Petition — ROBERTS v. BARRACK (Nos. 75-1314, 75-1258, 75-1300)

Sti. wae Court, U. &

FiLED 4

MAR 15 1976

—

IN THE

Supreme Court of the United

Octroser Term, 1975

no @5-1314

L RODAK, JR., CLERK

Wruus E. Roserts

and

Joun P. Buoway,

Petitioners,

vs.

Leonarp Barrack, Se~tma Mover anp/

Peragt Srvcer, as Co “xEcuTors oF THE

Estate or Syitvia Barrack, Deceasep,

on Benatr or HERSELF AND ALL OTHERS

Srumargiy Srrvarep,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THF

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

StrerHen V. Bomaz

44 Montgomery Street

Telephone: (415) 981-5000

Attorney for Petitioners,

William E. Roberts and

John P, Buchan

Ricuarp BE, GuecenaIME

J. C. Bensicx

He.uzr, Exeman, WHITE

& MoAvuuirrs

Of Counsel

ET | 0 nn lode ducwl es ceeeudebereues

oe SU eB ha 2 CN wink cee dae bs a dedawen

ey as nds ccs cdcenesceesaeeds

STATUTES AND RULES INVOLVED ...................

ose coh panehadenecescves

(1) Nature of the Action _.

I = 0 Soe) Ca eee cccew ee

REASONS FOR GRANTING THE WRIT ................

1. The Writ Should Be Granted Because the Decision Below

Is Con to the Principals of Blue Chip Stamps and

Applies Rule 10b-5 in an Improper Manner. .............

2. The Writ Should Be Granted Because the Decision Below

Improperly Eliminates Reliance As An Issue in Misrep-

resentation Cases in Order to Uphold Class Actions. ......

ED 0.6 068d vdeo qubestetbunsec¥edsinvcounas

17

ii

TABLE OF AUTHORITIES

Pages

Cases

Affiliated Ute Citizens v. United States, 406 U.S. 128 (1972) .. 3,8, 13,17

19, 20, 21, 22

Allan Organ Co. v. North Am. Rockwell Corp., 363 F. Supp.

ok oh out ck decbed buku ease oeeales A

Bangor Punta Operations, Inc. v. Bangor & Aroostook Railroad

ws , Sf, Rin Fe fa eee 13

on) v. Newport Steel weeaty 193 F.2d 461 ( 2nd Cir. .

1 Reig A! ss

Blackie v. Donen [“Ampex”] 524 F.2d $91 ( Oth Cir. 1975). passim

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

Caesars Palace Securities Litigation, 360 F. Supp. 366 (S.D.

Se MEE ous cal ccuace cy seeavsssu wks thoy saaieiebeesys 20

Carras v. Burns, 516 F.2d 251 (4th Cir. 1975) ............ 19

Chelsea Assoc. v. Rapanos, ... F.2d .. CCH Fed. Sec. L.

Reptr., § 95,374 (6th Cir. 1975) ...................00 00. 19

Chris-Craft Indus. v. Piper Aircraft Corp., 408 F.2d 341 (2nd

Cir.) cert. denied ‘414 & FT: ein 19

Davis v. Avco Corp., 371 F. Supp. 782 (N.D. Ohio 1974) ..... 20

Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974) ........... 5,7

Ernst & Ernst v. Hochfelder, Oct. Term 1974, No. 74-1042 .... 17

Grad v. Memorex Corp., 61 F.R.D. 88 (N.D. Cal. 1973) ...... 18

Green v. Wolf, 406 F.2d 291 (2nd Cir.) cert. denied 395 U.S.

gg RRR Ties i OA pe teen tonal a 18

Herbst v. ITT, 495 F.2d 1308 (2nd Cir. 1974) .............. 7

Herzfeld v. Laventhoi, Krekstein, Horwath & Horwath, 378

F. Supp. 112 (S.D.N.Y. i <5 su ween ke Seaane 20

In re Brown Co. Sec. Litigation, 355 F. une. 574 (S.D. N. Y.

REL Pe eee ee gar ed reer 18

In re Cosen _— Sevutiies Litigation, 360 F. Supp. 366

TE. so sou cee eel eadd teak eterne. vs

Jenkins v. Fidelity Bank, 365 F. Supp. 1391 (E.D. Pa. 1973) .. 20

Kahan v. Rosenstiel, 424 F.2d 161, (3d Cir. 1970) ........... 18

List v. Fashion Park, 340 F.2d 457 (2nd Cir. 1965) .......... 18

Lorber v. Beebe, F. Supp. .... 1975 CCH Fed. Sec. L.

Rptr. § 5363 (E.D.N.Y. a vee eee 20

iii

TaBLe or Contents—( Continued )

Mader v. Armel, 402 F.2d 158 (6th Cir. 1968).............. 18

Manor one Stores v. Blue Chip Stamps, 492 F.2d 136 (9th

Se eee re ees ¢ees 9

Rochez Bros. v. Rhoades, 491 F.2d 402 (3d Cir. 1973) ....... 19

Shapiro v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 495

so ccc y ec cn<ss sé cavesieesee 20

Sibbach v. Wilson & Co., 312 U.S. 1 (1941) ................ 15

Simon v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 482 F.2d

i a nee 18

TSC Industries, Inc. v. Northway, Inc., Oct. Term 1974, No.

Epo aise 5 sia SE Sn ee 17

be v. Smith, Barney & Co., 358 F. Supp. 892 (N.D. Utah

Se erent Pcie eek cou csa hi vied claae vase 20

ee ee aun seuheessaecseeees 18

Titan Group, Inc. v. Faggen, 513 F.2d 234 (2nd Cir. 1975) ... 20

Ultramares Corp. v. Touche, 255 N.Y. 170, 174 N.E. 441 (1931) 11

United Housing Foundation, Inc. v. Forman, 421 U.S. 837

gee oe er eee eae KbSM ies bhi 4 vv 0b bee b> 13

Vlandis v. Kline, 412 U.S. 44 (1973) ............. Joare i eatee 14

Statutes

Securities e Act of 1934

ds. ais iKchovends eu onKkssusee¥ on 2,3,5

13 (iS U.S.C. tie) a ee ee aera 5

ans ce Neca petuesddseteses 5, 23, 24

28 U.S.C.

IRs eS ee oe 2

Ra ERIREN =) PRRE teet S oar es ere e 6, 7, 12

ERS RI AR aS eer eye Ter T Sere 6

ET ie er ee ee i upon ee eee eens 5

Mt ear 0 rel Re eee a eieun sees 15

Regulations

17 C.F.R. 240.10b-5 [Securities Exchange Commission Rule

RE SRB ai A AI i passim

iv

TABLE OF Contents—( Continued )

ee

Pages

Rules

F oy 7. P.

TP PPEPET PORTER ET ee ree rr eee passim

Se ED u's ws vin alge ONS wae ae 6

UN Sos 6 Pac eka Re Shae Oe bee Fk Ce 5

Other Authorities

Advisory Committee Notes on Proposed Amendments to Fed-

eral Rules of Civil Procedure (Rule 23), 39 F.R.D.60.... 14

Note, The Impact of Class Actions on Rule 10b-5, 38 U. CHI.

SR fp earners ee 19

Note, The Reliance Requirement in Private Actions Under

SEC Rule 10b-5, 88 HARV. L. REV. 585................. 19

Report and Recommendations of the Special Committee of the

American College of Trial Lawyers on Rule 23 (1972) ..... 14,19

S. Rep. 792, 73rd Cong. 2d Sess. (1934) ................... 23

0 To OO O_O

1

IN THE

Supreme Court of the United States

Octoser Term, 1975

NO.

Wii E. Roserts

and

Joun P. Bucnan,

Petitioners,

vs.

Leonarp Barrack, Setma MoLper anp

Peart Sincer, as Co-Executors oF THE

Estate or Sytvia Barrack, Deceasep,

on Benaur or Hersetr anp ALL OTHERS

Srmimar_y Sitvatep,

Respondents.

PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE NINTH CIRCUIT

Petitioners, William E. Roberts and John P. Buchan,

respectfully pray that a writ of certiorari issue to review

the decision and judgment of the Court of Appeals for the

Ninth Circuit in the above actions.

A separate petition requesting review of the same deci-

sion was filed on March 5, 1976 (No. 75-1258).

OPINIONS BELOW

The opinion of the Ninth Circuit is reported at 524 F.2d

891 and is reproduced as Appendix A hereto. The prior

2

opinion of the District Court for the Northern District

of California has not been officially reported; it appears

at Appendix B.

JURISDICTION

The opinion and judgment of the Ninth Circuit were

filed on September 25, 1975. A timely petition for rehear-

ing was denied by order of December 16, 1975.

Jurisdiction of this Court is invoked pursuant to 28

U.S.C. § 1254(1).

QUESTIONS PRESENTED

This Petition arises out of an order certifying a class

action for alleged violation of 4 10b of the Securities Ex-

change Act (15 U.S.C. §78j[b]) and Rule 10b-5 there-

under, 17 C.F.R. 240.10b-5. The class was certified on

behalf of all purchasers of Ampex Corporation securities

during a 27-month period from May, 1970 to August, 1972.

Plaintiffs (Respondents here) contend that, during this

period, they and other class members were misled by mis-

representations concerning Ampex’s financial condition

and prospects. These purported misrepresentations in-

volved such diverse matters as earnings projections, in-

ventory valuation, asset to liability ratios, adequacy of

reserves for contingent liabilities and treatment of deferred

research and development expenses (See App. B, pp. 40-41),

and were contained in approximately 45 separate docu-

ments issued during the class period. There is no allega-

tion of self-dealing or profit-making by any of the

defendants.

The order certifying the above class was affirmed by

the Ninth Circuit on the ground that the policies under-

lying Rule 10b-5 require a liberal application of class

action standards, including, if necessary to permit class

3

certification, a relaxation of the requirements of both the

securities laws and Rule 23.

Although the broad issue raised here is the proper

interplay of Rule 10b-5 and Rule 23 standards, that issue

is presented more specifically through the following three

questions :

(1) Is the decision below materially inconsistent with

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

(1975)?

(2) Should Affiliated Ute Citizens v. United States,

406 U.S. 128 (1972) be extended to preclude evidence

of reliance (either affirmatively or by way of defense)

in misrepresentation, as opposed to non-disclosure,

cases?

(3) Do the policies underlying the securities laws re-

quire courts routinely to certify class actions in 10b-5

cases?

STATUTES AND RULES INVOLVED

The statutes and rules involved are:

Section 10-b of the Securities Exchange Act of 1934

and Rule 10b-5 thereunder; and

Rule 23, Fed. R. Civ. P.

They are set forth in Appendix C.

STATEMENT OF THE CASE

(1) Nature of the Action.

This is one of several purported class actions filed

against Ampex Corporation, its principal officers and di-

rectors (including petitioners Roberts and Buchan) and

its auditors, Touche Ross & Co. Plaintiffs claim that over

a 27-month period, the defendants in various respects mis-

represented the financial condition and outlook of Ampex

4

in approximately 45 separate financial reports and releases.

App. A, p. 19.

Plaintiffs are among the 100,000 or so persons who

bought 21,000,000 shares of Ampex stock and $50,000,000

of its debentures during the period in question in 120,000

separate transactions.’ See App. A, p. 18; App. B, pp. 40-41.

Plaintiffs contend that, as a result of defendants’ various

misrepresentations, the value of Ampex stock was artifi-

cially inflated, although the amount of the inflation varied

as the result of certain “partial disclosures” and other cor-

rective steps which had the dual effect of diminishing the

inflation in the price of the stock while “lulling investors

into believing the corporation’s financial position was finally

stable when, in reality, more distressing financial news was

forthcoming” (App. B, p. 41).

As noted above, while plaintiffs broadly assert a fail-

ure to depict accurately Ampex’s economic posture through-

out the class period—and consequently a violation of

duties owed to Ampex investors under Rule 10b-5—there

are no allegations of self-dealing or other windfall gain

by the defendants. In fact, there has been no serious con-

tention that defendants were other than negligent in fail-

ing to ascertain or disclose the true facts respecting the

company’s condition.”

(2) Proceedings Below.

(a) The Complaint. This action was commenced on

January 28, 1972 in the Kastern District of Pennsylvania

1Approximately one-third of the investors included in the class

not only purchased but resold some or all of their Ampex shares

during the class period. App. B, p. 41 (n. 6).

*The only arguable exception to the f ing was a claim that

defendant Roberts sold stock pen by him in December,

1971 (at a substantial loss) on the basis of inside information.

Plaintiffs’ derivative claim challenging that transaction was dis-

missed by the District Court on April 1, 1974 for faure to state a

claim upon which relief could be granted.

5

by Mrs. Sylvia Barrack, an Ampex shareholder (as well as

the mother of plaintiffs’ counsel, and now plaintiff, Leonard

Barrack). It was filed in the wake of an announcement by

Ampex that it expected to incur a loss of approximately

$40,000,000 in its fiscal 1972 (ending April 30, 1972). The

company subsequently announced that its loss would be in

the range of $80-$90 million— which it was ($86,000,000)—

and the complaint was thereafter amended te cover the en-

tire period through August 3, 1972 when the company

announced, in its annual report, that Touche Ross had with-

drawn its certification of the Company’s 1971 financial

statements because of uncertainty as to when certain losses

had actually occurred.‘

In their amended complaint, plaintiffs seek damages for

themselves and the alleged class under the implied civil

remedies of §10b and Rule 10b-5 (Count I), as well as

under the express provisions of §§ 13(a) and 18(a) of the

1934 Act [15 U.S.C. $4 78m, 78r] (Count IT).°

*After the action commenced, Mrs. Barrack died. Pursuant to

Rule 25, F. R. Civ. P., her co-executors—Leonard Barrack and his

two sisters—were substituted as parties plaintiff.

Several other Ampex investors were subsequently permitted to

intervene in the action as plaintiffs.

*Although it is now settled that the probability of plaintiffs’ suc-

cess on the merits is irrelevant to class certification (Eisen v. Car-

lisle & Jacquelin, 417 U.S. 156 [1974]), defendants e to prove

that the losses suffered were attributable principally to rapidly

changing business conditions in, e.g., the pre-recorded and

professional audio-video oy ay industries (in which Ampex

was a major force) and that the defendants acted reasonably and

promptly both in determining the extent of the potential loss and

in announcing it to the public.

5Shortly after its commencement the Barrack action was trans-

ferred to the Northern District of California by stipulation under

28 U.S.C. § 1404. It was thereafter consolidated, fo: ial pur-

, with several other similar cases also pending in Northern

istrict.

