Petition — Blackie v. Barrack

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In the

Supreme Court of the United States

OcTOBER TERM, 1975

RECEIVED | No 75-/258

MAR 5 1976 WILLIAM BLACKIE, et al.,

OFFICE OF THE CLE Petitioners,

*“LERK

| SUPREME Court, U.S, v.

ONARD BARRACK, et al.,

Respondents.

Petition for a Writ of Certiorari to the

United States Court of Appeals for the Ninth Circuit

ARTHUR R. ALBRECHT

Rosert C, BARRETT

McCuTCHEN, DoyLe, BROWN &

ENERSEN

601 California Street

San Francisco, California 94108

Telephone: [415] 981-3400

Attorneys for Petitioners Wil-

liam Blackie, Robert E.

Brooker, Richard ]. Elkus,

Arthur H. Hausman, Henry

A. McMicking, Nathan W.

Pearson, A. E. Ponting, Fred-

erick Seitz, and Irving Trust

Company, as Executor of the

Estate of H. S. M. Burns,

Deceased

/ THEODORE P. LAMBROS

4ist Floor

Transamerica Building

600 Montgomery Street

San Francisco, California 94111

Telephone: [415] 781-7722

Attorney for Petitioner Ampex

Corporation

————————————O

GORG PRINTING COMPANY OF CALIFORNIA, 346 FIRST STREET, SAN FRANCISCO 94105

SUBJECT INDEX

Page

Opinions Bed OW .....---..-.00-.o-ccoccsssccescscecenecenscenssenessonsaoenesenessnons 2

IN i sincetncinesctscnsinsneninsibimniinemmndimnanennnes 2

Questions Presented ....... scctieieaiielelniaitanialatilatajecicesadbiasgaiaiidabaaninicinids 3

Constitutional Provisions, Statutes and Rules Involved .......... 4

IRIE GE TD GID scecretinsevieniceninncevetinsiennctiibiaiiaaninnanantacees 4

Reasons for Granting the Wit ................0--.cs.cscscsseceseeeseenentnes 6

I. Blue Chip Stamps 1s Undermined by the Ninth Cir-

cuit’s Judgment and Is Not Considered ................-.-.-- 7

A. New Judicial Rules Facilitating Plaintiffs’

Proofs of Liability and Limiting Proof of

SII scncscceineisiccepnicsninansasiniceimesniaianaiihaianiiesitetesnioes 8

B. New Rules on the Measure of Damages ............ 9

C. Fusion of Separate and Distinct Claims Into One

IG GRID wcneesncencennsniititernccasnieatinniniiataeiei 10

II. The Enabling Act Is Violated by Abridgement of the

Substantive Rights of Defendants and Absent Class

Members and by Enlargement of Substantive Rights

of Plaintiffs to Facilitate Certification of a Class ......° 11

A. Defendants’ Rights to Prove Their Defenses

Against Liability Are Abridged and Modified by

New Rules of Proof, and Their Exposure to

Damages May be Greatly Increased by En-

larged New Rules of Damages Which Further

Facilitate Proof of Liability ............... ene 12

TABLE OF CONTENTS

(1) The Class Action Requirements of Man-

ageability and Predominance Must Govern

the Extent of Defendants’ Proof ................

(2) The Measure of Damages May Be Fash-

ioned to Eliminate Conflicts Otherwise

Creating Inadequacy of Representation or

Untypicality of Claims ..................:-0-0-0-0-+-

(3) Liability Under Section 10(b) May Be Es-

tablished as to Each of Various Diverse

Alleged Misreprsentations in One Mass

Trial of Materiality of All Alleged Misrep-

RN cersiatianinniciniticiaeiciminnnnnnnsnnene

Plaintiffs’ Substantive Rights Are Enlarged by

New Rules Facilitating Proof of Liability and

RIED csccencipcaicissesseennninscatnstanssnmnessheemtiilieneens

The Rights of Absent Class Members to Fair and

Adequate Representation Are Abridged by

Holdings That the Right to Opt Out Can Substi-

tute for Adequate Representation and That

There Is Probable Adequate Representation of

Conflicting Interests by Composite Representa-

tion of Different Groups Within the Class by

BD RE II eiicesesistccerstrnecesncirrertnisstoivisenninceati

(1) Right to Opt Out Is No Substitute for Ade-

GUMS TREPCCCCMAMION «2.02.2. .2rccccncseeseceseseseses

(2) “Probable” Representation by a Collection

of Plaintiff Representatives With the Same

Counsel Is Not Fair and Adequate Repre-

COTTE nccecccccsnsanssenssonsteccenssstovessccnmnsnsncnesess

Page

TABLE OF CONTENTS iii

Page

III. Due Process Is Violated by the Ninth Circuit's Pres-

ent Limitation of the Scope and Timing of Defend-

ants’ Defenses Under Threat of Unconstitutional

Irrebuttable Presumption of Causation and by

Authorization of Proceedings to Bind Absent Class

Members Without Fai: or Adequate Representation

or Any Representation At All ............----.---e--see-see-eee++ 19

A. Limitation of Defenses ................0c-c.covercsseceneeseste 19

(1) Present Restrictions on Proof in Defense to

Maintain Manageability ..................-..-0---+-- 20

(2) The Threat of an Unconstitutional Irrebut-

table Presumption — .............--.-s.cs0.0-0-2 necienni 21

B. Sanctioning a Class Action in Which Absent

Class Members Are Not Adequately Repre-

sented or Not Represented At All .............-.-..-.-. 22

(1) Opt-Out Is No Substitute for Fair and

Adequate Representation ..........-.-.--.-.----0-++- 22

(2) Class Members With Divergent Interests

in the Admitted Nine Different Crucial

Alleged Misrepresentations Are Not Rep-

resented by Plaintiff Representatives or by

SOG GINS ancesenccoseserncscnsccnnonsesencognvore 23

SIE sarvcninsieitnccinis nnimianannnintineninminnsammmaneasiemmamemanin 25

APPENDIX

Memorandum Opinion and Order of the District Court... A-1

Opinion of the Court of Appeals .............-----2---sssssseseeeseees A-10

Judgment of the Court of Appeals ........... capaaniicnne a

Order of the Court of Appeals Denying Petition for Re-

hearing and Rejecting Suggestion for Rehearing in Banc A-46

Constitutional Provisions, Statutes and Rules Involved ...... A-48

TABLE OF AUTHORITIES CITED

CASES Pages

Affiliated Ute Citizens v. United States, 406 U.S. 128,

rehearing denied, 407 U.S. 916, 408 U.S. 931 (1972) ....10, 16

American Surety Co. v. Baldwin, 287 U.S, 156 (1932) ........ 19

Armstrong v. Manzo, 380 U.S. 545 (1965)... 19

Blackie v. Barrack, 524 F.2d 891 (9th Cir. 1975) 2.000000... 2 and

throughout

Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723

(2079) nnannsnicssomsensccns 3, 6, 7,9, 10, 11, 13, 15

Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974) .............. 22

Garber v. Randell, 477 F.2d 711 (2d Cit, 1973) ....-.--.--0-0--+- 15

Gonzales v. Cassidy, 474 F.2d 67 (Sth Cir, 1973) -.............. 18, 23

Grannis v, Ordean, 234 U.S, 385 (1914) ..... eovescussssousase 20

Hansberry v. Lee, 311 U.S. 32 (1940) ........-..-ccececvsrsesavensseses 22

In re Dearborn Marine Service, Inc., 499 F.2d 263 (5th Cir.

1974), rehearing denied, 512 F.2d 1061 (1975) ........0----- 15

Johnson v. Manhattan Railway Co., 289 U.S. 479 (1933) .... 15

Lindsey v. Normet, 405 U.S. 56 (1972) -.-.---0-0-s--se00: a 19

Manley v. Georgia, 279 U.S, 1 (1929) ........-.0-:seressessssssessseees 21

Schlick v. Penn-Dixie Cement Corp., 50; 2d 374 (2d Cir.

1974), cert. denied, 421 U.S. 976 (1972 j -.--escesesneeseneeneeees 16

Vlandis v. Kline, 412 U.S, 441 (1973) ..........scsessesseessereeeees 21

CONSTITUTIONAL PROVISIONS

United States Constitution, Amendment V .............-..--.--000-- 3,4, 6

United States Constitution, Amendment XIV ...................... 21

TABLE OF AUTHORITIES CITED Vv

STATUTES Pages

Enabling Act, 28 U.S.C. § 2072 .......-.....-20-00------= 3, 4,6, 11, 12, 13

Judiciary and Judicial Procedure Code, 28 U.S.C. § 1254/1) 2

Judiciary and Judicial Procedure Code, 28 U.S.C. § 1292(b) 1,5

Judiciary and Judicial Procedure Code, 28 U.S.C. § 1331 .... 4

Judiciary and Judicial Procedure Code, 28 U.S.C. § 1337... 4

Securities Exchange Act of 1934, §10(b), i5 USC.

BPMN. ccnsereaiencrsveeccccscsnsasvasanacnscnscssraenssssascuees 2 and throughout

Securities Exchange Act of i934, §13(a), 15 USC.

| 4,5

Securities Exchange Act of 1934, §18(a), 15 USC.

ce 5

Securities Exchange Act of 1934, § 27, 15 U.S.C. § 78aa .... 4

OTHER AUTHORITIES

Rule 23, Federal Rules of Civil Procedure .............. 3, 4, 7, 11, 12,

13, 18, 22

Rule 42(a), Federal Rules of Civil Procedure ...................... 15

S.E.C. Rule 10b-5, 17 C.F.R. § 240.10b-5 —.....-- 4, 13

In the

Supreme Court of the United States

OcToBEeR TERM, 1975

No.

WILLIAM BLACKIE, et al.,

Petitioners,

Vv.

LEONARD BARRACK, et al.,

Respondents.

Petition for a Writ of Certiorari to the

United States Court of Appeals for the Ninth Circuit

Petitioners respectfully pray that this Court grant a writ of

certiorari to review the Judgment* of the United States Court of

Appeals for the Ninth Circuit, affirming, on discretionary inter-

locutory appeal under 28 U.S.C. § 1292(b), and on the basis of

*The Judgment on the discretionary appeal which was heard and is

here sought to be reviewed is designated as No. 74-2648, and appears

in the Appendix at p. A-45. Other Judgments in the case dismissing the

direct appeals, designated Nos. 74-2141, 74-2167, 74-2341 and 74-2466,

are treated in companion petitions for certiorari, and these petitioners

adopt the arguments set forth therein.

new substantive rules for the proof of liability and damages in

cases under Section 10(b) of the Securities Exchange Act of

1934, the conditional certification by the United States District

Court for the Northern District of California, of a single class of

all purchasers of a company’s securities over a 27-month period,

as plaintiffs in eight overlapping class actions for numerous, dis-

parate and changing alleged misrepresentations which plaintiffs

claim inflated each of their various respective purchase prices

in varying amounts at diverse times during the period.

OPINIONS BELOW

The Opinion of the United States Court of Appeals for the

Ninth Circuit (by Circuit Judge Koelsch and joined in by Circuit

Judges Tuttle and Browning) is reported at 524 F.2d 891, and

appears in the Appendix hereto at pages A-10 to A-44.* The

Opinion of the United States District Court for the Northern

District of California (by Judge Williams), not reported for

publication, also appears in the Appendix hereto at pages A-1

to A-9.

JURISDICTION

_ The date of the Judgment of the United States Court of Ap-

peals for the Ninth Circuit and the date of its entry was September

25, 1975. A timely petition for rehearing and rehearing in banc

was denied by order filed on December 16, 1975. This petition

for a writ of certiorari was filed within 90 days of that date. The

order denying rehearing appears in the Appendix hereto at pages

A-46 to A-47. The jurisdiction of this Court is invoked under

28 U.S.C. § 1254(1).

*All page references, unless otherwise indicated, are to the Ninth

Circuit's Opinion as set forth in the Appendix. This petition is directed to

pp. A-24 ff.; the first part of the Opinion, pp. A-10 to A-23, deals with

the issue of direct appealability.

QUESTIONS PRESENTED

May a federal court, consistently with this Court's Blue Chip

Stamps opinion,* the Enabling Act** and the parties’ rights to

due process,*** restrict defendants’ substantive proof against

liability and expand plaintiffs’ measure of damages for claims

under Section 10(b) of the Securities Exchange Act of 1934,

in order to certify a single conditional class of all purchasers of a

company’s securities over a 27-month period, claiming an agegrega-

tion of numerous, disparate and changing alleged misrepresenta-

tions in connection with their respective purchases:

(1) Where adoption of new substantive rules of proof of

Section 10(b) claims favoring plaintiffs and restricting defendants’

substantive rights to prove their defenses against liability are

necessary in order to satisfy the requirements of Rule 23(b) (3)

for predominance and manageability ?

(2) Where inevitable antagonisms of interest and resulting

inadequacy of representation and untypicality of claims as be-

tween different groups in the class arising from admitted interim

corrective reports, changing prices, and substantial sales by class

members during the period are only partly resolved by enlarging

the substantive rules as to the measure of damages, and where

absent class members with significantly different interests are not

represented at all?

