# Petition — Blackie v. Barrack > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385003_2191%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition - **Published:** January 1, 1976 - **Citation:** 429 U.S. 816 ## Text 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 il .. 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 12 13 15 16 17 18 18 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. 2 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. 3 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. 4 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 5 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- 6 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 (C) by fusing separate and distinct Section 10(b) claims for 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. 8 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. 9 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 10 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}. 11 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). 12 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, 13 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 14 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. 15 (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). 16 (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). 17 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. 18 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 19 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. 20 380 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. 21 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 22 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 23 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 24 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. 25 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, v. Leonard BARRACK et al., Plaintiffs-A ppellees. AMPEX CORPORATION, Defendant-Appellant, v. Benjamin L. KUSHNER, Plaintiff-Appellee. William E. ROBERTS and John Buchan, Defendants-Appellants, v. Benjamin L. KUSHNER et al., Plaintiffs-Appellees. TOUCHE ROSS & CO., Defendant-Appellant, v. Leonard BARRACK et al., Piaintiffs-A ppellees. William E. ROBERTS et al., Defendants-Appellants, v. 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 operation [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385003_2191%3A1. Public record. Not legal advice.