€

(b) Class Action Proceedings: District Court. On April

11, 1972, plaintiffs initially moved for class certification of

Counts I and II relying solely upon their complaint and

a supporting memorandum. No action was taken on that

motion until March 8, 1973 when an amended motion was

filed, again without any supporting evidentiary material.

Defendants replied to the amended motion by filing briefs

and several affidavits directed to the class issue.

On April 11, 1974, the court entered an Order certifying

a class under Rule 23(b)(3) with respect to plaintiffs’

Rule 10b-5 claim (Count I). The class was defined as “all . . .

purchasers of Ampex securities between May 2, 1970 and

August 3, 1972.” (App. B, p. 47).®

Motions for reconsideration of the class order were filed

by certain of the defendants (including Messrs. Roberts

and Buchan) on April 23, 1974. While those motions were

pending, all defendants filed notices of appeal from the

initial class action ruling under 28 U.S.C. § 1291. App. A,

p. 4. On June 28, 1974, the motions for reconsideration

were heard and denied. However, at the hearing on the re-

consideration requests, Judge Spencer Williams stated his

desire that the Court of Appeals consider the correctness

of the class order on interlocutory appeal. Therefore, and

in view of the uncertainty concerning a § 1291 appeal from

a class certification order, the court sua sponte certified its

order for § 1292(b) review. A petition for such review was

thereafter filed by defendants Roberts and Buchan (as

well as by defendants Blackie et al.) and was granted by

the Court of Appeals on August 5, 1974. App. A, p. 4.

(c) Class Action Proceedings: Court of Appeals. On

September 25, 1975, the Ninth Circuit affirmed the District

*Plaintiffs’ motion for class certification was denied as to Count II

on the ground that, in contrast to the judge-made requirements of

Rule 10b-5, the express liability provisions of the 1934 Act require

proof of subjective reliance by each investur—a circumstance which

the court conceded was incompatible with class treatment (App. B,

p. 40 (n. 7); see infra at 24).

7

Court’s class certification order in all respects. Blackie v.

Barrack, 524 F.2d 891 (9th Cir. 1975) (hereinafter referred

to as “Ampex’’). The court held:

(1) That despite the length of the class period, the

disparate character of the alleged misrepresentations

and the large number of «‘ocuments in issue, predomi-

nating common questions existed in view of the class’s

“common interest in determining whether [defendants’]

course of conduct [was] in its broad outlines action-

able...” (App. A, p. 19);

(2) That “reliance” in an “open market” case (i.e., the

typical class action situation) is “presumed” from the

materiality of the misrepresentations “without direct

proof of reliance” (App. A, p. 27)—the presumption

being, for all intents, conclusive (compare App. A, pp. 28-

29); and

(3) That there is no significant conflict between pur-

chasers at different times throughout the class period

(or even between persons who both purchased and resold

during the class period) since the seemingly disparate

interests of these class members are reconciled (i) by

abandoning the usual “out of pocket” measure of damages

in 10b-5 cases and (ii) by the assumed fact that “it

[would] be in the interests of each class member to maxi-

mize the inflation from [the misrepresentations] at every

point in the class period both to demonstrate the sine qua

non—liability—and to maximize his own potential dam-

ages.” (App. A, p. 34).’

~ 'The court also held, in a prior ion of its opinion, that class

certification orders are not appealable as of right under 28 U.S.C.

§ 1291, App. A, pp. 5-14. Although that holding conflicts, at least to

some extent, with decisions in the Second Circuit (e.g., Herbst v.

ITT, 495 F.2d 1308 [2d Cir. 1974]) and is an open issue in this

Court (see Eisen v. Carlisle & Jacquelin, supra), certiorari is not

sought on that ground by these petitioners. However, petitioners

do believe that the issue is an important one, and would urge

that it be considered in the event the writ is granted. See Petition

of Touche Ross & Co. for certiorari, No. 75-.........

8

Perhaps more important than these specific holdings are

the broad policy statements which underlie them. Under

the Ninth Circuit’s view, the goal of effectively enforcing

the securities laws through class actions requires a liberal

construction of the requirements both of the class action

rule and Rule 10b-5 itself (see App. A, at, e.g., pp. 20,

28 (n. 22), 29 and 30).°

REASONS FOR GRANTING THE WRIT

Certiorari should be granted because the decision below

is fundamentally at odds with Blue Chip Stamps v. Manor

Drug Stores, 421 U.S. 723 (1975) in its approach to Rule

10b-5 and the policies underlying it. Certiorari should also

be granted to consider the extent to which reliance remains

an issue in 10b-5 litigation—a question suggested, but not

resolved, by Affiliated Ute Citizens v. United States, 406

U.S. 128 (1972). Beyond these specific points, the overrid-

ing question presented here is how civil Rule 23 is to be

applied in securities cases under Rule 10b-5.

Petitioners recognize that virtually every request for

review before this Court asserts the significance of its par-

ticular issues or facts. We nonetheless submit that few

issues are of greater importance or more in need of clari-

fication and guidance from this Court than those presented

here. Moreover, since both Rule 23 and Rule 10b-5 are

essentially judicial creations, review in this Court is par-

ticularly appropriate—as the Court has itself noted. Com-

pare, e.g., Blue Chip Stamps, supra, at 749 (“We are deal-

ing with a private cause of action which has been judi-

cially found to exist, and which will have to be judicially

delimited one way or another unless and until Congress

addresses the question.’).

SA Petition for Rehearing en banc was denied by the Court of

Appeals on December 16, 1975.

9

1. The Writ Should Be Granted Because the Decision

Below Is Contrary to the Principals of Blue Chip Stamps

and Applies Rule 10b-5 in an Improper Manner. Viewed

most narrowly, Blue Chip and Ampex do not present the

same issue. Blue Chip reversed an earlier decision of the

Ninth Cireuit (492 F.2d 136 [9th Cir. 1973]) and reaf-

firmed the so-called “purchaser-seller” doctrine of Birn-

baum v. Newport Steel Corp., 193 F.2d 461 (2nd Cir. 1952),

whereas Ampex affirmed a class certification order that

did not involve the purchaser-seller doctrine as such. How-

ever, neither Blue Chip nor Ampex can be adequately un-

derstood without regard to the broader analysis which

underlies their specific holdings. In each of the cases, policy

considerations are neither implicit nor peripheral but fur-

nish the explicit premises of the respective opinions.

It is at this level that the two cases at once come to-

gether and diverge. For both cases present policy issues

which are largely identical. Yet the resolution of these

questions in the two cases differs in fundamental respects.

Indeed, unless the Court’s opinion in Blue Stamps is—con-

trary to its clear language—restricted to the particular

facts of that case, the Ninth Circuit’s Ampex opinion can-

not be reconciled with it and must be vacated if, for no

other reason, than because of its failure to follow or even

consider this Court’s decision in Blue Chip.’

In fairness to the Court of fogem. Blue Chip Stamps was

decided after Ampex had been y briefed and argued in the

Ninth Circuit (although Judge Browning, who wrote the majority

— in Blue Chip, was also on the Ampex panel). Nonetheless,

whether for that reason or otherwise, Ampex not only fails to dis-

tinguish Blue Chip Stamps but does not even cite it. In view of

this seeming failure, an appropriate disposition of the current peti-

tion may be simply to vacate Ampex and remand it for reconsidera-

tion in light of the Blue Chip decision.

10

In Blue Chip Stamps, a divided panel of the Ninth

Cireuit’ declined to apply the purchaser-seller limitation

to the facts there presented. The opinion was premised in

large part upon the court’s perception that applicable con-

gressional policies require a liberal approach to Rule 10b-5

and the elimination of obstructions to recovery in private

actions thereunder. See 492 F.2d at 140-41.

This Court reversed. In so doing it discussed at length

—and in language fully applicable here—the policy consid-

erations properly applicable in 10b-5 damage suits."

The Court recognized, first, that (as the Ninth Circuit

had noted) Rule 10b-5 is a potentially valuable weapon

against securities fraud and, further, that the purchaser-

seller limitation is in some senses “an arbitrary restric-

tion which unreasonably prevents some deserving plaintiffs

from recovering damages.” (421 U.S. at 738). However, the

Court also observed that there are countervailing consid-

erations which require the retention of reasonable limits

upon the class of persons who may seek damages under

the Rule:

“There has been widespread recognition that litigation

under Rule 10b-5 presents a danger of vexatiousness

different in degree and in kind from that which accom-

panies litigation in general... .

“The majority consisted of Judges Browning and Choy. Judge

Hufstedler ahoated

‘Petitioners expect Respondents te e that Blue Chip Stamps

is factually inapposite and that the Jengthy policy discussion therein

should be — as mere dicta. However, that argument is not

supported by Court’s decision. In fact, the opinion expressly

notes that since private actions under Rule 10b-5 represent a “judi-

cial oak . . . grown from little more than a legislative acorn” it is

“proper [to] consider . . . what may be described as policy consid-

erations when we come to flesh out the ions of the law with

respect tu which neither the congressional enactment nor the ad-

a regulations offer conclusive guidance.” (421 U. S. at

11

“We believe that the concern expressed for the danger

of vexatious litigation which could result from a widely

expanded class of plaintiffs under Rule 10b-5 is founded

in something more substantial than the common com-

plaint of the many defendants who would prefer avoid-

ing lawsuits entirely to either settling them or trying

them. .. .” (421 U.S. at 739-40).

“While much of the development of the law of deceit

has been the elimination of artificial barriers to recovery

on just claims, we are not the first court to express

concern that the inexorable broadening of the class of

plaintiff who may sue in this area of the law will ulti-

mately result in more harm than good. In Ultramares

Corp. v. Touche, 255 N.Y. 170, 174 N.E. 441 (1931), Chief

Judge Cardozo observed with respect to ‘a liability to an

indeterminate class’: ‘The hazards of a business con-

ducted on these terms are so extreme as to enkindle doubt

whether a flaw may not exist in the implication of a duty

that exposes to these consequences.’ Jd. at 179-180, 174

N.E. at 444.” (421 U.S. at 747-48).

In fact, petitioners submit that a fair reading of the

Blue Chip opinion as a whole reflects this Court’s strong

concern for the potential dangers of boundlessly extending

the dimensions of 10b-5 litigation without equivalent regard

for the practical realities which underlie such suits—realities

which are, if anything, even more clearly pertinent to the

instant class litigation. In this connection, the Court noted

that such “practical factors” were “entitled to a good deal

of weight” (421 U.S. at 749) and that it was, at the least,

appropriate to consider each side of the ledger in determin-

ing the appropriate contours of such litigation. As Justice

Powell stated in his concurring opinion:

“Tf an issue of statutory construction is to be decided

on the basis of assuring a federal remedy—in addition

12

to state remedies—for every perceived fraud, at least

we should strike a balance between the opportunities for

fraud presented by the contending views.” (421 U.S. at

760)

Notwithstanding these clear pronouncements, Ampex is

substantially a replay of the Ninth Circuit opinion in

Blue Chip Stamps in its policy discussion. For although

the case purports to address only the application of

Rule 23 standards in 10b-5 cases, the opinion cannot, as

we have noted, be appraised or understood without refer-

ence to its express policy premises, to wit: that the judicially

implied right of action under Rule 10b-5 must be “flexibly

adopted [sic] to the overriding purpose of enforcing the

Federal securities laws” (App. A, p. 29); that the “avail-

ability of the class action” plays a central role in the en-

forcement of Rule 10b-5 and that, therefore, both Rule 23

and Rule 10b-5 standards must be “liberally construed” to

effectuate those goals even if to do so requires an altera-

tion of substantive (or “procedural’’) rules and allowance

of an “overinclusive” recovery. App. A, p. 29 (n. 22).”

These considerations are articulated at several critical

points in the opinion and serve as its unquestioned founda-

tion.

Even more striking is the total absence from Ampex of

any reference to the competing “negative’’ concerns which

"The Ninth Circuit’s approach to Rules 10b-5 and 23 is perhaps

best highlighted by comparing its treatment of the “merits” of class

certification, on the one hand, with its refusal to permit appeal of

class certification orders under 28 U.S.C. §1291 on the other. As we

note in text, the principal thrust of the Court’s “merits” discussion

is that class actions are critical to the effectuation of Congressional

mand in the securities area and therefore must be liberally allowed.

owever, when discussing appealability, the court exhibits an un-

characteristically conservative attitude—suggesting at several points

that arguments concerning appealability are “properly addressed

to Congress.” See App. A, pp. 13-14. at is more, even ry -

Blue Chip Stamps had explicitly recognized that a case such as the

present presents an unusual “danger of vexatiousness” and a “settle-

13

had furnished a basis of the Blue Chip Stamps decision.

So far as Ampex is concerned, neither 10b-5 litigation nor

the certification of a damage class upwards of 100,000 in-

vestors offers any potential for encouraging strike suits or

extortionate settlements. Yet Blue Chip pointedly notes the

opposite. See 421 U.S. at 739-49."

It is not only the tenor of the Ampez opinion which is

contrary to Blue Chip Stamps. The specific results reached

are in several material respects also at odds with its ap-

proach to 10b-5 issues. For example, under Ampez, a class

action on behalf of any number of purchasers or sellers is

almost automatically assured merely by an allegation" that

defendants were engaged over a period of time in a scheme

or course of conduct which misrepresented or inflated the

value of the securities in question. It is no impediment

that these various alleged misstatements may be only mar-

ginally connected (or even totally unrelated), that they

ment value to the plaintiff out of any proportion to [its] prospect

of success at trial. . . .” (421 U.S. at 740), the Ampex panel was

able to find no evidence to justify such concerns. It suggested,

further, that the “fairness of the pressure” was in any event a ques-

tion for Congress to consider. App. A, p. 13.

Ampex at several points notes that this Court has urged a lib-

eral construction and application of the securities laws, including

Rule 10b-5, citing in particular Affiliated Ute, supra, at 151. While

that suggestion is obviously not without some support, it inexplica-

bly fails to account for the contrary discussion in Blue Chip Stamps

which is not only more to the point but more recent. See also 421

U.S. at 747-49, chee the Court deals expressly with its earlier policy

pronouncements and attempts to put them in perspective, and com-

pare Bangor Punta Operations, Inc. v. Bangor & Aroostook Railroad

Co., 417 U.S. 703, 716 (n. 13)-717 (1974) and United Housing

Foundation Inc. v. Forman, 421 U.S. 837, 859 (n. 26) (1975).

“The court’s opinion suggests that the allegations of plaintiffs’

complaint must be taken as true upon a class certification motion

and that certification should be made without an extensive eviden-

tiary hearing, not infrequently on the basis of the pleadings alone.

App. A, p. 16 (n. 17).