(3) Where separate and distinct claims of component groups

within the class are fused into one mass class claim by determina-

tions that “common course of conduct” to violate Section 10(b)

in different respects at diverse times is a common question of fact

and general principles of law are a common question of law?

’

*Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975).

**28 U.S.C. § 2072.

***Lnited States Constitution, Amendment V.

CONSTITUTIONAL PROVISIONS, STATUTES

AND RULES INVOLVED

The Constitutional provision involved is Amendment V of the

United States Constitution.

The statutes involved are: Section 10(b) of the Securities

Exchange Act of 1934 (15 U.S.C. § 78j(b)) and the Enabling

Act (28 U.S.C. § 2072).

The rules involved are: Rule 23 of the Federal Rules of Civil

Procedure and Rule 10b-5 promulgated by the Securities and

Exchange Commission (17 C.F.R. § 240.10b-5).

Each of the above is set out verbatim in the Appendix hereto at

pages A-48 to A-53.

STATEMENT OF THE CASE

This litigation began in the Eastern District of Pennsylvania in

January, 1972, as a purported class action on behalf of all pur-

chasers of Ampex securities from May 2, 1970 to January 12,

1972 against Ampex Corporation, its directors, and Touche Ross &

Co., its independent auditors. Plaintiffs claimed violations of

Sections 10(b) and 13(a) of the Securities Exchange Act of 1934

by diverse and general alleged misrepresentations and omissions

in annual and quarterly reports, SEC filings, press releases and

other documents, in which defendants allegedly overstated earn-

ings, inventories and other assets, buried expenses for research

and development, misrepresented current ratio, misstated accounts

and notes receivable, and failed to establish reserves for doubtful

accounts, to write off certain unspecified assets and to report the

proposed discontinuation of certain unspecified product lines.

Jurisdiction was invoked under Section 27 of the Securities Ex-

change Act and under 28 U.S.C. §§ 1331 and 1337. The action

was transferred to the Northern District of California before the

Honorable Spencer Williams, who consolidated it for pre-trial

with seven other class actions alleging some or all of the same

types of misrepresentations in various reports for differing and

overlapping periods. Various complaints in intervention were

allowed. Judge Williams also appointed David Berger, Esq., and

Leonard Barrack, Esq., counsel in the original Barrack action, as

lead counsel. Mevsrs. Berger and Barrack also directly represent

most of the other plaintiff class representatives and intervenors.

By amendment, the alleged class was extended from January

12 to August 3, 1972, and new allegations were added based on

events in that additional seven-month period, which included

further announcements in February and March, 1972, concerning

losses by Ampex. Plaintiffs’ complaints made no allegation of any

self-dealing or personal enrichment by defendants except for a

Section 10(b) derivative claim against defendant Roberts in a

relatively small amount, which was dismissed on the ground that

Ampex was not a purchaser. In January, 1974, defendants moved

for partial summary judgment against Leonard Barrack, Pearl

Singer and Selma Molder in their capacity as executors of the

Estate of Sylvia Barrack, the class representative, on the ground

that she individually could not have any claim fox alleged misrep-

resentations after her purchase of her 100 shares of Ampex stock

in April, 1971, fifteen months prior to the end of the purported

class period. The motion was denied. Defendants have provided

plaintiffs with extensive discovery, mainly through production of

tens of thousands of documents and through answers to interro-

gatories, which have been provided both before and after appeal.

The District Court certified the alleged class with regard to

claims under Section 10(b) conditionally and “subject to adjust-

ments by further order” of the Court. The claims under Section

13(a) were not certified for class treatment on the ground that

they could proceed only under Section 18(a) requiring individual,

subjective reliance which would necessarily defeat commonness

of issues of law or fact. On motion for reconsideration of the class

certification, Judge Williams saa sponte certified his class certifica-

tion order to the Court of Appeals for the Ninth Circuit under 28

U.S.C. § 1292(b) for defendants who had moved for reconsidera-

tion, but not others. The Ninth Circuit accepted the discretionary

appeals and considered them together with direct appeais.

The size of the class for the 27-month period is estimated to be

upwards of 100,000 investors, who purchased 21,000,000 shares

of common stock and $50,000,000 face amount of debentures in

approximately 120,000 transactions. During the period there were

2 annual reports, 7 quarterly interim financial statements, 469

press releases and 119 SEC filings. In their answering brief on

appeal (at p. 37, f£/n. 26), however, plaintiffs for the first time

stated that:

“This case, after discovery, will probably involve at most

46 deceptive documents over a 27-month period, including

press releases and SEC filings along with the two annual

reports and seven interim financial statements, see n. 1, supra.

The latter 9 documents are the heart of the plaintiffs’ case,

as these set forth (and the secondary documents merely

repeat) the deceptive financial results.” [Emphasis added. }

An estimated 38,000 purchasers sold their securities throughout

the period, during w!:ich prices and volume fluctuated materially.

REASONS FOR GRANTING THE WRIT*

The Judgment of the Ninth Circuit violated (1) the holding and

the policy of the Blue Chip Stamps case with regard to the sub-

stantive scope of Section 10(b) claims, (II) the provisions of

the Enabling Act against the alteration of substantive rights in

application of the Federal Rules of Civil Procedure, and (III) the

defendants’ due process rights to defense and the plaintiff class

members’ due process rights to representation. The reasons are

as follows:

*An additional reason for granting the writ, not treated herein, but

treated by other petitioners, is that the Judgments of the Ninth Circuit

are in conflict with the law of the Second Circuit on the direct appealability

of the certification of a class.

;

1. Blue Chip Stamps Is Undermined by the Ninth Circuit's Judg-

ment and Is Not Considered.

The Ninth Circuit's Judgment approved conditional certification

of a single class for prosecution of diverse claims under Section

10(b): (A) by devising new judicial rules to facilitate plaintiffs’

proof of liability and to limit severely defendants’ proof in

defense, in order to support the requirements of predominance

and manageability under Rule 23(b)(3), F.R.Civ.P.; (B) by

adopting new and expansive rules as to the measure of damages,

in order to avoid inevitable conflicts among class members pre-

venting fair and adequate representation under the Rule; and

component parts of the alleged class into an undifferentiated mass

claim for the entire class, provable and remediable one for all,

and all for one, by means of implausible common questions, all

contrary to the Blue Chip Stamps case.

The class consists of all purchasers of Ampex’s securities over

a 27-month period for the prosecution of Section 10(b) claims

based, with regard to each purchaser, on distinct alleged mis-

representations in connection with his respective purchase. As

shown below specifically with regard to each of these points, the

Judgment undermines the holding of this Court in Blue Chip

Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), which it

does not consider, that a Section 10(b) claim must be based upon

a misrepresentation in connection with the claimant's purchase or

sale,* and vitiates the policy of this Court, set forth in that case,**

to prevent judicial erosion of that rule because of the special

potential for abuse of Section 10(b) claims, which as this Court

said in Blue Chip Stamps present ‘a danger of vexatiousness

different in degree and in kind from that which accompanies

litigation in general.” 421 U.S. at p. 739. In addition, the Judg-

ment violates Section 10(b) itself.

*See 421 U.S. at p. 737.

**See 421 U.S. at pp. 738-749.

A. NEW JUDICIAL RULES FACILITATING PLAINTIFFS’ PROOFS OF LIA-

BILITY AND LIMITING PROOF OF DEFENSE

Having determined that there are common questions on the

grounds that ‘whether a defendant's course of conduct is in its

broad outlines actionable” is a common question of fact (Opinion

at p. A-27) and “the accounting and legal principles requiring

adequate reserves” constitute a common question of law (Opinion

at p. A-31),* the Ninth Circuit concluded that such common

questions are predominating, as against the overwhelming diversity

in questions of law and fact in the proof of liability for such

diverse misrepresentations, by ruling that (1) “plaintiffs satisfy

their burden of showing causation as to each by showing materi-

ality as to all’ (Opinion at p. A-36, £/n. 22), shifting to defend-

ants the burden of disproving materiality as to individuals as a

matter of defense, and (2) the test of the extent of defendants’

right to disprove plaintiffs’ prima facie case is the manageability

of the action, stating that if defendants’ attempted proof of their

defense should render the case unmanageable, “. . . we may have

to reconsider whether to make proof of causation from materiality

conclusive...’ (Opinion at p. A-36, f/n. 22).

The effect of these new rules is to create a vast expansion of

the scope of Section 10(b) liability through class actions em-

bracing undifferentiated Section 10(b) claims in which plaintiffs

are permitted to establish a prima facie, and perhaps even a con-

clusive, case of causation through materiality generally provable

in one trial from all evidence as to all alleged misrepresentations.

This conclusion not only establishes the questionable substitution

of materiality as prima facie proof of causation in place of reliance,

but, far worse, implicitly substitutes a generalized materiality for

the whole class in place of the materiality of a particular mis-

representation on which a particular purchaser's claim must be

based.

*This subject is discussed further below at p. 10.

At the same time, the new rules also make it practically im-

possible for defendants to address a defense to the misrepresenta-

tions, first, because the criss-crossing relationships in a single

trial of evidence with regard to a particular misrepresentation

bearing on the proof of another misrepresentation inevitably means

that defendants would have to defend each claimed misrepresenta-

tion by rebuttal of evidence adduced in support of all misrepre-

sentations; and second, because the rules, while vastly expanding

defendants’ burden of proof in defense, severely curtail what

defendants may do to adduce their defensive proof by the new

restrictions judicially imposed upon defendants to avoid un-

manageability of plaintiffs’ class.

The Judgment contravenes the policy of Blue Chip Stamps

against the fashioning of unique rules of corroboration and

damages correlative to the expansion of the scope of Section

10(b) because it adopts new substantive rules for facilitating

plaintiffs’ proof of Section 10(b) liability while restricting defend-

ants’ defense. It also violates Section 10(b) because that pro-

vision was not intended to enable claimants to prove their claims

on the strength of misrepresentations not in connection with

their respective purchases.

B. NEW RULES ON THE MEASURE OF DAMAGES

In its treatment of conflicts among the alleged class members

(i.e., inadequacy of representation and untypicality of the class

members’ claims), the Ninth Circuit further contravenes the

policy of Blue Chip Stamps by suggesting alternative theories of

damages to eliminate conflict problems. Defendants argue that

there are conflicts in the alleged class, inter alia, between class

members who sold during the period (a substantial number, esti-

mated at one-third of the class) and those who subsequently

bought, because of the different interests between them concerning

the time of a misiepiesentation, if any, and whether it persisted

at the point of sale (thus having no effect on selling price) or was

partly or fully disclosed (thus not being the basis of a claim for

the later purchaser). The Ninth Circuit suggests that this obvious

problem might be circumvented if, in place of the ordinary

standard of out-of-pocket loss for Section 10(b) claims, the

district judge might apply a rescissory measure of damages

(Opinion at p. A-40). This is abandoning the out-of-pocket rule

of damages as approved by this Court in Affiliated Ute Citizens v.

United States, 406 U.S. 128, 155 (1972), and potentially increasing

them enormously, to cram conflicting claims into the apparent

shape of a class, contrary to the policy of the Blue Chip Stamps

case, to avoid the fashioning of unique rules of damages to extend

Section 10(b) liability.

©. FUSION OF SEPARATE AND DISTINCT CLAIMS INTO ONE MASS CLAIM

The Ninth Circuit's Opinion makes it plain in its treatment

of common questions that it is sanctioning mass prosecution of

practically unlimited aggregations of Section 10(b) claims on a

class basis against a particular company, its directors and its

auditors. Where, as here, a class can be certified upon the gen-

eralizations that “whether a defendant's course of conduct is in

its broad outlines actionable” is a common question of fact

(Opinion at p. A-27) and “the accounting and legal principles

requiring adequate reserves’ constitute a common question of

law (Opinion at p. A-31), the certification of the class means

in effect that the rule of the B/ue Chip Stamps case does not apply

in class actions, which is the most common and important form

of Section 10(b) cases. Under these tests or similar generalized

allegations, all Section 10(b) cases could easily qualify as class

actions. Indeed, the Ninth Circuit says that “. . . even when

unrelated misrepresentations are alleged as part of a common

scheme, class members may share common factual yuestions,

and trial in the same forum avoids duplicative proof.” (Opinion

at p. A-29, f/n. 19) [emphasis added}.

To permit securities purchasers to prosecute as class claims in

one trial such different misrepresentations in connection with their

respective purchases violates the holding in the Blue Chip Stamps

case because it jumbles into an undifferentiated whole claims of

certain class members based on their respective purchases, with

other claims for other class members based on other misrepresenta-

tions in connection with other purchases, obliterating the funda-

mental nature of the claim by melding it with claims of others into

a general class claim.

il. The Enabling Act Is Violated by Abridgement of the Sub-

stantive Rights of Defendants and Absent Class Members and

by Enlargement of Substantive Rights of Plaintiffs to Facili-

tate Certification of a Class.

