in order

to make the statements made, in

the light of the circumstances

under which they were made, not

misleading, or

(3) to engage in any act, practice,

or course of business which operates

or would operate as a fraud or de-

ceit upon any person,

in connection with the purchase or sale of

any security. (17 CFR 240-10b-5)

22a

Rule 1l3a-l. Requirement of Annual

Reports.

Every issuer having securities

registered pursuant to Section 12 of the

Act shall file an annual report on the

appropriate form authorized or prescribed

therefor for each fiscal year after the last

full fiscal year for which financial state-

ments were filed in its registration state-

ment. Registrants on Form 8-B shall file

an annual report for each fiscal year begin-

ning on or after the date as of which the

succession occurred. Annual reports shall

be filed within the period specified in the

appropriate report form. At the time of

filing the annual report, a registrant other

than a person registered under the Public

Utility Holding Company Act of 1935 or the

Investment Company Act of 1940 shall pay to

the Commission a fee of $250, no part of

which shall be refunded. (17 CFR 240.13a-1)

_—

23a

Rule l3a-ll. Current Reports on Form 8-K.

(a) Except as provided in paragraph (b),

every registrant subject to Rule 13a-1 shall

file a current report on Form 8-K within ten

days after the close of any month during

which any of the events specified in that

form occurs, unless substantially the same

information as that required by Form 8-K has been

previously reported by the registrant.

(b) This rule shall not apply to

foreign governments, foreign private

issuers required to make reports on Form 6-K

pursuant to Rule 1l3a-16, issuers of American

Depositary Receipts for securities of any

foreign issuer, or investment companies re-

quired to file quarterly reports pursuant

to Rule 13a-12. (17 CFR 240.13a-11)

| 24a

Rule 13a-13. Quarterly Reports on Form 10-Q.

(a) Except as provided in paragraph (b),

every issuer which has securities registered

pursuant to Section 12 of the Act and which

is required to file annual reports pursuant to

Section 13 of the Act on Form 10-K, 12-K or

U5S shall file a quarterly report on Form

10-Q, within the period specified in General

Instruction A to that form, for each of the

first three fiscal quarters of each fiscal

year of the issuer, commencing with the first

such fiscal quarter which ends after securi-

ties of the issuer become so registered.

(b) Quarterly reports on Form 10-Q need

not be filed by the following issuers:

(1) Investment companies required

to file quarterly reports pursuant to

Rule 13a-12;

(2) Real estate companies required

to file quarterly reports pursuant to

Rule 13a-15;

ween te he

25a

(3) Foreign private issuers required to

file reports pursuant tc Rule 13a-16;

(4) Life insurance companies and

holding companies having only life in-

surance subsidiaries; or

(5) Companies in the promotional

or development stage to which paragraph

ulation S-X is applicable.

carriers and pipe line carriers which submit

financial reports to the Civil Aeronautics

Board, the Federal Communications Commission,

the Federal Power Commission or the Interstate

Commerce Commission may; at their option, in

lieu of furnishing the information called for by

Form 10-Q, file as exhibits to reports on

this form copies of their reports submitted

to such Board or Commission for the preceding

fiscal quarter or for each month of such quarter,

as the case may be, together with copies of

their quarterly reports, if any, for such

periods sent to their stockholders.

26a 27a

: necessary to correct any statement in any

(d) Notwithstanding the foregoing pro- Y Y

‘ear , earlier communication with respect to the

visions of this rule, reports on Form 10-Q,

, . solicitation of a proxy for the same meeting

or reports submitted in lieu thereof pursuant

or subject matter which has become false or

to paragraph (c), shall not be deemed to be |

isleading.

"filed" for the purpose of Section 18 of ” .

, (b) The fact that a proxy statement,

the Act or otherwise subject to the

ere ee ,; form of proxy or other soliciting material

liabilities of that section, but shall be :

; — has been filed with or examined by the

subject to all other provisions of the Act.

mmission shall not be deemed a finding by

(17 CFR 240. 13a-13) cs

the Commission that such material is accurate

Reg. $240.14a-9. (a) No solicitation or complete or not false or misleading, or that

subject to this regulation shall be made by | the Commission has passed upon the merits

means of any proxy statement, form of proxy, of or approved any statement contained

notice of meeting or other communication, therein or any matter to be acted upon by

written or oral, containing any statement security holders. No representation contrary

which, at the time and in the light of the to the foregoing shall be made. (17 CFR

circumstances under which it is made, is 240.14a-9)

false or misleading with respect to any

material fact, or which omits to state any

material fact necessary in order to make the

statements therein not false or misleading or |

28a

RELEVANT PORTIONS OF THE SECURITIES ACT OF 1933

SEC. 15. Every person who, by or through

stock ownership, agency, - otherwise, or

who, pursuant to or in connection with an

agreement or understanding with one or more

other persons by or through stock ownership,

agency, or otherwise, controls any person

liable under section 11 or 12, shall also be

liable jointly and severally with and to the

same extent as such controlled person to whom

such controlled person is liable, unless the

controlling person had no knowledge of or

reasonable ground to believe in the exist-

ence of the facts by reason of which the

liability of the controlled person is alleged

to exist. (15 U.8.C. 7F7e)

SEC. 17. (a) It shall be unlawful for

any person in the offer or sale of any

securities by the use of any means or instru-

ments of transportation or communication in

interstate commerce or by the use of the

mails, directly or indirectly--

29a

(1) to employ any device, scheme,

or artifice to defraud, or

(2) to obtain money or property by

means of any untrue statement of a material

fact or any omission to state a material

fact necessary in order to make the

statements made, in the light of the

circumstances under which they were

made, not misleading, or

(3) to engage in any transaction,

practice, or course of business which

operates or would operate as a fraud

or deceit upon the purchaser. (15 U.S.C.

77q (a) )

SEC. 22. (a) The district courts of

the United States, the United States courts

of any Territory, and the District Court of the

United States for the District of Columbia

shall have jurisdiction of offenses and vio-

lations under this title and under the rules

and regulations promulgatd by the Commission

in respect thereto, and, concurrent with

30a

State and Territorial courts, of all suits

in equity and actions at law brought to en-

force any liability or duty created by this

title. Any such suit or action may be

brought in the district wherein the defendant

is found or is an inhabitant or transacts

business, or in the district where the offer

or sale took place, if the defendant participated

therein, and process in such cases may be served

in any other district of which the defendant

is an inhabitant or wherever the defendant

may be found. Judgments and decrees so rendered

shall be subject to review as provided in

sections 128 and 240 of the Judicial Code,

as amended (U.S.C., title 28, secs. 225 and 347).

No case arising under this title and brought

in any State court of competent jurisdiction

shall be removed to any court of the United

States. No costs shall be assessed for or

against the Commission in any proceeding

under this title brought by or against it in

the Supreme Court or such other courts.

(15 U.S.C. 77 V(a))

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.