See generally App. A at fn. 19 (pp. 21-22) (“[E]ven when

misrepresentations are unrelated, class members may share a com-

mon question of law or fact... .”) In this connection, it is interesting

14

may involve vastly differing sets of underlying facts or

that they have appeared in numerous separate documents

issued throughout the class period—each of which is the

case here.

Consistent with this approach, the opinion below essen-

tially brushes aside the critical requirement that common

questions predominate over individual ones, noting that all

plaintiffs are joined by a common interest in “determining

whether a defendant’s course of conduct is in its broad—

outlines actionable” (App. A, p. 19)—a view which the

Court of Appeals predictably supports by reference to “the

substantial role that the deterrent effect of class actions

plays in accomplishing the objectives of the securities

laws.” App. A, p. 20.

Similarly, the Ninth Circuit’s approach to reliance, or

“transaction causation”, virtually eliminates it as an issue

in 10b-5 litigation. While couched in the language of “pre-

sumption”, the court in effect makes the presumption of

reliance conclusive, as a practical matter, by inviting dis-

trict courts to restrict or preclude defendants’ discovery

or rebuttal evidence on the point (App. A at 28-29 (n.22),

and by further promising that if these devices do not prove

successful in dissuading defendants from asserting their

rights, the presumption may be made “conclusive”. /d;

compare Vlandis v. Kline, 412 U.S. 441 (1973) (irrebutable

presumption violates due process).

that the Ninth Circuit quotes, in support of its “common question”

holding, the observation of the Advisory Committee on Rule 23

that “a fraud perpetrated on numerous persons by the use of similar

misrepresentations may be an appealing situation for a class action

(App. A at 20) without quoting the immediately succeeding sen-

tence which notes that, “[o]n the other hand, although having some

common core a fraud case may be unsuited for treatment as a class

action if there was material variation in the representations or in the

kind or degrees of reliance by the persons to whom they were

addressed.” 39 F.R.D. at 103.

15

Petitioners argued in the court below that abandoning

the reliance requirement as a means of facilitating class

suits is not only wrong under Rule 23, but is contrary

to 28 U.S.C. § 2072, the so-called “enabling act,” which

proscribes the alteration of substantive rights through

procedural rules. See Sibbach v. Wilson & Co., 312 U.S.

1 (1941). The Ninth Circuit attempts to avoid this concern

by suggesting that its reliance standard will be applicable

to all “open market actions”, individual or class. App. A,

p. 29. However, since the obvious genesis of the change is

the perceived imperative to uphold class suits in the “open

market” situation, it is disingenuous of the Court to sug-

gest that it is fashioning a rule of general applicability.

What is more, changing substantive rules for both class

and non-class cases as a means of facilitating class suits

is scarcely responsive to the statutory prohibition of

§ 2072.

The Ninth Circuit’s inexplicable failure to consider Blue

Chip Stamps is, by itself, an appropriate basis for review.

However, even in the absence of the Blue Chip decision,

petitioners submit that the assumptions of, and the results

reached by, Ampex are sufficiently extraordinary to merit

consideration by this Court.

As pointed out above, Ampex is justifiable only as an

exercise in judicial policy-making, and the policies which

Ampex makes are themselves justifiable only if the con-

siderations underlying Blue Chip Stamps are somehow ir-

relevant to the question of class certification, and if class

certification orders in 10b-5 cases are to be routinely

granted. Yet clearly that is not the case. Not only is the

language of Blue Chip almost directly applicable, but the

concerns it expresses apply with at least equal force to the

present litigation.

Moreover, in addition to the factors noted above, it

should be recalled that the court here has certified an

16

immense class against defendants who have not even been

accused of self-dealing or profiteering."* To the extent

that anyone has received “overpayment” for Ampex stock

as a result of defendants’ asserted misrepresentations,

those overpayments were received by sellers of Ampex

stock—a great number of whom are also members of the

plaintiff class—rather than by the defendants.

Thus, what the Ninth Circuit has, in effect, held is that

defendants who neither intended to deceive, nor profited

from, any alleged misrepresentation may nonetheless be

accountable for the difference between the market and the

“true” value of 21,000,000 Ampex common shares (as well

as $50,000,000 worth of Ampex debentures) purchased dur-

ing the twenty-seven month class period.

While the Court may, upon review, determine that this

in terrorem approach to 10b-5 liability is appropriate, the

wisdom of such a view is far from clear a priori. In the eur-

rent climate of increasing business compiexity and economic

crisis, the prospect of being exposed to crushing damage

liability in such circumstances will certainly discourage

many otherwise qualified businessmen from serving on cor-

porate boards or in related capacities. Whether such a

deterrent should be erected through the class action device

Since the merits of an action are not relevant to class certifica-

tion, the potential for disproportionately large settlements will fre-

quently turn solely upon the ability of plaintiffs to avoid dismissal

or summary -— Thus the mere assertion of a class claim will,

if Ampex stands, be an occasion for substantial payments—the

greatest single portion of which will ordinarily go to plaintiffs’

counsel. In this connection compare, once again, Blue Chip, in

which the Court aptly observed:

“In the field of federal securities laws governing disclosure of

information, even a complaint which by objective standards may

have very little chance of success at trial has a settlement value

to the plaintiff out of any proportion to its prospect of success at

trial as long as he may prevent the suit from being resolved

> him by dismissal or summary judgment.” (421 U.S. at

17

is an important issue which, we submit, ought to be ad-

dressed by this Court."

2. The Writ Should Be Granted Because The Deci-

sion Below Improperly Eliminates Reliance As An Issue

in Misrepresentation Cases in Order to Uphold Class

Actions. Certiorari should also be granted to consider

whether reliance remains an element of proof in 10b-5 mis-

representation cases. As observed previously, Ampez all

but eliminates it as an unnecessary obstacle to the mainte-

nance of class actions and, thus, to the enforcement of

presumed Congressional policy. See App. A, pp. 25-30.

While our concern with Ampez’s treatment of reliance

is, to a large extent, related to the points discussed above,

the issue deserves separate consideration in light of the

extraordinary array of conflicting approaches to reliance

within and among the Circuits—a confusion which results,

in part, from questions left open by this Court’s decision in

Affiliated Ute Citizens v. United States, supra.

More particularly, the issues presented here are (1)

whether Affiliated Ute’s apparent holding in respect to non-

disclosure cases should be extended to misrepresentation

17This Court has recently reviewed or agreed to consider several

cases touching the boundaries of 10b-5 litigation. See, e.g., in addi-

tion to Blue Chip and Affiliated Ute, TSC Industries, Inc. v. North-

way, Inc., No. 74-1471 (cert. granted 10/6/75) (“materiality”) and

Ernst & Ernst v. Hochfelder, No. 74-1042 (argued 12/3/75) (ac-

countants’ liability; “aider and abetter” liability). However, from

a practitioners’ viewpoint, none of these cases—important though

they be—has the significance of the class-related questions posed

here. Class actions are, to use the vernacular, “where it’s at” in com-

mercial litigation today. Given the overwhelming importance which

Rule 23 has assumed, particularly in the antitrust and securities

fields, we lly submit the* it is unfortunate that this Court

has not found an appropriate occasion to consider the Rule's central

implications in these areas. Petitioners, of course, hope that this

case presents such an occasion. We believe that the opinion below

represents a wi ershed in the development of 10b-5 class litigation

and that the importance of the issues raised is sufficient to justify

consideration.

18

actions, and (2) whether it is appropriate to modify the

reliance requirement in order to facilitate the maintenance

of class actions which would otherwise be impermissible.

As traditionally understood, reliance (which is sometimes

referred to as “transaction causation”) is related to, though

distinct from, the separate elements of materiality and

loss causation (or, simply, “causation”). Whether viewed

as a part of plaintiffs’ case or, conversely, as a permissible

affirmative defense, reliance contemplates a showing that

the defendants’ alleged misstatements were a cause of the

securities transaction which forms the basis of the plain-

tiff’s suit.

Prior to the advent of Rule 23 and the recent prolifera-

tion of 10b-5 damage actions thereunder, reliance was an

unquestioned element of the plaintiffs’ case. See, e.g., List v.

Fashion Park, 340 F.2d 457 (2nd Cir. 1965); Texas Con-

tinental Life Ins. Co. v. Dunne, 307 F.2d 242 (6th Cir.

1962). More recently, however, and largely as a result of

efforts to conform 10b-5 cases to the requirements of

Rule 23, many courts have sought—and in some instances

found—ways to eliminate,’* ameliorate,” delay,” or trans-

18Mader v. Armel, 402 F.2d 158 (6th Cir. 1968) cert. denied, 394

U.S. 930 (1969); Kahan v. Rosenstiel, 424 F.2d 161, 173-74 (3d Cir.

1970) cert. denied, 398 U.S. 950 (1970).

In re Brown Co. Sec. Litigation, 355 F. Supp. 574, 583 (S.D.N.Y.

1973); Simon v. Merrill Lynch, Pierce, Fenner & Smith, Inc. 482

F.2d 880, 884-85 (5th Cir. 1973).

2°Green v. Wolf, 406 F.2d 291, 301 (2nd Cir.) cert. denied 395

U.S. 977 (1968) (suggesting a bifurcated trial); but cf. Grad v.

Memorex Corp., 61 F.R.D. 88, 98 (N.D. Cal. 1973) (“Use of the

bifurcation method, however, does not resolve what , eee to be

an inherent conflict between proof of the reliance element of a

10b-5 action and the ‘predominance of common issues’ requirement

of Rule 23(b)(3); it merely delays resolution of the problem until

a later date.” )

19

fer” the burden of satisfying this requirement. See gen-

erally, Note, The Impact of Class Actions on Rule 10b-5,

U. Chi. L. Rev. 337 (1971); Report and Recommendations

of the Special Committee, of the American College of

Trial Lawyers on Rule 23, at p. 18 (1972); Note, The Re-

liance Requirement in Private Actions under SEC Rule

10b-5, 88 Harv. L. Rev. 584, 596(n.65) (1975). As the cases

cited in the accompanying notes suggest, the law is in a

confused state, and the issue continues to arise with pre-

dictable frequency. See 88 Harv L. Rev. et 586-87.

As the reliance debate was taking shape in the lower

courts, this Court decided Affiliated Ute, an opinion which,

with due respect, added fuel to the controversy and a fur-

ther dimension to the confusion.

In Affiliated Ute, employees of a defendant bank were

specifically charged with the responsibility of advising

mixed-blood Indians regarding transactions in securities.

These employees utilized their position of trust and con-

fidence to induce the Indians to sell these securities to

themselves and their friends, without disclosing the fact

that they were in a position to gain financially from the

Indians’ sales, and that the true value of the Indians’

shares in the market was substantially higher than the

price to be paid to them.

On these facts, this Court held that there was a quasi-

fiduciary relationship between plaintiffs and defendants

and, thus, an affirmative duty of disclosure. When defend-

ants withheld critical facts from the Indians, who then

sold, they violated Rule 10b-5 without regard to proof of

actual reliance:

21Rochez Bros. v. Rhoades, 491 F.2d 402, 410 (3d Cir. rots

Chris-Craft Indus. v. Piper Aircraft Corp., 480 F.2d 341 (2nd Cir.),

cert. denied 414 U.S. 910, 414 U.S. 924 (1973); Chelsea Assoc. v.

Repenss, ........ PSd ......:. , [1975 CCH Fed. Sec. L. Rep.

{ 95,374 at pp. 98,868-69] (6th Cir. 1975); Carras v. Burns, 516

F.2d 251, 257 (4th Cir. 1975).

20

“Under the circumstances of this case, involving pri-

marily a failure to disclose, positive proof of reliance is

not a prerequisite to recovery ... [The] obligation to

disclose and [the] withholding of a material fact estab-

lish the requisite element of causation in fact.” (406

U.S. at 153-54) (emphasis added).

The wake of this decision has been broad. Its currents,

however, flow in differing directions. Some -ourts have

concededly read Affiliated Ute as an invitation t.. . ispense

entirely with the reliance requirement in all 10b-5 cases ;”

others have simply ignored it, treated it as creating a

presumption of rcliance (thus shifting the burden of

proof)* or as limited to non-disclosure cases only.”

Which of these approaches is most nearly correct ought

now to be considered, for the issue not only recurs with

regularity but has-a tremendous potential impact upon

the resolution of 10b-5 cases, particularly in alleged class

actions.

Petitioners submit that it cannot, in all fairness, be said

that Affiliated Ute offers adequate guidance for the resolu-

tion of this issue. First, not only is the opinion itself care-

fully limited by its terms (“under the circumstances of this

22E.g., Davis v. Avco Corp., 371 F. Supp. 782, 792 (N.D. Ohio

1974); Allen Organ Co. v. North Am. Rockwell Corp., 363 F. Supp.

1117, 1127 (E.D. Pa. 1973); In re Caesars Palace Securities Litiga-

tion, 360 F. Supp. 366, 399 (S.D.N.Y. 1973)

23See note 21, supra.

**Titan Group, Inc. v. Faggen, 513 F.2d 234, 238-9 (2nd Cir.

1975); Shapiro v. Merrill ieomh Pierce, Fenner & Smith, Inc., 495

F.2d 228, 238 (2nd Cir. 1974); Jenkins v. Fidelity Bank, 365 F.

Supp. 1391, 1398 (E.D. Pa. 1973); Taylor v. Smith, Barney & Co.,

358 F. Supp. 892 (D. Utah 1973).

21

case”’), there are obvious distinctions between nondisclosure

and misrepresentation. cases.”

As we view Affiliated Ute, a critical element to the

Court’s holding was the fact that the defendants were under

an affirmative duty to make known to plaintiffs their con-

flicting interests in the Indians’ sales. Since they failed to

discharge that duty by withholding relevant information,

they were properly found to have violated Rule 10b-5.

Requiring proof of reliance in such circumstances would

not only have been logically unrealistic but unnecessary,

since it was the responsibility of the defendants to assure

that the pertinent information was made known to the

plaintiffs.

By contrast, in a misrepresentation case such as Ampez,

the plaintiff’s awareness (or unawareness) of the purport-

edly misrepresented facts at the time of his transaction is

critical. If, for example, a purchaser was entirely unaware

of the company’s alleged overstatement of income—and thus

could not demonstrate reliance thereon in purchasing its

stock —he is, under traditional principles, denied recov-

ery. If that rule is now w be changed, by extension of

Affiliated Ute or otherwise, we submit that the change

*5The opinion below suggests that the purported misstatements

of Ampex’s financial condition “either are or can be, cast in omis-

sion or non-disclosure terms” (App. A, p. 26, emphasis added)—

thus p rtedly bringing the case within the literal holding of

Affiliated Ute. However, that approach is patently disingenuous, as

several lower courts have previously recognized. See Herzfeld v.