The Judgment of the Ninth Circuit violates the provision of

the Enabling Act, 28 U.S.C. § 2072, that the Federal Rules of

Civil Procedure shall not “. . . abridge, enlarge or modify any

substantive right . . .,”" in three major respects in order to facilitate

certification of a class under Rule 23, F.R.Civ.P.: (A) defendants’

rights to prove their defense are abridged and modified by new

rules of proof limiting defense against liability, and their ex-

posure to damages may be greatly increased by enlarged new rules

of damages, in order to facilitate determinations of predominance,

manageability, typicality and adequacy of representation; (B)

plaintiffs’ substantive rights are enlarged correlatively and in

other ways for class action purposes; and (C) the rights of

absent class members to fair and adequate representation are

abridged by the holding that the right to opt out can substitute

for adequate representation and that there is adequate representa-

tion where there are numerous representatives “. . . who thus will

probably represent whatever conflicting interests there are. . .”

(Opinion at p. A-44).

A. DEFENDANTS’ RIGHTS TO PROVE THEIR DEFENSES AGAINST LIABILITY

ARE ABRIDGED AND MODIFIED BY NEW RULES OF PROOF, AND THEIR

EXPOSURE TO DAMAGES MAY BE GREATLY INCREASED BY ENLARGED

fe RULES OF DAMAGES WHICH FURTHER FACILITATE PROOF OF

IABILITY

The Ninth Circuit's Opinion, in order to facilitate class certifi-

cation under Rule 23(b) (3), F.R.Civ.P., reached the following

conclusions: common questions predominate over individual ques-

tions of reliance because materiality of a misrepresentation estab-

lishes a prima facie case of causation; materiality may be proven

in one mass trial because “plaintiffs satisfy their burden of show-

ing Causation as to each by showing materiality as to all” (Opinion

at p. A-36, f/n. 22); defendants’ rights to disprove causation so

proved by plaintiffs’ prima facie case will be limited so as not to

render the action unmanageable, failing which, proof of causation

from materiality may be made conclusive (Opinion at pp. A-33

to A-39, especially f/n. 22); and the measure of damages may be

broadened to resolve conflicts within the class. (Opinion at pp.

A-39 to A-41).

These conclusions abridge and modify defendants’ rights to

prove their defense against liability in the following ways:

(1) The Class Action Requirements of Manageability and Predominance Must

Govern the Extent of Defendants’ Proof

Confronted with the problem that defendants’ rights to disprove

plaintiffs’ prima facie case of causation through materiality might

render the action unmanageable or render the common questions

as found by the Court not to be predominant, the Ninth Circuit,

contrary to the Enabling Act, has enthroned the requirements of

manageability and predominance under Rule 23(b) (3) as the

measure of defendants’ substantive rights to make their proof.

The Court says:

“We think procedures can be found and used which will

provide 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 causa-

tion 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.”

(Opinion at p. A-36, £/n. 2) (emphasis added).

The Court states further:

“Indeed, we could, in the exercise of our Article III juris-

diction, transform the 10b-5. suit from its present private

compensatory mold by predicating liability to purchasers

solely on the materiality of a misrepresentation (7.¢., eco-

nomic damage) regardless of transactional causation, with-

out implicating the Enabling Act limitation.” (Opinion at

p. A-39, £/n. 24).

Such a conclusion is a far cry from the policy of this Court set

forth in the Blue Chip Stamps case, not to further extend liability

under Section 10(b) (see above at p. 7) beyond the present

private compensatory mold. It is hard to imagine a more sub-

stantive change in defendants’ rights than a change in the nature

of proof of their liability. Furthermore, despite the statement of

the Court that it could extend the nature of the liability under

Section 10(b) without implicating the Enabling Act limitation

(Opinion at p. A-39), the Opinion makes it clear that it threatens

to do so for the purposes of promoting manageability and pre-

dominance under Rule 23(b) (3), and the actual present limitation

on defendants’ proof is explicitly based on manageability.

(2) The Measure of Damages May Be Fashioned to Eliminate Conflicts Other-

wise Creating Inadequacy of Representation or Untypicality of Cicims

The Ninth Circuit also suggests a departure from the standard

out-of-pocket measure of damages in 10b-5 cases to an enlarged

rescissory or consequential measure of the damages in order to

meet the problem of eliminating conflicts between members of the

alleged class creating inadequacy of representation and untypicality

of claims (Opinion at pp. A-39 ff.). This problem is inevitable

between purchasers in the class who sold and later purchasers,

the purchasers who sold necessarily having to demonstrate correc-

tion affecting their sale price in order to prove out-of-pocket

damages caused by the misrepresentation, while later purchasers

have to prove continued inflation from the same misrepresentation

affecting their purchase price. Purchasers who sold and later

purchasers would thus be in direct conflict with regard not only

to quantum of damages, but necessarily with regard to issues of

liability concerning the existence, effect and extent of misrepresen-

tations at particular times giving rise to their respective damages.

The Ninth Circuit suggests new, enlarged measures of damages

to try to avoid these obvious conflicts, positing the possibility of

rescissory or consequential damages to avoid the conflicts. How-

ever, the measure of damages is a substantive rule of law. That

measure in Section 10(b) cases has been “‘out-of-pocket’’ loss,

i.e., the difference between what a purchaser paid and the real

value as measured at the time of purchase. The enlargement of

the measure of damages to rescissory or consequential damages

alters the substantive rights of the parties in order to facilitate

certification of the class.

Moreover, the Ninth Circuit concludes that such conflicts (and

others) concern damages and are peripheral. (Opinion at p.

A-41). However, the conflicts, unless the substantive rule of dam-

ages is changed, go to the very heart of the claims because the

ordinary rule of out-of-pocket damages applied to the circum-

stances of this case inevitably creates conflicts as to substantive

questions of liability on which damages must be based, i.e.,

whether and when there was a misrepresentation and whether,

when and to what extent it was corrected. These problems are

not peripheral, but dramatize the unsoundness of the generalized

conclusion that there is any real common question.

(3) Liability Under Section 10(b) May Be Established as to Each of Various

Diverse Alieged Misrepresentations in One Mass Trial of Materiality of

All Alleged Mi:representations

The right of defendants to separate trial of different claims

against them, as well as to severance of claims in pre-trial pro-

ceedings where consolidation would create prejudice or be funda-

mentally unfair continues to be recognized under a long line of

decisions, going back to Johnson v. Manhattan Ry. Co., 289 US.

479, 496 (1933), where the Court said:

“Under the statute, 28 U.S.C. § 734, consolidation is per-

mitted as a matter of convenience and economy in administra-

tion, but does not merge the suits into a single cause, or

change the rights of the parties, or make those who are

parties in one suit parties in another.”

See Garber v. Randell, 477 F.2d 711, 717 (2d Cir. 1973).

Nevertheless, the Ninth Circ. it has ordained one mass trial of

the materiality of all the allege? .nisrepresentations, of which

some are relied upon by some members of the class, and others by

other members, even with regard to unrelated misrepresentations,

because “plaintiffs satisfy their burden of showing causation as to

each by showing materiality as to all.” (Opinion at p. A-36,

f/n. 22; p. A-29, £/n. 19; p. A-40, f/n. 25; and p. A-41). This is

contrary to the decision in the Blue Chip Stamps case that a Section

10(b) claim may be based only upon a misrepresentation in con-

nection with the purchase (or sale) by the claimant and prejudices

substantial rights of defendants for the sake of certifying the

class.*

*Moreover, the eight class actions below were consolidated and lead

counsel appointed for pre-trial purposes only at an early stage in the

proceedings. The District Court did not decide on consolidated trial, and

certified the class conditionally and “subject to adjustments by further

order,” thus, at least implicitly, leaving the question whether one

consolidated trial of all claims in the eight class actions would be ap-

propriate. This is a matter which in the first instance should be in the trial

court’s discretion. Rule 42(a), Federal Rules of Civil Procedure; In re

Dearburn Marine Service, Inc., 499 F.2d 263, 270-71 (Sth Cir. 1974).

(4) Materiality Proves Causation

The Ninth Circuit's Judgment also establishes the materiality of

a misrepresentation as prima facie proof of causation (Opinion

at pp. A-34 ff.), leaving defendants only a limited and perhaps

short-lived opportunity to disprove materiality. In Affiliated Ute

Citizens v. United States, 406 U.S. 128 (1972), this Court held:

"Under the circumstances of this case, involving primarily

a failure to disclose, positive proof of reliance is not a pre-

requisite 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} This obligation to disclose and

this withholding of a material fact establish the requisite

element of causation in fact. [Citation}” (At pp. 153-54)

[emphasis added}.

The circumstances included a relatively small group (85) to

whom defendants owed an affirmative duty of disclosure which

they failed to perform in essentially a privity situation involving

special fiduciary relations.

The Ninth Circuit has translated that decision into a complete

elimination of the requirement of reliance by Section 10(b)

claimants for open market purchases. At most, Affiliated Ute

means that there may be some circumstances in which proof cf

actual reliance is not required, as in pure non-disclosure cases, but

it does not sanction the wholesale jettisoning of the requirement

of reliance as a proof of causation, especially in large open market

securities cases. The reasons are that securities purchasers buy

securities for a wide variety of reasons, price is affected by a wide

variety of factors other than a company's reports, and the ma-

teriality of a misrepresentation is at most one factor in the causa-

tion of a purchase at a particular price.

Moreover, the Ninth Circuit's position that reliance is not neces-

Sary in a misrepresentation case is in conflict with other substantial

authorities. See, e.g., Schlick v. Penn-Dixie Cement Corp., 507

F.2d 374, 380-381 (2d Cir. 1974) cert. denied, 421 US. 976

(1975).

B. PLAINTIFFS’ SUBSTANTIVE RIGHTS ARE ENLARGED BY NEW RULES

FACILITATING PROOF OF LIABILITY AND DAMAGES

Plaintiffs’ substantive rights are enlarged by the Ninth Circuit's

Judgment, not only correlatively to the abridgement of defendants’

rights with respect to proof of liability and measure of damages,

but significantly in other ways as well. The Judgment establishes

plaintiffs’ right to prove liability by a prima facie case of causa-

tion on proof of materiality, to prove materiality of any particular

alleged misrepresentation from expanded evidence of the material-

ity of other alleged misrepresentations, and from general ‘‘course

of conduct,” and to enjoy a drastically limited opposition to such

relaxed proof of plaintiffs’ claims, by restrictions on defendants’

proof to conform to requirements of manageability.

The Judgment also suggests plaintiffs’ right to possible rescissory

and consequential damages in place of out-of-pocket damages,

vastly expanding the ultimate potential recovery. The enlargement

of damages from out-of-pocket to rescissory or consequential

damages produces a further significant relaxation of requirements

of proof of liability by large segments of the class, those who

sold their securities during the class period, because it relieves

them of any need to prove the effect on their sale price of alleged

misrepresentations, as they would have to do under the rule of

out-of-pocket damages. It also correspondingly reduces the re-

quirements of proof by later purchasers who bought after earlier

purchasers sold because they can base claims on misrepresentations

also relied on by such earlier purchasers without diminution of

their claims by reason of recovery by earlier purchasers who sold.

In short, under the new rules enunciated by the Ninth Circuit,

plaintiffs in a class alleging Section 10(b) claims can not only

prove their case collectively one for all and all for one, on the

basis of just the materiality of misrepresentations, but they are

also relieved of most of the proof of effect on market price of the

misrepresentations determined to be material.

C. THE RIGHTS OF ABSENT CLASS MEMBERS TO FAIR AND ADEQUATE

REPRESENTATION ARE ABRIDGED BY HOLDINGS THAT THE RIGHT TO

OPT OUT CAN SUBSTITUTE FOR ADEQUATE REPRESENTATION AND

THAT THERE IS PROBABLE ADEQUATE REPRESENTATION OF CON-

FLICTING INTERESTS BY COMPOSITE REPRESENTATION OF DIFFERENT

GROUPS WITHIN THE CLASS BY THE SAME COUNSEL

(1) Right to Opt Out Is No Substitute for Adequate Representation

Absent class members cannot be bound by a determination in a

class action in which they are not adequately represented simply

because they have the opportunity under Rule 23 to opt out, as

the Ninth Circuit states in its Opinion. (Opinion at p. A-43).

Its holding on this point is unsound under the Rule (23(c) (2))

because the notice and opt-out provisions are predicated upon

the existence of a class and are not a substitute for conforming

with its requirements. The Ninth Circuit, in order to justify the

certification of a class, has transformed the opt-out provision,

applicable only where there is a class based on adequate repre-

sentation, into a substitute for adequate representation. This con-

clusion is contrary to the holding of the Fifth Circuit in Gonzales

v. Cassidy, 474 F.2d 67, 74, 76 (Sth Cir. 1973).

(2) “Probable” Representation by a Collection of Plaintiff Representatives

With the Same Counse! Is Not Fair and Adequate Representation

At the end of its Opinion, the Ninth Circuit says:

“Finally, and unlike numerous cases in which even one rep-

resentative 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 conflicting interests there are in

the development of plaintiffs’ trial strategies.” (Opinion at

p. A-44).

As pointed out in the Blackie petition for rehearing (f/n. at p.

