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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition
- **Published:** January 1, 1975

## Text

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 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.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385003_2205%3A1. Public record. Not legal advice.