Laventhol, Krekstein, Horwath & Horwath, 378 F. Supp. 112, 127

(S.D.N.Y. 1974); Lorber v. Beebe, .____. F. Supp. [1975

CCH Fed. See L. Rptr. {95,363 at 98,817] (S.D.N.Y. 1975) (opinion

modified on other grounds, February 11, 1976). If accepted, every

case could be treated as a non-disclosure action, since the reporting

of erroneous information could certainly be said to represent a non-

disclosure of the true facts. We do not believe that the Rule can

fairly be so read.

22

should be made by this Court upon a full review of the

competitive considerations.”®

Even apart from the uncertainties of Affiliated Ute (and

the consequent conflict in decisions), petitioners submit

that this Court ought to review Ampea’s treatment of the

reliance issue.

As noted briefly above, Ampex “eliminates” (App. A,

p.*29) the traditional reliance requirement in 10b-5 “open

market” cases (whether involving omissions or misrepre-

sentations) in favor of a purported “presumption” based

simply upon a showing that the representations were

“material”.

Once again, this reshaping is accomplished in the name

of policy. Indeed, it is in the discussion of reliance that

the lower court’s approach is most clearly articulated.

Thus the opinion notes, for example, that 10b-5 actions

“must be and have been flexibly adapted to the overriding

purpose of enforcing the Federal securities laws” (App.

A, p. 29; emphasis added). Since requiring positive proof

of reliance presents a potential obstacle to class suits,

26Ampex suggests that proof of individual reliance should not be

required since, if a misstatement is material the “market” will rely

on it, thereby inflating the price of the company’s stock and causing

injury to purchasers. Therefore, Ampex reasons, reliance should be

Sena from materiality, subject to the defendant's supposed

eed of rebuttal. App. A, pp. 27-28; compare discussion, supra at

14-15.

That approach, however, is semantic sleight of hand and should

be so pn sr ws Rew 9 What Ampex describes as reliance has tra-

ditionally been comprehended by the separate elements of mate-

riality and loss causation. Assuming that there has been a material

misstatement and consequent price inflation, proof of those facts

would establish materiality and causation of economic injury. They

would not, however, demonstrate that any particular transaction

(i.e., purchase of the company’s stock) was caused by the misr

resentation. It is that link which has always been provided by

reliance. While there may be sufficient reasons for eliminating that

requirement or shifting the burden of disproof to defendants, it

should at least be done forthrightly rather than through an Alice-

In- Wonderland approach to the English language.

23

Ampex “eliminates” it, thereby “obviating the danger of

subverting the class action with delaying and harassing

tactics.” App. A, p. 29 (n. 22) (emphasis added).

However, the court’s view of applicable Congressional

policy not only contradicts traditionally applicable princi-

ples but the expressed legislative intent itself—at least,

insofar as that intent can be determined. Proof of reliance

was unquestionably contemplated by Congress as an ele-

ment of private damage actions under the federal securities

statutes. In its principal discussion of civil liability under

the Securities Exchange Act, the Senate Report noted:

“Experience with state laws designed to prevent the

exploitation of the investor by supervision of the sale

of securities has demonstrated the inadequacy of crim-

inal penalties as the sole sanction. Customers are ordi-

narily reluctant to resort to criminal proceedings, and

in the absence of complaints by them, discovery of vio-

lations is almost impossible. Furthermore, if an investor

has suffered loss by reason of illicit practices, it is

equitable that he should be allowed to recover damages

from the guilty party. With these considerations in view,

the Bill provides that any person who unlawfully ma-

nipulates the price of a security, or who induces trans-

actions in a security by means of false or misleading

statements, or who makes a false or misleading state-

ment in the report of a corporation, shall be liable in

damages to those who have bought or sold the security

at prices affected by such violation or statement. In such

ease the burden is on the plaintiff to show the violation

or the fact that the statement was false or misleading,

and that he relied thereon to his damage.” S. Rep. 792,

73rd Cong. 2d Sess. (1934) at 12-13 (emphasis addea).

This approach was expressly embodied in $18 of the Act,

15 U.S.C. § 78r, which provides that

“any person who shall make or cause to be made any

statement in any application, report, or document filed

24

pursuant to this title or any rule or regulation there.

under or any undertaking contained in a registration

statement as provided in subsection. (d) of [section 15]

of this title, which statement was at the time and in the

light of the circumstances under which it was made false

or misleading with respect to any material fact, shall

be liable to any person (not knowing that such statement

was false or misleading) who, in reliance upon such

statement, shall have purchased or sold a security at

a price which was affected by such statement, for dam-

ages caused by such reliance... .” (emphasis added).

Ampex’s substantial departure from the legislative

scheme not only belies the Ninth Circuit’s stated intent

to pursue Congressional policy but is, again, directly con-

trary to Blue Chip.

Blue Chip states quite clearly that, whatever specula-

tion may be necessary because of the absence of an express

vrovision for civil damage actions, Rule 10b-5 should not

be interpreted or expanded in a manner inconsistent with

the express liability provisions of the securities laws:

“It would indeed be anomalous to impute to Congress

an intention to expand the plaintiff class for a judicially

implied cause of action beyond the bounds it delineated

for comparable express causes of action.” (421 U.S. at

736).

The anomaly to which Blue Chip adverts is dramatically

underscored in Ampex by the fact that plaintiffs’ addi-

tional attempt to bring a class action under §4$ 13 and 18

(Count IT) was denied by the district court precisely for

the reason that §18 “requires by its very language indi-

vidual, subjective reliance by those seeking relief there-

under [and that] requiring proof of individual reliance

for each class member would necessarily defeat common-

ness of issues of law or fact and preclude a class action

on that count.” App. B at 42 (n. 7).

25

CONCLUSION

Ampex proceeds from the premise that class suits must

be facilitated in every manner because they further the

enforcement and deterrent effect of the securities laws. We

quite agree that the pro forma certification of massive

classes, as in Ampez, will doubtless produce an ever-in-

creasing flow of such cases and result in not insubstantial

settlements to plaintiffs (and their lawyers). However, as

Blue Chip aptly observes the proliferation, as well as the

expanding boundaries, of this type of litigation is not with-

out its hazards—both to defendants and to the judicial

process. What is more, the law not infrequently recognizes

higher concerns than mere expedience. Use of improperly

coerced confessions would doubtless ease the burden of

gaining criminal convictions, yet we preclude them out of

concern that innocent as well as guilty people may other-

wise suffer and because of the paramount importance at-

tached to procedural and substantive fairness.

So here, the Court of Appeals has, in the name of policy,

largely dispensed with the requirements of Rule 23 in

10b-5 cases. In so doing, it not only ignores the interests

and rights of defendants, but also a recent opinion of this

Court.

Accordingly, and for the reasons set forth above, this

Petition for a writ of Certiorari should be granted.

Dated: March 11, 1976

Respectfully submitted,

STEPHEN V. Bomse

Attorney for Petitioners,

William E. Roberts and

John P. Buchan

Ricuarp EK. GuGGENHIME

J. C. Bensick

Heuer, EnRMAN, WHITE

& McAULIFFE

Of Counsel

APPENDIX A

OPINION OF THE COURT OF APPEALS

William BLACKIE et al.,

Defendants-Appellants,

v.

Leonard BARRACK et al.,

Plaintiffs-Appellees.

AMPEX CORPORATION,

Defendant-Appellant,

v.

Benjamin L. KUSHNER,

Plaintiff-A ppellee.

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,

Plaintiffs-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.

2 Appendix—Opinion of the Court of Appeals

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

& Enersen, San Francisco, Cal. for defendants-appellants in

No. 74-2141.

David Berger (argued), Philadelphia, Pa., for plaintiff-

appellees in No. 74-2141.

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

defendant-appellant in No. 74-2141.

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

McAuliffe, San Francisco, Cal., for defendants-appellants

in No. 74-2341.

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

appellee 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 plain-

tiff-appellee in No. 74-2648.

OPINION

Before TUTTLE,* KOELSCH and BROWNING, Cir-

cuit 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 Securities 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,

Appendix—Opinion of the Court of Appeals 3

for fiscal 1970, reported a profit of $12 million. By January

1972, the company was predicting an estimated $40 million

loss for fiscal 1972 (ending April 30, 1972). Two months

later the company disclosed the loss would be much larger,

in the $80 to $90 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 audi-

tors 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 faet suffered in that

year.

Several suits were filed following the 1972 disclosures

of Ampex’s losses. They were consolidated for pre-trial

purposes. The named plaintiffs in the various complaints

involved in these appeals' purchased Ampex securities dur-

ing the 27 month period between the release of the 1970

and 1972 annua! reports, and seek to represent all pur-

chasers of Ampex securities during the period. The corpo-

ration, its principal officers during the 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 until the true condition was dis-

closed 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 pur-

chased Ampex securities during the 27 month period. The

1The lead action here, the so-called Molder action, was ori y

field in the Eastern District of Pennsylvania in January of 1972, and

transferred to the Northern District of California, where it was con-

solidated for pretrial with seven other actions. Twelve parties have

been allowed to intervene as plaintiffs in the Molder action.

th "dri g Be Ap | the remaining individual de

wi iod; the remaining

Senate Gene in office throughout the period.

4 Appendix—Opinion of the Court of Appeals

defendants filed notices of appeal from the order of cer-

tification on May 9 and 10, 1974.*

Additionally, the district judge, in an order entered July

1, 1974, denying a motion made by defendants Roberts and

Buchan, and defendants Blackie, et al., for reconsideration

of the class certification, permitted those defendants to seek

an interlocutory appeal from that order under 28 U.S.C.

§ 1292(b).* We granted the petition for interlocutory re-

view.” That appeal was designated No. 74-2648, and con-

solidated with the direct appeals.

In December of 1974, plaintiffs filed a motion to dismiss

the various appeals—the purportedly direct appeals on the

ground that the certification order is not appealable under

28 U.S.C. § 1291, and the § 1292(b) appeal on the ground

that it has been prosecuted in a dilatory manner.

The appeals having now been heard and submitted, we

face three issues: 1) whether the order certifying the class

is a final order appealable under § 1291; 2) whether the in-

terlocutory 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 stand-

ards set out in Fed.R.Civ. P.23(a) and (b)(3). To sum-

marize our decision, we hold the certification order non-

’The direct appeals are designated Nos. 74-2141, 74-2341, 74-2167,

and 74-2466.

*The district court did not grant [pant peaiien 0 eae Touche

and Ampex to seek interlocu review, as not

the motion for reconsideration before the of their notices

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

him of Wn ie kno made 4 1900(R) te >a See ee

ment that it is here under § 1292(b ) by virtue t's

wr yo & "The chine or.

pp. taking of an interlocutory a requires a

Gnatismney telmnceh tr bath Go deus Gall aad Gee

appeals—that ju t is exercised with respect to particular par-

ties. AS a ult, Fed.R.App BP. © dee net guevtlle, as Gees Baio 4

‘Thus, shes tee cael tor datinatian sande

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

us.

Appendix—Opinion of the Court of Appeals 5

appealable and dismiss the direct appeals; we deny the

motion to dismiss the § 1292(b) certified appeals; and, on

the merits, hold that the suit may properly be maintained

as a class action.

I. Appealability wnder § 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 Cobblediek v. United States, 309 US.

323, 324-325, 60 S.Ct. 540, 84 L.Ed. 783 (1940). The require-

ment saves judicial time by eliminating review of rulings

adverse to an eventually successful litigant. But more im-

portantly, the uniform imposition of finality as a condition

of review improves the quality of justice administered by

the judicial system. On balance, the rule shortens the time

needed for resolution of controversies, saving litigants both

time and money; “[requiring finality avoids] the obstruc-

tion to just claims that would come from permitting the

harrassment 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 pri-

mary bars against Bleak House Judicial administration ;*

*A system of judicial administration, fortunately unknown in this

country,

“hich has its ruined suitor te ny Na ay een pb pamenl

man’s — Spee pg a

its practitioners who would not give—who does not often give—

the warning, ‘Suffer any wrong that can be done you, rather

than come herel’”

Dickens, Bleak House, in The World of Law—I, The Law

in Literature 42 fT Losleal 1960).

6 Appendix—Opinion of the Court of Appeals

as such, its rationale applies equally to an order certifying

a class. :

Nevertheless, in some circumstances deferring an appeal

practically operates to deny effective review, as the right

threatened by an adverse ruling will have been lost in the

interim before final disposition of the other aspects of the

controversy. The Court therefore has given the §1291

final decision requirement a “practical rather than a tech-

nical construction,” Cohen v. Beneficial Industrial Loan

Corp., 337 U.S. 541, 548, 69 S.Ct. 1221, 1226, 93 L.Ed. 1528

(1949), and allowed interlocutory appeal from a “small

class [of orders} which finally determine claims of right

separable from and collateral to, rights asserted in the

action, too important to be denied review and too inde-

pendent of the cause itself to require that appellate consid-

eration be deferred until the whole case is adjudicated.”

Cohen, at 546, 69 S.Ct. at 1225. See Eisen v. Carlisle & Jac-

quelin, 417 U.S. 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 nevertheless held a class

certification order non-appealable under Cohen. Thill Se-

curities 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 7110.13[9],

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

The Second Circuit, however, has permitted appeal in cer-

tain limited circumstances. In Eisen v. Carlisle € Jacquelin,

370 F.2d 119 (2d Cir. 1966), cert. denied, 386 U.S. 1035, 87

S.Ct. 1487, 18. L.Ed.2d 598 (1967) (Eisen I), that court

recognized that an order denying class action status effec-

tively sounded the “death knell” of the plaintiff's suit. As

“no lawyer of competence is going to undertake this com-

plex and costly case to recover $70 for Mr. Eisen,” the in-

dividual claim could not be adjudicated, and as a practical

Appendix—Opinion of the Court of Appeals 7

matter the class question could never be appealed. The court

therefore concluded the order was appealable under Cohen.

We have adopted the death knell doctrine. Falk v. Dempsey-

Tegeler & Co., Inc., 472 F.2d 142 (9th Cir. 1972) ; Weingart-

ner v. Union Oil Company of California, 431 F.2d 26 (9th

Cir. 1970).