10), there was no determination that there is fair and adequate

representation for several of the crucial periods following the

issuance of the nine documents which plaintiffs state are the

heart of their case. In fact, there is actually no representation,

even in the form of plaintiff representatives, for members of the

class in several of those periods, and other plaintiff representa-

tives and intervenors who purchased in different crucial periods

are represented by the same counsel, Messrs. Berger and Barrack.*

ill. Due Process Is Violated by the Ninth Circuit's Present Limita-

tion of the Scope and Timing of Defendants’ Defenses Under

Threat of Unconstitutional Irrebuttable Presumption of Causa-

tion and by Authorization of Proceedings to Bind Absent

Class Members Without Fair or Adequate Representation, or

Any Representation At All.

Two of the above-described changes in the parties’ substantive

rights are so fundamental that they violate the due process clause

of the Fifth Amendment: (A) the limitation on defendants’ rights

to present defenses against Section 10(b) liability so as not to

render plaintiffs’ action unmanageable, under threat of uncon-

stitutional irrebuttable presumption of causation from proof of

materiality, and (B) the certification of a class action on behalf

of absent class members not fairly or adequately represented and

not represented at all, on the grounds that they can opt out on re-

ceiving notice or are “probably” represented by the presumed

presence of representative plaintiffs, who nevertheless have the

same counsel.

A. LIMITATION OF DEFENSES

“Due process requires that there be an opportunity to present

every available defense.” Lindsey v. Normet, 405 U.S. 56, 66

(1972); American Surety Co. v. Baldwin, 287 US. 156, 168

(1932). “It is an opportunity which must be granted at a mean-

ingful time and in a meaningful manner.” Armstrong v. Manzo,

*See p. 24 below.

380 U.S. 545, 552 (1965); Grannis v. Ordean, 234 U.S. 385, 394

(1914).

The Ninth Circuit's Judgment, constituting the law of the case

in this matter, and the law of the Ninth Circuit, plainly imposes

on defendants the present obligation to limit their defenses to

Section 10(b) liability to keep the litigation manageable as a class

or to forego entirely the right to present a defense to the Court's

rule of prima facie proof of causation from materiality (Opinion

at p. A-36, f/n. 22). Although the Court mentions unexcep-

tionable limitations against repetitive evidence and other reasonable

limitations upon the defense against delaying and harassing tac-

tics, the est set forth for the limits on presentation of the defense

is manageability of the action. Furthermore, this restricted oppor-

tunity for presenting a defense may be postponed to the damage

stage of the trial (Opinion at p. A-36, f/n. 22).

Both the present limitations imposed by this rule, even apart

from the chill on the defense imposed by the threat of an irre-

buttable presumption, and the threatened rule itself, are uncon-

stitutional denials of due process.

(1) Present Restrictions on Proof in Defense to Maintain Manageability

The Ninth Circuit's Judgment not only eliminates the require-

ment that plaintiffs prove reliance, substituting materiality for

reliance as proof of causation, but further limits defendants’

proof against materiality, as well as reliance, to keep plaintiffs’

action manageable. Defendants’ ability to disprove materiality,

as well as to prove that a particular plaintiff's purchase was in

fact caused by factors other than defendants’ alleged wrongdoing,

would be governed by the requirements of manageability of the

action plaintiffs chose to commence.

Furthermore, the postponement until the damage stage of the

trial of the rebuttal of individual causation totally deprives de-

fendants of any meaningful defense to liability by postponing

the defense to liability until after liability has been established.

The Ninth Circuit's rule is arbitrary and unreasonable because:

(1) in practical operation, it means that defendants must

weigh the presentation of their defense to-liability against

the effects of doing so on the manageability of the action;

(2) it facilitates maintenance of plaintiffs’ case as a class

action under Rule 23, which should be plaintiffs’ respon-

sibility alone, at tiie expense of defendants’ right to defend

against liability; and :

(3) defendants’ defense to liability may be postponed

until after liability has been established.

(2) The Threat of an Unconstitutional Irrebuttable Presumption

In Viandis v. Kline, 412 U.S. 441 (1973), this Court held a

statutory irrebuttable presumption to be contrary to the due proc-

ess clause of the Fourteenth Amendment to the Constitution,

citing other cases under both the Fifth and Fourteenth Amend-

ments invalidating presumptions which are arbitrary and unrea-

sonable and operate to deny a fair opportunity to rebut them.

Viandis v. Kline, 412 US. at 446 (1973); Manley v. Georgia,

279 U.S. 1, 6 (1929).

The Ninth Circuit's present limitation on defendants’ proof and

the threatened irrebuttable presumption are arbitrary and un-

reasonable because:

(1) they impose the threatened sanction of a change in

the rule of law to make the presumption irrebuttable if de-

fendants proceed far enough with their defense to render

plaintiffs’ class unmanageable;

(2) they threaten to create an irrebuttable presumption

not necessarily or universally true in fact because the mate-

riality of a misrepresentation does not necessarily mean the

causation of the purchase made in connection with it, as

the Ninth Circuit itself recognizes earlier in its Opinion by

attempting to categorize the means by which defendants

might rebut the presumption, so long as it has not been

made irrebuttable (Opinion at p. A-35);

(3) reasonable alternative means exist for the determina-

tion of the proof of liability by separation of the multitude of

claims made into distinct classes conforming to the require-

ments of Rule 23, which would greatly reduce the problems

of manageability of the claims made in a single class action.

B. SANCTIONING A CLASS ACTION IN WHICH ABSENT CLASS MEMBERS

ARE NOT ADEQUATELY REPRESENTED OR NOT REPRESENTED AT ALL

In Hansberry v. Lee, 311 U.S, 32 (1940), and more recently

in Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 176 (1974), the

Supreme Court confirmed the importance of adequacy of rep-

resentation for due process in class action cases. The Ninth Cir-

cuit’s Judgment permits the certification of a class even when

there are conflicts among class members, on the grounds that

(1) “. .. under 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 him-

self of the representation offered” (Opinion at p. A-43), and (2)

. 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 conflicting interests there are in the develop-

ment of plaintiffs’ trial strategies” (Opinion at p. A-44).

(1) Opt-Out Is No Substitute for Fair and Adequate Representation

However, the position of the Ninth Circuit is constitutionally

unsound. Under Hansberry, class members may have different

positions, but there may not be conflicts among class members.

Characterizing the conflicts as only ‘secondary’ or ‘‘peripheral,”

as the Ninth Circuit has done, does not satisfy due process re-

quirements because the courts should not prejudge the effects of

constitutional violations of the rights of absent parties without

adequate representation. This was so held by the Fifth Circuit

in Gonzales v. Cassidy, 474 F.2d 67 (Sth Cir. 1973):

“Due process of law would be violated for the judgment in

a class suit to be res judicata to the absent members of a class

unless the court applying res judicata can conclude that the

class was adequately represented in the first suit. [Citations}”

(at p. 74.)

“The purpose of Rule 23 would be subverted by requiring a

class meinber who learns of a pending suit involving a class

of which he is a part to monitor that litigation to make cer-

tain that his interests are being protected; this is not his

responsibility—it is the responsibility of the class representa-

tive to protect the interests of all class members.” (at p. 76.)

(2) Class Members With Divergent Interests in the Admitted Nine Different

Crucial Alleged Misrepresentations Are Not Represented by Piaintiff Repre-

sentatives or by Separate Counsel

Without any determination having been made, the Ninth Cir-

cuit asserts that:

“{UJnlike numerous 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 pur-

chased throughout the class period, and who thus will

probably represent whatever conflicting interests there are

in the development of plaintiffs’ trial strategies.” (Opinion

at p. A-44) [emphasis added}.

This hope of “probable representation” is not sufficient to sat-

isfy the requirements of due process because there is no deter-

mination that there is at least one class representative who

purchased in connection with each of the nine documents (the

two annual and seven quarterly reports) admitted by plaintiffs

to be the crucial misrepresentations. Moreover, the alleged class

lacks not only a named plaintiff representative for each such

misrepresentation, but also lacks separate counsel for each of the

divergent interests asserted, inasmuch as most of the named

plaintiffs are represented by the same counsel, Messrs. Berger

and Barrack.*

As shown by the chart of the respective purchases made by the

named class representatives and intervenors, which was furnished

to the Court of Appeals** and to the District Court*** no

purchase was made by any named class representative or inter-

venor from the beginning of the class period May 2, 1970, to

August 13, 1970; nor from August 21, 1970 to March 5, 1971;

nor from January 13, 1972 to the end of the class period, August

3, 1972. Thus, during approximately 15 of the 27 months of the

class, no named representative or intervenor even made a pur-

chase of Ampex stock. As a result any absent class member whose

purchase occurred during one of these periods has no named

representative to represent his particular time period and no

counsel who would be in a position to represent his particular

interests.

*Messrs. Berger and Barrack represent class representative Sylvia

Barrack (now Leonard Barrack, et al. as Executors of her Estate) and

intervenors Dooling, McDevitt, Sigafoos, the Abrahams and the Kogoks.

**Exhibit 6 to the Brief on Appeal of defendant-appellant Touche

Ross & Co,

***Exhibits F and G to Appendix I to Memorandum of Defendants

Blackie, et al. In Opposition to Plaintiffs’ Motion for Class Action Deter-

mination, which Memorandum was also appended to the Petition to the

Ninth Circuit for Permission to Appeal.

CONCLUSION

For the reasons set forth above, petitioners respectfr''y pray

that this Court grant a writ of certiorari to review the Judgment

of the United States Court of Appeals for the Ninth Circuit.

Dated: March 4, 1976

Respectfuly submitted,

ARTHUR R. ALBRECHT

Rosert C. BARRETT

Attorneys for Petitioners Wil-

liam Blackie, Robert E.

Brooker, Richard J]. Elkus,

Arthur H. Hausman, Henry

A. McMicking, Nathan W.

Pearson, A, E. Ponting, Fred-

erick Seitz, and Irving Trust

Company, as Executor of the

Estate of H. S. M. Burns,

Deceased

THEODORE P. LAMBROS

Attorney for Petitioner Ampex

Corporation

APPENDIX

MEMORANDUM OPINION AND ORDER

OF THE DISTRICT COURT

Original Filed Apr 11 1974

Clerk, U.S. Dist. Court

San Francisco

In the United Siates District Court

for the Northern District of California

Master File No. C-72-360 SW

In Re Consolidated Pretrial

Proceedings in Ampex Securities Cases )

This document relates to:

Molder (formerly BARRACK)

File No. C-72-521 SW

MEMORANDUM OPINION AND ORDER

This action is brought by Mrs. Barrack, through her executors,

Leonard Barrack, Pearl Singer Molder and Selma Molder, on

behalf of herself (now her estate) and all other purchasers of

Ampex securities between May 2, 1970 and August 3, 1972. The

complaint charges violations of sections 10(b) and 13(a) of

the 1934 Securities and Exchange Act, 15 Ux C. § 78j(b) and

§ 78n(a) and the Rules 10b-5 and 13 promulgated thereunder,

15 C.F.R. 240.10b-5 and 240.13." Jurisdiction is premised on 15

U.S.C. § 78aa.

This action is before the Court on plaintiffs’ motion to certify

a class. It is this motion to which the Court will address itself.

After careful consideration of the volumes of papers submitted,

the arguments and authorities on both novel and well worn

1. The amended Molder complaint also contains a count of breach

of fiduciary duty against defendant Roberts brought derivatively under

alternative theories of 10b-5 violations and common law. This count has

been previously dismissed on defendant Robert's [sic} 12(b)(6) motion.

Thus the Court will not address any objections to certification based upon

this count.

A-2 Ap pendix—O pinion of the Distrit Court

theories, the Court finds that a conditional class defined as all

Ampe security purchase:s within the designated 27-month period

is warranted. Rule 23(c) (1). The Court, however, on a proper

factual showing, reserves the right to reduce or expand the class

as to time, types of securities, or types of transactions, to designate

appropriate subclasses and to terminate the class. Rule 23(c) (4).

-* " FACTS

Although this is extremely complicated litigation not easily

summarized, the crux of the allegations is that Ampex and its

officers, directors and auditors ‘Touche Ross) conspired and

aided and abetted in misrepresenting, in various publicatious, the

corporation's earnings and financial condition. These publications

include, but are not limited to annual reports, interim reports,

press releases, and SEC filings.* The period of time, over which

these violations allegedly occurred and coinciding with the period

of this class, commenced May 2, 1970 when the 1970 annual

report issued,* and terminated Avgust 3, 1972 when Touche Ross

withdrew its certificate.*

More specifically plaintiffs claim that defendants misrepresented

the corporation's financial security by the deceitful use of certain

accounting procedures. It is claimed that the corporation's reports

did not reveal specific crucial items, e.g., the true depreciated value

2. During the 27-month period in question there are claimed to have

been 3 annual reports, six quarterly interim reports, 469 press releases

and 119 filings with the SEC. Although not definitively narrowed, it

seems that the alleged violations involve some 45 of these publications.

3. There appears to be a factual dispute concerning the date of the

1970 annual report. The plaintiffs claim the class begins with the issuance

of this document May 2, 1970 but some defendants claim that it did not

issue until July 1970.

4. In this 27-month period there were 570 business days during which

there were 170,000 transactions in Ampex securities with a total of

21,000,000 shares traded.

Appendix—O pinion of the District Court A-3

of inventories, deferred research and development expenses, ac-

curate asset to liability ratios, contingent liabilities not covered by

adequate reserves, and the accurate value of discontinued items.

The cumulative effect, according to plaintiffs, was to give the in-

vestment community the impression that Ampex was more secure

than was perhaps warranted, thus causing its stock to sell at arti-

ficially inflated prices. In mid-1972 Ampex reported an approxi-

mate $90,000,000 loss.

Plaintiffs further allege that throughout this 27-month period

between the initiation of these deceptive practices and the precipi-

tous fall, Ampex took steps to partially correct certain “accounting

errors.”> These corrections allegedly caused downward adjust-

ments in the talue of Ampex securities, but these corrections also

allegedly had the effect of lulling investors into believing the

corporation's financial position was finally stable when, in reality,

more distressing financial news was forthcoming.

The class that plaintiffs seek to represent encompasses all pur-

chasers of Ampex securities within the 27-month period. At this

point no one really knows how many members this class would

include, although the defendants estimate that it could include

upwards of 100,000 investors.® The class purportedly include both

past and present shareholders and debenture holders.

Based upon these statistics, all parties agree that the asserted

class is so numerous that joinder is impracticable, Rule 23(a) (1),

5. Some examples of these partial disclosures are as follows: the

announcement March 16, 1971 that the company had not been expensing

research and development currently, resulting in a 10.7 million dollar

loss; the announcement January 11, 1972 of a 40 million dollar loss due

to lack of reserves to cover contingent liabilities, doubtful accounts, and

discontinued lines; the announcement shortly after January 1972 that

40 million was a low estimate of the loss; and the announcement in the

1972 annual report (March, 1972) of an 86 million dollar loss for the

whole year.

6. Of these investors it is estimated that perhaps 35,000 also resold

during the period and 46,000 no longer hold Ampex securities.

A-4 Appendix—O pinion of the District Court

but there is no agreement on the other requirements of Rule 23.7

Defendants have raised many potential problems which could

affect the viability of this proposed class. Fulfillment of all Rule

23 requirements aside from 23(a)(1), numerosity, has been

challenged on several theories. After tedious culling, the Court

is of the opinion that the arguments concerning manageability,

superiority and adequacy of representation by plaintiffs’ attorneys

to the extent not handled infra lack merit. No doubt management

of this class will not be simple, but the Court does not envision

the necessity of thousands of days of trial with hundreds of

interlocking subclasses before several juries, as feared by defend-

ants.

Any conflicts that Mrs. Barrack’s executors as class representa-

tives may have with their role as executors does not affect their

ability to represent the members of this class. Whether their

role herein would pose a justiciable issue for the estate or

beneficiaries thereof would necessarily have to be raised and

litigated elsewhere. It does not conceivably create representation

problems here.

Other issues raised concerning the competency of plaintiff's

counsel to represent this class are unconvincing and not worthy

of discussion.

Accordingly, in passing on plaintiffs’ motion the Court will

only focus on the questions of commonality of fact or law and

a number of the alleged conflict of interest problems.

7. The §13(a) claim in Count II cannot proceed as a class action

and must be pursued individually by the named plaintiffs. Defendants

allege and the Court agrees that private actions for 13(a) violations can

only proceed under the authority of § 18(a), 15 U.S.C. § 78r(a). In re

Penn Central Securities Litigation, 347 F.Supp. 1327, 1340 (E.D. Pa.

1972). Section 18(a) requires by its very language individual, subjective

reliance by those seeking relief thereunder. See, Heit v. Weitzen, 402 F.2d

909, 916 (2d Cir. 1968). Requiring proof of individual reliance for

each class member would necessarily defeat commonness of issues of law

or fact and preclude a class action on that count. This does not, of course,

preclude the certification of the class for the purposes of the 10b-5 count.

Rule 23(c) (4) (A).

Appendix—O pinion of the District Court A-5

COMMON ISSUES OF LAW AND FACT AND

PREDOMINANCE OF COMMON QUESTIONS

Defendants argue that there is no commonality on the issues

in this action because the only commonness pleaded is con-

spiracy; that is plaintiffs seek to tie a series of individual

wrongs together with a veil of conspiracy. That allegations of

conspiracy alone cannot create common issues of fact and law

is not disputed. See Richland v. Cheatham, 272 F.Supp. 148

(S.D.N.Y. 19°). Although confusingly pleaded, the Court is

convinced from the total record that conspiracy is not the lynch

pin which holds this cause of action together. Conspiracy is

only the device employed by plaintiffs to sweep in the numerous

defendants.

The common issues of law and fact and the common issues

which predominate are the various alleged misrepresentations

and omissions originating in the May 2, 1970 annual report

concerning overstated inventory, buried research and develop-

ment costs and misstated current ration [sic} of assets to liabili-

ties, among other things, creating an erroneous image of pros-

perity. These possible accounting failings which are alleged

§ 10(b) violations reappear again in the 1971 annual report

along with other alleged misrepresentations. The incidents of

fraud were then allegedly repeated and enhanced in the various

other publications purported to be links in this chain of mis-

representations. This appears to the Court to be the classic

situation of the “standing dominoes” discussed in Fischer v.

Kletz, 41 F.R.D. 377, 381 (S.D.N.Y. 1966). If it is proved,

for instance, that the value of the inventory was materially mis-

presented [sic] in the 1970 Annual Report, mere proof of the re-

petition of this overstatement would suffice to prove another viola-

tion. Since this would also be true for each of the alleged

representations or omissions, the Court is of the opinion that the

allegations constitute a “common course of conduct over the entire

——_———_—_—_———_—_—— —

A-6 Appendix—O pinion of the District Court

period, directed against all investors. . . ,” Harris v. Palm

Springs Alpine Estates, Inc., 329 F.2d 909, 914 (9th Cir. 1964),

cited also in Fischer v. Kletz, supra at 381. See also the analysis

of the Fischer rationale in Richland v. Cheatham, supra at 155.

This case is admittedly more complicated than Fischer, with

many more potential representations and possible interim inter-

vening curative representations which may or may not eliminate

the causal effect of some of the alleged accounting misrepresenta-

tions. These complications, although troublesome to the proof

of causation and damage, do not militate against this finding

of commonness upon the record now before us.

Defendants also argue that actual subjective reliance must

necessarily be required before recovery could be granted, espe-

cially in a non-privity case such as this,* and that in a class this

size with many representations at many different times, the

diverse issues of reliance alone preclude the existence of common

issues of law and fact. Subjective reliance as these defendants

urge is not now an element of proof necessary to prevail on

this action, see Affiliated Ute Citizens v. United States, 406

U.S. 128 (1972); see also the discussion in Grad v. Memorex

Corp., 61 F.R.D. 88, 97-101 (N.D. Cal. 1973), and thus does

not destroy the question of commonness here. The more reason-

able reliance theory commonly applied in these large security

cases is causal connection or causal nexus. Although proof

of the causal nexus between the alleged fraud and the inflated

price and the harm incurred will undoubtedly be complex, it

neither precludes commonness nor typicality. At this point, the

Court also cannot say that it would make this class inherently

unmanageable

8. The defendants argue forcefully that lack of —— distinguishes

this case from those cases which hold that neither subjective reliance nor

scientor are required to prevail in 10b-5 suits. They further argue that

these elements must be proved and that the application of Rule 23 cannot

change this substantive requirement. To the extent it is necessary to decide

this issue on this motion the Court finds defendant's arguments unper-

suasive. See the discussion in Grad v. Memorex, Cited infra.

a ae

Appendix—O pinion of the District Court A-7

CONFLICTS

First, Ampex argues that the application of the correct damage

theory to these facts would create irreconcilable conflict among

the members.® Assuming arguendo, that the appropriate damage

formula is out-of-pockets as urged by defendants, and also that

the intrinsic value of the stock is measured by the difference

between the price immediately before and the price immediately

after the partial corrections, the Court is still umpersuaded that

irreconcilable conflicts between the members destroy commonality

of issues or render the class unmanageable. After studying the

number of examples presented in the papers, the Court is not

convinced that the proofs required to prove one member’s dam-

age or the plaintiffs’ damage operates against the next member's

claim or precludes the plaintiff from asserting that member's

rights with equal zeal. At this point, there is no reason to believe

that the members’ various positions are diametrically opposed

to each other.

It is further argued that under any theory, assuming causation

as pleaded, there is an inherent conflict when one member alleges

that he sold at a loss while at the same time another member

alleges he bought at a fraudulently induced inflated price. If

there was only partial disclosure, it is not inconceivable that

one member may be selling out at a loss at the same time one

9. Probl-ms measuring damages are not usually considered in de-

termining a class, Herbst v. Able, 47 F.R.D. 11, 17 (S.D.N.Y. 1969);

Grad v. Memorex, supra; Dorfman v. First Boston Corp., Civil Action

No. 70-1845 (E.D. Pa. 1973), but when, as here, it is purported that

the damage theory may affect the causal connection between the alleged

fraud and the injury, defeating commonality and typicality the Court will

consider it for that purpose only.

Ampex alleges that the plaintiff's damage theory, the difference be-

tween the purchase price and the sales price after partial disclosure, is

tantamount to rescissory damages and thus inappropriate in a png me |

situation. They further argue that the correct measure would be out-of-

pocket, that is the difference the purchase price and the true value at the

time of the purchase [sic}. It is unnecessary to rule on this point at this

time.

A-8 Appendix—O pinion of the District Court

member buys in at a price still inflated due to yet undisclosed

fraud. Admittedly these circumstances greatly complicate this

case but they do not create obvious conflicts which are irreconcil-

able.

Neither does the Court find persuasive defendant's arguments

that debenture purchasers and stock purchasers cannot be repre-

sented by a shareholder and are in such conflict with plaintiff

as to preclude any commonality of the issues. Although it is

not unimaginable that purchasers of debentures could be in-

fluenced by considerations other than those influencing stock

investors, see Carlisle v. LTV Electronics, Inc., 54 F.R.D. 237

(N.D. Tex. 1972), the Court, at this time is not convinced that

these differences exist here.’ The very nature of the positions

of these two security holders does not as a matter of law

preclude their inclusion in the same class. See Fischer v. Kletz,

supra at 384; In re Ceasars {sic} Palace Securities Litigation, CCH

Sec.L.R. $94,005, 94,049." The Court does concede that there

may well have to be a distinct damage analysis employed to

determine debenture holders’ losses, but these are problems which

can be solved with subclasses. They do not frustrate the certifica-

tion of this class.

Defendants also urge that there is a conflict between those

potential class members who purchased within the 27-month

period and have since sold all their shares and those who still

now hold their shares, because success of this lawsuit would

10. The Court has noted that in C-72-360 SW, Kushner v. Ampex,

et al, consolidated with the subject case for pretrial proceedings, the com-

plainant is a debenture purchaser and complains of exactly the same

wrongdoing in the connection and sale of his security as does plaintiff

Molder.

11. Dolgow v. Anderson, 43 F.R.D. 472, 492 (E.D.N.Y. 1968) and

Herbst v. Able, 278 F.Supp. 669 (S.D.N.Y. 1967), relied on by the

defendants, do not militate against this finding since they merely found

under their particular circumstances and at the stage of their proceedings,

these two groups should not proceed together while recognizing that this

would not apply to all situations.

Appendix—O pinion of the District Court A-9

be to the latter's detriment. Again, if these conflicts do prove

viable then appropriate subclasses may be the answer. See

Herbst v. Able, 47 F.R.D. 11, 15 (S.D.N.Y. 1969).

Finally, defendant Touche Ross claims that if a class is

certified it should not be allowed to proceed against them,

since they were only involved with Ampex for nine of the 117

weeks in the class period. Even assuming the validity of this

assertion, this would appear to be irrelevant to certifying the

class. See Fogel v. Wolfgang, 47 F.R.D. 213 (S.D.N.Y. 1969).

Procedural devices are available to Touche Ross to narrow the

issues as to them. Also since this is, as of yet, a conditional class

necessary adjustments and subclasses could solve this problem.

In accordance with the findings expressed herein, the Court

ORDERS that the plaintiffs’ motion to certify this class is HEREBY

GRANTED subject to the following cor "tions:

1. the class shall be defined as all those purchasers of

Ampex securities between May 2, 1970 and August 3, 1972;

2. the class is a conditional class subject to adjustments

by further order of this Court;

3. the class action is limited to the 10b-5 cause of action

stated in Count I of plaintiffs’ complaint;

4. and plaintiffs shall bear the cost of notifying the class

after Court approval of notice form and timing in accordance

with Eisen v. Carlisle & Jacqueline, 479, F.2d 1005 (2d Cir.

1973).

Dated: April 10, 1974.

/s/ SPENCER WILLIAMS

UnrtTeD STATES DISTRICT JUDGE

A-10

OPINION OF THE COURT OF APPEALS

William BLACKIE et al.,

Defendants-Appellants,

Leonard BARRACK et al.,

Plaintiffs-A ppellees.

AMPEX CORPORATION,

Defendant-Appellant,

Benjamin L. KUSHNER,

Plaintiff-Appellee.

William E. ROBERTS and John

Buchan, Defendants-Appellants,

Benjamin L. KUSHNER et al.,

Plaintiffs-Appellees.