From that springboard the Secon’ 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 plain-

tiffs and defendants” (Korn v. Franchard Corp., 443 F.2d

1301, 1307 (2d Cir. 1971) (Friendly, J., coneurring)), a

panel of the circuit held in Eisen v. Carlisle é Jacquelin, 479

F.2d 1005, 1007 n. 1 (2d Cir. 1973) (Eisen III), that defend-

ants could appeal an order granting class status under

three specified conditions. As explicated in Herbst v. Inter-

national 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 con-

duct of the case’ ” (i.e., when, were the class determination

reversed, the individual claims presented would be too small

- to continue the suit, thus effectively terminating it—the re-

verse 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.’

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

(2d Cir. 1974); Kohn v. Royail, gal and Wells, 496 F.2d 1094,

1099 (2d Cir. 1974). But see General Motors Corp., supra, at

*Wholly aside from our disagreement with the Second Circuit

rule, we doubt that the order involved here would be appealable

under that rule. Including intervenors, the named plaintiffs pur-

chased 10,000 shares during the class period and damages would

appear to be such that the action would proceed were the order

8 Appendix—Opinion of the Court of Appeals

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

Circuit’s rule impermissibly® disregards the conditions

placed on appealability by Cohen. The rule of finality is a

statutorily imposed restraint on our jurisdiction; as noted,

it imposes a legislative judgment that on balance time and

money will be saved if appeal is deferred until the con-

clusion of a suit. We are not free to disregard that judg-

ment; exceptions to uniform application undermine the

rule’s purpose by fostering litigation about whether an

order is exceptional and appealable. And with the pro-

liferation of narrow and peculiar exceptions, the more

doubtful and difficult it becomes to determine appealability,

at district and appellate court levels, increasingly inviting

supposedly foreclosed 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 an effort to prevent the inevitable injustices to liti-

gants which result from application of a prophylactic rule

which operates “on balance,” but only in those limited situ-

ations where it can be accomplished with a minimum intru-

sion on the statutory policy. Thus, Cohen requires not only

reversed. Thus, criteria 1 may not be satified. See, e.g., Falk, supra

(holding individual claim of $14,125 too ay 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 an

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.

*We recognize that it is not altogether certain that the Cohen

standards represent the outer parameters of a bility, 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 observa-

tion in Eisen IV, 417 U.S. at 170, 94 S.Ct. at 2149, that “[n]Jo verbal

formula yet devised can explain prior finality decisions with uner-

ring 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.

Appendix—Opinion of the Court of Appeals 9

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

only when the appellate court will not be required to dupli-

cate efforts entailed in a later review on the merits, or to

review a decision whose tentative nature will render the

appellate court’s decision fruitless later in the lawsuit.

We are clear that a class certification order does not fall

within Cohen. The finality condition is not met, as such an

order is not a final determination of the propriety of a

class. Under Fed.R.Civ.P.23(c)(1), a class must be cer-

tified as soon as practicable aftcr commencement of the

action, and is made conditiona) 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 discov-

ered *aets warrant.’® Nor is the class issue separable from

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

questions, typicality, conflicts and adequacy of representa-

tion, Fed.R.Civ.P.23(a), and predominance tests, Fed.R.

Civ.P.23(b)(3), are determinations (unlike, for example,

the notice question involved in Eisen IV) which may re-

quire review of the same facts and the same law presented

by review of the merits.”

Nor, for that matter, does the order threaten the de-

fendant with any irreparable harm cognizable under

Cohen. The defendant does not lose any legal rights or

1“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

unsettled question. If the right were admitted or clear and the order

involved only an exercise of discretion as to the amount of security,

a matter the statute makes subject to reconsideration from time to

time, a present a different question.” Cohen, at

547, 69 S.Ct. at 1226.

See Kohn, supra, at 1099; General Motors Corp., supra, at 659.

In fact, as a ruling on class certification must be made soon after

commencement of the action, the facts governing the class deter-

mination will inevitably be less clear than after the case has gone

to judgment.

10 Appendix—Opinion of the Court of Appeals

entitlement in the interim between certification and appeal

—appeal after the litigation fully protects from a judg-

ment for an improper class. See Geo.Wash. Note, supra,

at 628-630.

The Second Cireuit found the requisite injury in the in-

creased, and generally irrecoverable, costs of defending the

class action. With deference, we disagree. The final decision

rule itself often increases the time and cost of litigation.

Denial of immediate review from orders denying motions

to dismiss, Fed.R.Civ.P. 12(b)(6), or for summary judg-.

ment, Fed.R.Civ.P. 56, may subject a defendant in particu-

lar 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 final 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 allow-

ing appeal and thus avoiding the substantial costs of liti-

gating 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

'2Neither 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.

Appendix—Opinion of the Court of Appeals 11

otherwise appealable under the narrower Cohen exception,

when the district judge would have refused to certify a

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

decertify the class, and where, ou the merits, the order is

reversed. Even then, later developments in the suit may

lead to reinstatement of the class. To be balanced against

savings is the loss of time and money resulting from appeal

in which the order is held non-appealable, or the order is

affirmed. Neither we nor (we suggest) the Second Circuit

have any way of striking that balance. We can only specu-

late concerning the various costs, time spans, and per.

centages which must necessarily be appraised to determin.

whether the Second Circuit’s exception could pay its way;

it is ultimately a question which is best suited to legislative

investigation and judgment. |

Moreover, we would suggest that the number of suits in

which a rule of appealability would be worthwhile may be

relatively small. The standard of review is abuse of discre-

tion. A number of the criteria set out in Rule 23 relate to

matters, such as manageability, adequacy of representation,

feasibility of joinder, superiority to other available methods

of adjudication, and the like, which are much more within

the knowledge of the district court in touch with the litiga-

tion 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 cer-

tify an interlocutory appeal.’* The number of cases in which

massive litigation costs are threatened, in which a district

13Generally 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 i to the

nal claims of the class representative have to be decided. Note,

nterlocutory Appeals in the Federal Courts Under 28 U.S.C.

§ 1292(b), 88 Harv.L.Rev. 607, 630-631 n. 97 (1975).

12 Appendix—Opinion of the Court of Appeals

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”

doctrine allows plaintiffs to appeal order denying class

status, parity of treatment requires that defendants be al-

lowed to appeal orders granting such status. We disagree.

Precisely the same disparity exists between plaintiffs and

defendants with regard to summary judgment or motion to

dismiss orders. So long as they are differently situated in a

manner relevant to the purposes of the final decision rule,

plaintiffs and 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 knell” situation effectively terminates the suit and

precludes presentation of the merits; an order granting

does not end the suit, or preclude presentation of the de-

fense, and is subject to reevaluation as well. See Geo. Wash.

Note, supra, at 631-632.

The final consideration relied on by the Second Circuit, see

Herbst, supra, at 1313, strenuously urged here, is that a class

certification order in a large-class, small-claim class action

threatens such ruinous liability that the defendant inevit-

ably must settle even frivolous claims, thereby effectively

precluding review of the crucial class certification order un-

less interlocutory review is allowed. Again, we are unper-

suaded. In large part the argument is an attack on the de-

cision 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 substantial claim—that fact alone does not

Appendix—Opinion of the Court of Appeals 13

generally confer appealability on an order which effectively

requires a defense to a large claim. The fairness of the pres-

sure—t.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 economically

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

priety of an attendant judicial alteration of the final deci-

sion 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 coer-

ceive effect. That is a distinction without a difference unless

class certification orders have unique effects specially im-

plicating 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 defendant to the co-

ercion of a large potential liability; or that a higher per-

centage of frivolous claims are presented in class actions

than in others; or that the magnitude of the potential lia-

bility in class actions is leading to settlement of more frivo-

lous 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.”

144We note that the supposed in terrorem effect of the class cer-

tification will ge despite a right of immediate appeal—the claim

may be frivolous and the class proper. Immediate appeal will

eliminate only the improper] certifi coercive class action, at the

expense of both frivolous and non-frivolous, p [sic] i

classes. It may well be better to attack the “bla il” problem

directly with a riate safeguards rather than collaterally under-

mining the final decision rule.

14 Appendix—Opinion of the Court of Appeals

In either event, however, the argument is again properly

addressed to Congress. We have no reliable knowledge,”

and no good means of acquiring any, about the present na-

ture 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

ery of “blackmail” in fact reflects an abnormally high inci-

dence of unfairly coerced settlements, or is rather the

pained outery of defendants whose previously advantaged

litigating position has been undermined, and who must now

confront small claimants (who have been given the capacity

to exert pressure proportionate to the magnitude of the

total injury occasioned by defendant’s alleged violation of

the law) on more equal grounds. Without such knowledge,

there is no justification for departure from the “final deci-

sion” 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.

Ii. The § 1292(b) interlocutory appeals.

We deny the motion to dismiss the § 1292(b) appeals.

The prosecution of these appeals has not been a model of

diligence. Defendants were granted an extension of the

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 inconclu-

sive, or no, empirical evidence; most of the debate is feuntiel 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 Com-

mittee 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 15

time to transmit the record, and three extensions in the

briefing schedule. Some of those delays could have been

avoided; while the issues involved are somewhat complex,

we note that much of the material in the appellate briefs

was presented to the trial court, and that the lawyers did

not start from scratch here.

However, the motion to dismiss is addressed to our dis-

cretion, and we think dismissal is not mandated in this case.

From the somewhat conflicting representations before us

it appears that appellees may have agreed to the extensions,

although that acquiescence may have been induced by a now

disclaimed representation that plaintiffs could continue with

discovery while the case was on appeal. Because the record

is hazy, because we have granted the extensions, and because

the issues have now been briefed and argued and are ripe

for decision, we think the preferable course is for us to

decide the appeal and provide guidance to the trial court.

However, we do note that one purpose of interlocutory

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

ing extensions defeat that purpose, and that in appropriate

circumstances we can deny unwarranted extensions and

dismiss appeals to prevent an interlocutory appeal from

being misused as a dilatory tactic.

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

and Blackie, et al., § 1292(b) appeals.

III. Compliance with the Requirements of Fed.R.Civ.P.

23(a) and (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 Jn re Hotel Telephone Charges,

500 F.2d 86, 90 (9th Cir. 1974) defendants argue that he im-

properly engaged in speculation when determining whether

a common question exists, and whether conflicts make class

16 Appendix—Opinion of the Court of Appeals

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

complaint’® and the other material before him (material

sufficient to form a reasonable judgment on each require-

ment), 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.

Defendants misconceive the showing required to estab-

lish a class under Hotel Telephone Charges. We indicated

there that the judge may not conditionally certify an im-

proper class on the basis of a speculative possibility that

it may later meet the requirements. 500 F.2d at 90. How-

ever, 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

'6In large part appellants’ attack on the district judge’s approach

sa reiteration of their disagreement with his legal conclusion. The

+ gp language seized upon in the opinion simply conditions

conclusion that a common question exists on plaintiffs’ of

the allegations—+.e., if plaintiffs prove their allegation of X, X will

be a question of fact or law common to the class. wpe a wpe

is entirely proper and necessary. Likewise, the court that any

conflicts at present did not appear to defeat adequacy of representa-

tion, but that if any unforeseen difficulties arose, they could be

cured by sub-classes—again a proper application of the Rule.

Appendtx—Opinion of the Court of Appeals 17

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 practicable 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 prelimi-

nary 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 requested by defendants is not required. So

long as he has sufficient material before him to determine

the nature of the allegations, and rule on 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 cor-

rect legal principles in making the ruling, and whether the

ruling was within the permissible boundaries of the dis-

cretion 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

Rule 23 provides in part:

“(a) Prerequisites to a Class Action. One or more members

of a may sue or be sued as representative parties on behalf

of all only if (1) the class is so numerous that joinder of all

members is impracticable, (2) there are questions of law or

fact common to the class, 7 Pe aos Td - - of -

representative parties are c or defenses 0

the and (4) the alamo parties will fairly and

a protect the interests of the class.

“( Y Class Actions Maintainable. An action may be main-

tained as a class action if the prerequisites of subdivision (a)

are satisfied, and in addition:

AY the court finds that the questions of law or fact common

to members of the class predominate over any questions

(Footnotes continued on following page )

18 Appendix—Opinion of the Court of Appeals

numerosity (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, all of defendants’ contentions can be

resolved by addressing 3 underlying questions: 1) whether

a common question of law or fact unites the class ; 2) whether

direct individual proof of subjective reliance by each

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 represciiaiion 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 later. Plaintiffs’ complaint alleges that

the price of the company’s stock was artificially 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 inventories and other assets, (c) buried ex-

pense items and other costs incurred for research and

development in inventory, (d) misrepresented the com-

panies’ current ratio, (e) failed to establish adequate

reserves for receivables, (f) failed to write off certain

affecting only individual members, and that a class action is

superior to other available methods for the fair and efficient

adjudication of the controversy. The matters pertinent to the

findings include: (A) the interest of members of the class in

individually controlling the prosecution or defense of separate

actions; (B) the extent and nature of any litigation concernin

the controversy already commenced by or against members

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.”

Appendix—Opinion of the Court of Appeals 19

assets, (g) failed to account for the proposed dis-

continuation of certain product lines, (h) misrepre-

sented 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 number of different documents, each pertaining to a dif-

ferent period of Ampex’s operation, the defendants argue

that purchasers througnout the class period do not present

common issues of law or fact. They reason that proof of

10b-5 liability will require inspection of the underlying set

of facts to determine the falsity of the impression given by

any particular accounting item presented; that the under-

lying facts fluctuate as the business operates (i.e., inventory

is bought and sold, accounts are paid off and created) ; thus,

proof of the actionability of a current accounting represen-

tation or omission will apply only to those who purchased

while a financial report was current; from which they con-

clude 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 com-

mon 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 one suit. See

Green v. Wolf Corporation, 460 F.2d 291, 298 (2d Cir. 1968) ;

20 Appendix—Opinion of the Court of Appeals

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 v. Realty Equities Corporation of New York, 54

F.R.D. 420 (S.D.N.Y.1972); Herbst v. Able, 47 F.R.D. 11

(S.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 common course of conduct over the entire period di-

rected against all investors, generally relied upon, and

violating common statutory 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

Committee on the Rule: “{A] fraud perpetrated on numer-

ous persons by the use of similar misrepresentations may be

an appealing situation for a class action . . .” Advisory Com-

mittee 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 consist-

ently upheld, see In re Caesars Palace Securities Litigation,

360 F.Supp. 366, 395-96 (S.D.N.Y.1973), in large part be-

cause of the substantial role that the deterrent effect of

class actions plays in accomplishing the objectives of the

securities laws. See III Loss, Securities Regulation 1819

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

antifraud laws] may depend on the applicability of the class

action device”).