TOUCHE ROSS & CO.,

Defendant-Appellant,

Leonard BARRACK et al.,

Piaintiffs-A ppellees.

William E. ROBERTS et al.,

Defendants-Appellants,

Leonard BARRACK et al.,

Plaintiffs-Appellees.

Nos. 74-2141, 74-2341, 74-2167,

74-2466 and 74-2648.

United States Court of Appeals,

Ninth Circuit.

Sept. 25, 1975.

Appendix—O pinion of the Court of Appeals A-11

Arthur R. Albrecht (argued), McCutchen, Doyle, Brown &

Enersen, San Francisco, Cal. for defendants-appellants in No. 74-

2141.

David Berger (argued), Philadelphia, Pa., for plaintiffs-ap-

pellees in No. 74-2141.

Theodore P. Lambros (argued), San Francisco, Cal., for de-

fendant-appellant in No. 74-2141.

Stephen V. Bomse (argued), Heller, Ehrman, White & Mc-

Auliffe, San Francisco, Cal., for defendants-appellants in No. 74-

2341.

Thomas Elke (argued), San Francisco, Cal., for plaintiff-ap-

pellee in Nos. 74-2341 and 74-2648.

William W. Godward (argued), Cooley, Godward, Castro,

Huddleson & Tatum, San Francisco, Cal., for defendant-appellant

in No. 74-2466.

Melvyn I. Weiss (argued), Millberg & Weiss, New York City,

for plaintiff-appellee in Nos. 74-2466 and 74-2648.

Thomas A. H. Hartwell (argued), Cooley, Godward, Castro,

Huddleson & Tatum, San Francisco, Cal., for plaintiff-appellee in

No. 74-2648.

OPINION

Before TUTTLE,* KOELSCH and BROWNING, Circuit

Judges.

*The Honorable Elbert P. Tuttle, United States Court of Appeals

Senior Circuit Judge for the Fifth Circuit, sitting by designation.

KOELSCH, Circuit Judge:

These are appeals from an order conditionally certifying a class

in consolidated actions for violation of Section 10(b) of the Se-

curities and Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule

10b-5 promulgated thereunder, 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

A-12 Appendix—Opinion of the Court of Appeals

1970, reported a profit of $12 million. By January 1972, the com-

pany 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 million 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 certification 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 Am-

pex’s losses. They were consolidated for pre-trial purposes. The

named plaintiffs in the various complaints involved in these ap-

peals’ purchased Ampex securities during the 27 month period

between the release of the 1970 and 197!

to represent all purchasers of Ampex secur

1al reports, and seek

luring the period.

The corporation, its principal officers duringhe period,* and the

company’s independent auditor are named as defendants. The

gravamen of all the claims is the misrepresentation 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

unti! 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, conditionally

certifying as a class all those who purchased Ampex securities

1. The lead action here, the so-called Molder action, was originally

filed in the Eastern District of Pennsylvania in January of 1972, and trans-

ferred 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 relationship with

Ampex during the class period; the remaining individual defendants were

in office throughout the period.

Appendix—Opinion of the Court of Appeals —_A-13

during the 27 month period. The defendants filed notices of ap-

peal from the order of certification on May 9 and 10, 19742

Additionally, the district judge, in an order entered July 1,

1974, denying a motion made by defendants Roberts and Buchan,

and defendants Blackie, et a/., for reconsideration of the class

certification, permitted those defendants to seek an interlocutory

appeal from that order under 28 U.S.C. § 1292(b).* We granted

the petition for interlocutory review.® That appeal was designated

No. 74-2648, and consolidated with the direct appeals.

In December of 1974, piaintiffs 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 certifying

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 di$miss the § 1292(b) certified appeals;

3. The direct appeals are designated Nos. 74—2141, 74—2341, 74—

2167, and 74—2466.

4. The district co:s+ did not grant permission to appellants Touche

and Ampex to seek interlocutory re¥iew, as they had not joined in the

motion “ reconsideration filed before the filing of their notices of

appeal. The court assumed that the filing of the notices divested him of

jurisdiction over those defendants. We reject Ampex’ argument that it is

here under § 1292(b) by virtue of its codefendant's interlocutory appéal

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 re-

spect to particular parties. As a result, Fed.R.App.P. 5 does not provide,

as does Rule 4, for parties to join in others’ appeals.

5. Thus, whether the standards for certification of such an appeal set

out in § 1292(b) were met has been decided, and is not now before us.

A-14 Appendix—Opinion of the Court of Appeals

and, on the merits, hold that the suit may properly be maintained

as a class action.

1. Appealability under § 1291 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-fold

policy judgment about judicial administration which was written

into the first Judiciary Act and adhered to ever since. See Cobble-

dick v. United States, 309 U.S. 323, 324-325, 60 S.Ct. 540, 84

L.Ed. 783 (1940). The requirement saves judicial time by

eliminating rcview 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 admin-

istered 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 judgment.” Cobbledick, supra at 325, 60 S.Ct. at 541. 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

6. A system of judicial administration, fortunately unknown in this

country,

Svhich has its ruined suitor, with his slipshod 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).

Appendix—O pinion of the Court of Appeals —_A-15

Nevertheless, in some circumstances deferring an appeal prac-

tically 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 construction,” Cohen v. Beneficial

Industrial Loan Corp., 337 US. 541, 548, 69 S.Ct. 1221, 1226,

93 L.Ed. 1528 (1949), and allowed interlocutory appeal from a

“small class [of orders} which final'y determine claims of 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, 69 S.Ct. at

1225. See Eisen v. Carlisle & Jacquelin, 417 US. 156, 170-172,

94 S.Ct. 2140, 40 L.Ed.2d 732 (1974) (Eisen IV); Note, Class

Action Certification Orders: An Argument for the Defendant's

Right to Appeal, 42 Geo.Wash.L.Rev. 621, 625-628 (1974).

Two of the three circuits which have faced the issue have never-

theless 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 J 110.13{9},

at 184-187 (2d ed. 1970).

The Second Circuit, however, has permitted appeal in certain

limited circumstances. In Eisen v. Carlisle & Jacquelin, 370 F.2d

119 (2d Cir. 1966), cert. denied, 386 US. 1035, 87 S.Ct. 1487,

18 L.Ed.2d 598 (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 undertake this complex and costly case to recover $70

for Mr. Eisen,” the individual claim could not be adjudicated,

and as a practicai matter the class question could never be

appealed. The court therefore concluded the order was appeal-

able under Cohen. We have adopted the death knell doctrine.

Falk v. Dempsey-Tegeler & Co., Inc., 472 F.2d 142 (9th Cir.

A-16 Appendix—Opinion of the Court of Appeals

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. Influenced by the

suggestion that it consider a rule which would “afford equality

of treatment as between plaintiffs and defendants” (Korn v.

Franchard Corp., 443 F.2d 1301, 1307 (2d Cir. 1971) (Friendly,

J., concurring) ), a panel of the circuit held in Essen v. Carlisle &

Jacquelin, 479 F.2d 1005, 1007 n. 1 (2d Cir. 1973) (Eisen IID),

that defendants could appeal an order granting class status under

three specified conditions. As explicated in Herbst v. International

Telephone and Telegraph Corp., 495 F.2d 1308, 1312 (2d Cir.

1974), such an order is appealable when the class determination

is ‘‘ ‘fundamental to the further conduct of the case’ (7.e., when,

were the class determination reversed, the individual claims

presented 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.*

7. See General Motors Corp. v. City of New York, 501 F.2d 639, 645

(2d Cir. 1974); Kohn v. Royall, Koegal and Wells, 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 purchased 10,000 shares

during the class period and damages would appear to be such that the

action would proceed were the order reversed. Thus, criteria 1 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

probably not met either. See Kohn, supra, at 1099; General Motors Corp.,

supra, at 646, 659.

Appendix—Opinion of the Court of Appeals —_A-17

We decline to do so, because we believe that the Second Cir-

cuit’s rule impermissibly’ disregards the conditions placed on

appealability by Coben. The rule of finality is a statutorily im-

posed restraint on our jurisdiction; as noted, it imposes a legisla-

tive judgment that on balance time and money will be saved if

appeal is defersed until the conclusion of a suit. We are not

free to disregard that judgment; exceptions to uniform applica-

tion 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 doubt-

ful and difficult it becomes to determine appealability, at district

and appellate court levels, increasingly inviting supposedly fore-

closed interlocutory litigation.

In this view and while recognizing that it is nevertheless such

an exception, we think the Cohen “collateral order” standards

should be restrictively construed. The Cohen rule is 2a effort to

prevent the inevitable injustices to litigants which result from ap-

plication 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 result 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, immediate review is available orly 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 na-

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 practical

rather than technical construction, and its later observation in Evsen IV,

417 US. at 170, 94 S.Ct. at 2149, that “{n]o verbal formula yet devised

can explain 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 narrowly construed, which

we set out below.

A-18 Appendix—Opinion of the Court of Appeals

ture 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 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 dis-

covered facts warrant.’® Nor is the class issue separable from the

merits in all cases (including this one). The common questions,

typicality, conflicts and adequacy of representation, Fed.R.Civ.P.

23(a), and predominance tests, Fed.R.Civ.P. 23(b) (3), are deter-

minations (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 defendant

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 Ciruit found the requisite injury in the increased,

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

10. “But we do not mean that every order fixing security is subject

to appeal. Here it is the right to security that presents a serious and un-

settled 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, 69 S.Ct. at 1226.

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 com-

mencement of the action, the facts governing the class determination will

inevitably be less clear than after the case has gone to judgment.

Appendix—Opinion of the Court of Appeals —_A-19

review from orders denying motions to dismiss, Fed.R.Civ.P.

12(b) (6), or for summary judgment, Fed.R.Civ.P. 56, may sub-

ject a defendant in particular cases to defense cost 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 firal decision rule will most

benefit all litigants, statutorily foreclosing reliance on litigation

costs as a justification 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 ex-

ception, when the district judge would have refused to certify a

§ 1292(b) appeal, where the district judge would not later decer-

tify the class, and where, on the merits, the order is reversed.

‘Even then, later developments in the suit may lead to reinstate-

ment 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 sug-

gest) the Second Circuit have any way of striking that balance.

We can only speculate concerning the various costs, time spans,

12. Neither Cohen nor Eisen IV 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 appealability.

A-20 Appendix—Opinion of the Court of Appeals

and percentages which must necessarily be appraised to determine

whether the Second Circuit's exception could pay its way; it is

ultimately a question which is best suited to legislative investiga-

tion 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 manage-

ability, adequacy of representation, feasibility of joinder, supe-

riority to other available methods of adjudication, 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 reverse 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 appeal, and which thereafter results

in reversal of the class certification, may prove small indeed.

The second consideration is that, because the “death knell” doc-

trine allows plaintiffs to appeal order denying class status, parity

of treatment requires that defendants be allowed to appeal orders

granting such status. We disagree. Précisely the same disparity

exists between plaintiffs and defendants with regard to summary

judgment or motion to dismiss orders. So long as they are differ-

ently situated in a manner relevant to the purposes of the final

decision rule, plaintiffs and defendants 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

13. 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).

Appendix—Opinion of the Court of Appeals —_A-21

knell” situation effectively terminates the suit and precludes pres-

entation of the merits; an order granting does not end the suit,

or preclude presentation of the defense, and is subject to reevalu-

ation 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 precluding review of the

crucial class certification order unless interlocutory review is al-

lowed. 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 previous orders) is wielded by any plaintiff with a sub-

stantial claim—that fact alone does not generally confer appeal-

ability on an order which effectively requires a defense to a large

claim. The fairness of the pressure—/.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 approving Rule

23(b) (3), created a vehicle to put small claimants in an econom-

ically feasible litigating posture. In that light, we doubt the pro-

priety 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 certification

orders have unique effects specially implicating the policy of the

final decision rule. It may well be that a higher percentage of class

certification orders are erroneous than others which subject a de-

A-22 Appendix—Opinion of the Court of Appeals

fendant to the coercion of a large potential liability; or that a

higher percentage of frivolous claims are presented 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 ad-

dressed 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 deciding whether

the present hue and cry of “blackmail” in fact reflects an abnor-

mally high incidence of unfairly coerced settlements, or is rather

the pained outcry of defendants whose previously advantaged lit-

igating position has been undermined, and who must now con-

14. We note that the supposed in terrorem effect of the class certifica-

tion will persist despite a right of immediate appeal—the claim may be

frivolous and the class proper. Immediate appeal will eliminate only the

improperly certified coercive class action, at the expense of both frivolous

and non-frivolous, property [sic] certified classes. It may well be better to

attack the “blackmail” problem directly with appropriate safeguards rather

than collaterally undermining the final decision rule.

15. Both sides have cited extensive commentary, by courts and critics

alike, on the supposed in terrorem effect of class actions. Almost inevitably

those opinions are supported by highly inconclusive, or no, empirical evi-

dence; most of the debate is founded on speculation, primarily dictated

by the writer's personal experience and feelings for or against class actions.

The empirical evidence on the subject 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 dis-

posed of in defendant's favor on preliminary motions. See Committee on

Commerce, 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.

Appendix—Opinion of the Court of Appeals —_A-23

front small claimants (who have been given the capacity to exert

pressure proportionate to the magnitude of the total injury oc-

casioned by defendant's alleged violation of the law) on more

equal grounds. Without such knowledge, there is no © stification

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 dili-

gence. 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 ma-

terial 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 discretion,

and we think dismissal is not mandated in this case. From the

somewhat conflicting representations before us it appears that ap-

pellees may have agreed to the extensions, although that acquie-

scence 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 grantéd

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 io the trial

court. However, we do note that one purpose of interlocutory

appeals is to hasten the conclusion of a lawsuit, that briefing ex-

tensions defeat that purpose, and that in appropriate circumstances

we can deny unwarranted extensions and dismiss appeals to pre-

vent an interlocutory appeal from being misused as a dilatory

tactic.

A-24 § Appendix—Opinion of the Court of Appeals

We turn to the merits of defendants’ Buchan and Roberts, and

Blackie, et al., § 1292(b) appeals.

Ill. Compliance with the Requirements of Fed.R.Civ.P. 23(a)

and (b)(3).

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 improperly engaged in

speculation when determining whether a common question exists,

and whether conflicts make class representation 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 before him (material sufficient to

form a reasonable judgment on each requirement), considered the

nature and range of proof necessary to establish those allegations,

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.

16. In large part appellants’ attack on the district judge’s approach

is a reiteration of their disagreement with his legal conciusions. The

speculative language seized upon in the opinion simply conditions the

conclusion that a common question exists on plaintiffs’ proof of the alle-

gations—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.

17. The court is bound to take the substantive allegations of the com-

plaint 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 proof of his claim,

it does require sufficient information to form a reasonable judgment. Lack-

ing that, the court may request the parties to supplement the pleadings

with sufficient material to allow an informed judgment on each of the

Rule's requirements.

priate mammalian

Appendix—O pinion of the Court of Appeals _A-25

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 possibility that a plaintiff

will be unable to prove his allegations, nor the possibility that the

later course of the suit might unforeseeably prove the original

decision to certify the class wrong, is a basis for declining to certify

a class which apparently satisfies the Rule. The district judge is

required by Fed.R.Civ.P. 23(c) (1) to determine “as soon as prac-

ticable after the commencement of an action brought as a class

action . . . whether it is to be so maintained.” The Court made

clear in Eisen IV that that determination does not permit or

require a preliminary inquiry into the merits, 417 U.S. at 177-178,

69 S.Ct. 1221; 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 extensive evidentiary showing of the sort re-

quested by defendants is not required. So long as he has sufficient

material before him to determine the nature of the allegations,

and rule on compliance with the Rule’s requirements, and he bases

his ruling on that material, his approach cannot be faulted because

plaintiffs’ proof may fail at trial. Of course, whether he applied

correct 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.

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 numer-

18. 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

A-26 Appendix—Opinion of the Court of Appeals

Osity (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). However, ali

of defendants’ contentions can be resolved by addressing 3 un-

derlying questions: 1) whether a common question of law or

fact unites the class; 2) whether direct individual proof of sub-

jective reliance by each class 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 representation inadequate?

We turn to the first issue.

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

iater. Plaintiffs’ complaint alleges that the price of the company’s

stock was artifically inflated because:

“the annual reports of Ampex for fiscal years 1970 and 1971,

various interim reports, press releases and other documents

(a) overstated earnings, (b) overstated the value of inven-

the class, (3) the claims or defenses of the representative parties

are typical of the claims or defenses of the class, and (4) the repre-

sentative parties will fairly and adequately protect the interests of

the class.

“(b) Class Actions Maintainable. An action may be maintained

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 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 con-

troversy. 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 concerning the controversy already com-

menced 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.”

ll, CI ti ac NI a Ae le Ok at tial i tt et LL A AE A A TR A BS ON te Ce

Appendix—O pinion of the Court of Appeals —_A-27

tories 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 receivables, (f) failed to

write off certain assets, (g) failed to account for the proposed

discontinuation of certain product 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 releases and SEC filings.

Because the alleged misrepresentations are contained in a num-

ber of different documents, each pertaining to a different period

of Ampex’s operation, the defendants argue that purchasers

throvyinout 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 pre-

sented; that the underlying facts fluctuate as the business operates

(7. e@., inventory is bought and sold, accounts are paid off and

created); thus, proof of the actionability of a current 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.

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 differences in class

members’ positions, and that the issue may profitably be tried in

A-28 Appendix—Opinion of the Court of Appeals

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 v. Palm Springs Alpine Estates, 329 F.2d 909 (9th Cir.

1964); U. S. Financial Securities Litigation, 64 F.R.D. 443 (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

~weve=s --- », Realty Equities Corporation of New York, 54 F.R.D. 420

(S.D.N.Y.i1972); Herbst v. Able, 47 F.R.Ds11 (S.D.N.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 payments

on the securities at different times and stand in different

positions . . . [S}ince the complaint alleges a commun course

of conduct over the entire period directed against all in-

vestors, generally relied upon, and violating common statu-

tory provisions, it sufficiently appears that the questions

common to all investors will be relatively substantial.” 329

F.2d at 914.

Those views are consistent with the views of the Advisory Com-

mittee 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 on Rule 23,

Proposed Amendments to the Rules of Civil Procedure, 39

F.R.D. 69, 103 (1966). The availability of the class action to

redress such frauds has been consistently upheld, 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 objec-

tives cf the securities laws. See III Loss, Securities Regulation 1819

i. crea

nat se il at en a Ae at a SO CL OT I CN i Tt ee

a oe es 0 ee ee moe

Appendix—O pinion of the Court of Appeals A-29

(2d ed. 1961) (“the ultimate effectiveness of [the security anti-

fraud 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 boundarics of the “common course

of conduct” test is somewhat unclear,”’ the test is more than

19. Because plaintiffs have alleged specific strands of misrepresentation

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 number of courts have apparently

held that allegations simply that earnings and stock price have been in-

flated over a period of time by a defendant's misrepresentations is suffi-

cient to satisfy the common question requirement (although the cases are

somewhat unclear because they fail to specify the precise misrepresenta-

tions which allegedly inflated earnings). See Fischer v. Kletz, supra;

Krongnberg, supra; Werfel v. Kramarsky, supra. See Feldman v. 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 conduct’’ case, by iden-

tical repeated misrepresentations, and if defendant's liability can be estab-

lished 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 require-

ment in the securities fraud context. Rule 10b-5 liability is not restricted

solely to isolated misrepresentations or omissions; it may also be predi-

cated 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 members

may share a common question of law or fact. Of course, if an early mis-

representation is undissipated, a later purchaser will present a common

uestion even if another misrepresentation has intervened. But even if

e 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 estab-

lish duty standards, culpability, or damages regarding the later fraud; it

would establish background information 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 ques-

tions, and trial in the same forum avoids duplicative proof. That is a

major purpose of a class action; the “common question” requirement

A-30 Appendix—Opinion of the Court of Appeals

satisfied when a series of financial reports uniformly misrepre-

sent a particular item in the financial statement. In that situation,

the misrepresentations are “interrelated, interdependent, and cu-

mulative;” ‘“[l}ike standing dominoes . . . one misrepresentation

. 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 uncollectible

accounts receivable and for contractually guaranteed royalty pay-

ments, and the overstatement of inventory. The 1972 Annual

Report shows writedowns of $31.9 million as provision for

royalty guarantees, $11.8 million for uncollectible accounts receiv-

able, and $15 million for inventory. Plaintiffs allege that the

writedowns had roots tracing back to the beginning of the class

period, an allegation somewhat borne out by the auditors’ with-

drawal 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 attributable to earlier years. Plaintiffs

contend that the company’s financial reports throughout the

period uniformly and fraudulently failed to establish reserves in

amounts adequate to satisfy accepted accounting principles, injur-

ing all purchasers of the consequently inflated stock.

should be interpreted to obtain that objective. Naturally, when the com-

ponent misrepresentations of a “course of conduct” fraud are unrelated, a

great many more non-common questions exist. In that situation no repre-

sentative’s claim may be typical of the rest of the class, Rule 23(a) (3),

although that depends on how broadly that requirement is construed. See

text at note 25, imfra, and note 25 infra. We think it is for the predomin-

ance and other requirements of Rule 23(b) (3), rather than the common

question requirement, to function to keep the balance between the econo-

mies 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 straightfor-

ward schemes to inflate stock prices.

aa i i ania an

Appendix—O pinion of the Court of Appeals A-31

In this aspect, plaintiff: 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 operations.

Failure in any particular period to recognize that a portion of the

accounts receivable generated in that period are uncollectible, 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 understating 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

adequate reserves—/. e., by a common question of law.*° Here,

20. Appellants make much of the distinction between an accounting

principle and estimate, arguing that the exercise of judgment involved in

an estimate depends on analysis of facts which change, making legal

evaluation of different estimates distinct leg2l and factual problems. The

distinction makes little sense in this context. The judgment necessary to

make an estimate must be controlled by the accounting principle. Thus,

even when only detached, unconnected 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 2 class action is involved, the

situation is the same as where a consistent misapplication of an accounting

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.

A-32 Ap pendix—O pinion of the Court of Appeals

however, in light of the progressive deterioration of Ampex’s

financial 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 common

issues. Defendants again contend it does not because the valua-

tion of any particular period’s closing inventory involves a proc-

ess 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 opening inventory, deflat-

ing rather than inflating stock price. While true in the abstract,

appellants’ position disregards the real substance of the plaintiffs’

complaint which is again highlighted by the 1972 Report. In

explaining the $15 million writedown, the company stated: “Inven-

tories of stereo tapes more than six months old and more than

one year old were written down 50% and 100% respectively . . .

No significant writedown of this nature were made in the prior

year.”

Plaintiffs thus are complaining of the balance sheet effect of

inventory overvaluation. They are alleging that by failing through-

out the class period to recognize and account for inventory ob-

solescence each time the inventory was valued, the company

consistently inflated the value at which it carried inventory on

the balance sheet.** In effect, plaintiffs are complaining of a

consistent disregard of the accounting principle that inventory

be valued at “lower of cost or market.” Again, common questions

of law and facts are presented.

21. Whether inflation of assets rather than earnings is material to

the stock price is for the jury, not us, to decide.

-o ee

: ~ a ee

Appendix—O pinion of the Court of Appeals A-33

The class members also share an interest in establishing the

standard of care required of tle various defendants under the

White v. Abrams, 495 F.2d 724 (9th Cir. 1974), flexible duty

standard. The flexible duty of any defendant, while depending 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 statu-

torily imposed duty not to manipulate the market. Differences

in sophistication, etc., among purchasers have no bearing in the

impersonal market fraud context, because dissemination of false

information necessarily translate through market merchanisms

into price inflation which harms each purchaser identically. Sze

U.S. Financial Securities Litigation, 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.S. Financial

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

chartered 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 impediment

—subjective reliance is not a distinct element of proof of 10b-5

claims of the type involved in this case.

A-34 Appendix—O pinion of the Court of Appeals

The class members’ substantive claims either are, or can be,

cast in omission or non-disclosure terms—-the company’s financial

reporting failed to disclose the need for reserves, conditions re-

flecting on the value of the inventory, or other facts necessary

to make the reported figures not misleading. The Court has rec-

ognized that under such circumstances

“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. 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 US. 128,

153-154, 92 S.Ct. 1456, 1472, 31 L.Ed.2d 741 (1972). See U. S.

Financial Securities Litigation, supra, at 451; Caesars Palace Secur-

ities Litigation, supra, at 399; In re Penn C entral Securities Litiga-

tion, 347 F.Supp. 1327, 1344 (E.D.Penn.1972).

Moreover, proof of subjective reliance on particular misrepre-

sentations is unnecessary to establish a 10b-5 claim for a deception

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., 67 F.R.D. 468, at 480 (S.D.N.Y. 1975);

U. §. Financial Securities Litigation, supra, at 449-451; Werfel v.

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 causation

is adequately established in the impersonal stock exchange con-

text by proof of purchase and of the materiality of misrepresenta-

tions, without direct proof of reliance. Materiality circumstantially

Se eT

letra one A

Appendix—O pinion of the Court of Appeals A-35

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 plaintiff's

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 (materiality) ,

and that he himself acted on it, in order to establish the defend-

ant’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 mate-

riality of the misrepresentation, see Tucker v. Arthur Andersen &

Co., supra, at 480; 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 causation. Defendants may

do so in at least 2 ways: 1) by disproving materiality or by

proving that, despite materiality, an insufficient number of traders

relied to inflate the price; and 2) by proving that an individual

plaintiff purchased despite knowledge of the falsity of a repre-

sentation, or that he woula have, had he known of it.**

22. A number of cases indicate that proof of materiality raises “‘pre-

sumption” of reliance. The Court did not speak of a presumption in Mills

or Affiliated Ute; we prefer to recognize that materiality directly estab-

lishes causation more likely than not, and that reliance as a separate

requirement is simply a milepost on the road to causation. The net result

is in either view the same; the validity of either view turns on the assump-

tion that the particular investor is more likely to act like the reasonable’

investor than not.