Appendix—Opinion of the Court of Appeals 21

While the nature of the interrelationship and the degree

of similarity which must obtain between different represen-

tations in order to come within the outer boundaries of the

“common course of conduct” test is somewhat unclear,’® the

®Because plaintiffs have alleged specific strands of misrepresenta-

tion oning throughout financial statements of the class —

they are well within whatever the outer boundaries might be, an

we ~~ 4 not resolve +g fe prey om. however, ay x number of

courts have apparently he t allegations simp at earnings

and stock price have been inflated over a said a time by a

defendant's misrepresentations is sufficient to satisfy the cormmon

question requirement (although the cases are somewhat unclear

because fail to specify recise misrepresentations which

allegedly inflated earnings). See Fischer v. , supra; Kronen-

berg, supra; Werfel v. Kramarsky, ome See Feldman v. Lifton,

F.R.D. ae ede (S.D.N.Y. 1974). ——— point = 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 identical a misrepresentations, and if defendant's

liability can be establi by proof both of the same set of facts

and same legal principle. We think that is far to restrictive a view

of the common question requirement in the securities fraud context.

Rule 10b-5 liability is not restricted solely to isolated misrepresenta-

tions or omissions; it may also be predicated on a “practice, or

course of business which operates .. . as a fraud . . .” Under that

section class members may well be united in establishing liability

for fraudulently creating an illusion of prosperity and false expecta-

tions. °

Moreover, even when misrepresentations are unrelated, class

members may share a common question of law or fact. Of course,

if an early misrepresentation is undissipated, a later purchaser will

present a common question even if another misrepresentation has

intervened. But even if the effect of the earlier misrepresentation is

dissipated, proof of the earlier misrepresentation any Oe relevant

to the latter haser’s case. Proof of the earlier fraud and its

effects might be relevant circumstantially to establish duty stand-

ards, 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 questions, and trial in the same forum avoids duplicative

proof. t is a major pees of a class action; the “common

question” reyuirement should be interpreted to obtain that objec-

tive. Na y, when the component misrepresentations of a “course

(Footnotes continued on following page )

22 Appendix—Opinion of the Court of Appeals

test is more than satisfied when a series of financial reports

uniformly misrepresent a particular item in the financial

statement. In that situation, the misrepresentations are

“interrelated, interdependent, and cumulative;” “(like

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 un-

collectible accounts receivable and tur contractually guar-

anteed royalty payments, and the overstatement of inven-

tory. The 1972 Annual Report shows writedowns of $31.9

million as provision for royalty guarantees, $11.8 million

for uncollectible accounts receiva»le and $15 million for

inventory. Plaintiffs allege that the writedowns had roots

t. cing back to the beginning of the class period, an allega-

tion somewhat borne out by the auditors’ withdrawal of

certification of the 1971 report because of uncertainty that

the huge losses reported in 1972 were the product of 1972

business operations, and not 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 ac-

cepted accounting principles, injuring all purchasers of

the consequently inflated stock.

of conduct” fraud are unrelated, a great many more non-common

questions exist. In that situation no representative’s claim may be

typical of the rest of the class, Rule 23(a)(3), although that de-

pends on how broadly that requirement is construed. See text at

note 25, infra, and note 25 infra. We think it is for the predomi-

nance and other requirements of Rule 23(b)(3), rather than the

common question requirement, to function to keep the balance

between the economies attained and lost by allowing a class action.

The common question requirement should not restrictively

interpreted to attain that objective, particularly as to do so would

eliminate the class action deterrent for those who engage in com-

plicated and imaginative rather than straightforward schemes to

inflate stock prices.

eee

Appendix—Opinion of the Court of Appeals 23

In this aspect, plaintiffs allege a source of inflation com-

mon to every purchaser. The creation of a reserve is of

course simply an adjustment made to the balance sheet

and income statement to provide a more realistic view of

the business and its operations. Failure in any particular

period to recognize that a portion of the accounts receiv-

able generated in that period are uncollectible, and to

create or adjust a reserve, will have the effect of inflating

the balance sheet assets and surplus, and overstating the

income for the period; likewise failure to recognize accrued

liabilities for royalty payments will inflate surplus by un-

derstating liabilities, and will overstate income. Naturally,

any inflation in the stock price due to inadequate reserves

will persist until the reserves become adequate or until the

losses are in fact written off.

Defendants nevertheless contend that a class is improper

because each purchaser must depend on proof of a dif-

ferent set of accounting facts to establish the inadequacy

of the reserves at the time he bought. Defendants miscon-

ceive the requirement for a class action; all that is required

is a common issue of law or fact. Even were we to assume

that the reserves were at some points during the period

adequate, the class members still would be united by a

common interest in the application to their unique situation

of the accounting and legal principles requiring adequate

reserves—i. e., by a common question of law.”° Here, how-

2°Appellants make much of the distinction between an accounting

ie. and estimate, arguing that the exercise of jud t in-

volved in an estimate depends on analysis of facts which change,

makin legal evaluation of different estimates distinct legal and

factual roblems. The distinction makes little sense in this context.

The judgment neces to make an estimate must be controlled by

the accounting principle. Thus, even when only detached, uncon-

nected incidents of incorrect estimates are alleged, the jury must

nevertheless be appraised of the common standard of law by which

to judge the estimates—the accounting principle—and a common

question is presented. Insofar as a class action is involved, the

(Footnotes continued on following page )

24 Appendix—Opinion of the Court of Appeals

ever, in light of the progressive deterioration of Ampex’s

financial position and the magnitude of the losses at the

end ef the period, even the fact that reserves were in real-

ity inadequate throughout much if not all of the period

may not be in serious dispute; rather, the question will be

whether the inadequacy was in some sense culpable because

the contingencies which proved them inadequate were fore-

seen or foreseeable.

The alleged inventory overvaluation likewise presents

common issues. Defendants again contend it does not be-

cause the valuation of any particular period’s closing in-

ventory involves a process of physical estimation based on

that inventory’s characteristics, and that overstatement of

one period’s closing inventory, while overstating that pe-

riod’s income, will have an opposite effect on the next

period’s income by overstating opening inventory, deflating

. rather than inflating stock price. While true in the abstract,

appellants’ position disregards the real substance of the

plaintiffs’ complaint which is again highlighted by the 1972

Report. In explaining the $15 million writedown, the com-

pany stated: “Inventories of stereo tapes more than six

months old and more than one year old were written down

50% and 100% respectively ... No significant writedown

of this nature were made in the prior year.”

Plaintiffs thus are complaining of the balance sheet effect

of inventory overvaluation. They are alleging that by fail-

ing throughout the class period to recognize and account

for inventory obsolescence each time the inventory was

valued, the company consistently inflated the value at which

situation is the same as where a consistent misapplication of an

accounting principle as part of a course of conduct to inflate the

stock price is alleged. And, moreover, it appears to us, contrary to

appellants’ contentions, that plaintiffs are complaining of abuses of

accounting principles, not estimates.

nr | lp an ean.

Appendix—Opinion of the Court of Appeals 25

it carried inventory on the balance sheet.”' In effect, plain-

tiffs are complaining of a consistent disregard of the ac-

counting principle that inventory be valued at “lower of cost

or market.” Again, common questions of law and facts are

presented.

The class members also share an interest in establishing

the standard of care required of the various defendants

under the White v. Abrams, 495 F.2d 724 (9th Cir. 1974),

flexible duty standard. The flexible duty of any defendant,

while depending on his particular relationship to Ampex

and to the financial reporting involved, will be owed identi-

cally to all market purchasers, who are for practical pur-

poses identically situated. The culpability of each defend-

ant’s conduct is to be measured against the statutorily im-

posed duty not to manipulate the market. Differences in

sophistication, ete., among purchasers have no bearing in

the impersonal market fraud context, because dissemina-

tion of false information necessarily translate through mar-

ket mechanisms into price inflation which harms each pur-

chaser identically. See U.S. Financial Securities Litigation,

supra, at 451-452.

Moreover, because of the relative similarity of the various

documents involved, the duty owed by a defendant with

respect to such documents will probably be uniform. or

nearly so, further uniting the positions of all class pur-

chasers.

2. Predominance and reliance.

Defendants contend that any common questions which

may exist do not predominate over individual questions of

reliance and damages.

The amount of damages is invariably an individual

question and does not defeat class action treatment. E. g.,

*1Whether inflation of assets rather than earnings is material to

the stock price is for the jury, not us, to decide.

26 Appendix—Opinion of the Court of Appeals

U.S. Financial Securities Litigation, supra, at 448 n. 5, and

cases there cited. Moreover, in this situation we are con-

fident that should the class prevail the amount of price

inflation during the period can be chartered and the process

of computing individual damages will be virtually a me-

chanical task. See n. 24 infra.

Individual questions of reliance are likewise not an im-

pediment—subjective reliance is not a distinct element of

proof of 10b-5 claims of the type involved in this case.

The class members’ substantive claims either are, or can

be, cast in omission or non-disclosure terms—the company’s

financial reporting failed to disclose the need for reserves,

conditions reflecting on the value of the inventory, or other

facts necessary to make the reported figures not mislead-

ing. The Court has recognized that under such circum-

stances

“involving primarily a failure to disclose, positive

proof of reliance is not a prerequisite to recovery. All

that is necessary is that the facts withheld be material

in the sense that a reasonable investor might have con-

sidered them important in the making of this decision.

This obligation to disclose and this withholding of a

material fact establish the requisite element of causa-

tion in fact.” (citations omitted)

Affiliated Ute Citizens of Utah v. United States, 406 U.S.

128, 153-154, 92 S.Ct. 1456, 1472, 31 L.Ed.2d 741 (1972).

See U.S. Financial Securities Litigation, supra, at 451;

Caesars Palace Securities Litigation, supra, at 399; In re

Penn Central Securities Litigation, 347 F.Supp. 1327, 1344

(E.D.Penn.1972).

Moreover, proof of subjective reliance on particular mis-

representations is unnecessary to establish a 10b-5 claim

for a deception inflating the price of stock traded in the

Appendix—Opinion of the Court of Appeals 27

open market. See Herbst v. I. T. T. supra, at 1315-1316;

Chris-Craft Industries, Inc. v. Piper Aircraft Corp., 480

F.2d 341, 373-374 (2d Cir. 1973); Tucker v. Arthur Ander-

sen & Co., 67 F.R.D. 468, at 480 (S.D.N.Y. 1975); U.S.

Financial Securities Litigation, supra, at 449-451; Werfel

v. Kramarsky, supra, at 681; In re Memorex Security

Cases, supra, at 100-101; Siegel v. Realty Equities Corpo-

ration of New York, supra, at 424-425; Herbst v. Able,

supra, at 20. Proof of reliance is adduced to demonstrate

the causal connection between the defendant’s wrongdoing

and the plaintiff’s loss. We think causation is adequately

established in the impersonal stock exchange context by

proof of purchase and of the materiality of misrepresenta-

tions, without direct proof of reliance. Materiality circum-

stantially establishes the reliance of some market traders

and hence the inflation in the stock price—when the pur-

chase is made the causational chain between defendant’s

conduct and plaintiff’s loss is sufficiently established to

make out a prima facie case. See In re Memorex Security

Cases, supra, at 101; Note, The Reliance Requirement in

Private Actions Under SEC Rule 10b-5, 88 Harv.L.Rev.

584, 593 (1975).

Defendants argue that proof of causation solely by proof

of materiality is inconsistent with the requirement of the

traditional fraud action that a plaintiff prove directly both

that the reasonable man would have acted on the mis-

representation (materiality), and that he himself acted on

it, in order to establish the defendant’s responsibility for

his loss, which justifies the compensatory recovery.

We disagree. The 10b-5 action remains compensatory; it

is not predicated solely on a showing of economic damage

(loss causation). We merely recognize that individual

“transactional causation” can in these circumstances be in-

ferred from the materiality of the misrepresentation, see

Tucker v. Arthur Andersen & Co., supra, at 480; Schlick v.

28 Appendix—Opinion of the Court of Appeals

Penn-Dixie Cement Corp., 507 F.2d 374, 381-382 (2d Cir.

1974), and shift to defendant the burden of disproving a

prima facie case of causation. Defendants may do so in at

least 2 ways: 1) by disproving materiality or by proving

that, despite materiality, an insufficient number of traders

relied to inflate the price; and 2) by proving that an indi-

vidual plaintiff purchased despite knowledge of the falsity

of a representation, or that he would have, had he known

of it.”

224 number of cases indicate that proof of materiality raises “pre-

sumption” of reliance. The Court did not speak of a presumption in

Mills or Affiliated Ute; we prefer to recognize that materiality

directly establishes causation more likely than not, and that reliance

as a separate requirement is simply a milepost on the road to

causation. The net result is in either view the same; the validity of

either view turns on the assumption that the ——— investor is

more likely to act like the reasonable investor not.

There is some debate as to whether the “presumption” of reliance

may be rebutted; the general view is that it may be, see Harvard

Note, supra, at 600 and 600 n. 75, and cases there cited, although

sound contrary opinion exists. See Herbst v. ITT, supra, at 1316 n.

14; Chris-Craft Industries, Inc., supra, at 400 (Mansfield, J., con-

anne OF dissenting ). The 10b-5 private suit serves a public pur-

pose, but has done so since its judicial creation in the framework

of a private damage suit. We doubt the right to disprove causation

will substantially reduce a defendant's liability in the open market

fraud context, as we doubt that a defendant would be able to prove

in many instances to a jury’s satisfaction that a plaintiff was indif-

ferent to a material fraud. Nevertheless, we think the public purpose

can be adequately served within the traditional compensatory suit

framework by limiting recoveries to those who are in fact injured,

and excluding those whom a defendant proves have not been in-

jured, and that 10b-5 suits should continue in that mold until a

contrary need appears or until the Court directs otherwise.

The right of rebuttal, however, does not preclude the predomi-

nance of common questions. Causation as to each class member is

commonly proved more likely than not by materiality. That showing

will iahallly be conclusive as to most of the class. The fact that

a defendant may be able to defeat the showing of causation as to a

few individual class members does not transform the common ques-

tion into a multitude of individual ones; plaintiffs satisfy their bur-

den of showing causation as to each by showing materiality as to all.

The right to disprove causation will not render the action un-

manageable. A defendant does not have unlimited rights to dis-

covery against unnamed class members; the suit remains a repre-

Eee eee

Appendix—Opinion of the Court of Appeals 29

That the prima facie case each class member must estab-

lish differs from the traditional fraud action, and may,

unlike the fraud action, be established by common proof, is

irrelevant; although derived from it, the 10b-5 action is not

coterminous with a common law fraud action. As we re-

cently recognized in White v. Abrams, the fraud action

must be and has been flexibly adopted to the overriding

purpose of enforcing the Federal securities laws. 495 F.2d

at 731. See Affiliated Ute, supra, at 151; Superintendent of

Insurance v. Bankers Life € Casualty Co., 404 U.S. 6, 12, 92

S.Ct. 165, 30 L.Ed.2d 123 (1971); Mills v. Electric Auto-Lite

Co., 396 U.S. 375, 90 S.Ct. 616, 24 L.Ed.2d 593 (1970); SEC

v. Capital Gains Research Bureau, 375 U.S. 180, 186, 195, 84

S.Ct. 275, 11 L.Ed.2d 237 (1963).