A-36 Appendix—O pinion of the Court of Appeals

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. ITT, supra, at 1316 n. 14; Chris-Craft In-

dustries, Inc., supra, at 400 (Mansfield, J., concurring and dissenting).

The 10b-5 private suit serves 2 public purpose, but has done so since its

judicial creation in the farmework 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 pur-

pose can be adequately served within the traditional compensatory suit

framework 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 predominance of

common questions. Causation as to each class member is commonly proved

more likely than not by materiality. That showing will undoubtedly be con-

clusive 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 common 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 unmanage-

able. 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 v.

Awards Marketing Corporation, 55 F.R.D. 460 (D.Utah 1972); Fischer

v. Wolfinbarger, 55 F.R.D. 129 (W.D.Ky. 1971). The district judge

may reasonably control discovery to keep the suit within manageable

bounds, and to prevent fruitless fishing 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 repetitive 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 a can be found and used which will provide

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.

Appendix—O pinion of the Court of Appeals A-37

That the prima facie case each class member must establish

differs from the traditional fraud action, and may, unlike the

fraud action, be established by common proof, is irrelevant; al-

though derived from it, the 10b-5 action is not coterminous 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; Superintendent

of Insurance v. Bankers Life & Casualty Co., 404 US. 6, 12, 92

S.Ct. 165, 30 L.Ed.2d 123 (1971); Mills v. Electric Auto-Lite Co.,

396 U.S. 375, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970) ; SEC v. Capital

Gains Research Bureau, 375 U.S. 180, 186, 195, 84 S.Ct. 275, 11

L.Ed.2d 237 (1963).

Here, we eliminate the requirement that plaintiffs prove re-

liance directly in this context because the requirement imposes an

unreasonable and irrelevant evidentiary burden. A purchaser 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 generally on the supposition

that the market price is validly set and that no unsuspected man-

ipulation has artificially inflated the price, and thus indirectly on

the truth of the representations underlying the stock price—

whether he is aware of it or not, the price he pays reflects material

misrepresentations. Requiring direct proof from each purchaser

that he relied on a particular representation 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.

A-38 Appendix—O pinion of the Court of Appeals

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 unneces-

sary in Affiliated Ute and Mills (1 would not haye 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 deter-

mine. 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 ade-

quately established indirectly, by proof of materiality coupled with

the common sense that a stock purchaser 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 bur-

den.

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

23. 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 al-

legedly fraudulent representation was made. Here we do not retreat from

that position, or from the implicit requirement 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.

Appendix—O pinion of the Court of Appeals A-39

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 inter-

ests of class members in proving damages from price inflation

(and hence the existence and materiality of misrepresentations

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 desice to maximize the deflation due to an interven-

ing corrective disclosure in order to maximize his out of pocket

damages, but in so doing will conflict with his purchaser, who is

interested in maximizing the inflation in the price he pays. We

agree that class members might at some point during this litiga-

tion 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 measure.

Under the out of pocket standard each purchaser recovers 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 damages,” must be diminished

by the inflation he recovers from his purchaser. Thus, he is inter-

ested in proving that some intervening event, such as a corrective

24. Indeed, we could, in the exercise of our Article III jurisdiction,

transform the 10b-5 suit from its present private compensatory mold by

predicating liability to purchasers solely on the materiality of a misrepre-

sentation (7. e., economic damage) regardless of transactional causation,

without implicating the Enabling Act limitation.

A-40 Appendix—O pinion of the Court of Appeals

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., 517 F.2d 1068, at 1071

(9th Cir. 1975); Janigan v. Taylor, 344 F.2d 781, 786 (ist Cir.

1965); Estate Counseling Service, Inc. v. Merrill Lynch, Pierce,

Fenner & Smith, Inc., 303 F.2d 527 (10th Cir. 1962); Abraham-

son v. Fleschner, 392 F.Supp. 740, at 746 (S.D.N.Y.1975); see

Sigafus v. Porter, 179 US. 116, 123, 21 S.Ct. 34, 45 L.Ed. 113

(1900) ; Smith v. Bolles, 132 U.S. 125, 10 S.Ct. 39, 33 L.Ed. 279

(1889); Note, The Measure of Damages in 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. Fleschner, supra, at 746; see Stanford Note,

—-+ -—- -_—_

25. Appellants contend that the inflation paid must be measured by

the change in price after a corrective release. That drop is of course circum-

stantial 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 ~apitalization of earnings tech-

niques 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 pro-

longed 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 An-

dersen & Co., supra, at 482. However, from an eo 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 mem-

ber.

Appendix—O pinion of the Court of Appeals A-41

supra, at 374-376; A. Bromberg, supra, at 226, or to allow con-

sequential damages. Foster, supr.t, 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 482; Handwerger v, Ginsberg.

CCH Fed.Sec.L.Rep. § 94,934, at 97,241 (S.D.N.Y.1975); Cae-

sars 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

declined to consider conflicts, particularly as they regard damages,

sufficient to defeat class action status at the outset unless the con-

flict 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 Corpora-

tion of New York, supra, at 426.

Here, the conflict, if any, is peripheral, and substantially out-

weighed by the class members’ common interests. Even assuming

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 misrepresentations.

The major portion of the inflation alleged is attributed 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 demon-

strate the sine gua non—liability—and to maximize his own

potential damages—the more the stock is inflated, the more every

A-42 Appendix—O pinion of the Court of Appeals

class member stands to recover. Moreover, because the major

portion of the inflation is attributed to causes persisting through-

out 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 pur-

chasers. Because both share an interest in maximizing overall

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, re-

jected defendants’ position, for the potential conflict is present

in most prolonged classes involving a series of misrepresentations.

See Green v. Wolf Corporation, supra; Tucker v. Arthur Ander-

sen & Co., at 475-476 and 476 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 Securities Litigation, supra; Siegel v. Real-

ty 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 repre-

sentative’s claims be “typical” and that the class be “fairly and

adequately” represented—claims need not be coextensive. Cae-

sars Palace Securities Litigation, supra, at 397. Those require-

ments are in part constitutionally dictated, as due process re-

quires, in order to give collateral res judicata effect to a judgment

against class members, that their interests have been adequately

Appendix—O pinion of the Court of Appeals A-43

represented in the class action. Hansberry v. Lee, 311 US. 32,

61 S.Ct. 115, 85 L.Ed. 22 (1940).

Hansberry does not, however, as defendants seem to assume,

dictate that any divergence of interest among class members vio-

lates 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 touchstone

of adequacy and fairness of representation (see In re Four Sea-

sons Securities Laws Litigation, 502 F.2d 834, 842. (10th Cir.

1974); Eisen IV, at 177) must be judged in light of the serious-

ness 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 un-

fairness; and any other facts bearing’ on the fairness with which

the absent class member is represented.

Hansberry is not controlling here—in Hansberry 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 the

notice and opt-out procedure of Rule 23(b) (3) and 23(c) (2),

26. The rule requires adequate representation. The alternative may be

none at all.

“The basic concept of commonality, a requirement which is prevalent

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 Se-

curities Litigation, supra, at 397-398.

A-44 Appendix—O pinion of the Court of Appeals

an absent clags member may evaluate his position in the class

and decide for himself whether to avail himself of the repre-

sentation offered. See, e.g., Four Seasons Securities Laws Litiga-

tion, supra, at 842-844; Herbst v. Able, supra, at 15. The potential

conflicts are at most peripheral. And the district 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 numerous 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 pur-

chased throughout the class period, and who thus will probably

represent whatever conflicting interests there are in the develop-

ment of plaintiffs’ trial strategies. In light of those various fac-

tors, we agree with the district. judge that the class representatives

are typical and wi!l adequately and fairly represent the class.*"

Afhrmed.

27. We likewise reject the contention that conflicts between debenture

holders and shareholders require decertification at this time; see Hands-

werger v. Ginsberg, supra, at 97, 240--97, 241; Caesars Palace Securities

Litigation, supra, at 398--399; Ficcher v. Kletz, supra, at 384; or that

present shareholders and those purchasers who have sold their shares ir-

reconcilably conflict. See Handswerger, supra, at 97, 240 n. 3; Herbst v.

ITT. supra, at 1314; Herbst v. Able, supra, at 15.

A-45

JUDGMENT OF THE COURT OF APPEALS

United States Court of Appeals

For the Ninth Circuit

William E. Roberts, John P. Buchan,

William Blackie, etc., et al.,

Defendants-Appellants, \ No. 74-2648

V. \ Civil 72-0521

Leonard Barrack, Selma Molder, etc., et al.,

Plaintifts-Appellees.

APPEAL from the United States District Court for the

NORTHERN District of CALIFORNIA

THIS CAUSE came on to be heard on the Transcript of the

Record from the United States District Court for the NORTHERN

District of CALIFORNIA and was duly submitted.

ON CONSIDERATION WHEREOF, It is now here ordered

and adjudged by this Court, that the judgment of the said District

Court in this Cause be, and hereby is AFFIRMED.

A True Copy Attest Feb 27 1976

Emil E. Melfi, Jr., Clerk

by Tim Jones, Deputy

Filed and entered September 25, 1975

A-46

ORDER OF THE COURT OF APPEALS

DENYING PETITION FOR REHEARING AND

REJECTING SUGGESTION FOR REHEARING

IN BANC :

United States Court of Appeals

For the Ninth Circuit

FILED DEC 16, 1975

Emil E. Melfi, Jr.

Clerk, U.S. Court of Appeals

Leonard Barrack, et al.,

Plaintiffs-A ppellees,

vs. No. 74-2141

William Blackie, et al.,

Defendants-Appellants.

Benjamin L. Kushner,

Plaintiff-Appellee,

vs. No. 74-2167

Ampex Corporation,

Defendant-Appellant.

Benjamin L. Kushner, et al.,

Plaintiffs-Appellees,

_ VS. No. 74-2341

William E. Roberts and John Buchan,

Defendants-Appellants.

Leonard Barrack, et al.,

Plaintiffs-Appellees,

we No. 74-2466

Touche Ross & Co.,

Defendant-Appellant.

Leonard Barrack, et al.,

Plaintiffs-Appellees,

bs No. 74-2648

William E. Roberts, et al.,

Defendants-Appellants.

Before: Tuttle,* Koelsch and Browning, Circuit Judges.

*The Honorable Elbert P. Tuttle, Senior United States Circuit Judge for

the Fifth Circuit, sitting by designation.

Ap pendix—Order Denying Petition for Rehearing A-47

ORDER DENYING PETITION FOR REHEARING AND

REJECTING SUGGESTION FOR REHEARING IN BANC

The panel, as constituted in the above case, voted to deny the

petition for a panel rehearing. Judges Koelsch and Browning

voted to reject the suggestion for a rehearing in banc, and Judge

Tuttle has recommended against an in banc rehearing.

The full court has been advised of the suggestion for an in

banc hearing, and no judge of the court has requested a vote on

the suggestion for rehearing in banc. F. R. App. P. 35(b).

The petition for rehearing is denied, and the suggestion for a

rehearing in banc is rejected.

A-48

CONSTITUTIONAL PROVISIONS,

STATUTES AND RULES INVOLVED

UNITED STATES CONSTITUTION, AMENDMENT V pro-

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 de-

prived of life, liberty, or property, without due process of law;

nor shall private property be taken for public use, without just

compensation.

SECTION 10(B) OF THE SECURITIES EXCHANGE

ACT OF 1934 (15 U.S.C. § 78j(b)) provides in relevant part as

follows:

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 ex-

change—

* * #

(b) To use or employ, in connection with the purchase or sale

of any security registered on a national securities exchange or any

security not so registered, any manipulative or deceptive device

or contrivance in contravention of such Tules and regulations as

the Commission may prescribe as necessary or appropriate in the

public interest or for the protection of investors.

ee ee

Appendix—Constitutional Provisions, Statutes and A-49

Rules Involved

THE ENABLING ACT (28 U.S.C. § 2072) provides as fol-

lows:

Rules of civil procedure

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 admiralty

and maritime cases, and appeals t/erein, and the practice and pro-

cedure 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 administrative agencies, boards,

commissions, and officers.

Such rules shall not abridge, enlarge or modify any substantive

right and shall preserve the right of trial by jury as at common

law and as declared by the Seventh Amendment to the Constitu-

tion.

Such rules shall not take effect until they have been reported to

Congress by the Chief Justice at or after the beginning of a regu-

lar session thereof but not later than the first day of May, and

until the expiration of ninety days after they have been thus re-

ported.

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

prescribed by the Supreme Court.

RULE 10B-5 (17 C.F.R. § 240. 10b-5) provides as follows:

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,

A-50 Appendix—Constitutional Provisions, Statutes and

Rules Involved

or of the mails or of any facility of any national securities ex-

change,

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to

omit to state a material fact necessary in order to make the state-

ments made, in the light of the circumstances under which they

were made, not misleading, or

operates or would operate as a fraud or deceit upon any person,

in connection with the purchase or sale of any security.

RULE 23 OF THE FEDERAL RULES OF CIVIL PROCE-

DURE provides as follows:

Class actions

(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

This text is long and has been trimmed here. Open the source document for the complete record.

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.