Here, we eliminate the requirement that plaintiffs prove

reliance directly in this context because the requirement

imposes an unreasonable and irrelevant evidentiary burden.

A purchaser on the stock exchanges may be either unaware

sentative one. See Clark v. Universal Builders, Inc., 501 F.2d 324

(7th Cir. 1974); Gardner v. Awards Marketing Corporation, 55

F.R.D. 460 (D.Utah 1972); Fischer v. Wolfinbarger, 55 F.R.D. 129

(W.D.Ky. 1971). The district judge may reasonably control dis-

covery to keep the suit within manageable bounds, and to prevent

fruitless fishing expeditions with li De ers of success. He may

also exercise discretion in the conduct of the trial, to prevent a time-

consuming series of mini-trials on causation, by 'imiting introduction

of repetitive evidence, or by limiting evidence to instances where

causation is in doubt; he may also postpone trial of the rebuttal of

individual causation until the C image stage of the trial; indeed, he

has extensive powers to expedite the suit with procedural innova-

tions. See Rule 23(d). We think procedures can be found and used

which will provide fairness to the defendants and a genuine resolu-

tion of disputed issues while obviating the danger of subverting the

class action with delaying and harassing tactics. If not, we may have

to reconsider whether to make proof of causation from materiality

conclusive, keeping in mind that the Court has directed that the

statute be liberally construed to effectuate its remedial purposes,

and that that purpose may be served only by allowing an over-

inclusive recovery to a defrauded class if unavailability of the

class device renders the alternative a grossly underinclusive re-

covery.

30 Appendix—Opinion of the Court of Appeals

of a specific false representation, or may not directly rely

on i1; he may purchase because of a favorable price trend,

price earnings ratio, or some other factor. Nevertheless,

he relies generally on the supposition that the market price

is validly set and that no unsuspected manipulation has

artificially inflated the price, and thus indirectly on the

truth of the representations underlying the stock price—

whether he is aware of it or not, the price he pays reflects

material misrepresentations. Requiring direct proof from

each purchaser that he relied on a particular representa-

tion when purchasing would defeat recovery by those whose

reliance was indirect, despite the fact that the causational

chain is broken only if the purchaser would have purchased

the stock even had he known of the misrepresentation. We

decline to leave such open market purchasers unprotected.

The statute and rule are designed to foster an expectation

that securities markets are free from fraud—an expectation

on which purchasers should be able to rely.

Thus, in this context we think proof of reliance means at

most a requirement that plaintiff prove directly that he

would have acted differently had he known the true facts.

That is a requirement of proof of u speculative negative (I

would not have bought had I known) precisely parallel to

that held unnecessary in Affiliated Ute and Mills (1 would

not have sold had I known). We reject it here for the same

reasons. Direct proof would inevitably be somewhat pro-

forma, and impose a difficult evidentiary burden, because

addressed to a speculative possibility in an area where

motivations are complex and difficult to determine. That

difficulty threatens to defeat valid claims—implicit in

Affiliated Ute is a rejection of the burden because it leads

to underinclusive recoveries and thereby threatens the en-

forcement of the securities laws. See Harv. Note, supra, at

590-91. Here, the requirement is redundant—the same causal

nexus can be adequately established indirectly, by proof of

ee

.

®e.

*

-

Appendix—Opinion of the Court of Appeals 31

materiality coupled with the common sense that a stock

purchaser does not ordinarily seek to purchase a loss in the

form of artificially inflated stock.2* Under those cireum-

stances we think it appropriate to eliminate the burden.

Defendants contend that elimination of individua! preof

of subjective reliance alters and abridges their substantive

rights in violation of the Rules Enabling Act, 28 U.S.C.

§ 2072. The obvious answer is that the standards of proof

of causation we have set out apply to all fraud on the mar-

ket cases, individual as well as class actions. No interpreta-

tion of Rule 23 is involved, and the Rules Enabling Act

limitation is not implicated.**

C. Conflicts

Defendants’ final major argument is that conflicts among

class members preclude class certification. They contend

that the interests of class members in proving damages

from price inflation (and hence the existence and materiality

of misrepresentations subsumed in proving inflation) irrec-

oncilably conflict, because some class members will desire

to maximize the inflation existing on a given date while

others will desire to minimize it. For examp!-, they posit

that a purchaser early in the class period who later sells

will desire to maximize the deflation due to an intervening

corrective disclosure in order to maximize his out of pocket

*8Raschio v. Sinclair, 486 F.2d 1029 (9th Cir. 1973), is in no way

inconsistent with our present position. There we dealt with the

statutory “in connection with” en, and held that it could

not be met as a matter of law when the stock was purchased two

months before the allegedly fraudulent representation was made.

Here we do not retreat from that position, or from the implicit

requirement set out there that there be a reasonable transactional

nexus between the fraud and the loss—we simply amplify on the

manner in which that nexus may be proved.

24Indeed, we could, in the exercise of our Article III jurisdiction,

transform the 10b-5 suit from its present private compensatory mold

by predicating liability to purchasers solely on the materiality of a

mis tation (i. e., economic my regardless of transac-

tional causation, without implicating the Enabling Act limitation.

32 Armendix-—Opinion of the Court of Appeals

damages, but in so doing wiii confict with his purchaser,

who is interested in maximizing the inflation in the price he

pays. We agree that class members might at some point

during this litigation have differing interests. We alto-

gether disagree, for a spate of reasons, that such potential

conflicts afford a valid reason at this time for refusing to

certify the class.

Defendants’ position depends entirely on adoption of the

out of pocket loss measure of damages, rather than a rescis-

sory measure. Under the out of pocket standard each pur-

chaser recovers the difference between the inflated price

paid and the value received, plus interest on the difference.

If the stock is resold at an inflated price, the purchaser-

seller’s damages, limited by § 28(a) of the Act, 15 U.S.C.

§ 78bb(a) to “actual damages,” must be diminished by the

inflation he recovers from his purchaser. Thus, he is inter-

ested in proving that some intervening event, such as a cor-

rective release, had diminished the inflation persisting in

the stock price when he sold.”

*5 Appellants contend that the inflation paid must be measured by

the change in price after a corrective release. That is of course

circumstantial evidence of the inflation when purchased, but it is not

the exclusive method of measuring inflation. The fact finder may

rely on other methods of determining actual value on the date of

purchase, including expert testimony on actual value derived from

capitalization of earnings techniques or testimony on book value.

Particularly where, as here, the amount of inflation due to absence

or insufficiency of reserves may fluctuate, such evidence is necessary

in the absence of corrective releases. In any event, the —_ after a

corrective disclosure will not be conclusive of the amount of original

inflation, both because the correction may be only ial (as is

alleged of the major corrections involved here), and because the

prolonged nature of the fraud introduces other market variables

which may affect the amount the market reacted to disclosures at

different times during the class period. Stanford Note, infra, at

384-385; Tucker v. Arthur Andersen & Co., supra, at 482. However,

from an appropriate mix of the various methods we are confident

that the jury will be able to trace a graph delineating the actual

value of the stock throughout the class period. When compared with

a comparable Fraph of the price the stock sold at, the determination

of damage will be a mechanical task for each class member.

Appendix—Opinion of the Court of Appeals 33

While out of pocket loss is the ordinary standard in a

10b-5 suit, Foster v. Financial Technology, Inc., 517 F.2d

1068, at 1071 (9th Cir. 1975); Janigan v. Taylor, 344 F.2d

781, 786 (1st Cir. 1965); Estate Counseling Service, Inc. v.

Merril Lynch, Pierce, Fenner & Smith, Inc., 303 F.2d 527

(10th Cir. 1962); Abrahamson v. Fleschner, 392 F.Supp.

740, at 746 (S.D.N.Y.1975) ; see Sigafus v. Porter, 179 U.S.

116, 123, 21 S.Ct. 34, 45 L.Ed. 113 (1900); Smith v. Bolles,

132 U.S. 125, 10 S.Ct. 39, 33 L.Ed. 279 (1889); Note, The

Measure of Damages in Rule 10b-5 Cases Involving Actively

Traded Securities, 26 Stan.L.Rev. 371, 383-384 (1974); 3

A. Bromberg, Securities Law, Fraud—Rule 10b-5, § 9.1, at

226-227 (1974), it is within the discretion of the district

judge in appropriate circumstances to apply a rescissory

measure, Chasins v. Smith, Barney & Co., 438 F.2d 1167,

1173 (2d Cir. 1970); Abrahamson v. Fleschner, supra, at

746; see Stanford Note, supra, at 374-376; A. Bromberg,

supra, at 226, or to allow consequential damages. Foster,

supra, at 3; Zeller v. Bogue Elec. Mfg. Co., 476 F.2d 795,

802-803 (2d Cir. 1973). It is for the district judge, after be-

coming aware of the nature of the case, to determine the

appropriate measure of damages in the first instance; the

possible creation of potential conflicts by that decision does

not render the class inappropriate now. The Rule provides

the mechanism of subsequent creation of subclasses, Rule

23(c)(4), to deal with latent conflicts which may surface as

the suit progresses. Green v. Wolf Corporation, supra, at

299; Tucker v. Arthur Andersen & Co., supra, at 482; Hand-

werger v. Ginsberg, CCH Fed.Sec.L.Rep. { 94,934, at 97,241

(S.D.N.Y.1975); Caesars Palace Securities Litiga‘‘on,

supra, at 398; Sol S. Turnoff v. N. V. Nederlandsche Com-

binatie Voor Chemische Industrie, 51 F.R.D. 227, 233 (E.D.

Pa.1970). As a result, courts have generally declined to con-

sider conflicts, particularly as they regard damages, suffi-

cient to defeat class action status at the outset unless the

34 Appendix—Opinion of the Court of Appeals

conflict is apparent, imminent, and on an issue at the very

heart of the suit. See Hawk Industries, Inc. v. Bausch &

Lomb, Inc., 59 F.R.D. 619 (S.D.N.Y. 1973) ; Siegel v. Realty

Equities Corporation of New York, supra, at 426.

Here, the conflict, if any, is peripheral, and substantially

outweighed by the class members’ common interests. Even

assuming arguendo that the out of pocket standard applies,

the class is proper. Every class member shares an over-

riding common interest in establishing the existence and

materiality of misrepresentations. The major portion of

the inflation alleged is attributed to causes which allegedly

persisted throughout the class period. It will be in the

interest of each class member to maximize the inflation

from those causes at every point in the class period, both

to demonstrate the sine qua non—liability—and to maxi-

mize his own potential damages—the more the stock is in-

flated, the more every class member stands to recover.

Moreover, because the major portion of the inflation is

attributed to causes persisting throughout the period, in-

terim corrective disclosures (of which there appear to have

been only two or three) do not necessarily bring predis-

closure purchasers into conflict with post-disclosure pur-

chasers. Because both share an interest in iaaximizing

overall inflation, the latter purchaser will no doubt strive

to show a substantial market effect from disclosure of the

lesser (or partial) causes of inflation to maximize the

inflation attributable to more serious causes persisting

when he bought—a showing which will increase the recov-

ery of the earlier purchaser. In that light, any conflicting

interests in tracing fluctuations in inflation during the class

period are secondary, and do not bar class litigation to

advance predominantly common interests. Courts faced

with the same situation have repeatedly, either explicitly

or implicitly, rejected defendants’ position, for the poten-

Appendix—Opinion of the Court of Appeals 35

tial conflict is present in most prolonged classes involving

a series of misrepresentations. See Green v. Wolf Corpo-

ration, supra; Tucker v. Arthur Andersen & Co., at 475-

476 and 476 n. 14, and cases there cited, and at 97,936;

Aboudi v. Daroff, supra, at 391-392; U. S. Financial Se-

curities Litigation, supra, at 452; In re Memorex Security

Cases, supra; Caesars Palace Securities Litigation, supra;

Siegel v. Realty Equities Corporation of New York, supra,

at 426; Dolgow v. Anderson, supra; Fischer v. Kletz,

supra, at 381-383; Kronenberg, supra.

In support of that conclusion, we note that Rule 23 makes

no mention of conflicts. The Rule’s requirements are that

the representative’s claims be “typical” and that the class

be “fairly and adequately” represented—claims need not

be coextensive. Caesars Palace Securities Litigation, supra,

at 397. Those requirements are in part constitutionally

dictated, as due process requires, in order to give collateral

res judicata effect to a judgment against class members,

that their interests have been adequately represented in

the class action. Hansberry v. Lee, 311 U.S. 32, 61 S.Ct.

115, 85 L.Ed. 22 (1940).

Hansberry does not, however, as defendants seem to as-

sume, dictate that any divergence of interest among class

members violates due process (thereby necessarily requir-

ing an identity of interests to satisfy Rule 23’s adequacy

or representation and typicality requirements). Neither the

Rule’s requirements nor those of due process are so inflex-

ible. The due process touchstone of adequacy and fairness

of representation (see In re Four Seasons Securities Laws

Litigation, 502 F.2d 834, 842 (10th Cir. 1974) ; Eisen IV, at

177) must be judged in light of the seriousness and extent

of conflicts involved compared te the importance of issues

uniting the class; the alternatives to class representation

36

available ;** the } rocedures available to limit and prevent

unfairness; and any other facts bearing on the fairness

with which the absent class member is represented.

Hansberry is not controlling here—in Hansberry there

was nothing to satisfy due process. Not only were the mem-

bers of the purported class of property owners diametrically

opposed on the central issue—the validity of racial cove-

nants restricting their property— but the state class action

procedure provided absent class members no notice. Here,

on the other hand, under the notice and opt-out procedure

of Rule 23(b)(3) and 23(c)(2), an absent class member

may evaluate his position in the class and decide for himself

whether to avail himself of the representation offered. See,

e.g., Four Seasons Securities Laws Litigation, supra, at

842-844; Herbst v. Able, supra, at 15. The potential conflicts

are at most peripheral. And the district judge will retain

constant supervision, through his powers under Rule 23(d)

and (e), aud through his ability to decertify or create sub-

classes, to assure fairness of representation. See Dolgow v.

Anderson, supra, at 496. Finally, and unlike numerous cases

in which even one representative has been held adequate to

represent a prolonged class, the class members here will be

represented by numerous named representatives, with sub-

stantial personal stakes, who purchased throughout the

class period, and who thus will probably represent whatever

26The rule requires adequate representation. The alternative may

be none at all.

“The basic concept of commonality, a requirement which is

prevalent throughout Rule 23 and is premised upon a funda-

mental recognition that representatives of a class must have

interests which are not in opposition to the members of that

class, must be interpreted to best effectuate the primary pur-

poses of the class action device, i. e., to give small investors a

reasonable opportunity to vindicate their claims in a manner

which will not place an undue burden upon them. It is in this

light that we must approach the defendants’ objections to the

instant class actions under Rule 23(a)(3).” Caesars Palace Se-

curities Litigation, supra, at 397-398.

|

|

|

|

37

conflicting interests there are in the development of plain-

tiffs, trial strategies. In light of those various factors, we

agree with the district judge that the class representatives

are typical and will adequately and fairly represent the

class.”

Affirmed.

2™We likewise reject the contention that conflicts between

debenture holders and shareholders require decertification at this

time; see Handswerger v. Ginsberg, supra, at 97, 240-97, 241;

Caesars Palace Securities Litigation, supra, at 398-399; Fischer v.

Kletz, supra, at 384; or that present shareholders and those pur-

chasers who have sold their shares irreconcilably conflict. See

am ery supra, at 97, 240 n. 3; Herbst v. ITT, supra, at 1314;

Herbst v. Able, supra, at 15.

a]

38 Appendix—Opinion of the District Court

JUDGMENT OF THE COURT OF APPEALS

United States Court of Appeals

For the Ninth Circut

William E. Roberts, John P. Buchan,

William Blackie, etc., et al.,

Defendants-Appellant

— renee

Vv. | Civil 72-0521

Leonard Barrack, Selma Molder, etc., et al.,

Plaintiffs-Appellees.

APPEAL from the United States District Court for the

NORTHERN District of CALIFORNIA

THIS CAUSE came on to be heard on the Transcript of

the Record from the United States District Court for the

NORTHERN District of CALIFORNIA and was duly sub-

mitted.

ON CONSIDERATION WHEREOF, It is now here or-

dered and adjudged by this Court, that the judgment of the

said District Court in this Cause be, and hereby is AF-

FIRMED.

A True Copy Attest Feb 27, 1976

Emil FE. Melfi, Jr., Clerk

by Tim Jones, Deputy

Filed and entered September 25, 1975

a ee ae a ua i ad.

Appendix—Opinion of the District Court

APPENDIX B

MEMORANDUM OPINION AND ORDER

OF THE DISTRICT COURT

Original Filed Apr 11 1974

Clerk, U.S. Dist. Court

San Francisco

In the United States 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 U.S.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.

Py = pon a ee tek , heb el

u uty a verts ivatively

under pe theories of 10b-5 violations and common law. This

count has been previously dismissed on defendant Robert's [sic]

mre hs motion. Thus the Court will not address any objections to

ification based upon this count.

40 Appendix—Opinion of the District Court

After careful consideration of the volumes of papers

submitted, the arguments and authorities on both novel and

well worn theories, the Court finds that a conditional class

defined as all Ampex security purchasers within the desig-

nated 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 Am-

pex and its officers, directors and auditors (Touche Ross)

conspired and aided and abetted in misrepresenting, in

various publications, the corporation’s earnings and finan-

cial condition. These publications include, but are not

limited to annual reports, interim reports, press releases,

and SEC filings.2 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 August 3, 1972 when Touche

Ross withdrew its certificate.*

More specifically plaintiffs claim that defendants misrep-

resented 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,

2During 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.

8There appears to be a factual dispute concerning the date of the

1970 annual report. The plaintiffs claim the class ins with the

issuance of this document May 2, 1970 but some defendants claim

that it did not issue until July 1970.

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

which there were 120,000 transactions in Ampex securities with a

total of 21,000,000 shares traded.

Appendix—Opinion of the District Court 41

e.g., the true depreciated value of inventories, deferred

research and development expenses, accurate asset to lia-

bility 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

investment community the impression that Ampex was

more secure than was perhaps warranted, thus causing its

stock to sell at artificially inflated prices. In mid-1972

Ampex reported an approximate $90,000,000 loss.

Plaintiffs further allege that throughout this 27-month

period between the initiation of these deceptive practices

and the precipitous fall, Ampex took steps to partially cor-

rect certain “accounting errors.”*> These corrections al-

legedly caused downward adjustments in the value of Am-

pex 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

purchasers 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.

5Some examples of these ial disclosures are as follows: the

announcement March 16, 1971 that the company had not been

e i ng research and development currently, resulting in a 10.7

uailien 2 ollar loss; the announcement January 11, 1972 of a 40 mil-

lion 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 announcement in the 1972 annual report (March, 1972) of

an 86 million dollar loss for the whole year.

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

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

42 Appendix—Opinion of the District Court

Based upon these statistics, all parties agree ‘that the

asserted class is so numerous that joinder is impracticable,

Rule 23(a)(1), 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), numer-

osity, has been challenged on several theories. After tedious

culling, the Court is of the opinion that the arguments con-

cerning manageability, superiority and adequacy of repre-

sentation 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 defendants.

Any conflicts that Mrs. Barrack’s executors as class

representatives 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 neces-

sarily have to be raised and litigated elsewhere. It does not

conceivably create representation problems here.

Other issues raised concerning the competency of plain-

tiff’s counsel to represent this class are unconvincing and

not worthy of discussion.

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

and must be pursued individually by the named plaintiffs. Defend-

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

violations can only proceed under the authority of §18(a), 15

US.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).

—e proof of individual reliance for each class member would

necessarily defeat commonness of issues of law or fact and ude

a class action on that count. This does not, of course, ude the

YT iNT 4 the class for the purposes of the 10b-5 count. Rule

c A).

Appendix—Opinion of the District Court 43

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.

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 conspiracy; that is plaintiffs seek to tie a series of indi-

vidual 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. 1967). 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 misrepresenta-

tions and omissions originating in the May 2, 1970 annual

report concerning overstated inventory, buried research

and development costs and misstated current ration [sic]

of assets to liabilities, among other things, creating an er-

roneous image of prosperity. These possible accounting

failings which are alleged § 10(b) violations reappear again

in the 1971 annual report along with other alleged misrep-

resentations. The incidents of fraud were then allegedly

repeated and enhanced in the various other publications

purported to be links in this chain of misrepresentations.

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 in-

stance, that the value of the inventory was materially mis-

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

44 Appendix-—Opinion of the District Court

the repetition of this overstatement would suffice to prove

another violation. 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 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 in-

terim intervening curative representations which may or

may not eliminate the causal effect of some of the alleged

accounting misrepresentations. These complications, al-

though 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, especially 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.

®8, 97-101 (N.D. Cal. 1973), and thus does not destroy the

*The defendants e forcefully that lack of privity distinguishes

this case from + wort a 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 unpersuasive. See the discussion in

Grad v. Memorex, cited infra.

Appendix—Oyinion of the District Court 45

question of commonness here. The more reasonable 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.

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 immedi-

ately before and the price immediately after the partial cor-

rections, the Court is still unpersuaded that irreconcilable

conflicts between the members destroy commonality of is-

sues 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 mem-

ber’s damage or the plaintiffs’ damage operates against the

next member’s claim or precludes the plaintiff from assert-

ing that member’s rights with equal zeal. At this point,

*Problems 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, : Dorfman v. First Boston Corp., Civil

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

rted that the damage theory may affect the causal connection

een the alleged fraud the injury, defeating commonality

and typicality the Court will consider ii for that purpose only.

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

between the purchase price and the sales price after partial dis-

closure, is tantamount to rescissory damages and thus inappropriate

in a ets | nner pe They further a 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 un-

necessary to rule on this point at this time.

46 Appendix—Opinion of the District Court

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 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 irreconcilable.

Neither does the Court find persuasive defendant’s argu-

ments that debenture purchasers and stock purchasers

cannot be represented 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 influenced by considerations other than

those influencing stock investors, see Carlisle v. LTV Elec-

tronics, 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 secu-

rity holders does not as a matter of law preclude their in-

clusion 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

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

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

complainant is a debenture purchaser and — oy of exactly the

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

plaintiff Molder.

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

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

defendants, do not militate against this finding since they merely

found under their particular circumstafices and at the stage of their

proceedings, these two groups should not proceed tog while

recognizing that this would not apply to all situations.

Appendix—Opinion of the District Court 47

there may well have to be a distinct damage analysis em-

ployed to determine debenture holders’ losses, but these are

problems which can be solved with subclasses. They do not

frustrate the certification 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 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 Ampez 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 sub-

classes 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

conditions:

1. the class shall be defined as all those purchazers

of Ampex securities between May 2, 1970 and August 3,

1972;

2. the class is a conditional class subject to adjust-

ments 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;

48 Appendix—O pinion of the District Court

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

Unrrtep States District J upGE

APPENDIX C

CONSTITUTIONAL PROVISIONS,

STATUTES AND RULES INVOLVED

SECTION 10(B) OF THE SECURITIES EXCHANGE

ACT OF 1934 (15 U.S.C. § 78j(b)) provides in relevant part

as follows:

Manipulative and deceptive devices

It shall be unlawful for any person, directly or indirectly,

by the use of any means or instrumentality of interstate

commerce or of the mails, or of any facility of any national

securities exchange—

* & .

(b) To use or employ, in connection with the purchase or

sale of any security registered on a national securities ex-

change or any security not so registered, any manipulative

or deceptive device or contrivance in contravention of such

rules and regulations as the Commission may prescribe as

necessary or appropriate in the public interest or for the

protection of investors.

RULE 10b-5 (17 C.F.R. § 240. 10b-5) provides as follows:

Employment of manipulative and deceptive devices.

It shall be unlawful for any person, directly or indirectly,

by the use of any means or instrumentality of interstate

commerce, or of the mails or of any facility of any national

securities exchange,

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or

to omit to state a material fact necessary in order to make

the statements made, in the light of the circumstances

under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business

which operates or would operate as a fraud or deceit upon

any person, in connection with the purchase or sale of any

security.

50 Appendix—C onstitutional Provisions, Statutes

and Rules Involved

RULE 23 OF THE FEDERAL RULES OF CIVIL PROCE-

DURE provides as follows:

Class actions

(a) Prerequisites to a Class Action. One or more mem-

bers of a class may sue or be sued as representative parties

on behalf of all only if (1) the class is so numerous that

joinder of all members is impracticable, (2) there are ques-

tions of law or fact common to the class, (3) the claims or

defenses of the representative parties are typical of the

claims or defenses of the class, and (4) the representative

parties will fairly and adequately protect the interests of

the class.

(b) Class Actions Maintainable. An action may be main-

tained as a class action if the prerequisites of subdivision

(a) are satisfied, and in addition:

(1) tke prosecution of separate actions by or against in-

dividual members of the class would create a risk of

(A) inconsistent or varying adjudications with respect

to individual members of the class which would establish

incompatible standards of conduct for the party opposing

the class, or

(B) adjudications with respect to individual members of

the class which would as a practical matter be dispositive

of the interests of the other members not parties to the

adjudications or substantially impair or impede their ability

to protect their interests; or

(2) the party opposing the class has acted or refused to

act on grounds generally applicable to the class, thereby

making appropriate final injunctive relief or corresponding

declaratory relief with respect to the class as a whole; or

(3) the court finds that the questions of law or fact com-

mon to the members of the class predominate over any

questions affecting only individual members, and that a

class action is superior to other available methods for the

i he Sis PR tom a «

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Appendix—C onstitutional Provisions, Statutes 51

and Rules Involved

fair and efficient adjudication of the controversy. The mat-

ters pertinent to the findings include: (A) the interest of

members of the class in individually controlling the prosecu-

tion or defense of separate actions; (B) the extent and

nature of any litigation concerning the controversy already

commenced by or against members of the class; (C) the

desirability or undesirability of concentrating the litigation

of the claims in the particular forum; (D) the difficulties

likely to be encountered in the management of a class uction.

(c) Determination by Order Whether Class Action to Be

Maintained; Notice; Judgment; Actions Conducted Par-

tially as Class Actions.

(1) As soon as practicable after the commencement of

an action brought as a class action, the court shall deter-

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

under this subdivision may be conditional, and may be

altered or amended before the decision on the merits.

(2) In any class action maintained under subdivision (b)

(3), the court shall direct to the members of the class the

best notice practicable under the circumstances, including

individual notice to all members who can be identified

through reasonable effort. The notice shall advise each

member that (A) the court will exclude him from the class

if he so requests by u specified date; (B) the judgment,

whether favorable or not, will include all members who do

not request exclusion; and (C) any member who does not

request exclusion may, if he desires, enter an appearance

through his counsel.

(3) The judgment in an action maintained as a class

action under subdivision (b) (1) or (b) (2), whether or

not favorable to the class, shall include and describe those

whom the court finds to be members of the class. The judg-

ment in an action maintained as a class action under sub-

division (bd) (3), whether or not favorable to the class, shall

52 Appendix—Constitutional Provisions, Statutes

and Rules Involved

include and specify or describe those to whom the notice

provided in subdivision (¢) (2) was directed, and who have

not requested exclusion, and whom the court finds to be

members of the class.

(4) When appropriate (A) an action may be brought or

maintained as a class action with respect to particular

issues, or (B) a class may be divided into subclasses and

each subclass treated as a class, and the provisions of this

rule shall then be construed and applied accordingly.

(d) Orders in Conduct of Actions. In the conduct of

actions to which this rule applies, the court may make

appropriate orders: (1) determining the course of pro-

ceedings or prescribing measures to prevent undue repe-

tition or complication in the presentation of evidence or

argument; (2) requiring, for the protection of the mem-

bers of the class or otherwise for the fair conduct of the

action, that notice be given in such manner as the court

may direct to some or all of the members of any step in

the action, or of the proposed extent of the judgment, or

of the opportunity of members to signify whether they

consider the representation fair and adequate, to intervene

and present claims or defenses, or otherwise to come into

the action; (3) imposing conditions on the representative

parties or on intervenors; (4) requiring that the pleadings

be amended to eliminate therefrom allegations as to repre-

sentation of absent persons, and that the action proceed

accordingly; (5) dealing with similar procedural matters.

The orders may be combined with an order under Rule 16,

and may be altered or amended as may be desirable from

time to time.

(e) Dismissal or Compromise. A class action shall not

be dismissed or compromised without the approval of the

court, and notice of the proposed dismissal or compromise

shall be given to all members of the class in such manner

as the court directs.