Petition — Darneille v. Caro
Supreme Court brief1980
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- wema Court, U. My;
< i EILED
In THE ih =OMAY 2
Supreme Court of the United Miy
>>
1980
PF oak JR., CLERR
Ocrosger Term, 1979
“79-1736
Grorce J. DaRNEILLE ef al.,
Petitioners,
v.
MicHaEL Cano,
Respondent.
PETITION FOR A WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
= ——————
Tomas F. Curnin .
Attorney for Petitioners
George J. Darneille and
F. Arnold Daum
80 Pine Street
New York, New York 10005
(212) 825-0100
Of Counsel:
Tuomas J. KavauEr
Cann Gorpon & Rermnpzi
Attorneys for Petitioners George J. Darneille
, and F. Arnold Dawm
Tomas C. Morrison
Gens M. Baver
PatrersoN BetKNaP Wess & TYLER
Attorneys for Petitioner
Webster Securities Limited
Peter FE. CauamMari
HertTzoc Cauamari & GLEASON
Attorneys for Petitioner Alex W. Head
Geratp EK. Bove.
Attorney for Petitioner
Beaumont Development Corporation
May 2, 1980
TABLE OF CONTENTS
PAGE
Prelimminncy Dem teeah | siccccssiccsccinnecncetnimeneearcaoanan 1
Opinions and SorGere Tk .ocsciniccincccsctnenaae 2
SUT, oinicseni cisinnscsinitnachinct bined 2
Question Presented ~wccstcbuand lh eee en abies 2
‘Constitutions and Statutory Provisions Involved ........ 2
Btatement oF th GM nocicwencisinsisectenmeeeein 3
REASONS FOR GRANTING THE WRIT
The Decision Below Conflicts With Prior Supreme
Court Authority by Sanctioning “Client-Less Liti-
gation” and Disregards the Constitutional Re-
quirement of a Live Controversy Throughout the
Entirety of the Litigation Because Mr. Weisman,
Who Abandoned His Action (Unlike the Plaintiffs
in Roper and Geraghty), No Longer Had a Per-
sonal Stake in the Outcome of the Litigation and
Mr. Caro (Unlike the Intervenor in United Air-
lines) Did Not Seek to Intervene to Appeal the
Denial of Class Certification, Thus Leaving No
One Before the Court With Any Claimed Interest
Adverse te Amy EReRORGOR once 6
The Decision Below Is Not Governed by Roper
and Geraghty or by United Airlines ................ 6
The Decision Below Conflicts With Prior De-
Cisioms Of: Tite COGRR a ccmpcictsamsnteanene 10
CoNcoLUSION ....... : : 14
ii
APPENDIX: PAGE
A—Order of the Court of Appeals, dated January 9,
1980, reversing and remanding the Order of the
TE ENO bisciniitncicccmsonchciieiaredeteaubeasan la
B—Orders of the Court of Appeals, dated February
27, 1980, denying petition for rehearing and
rehearing © DOME. nsannneannnscovencnennnnvonssonseonsesnnscnns 6a
C—Order of the District Court, dated March 14, 1979,
I TOI. a caienccitcciuncicssinandaceenanie 9a
D—Order of the Court of Appeals, dated June 8, 1979,
denying Putative Intervenor Caro’s petition for
mandamus and reinstating appeal ...................-.... 10a
K—Order of the Court of Appeals, dated May 14, 1979,
dismissing Putative Intervenor Caro’s: appeal
for failure to perfect property ............200.00...c0000--- 12a
F—Order of the Court of Appeals, dated January 17,
1979, dismissing Original Plaintiff Weisman’s
IOI acescehickaniscaciiguntemicaenastearnmeinsia tibiigsniiaeh ten 14a
G—Order of the Court of Appeals, dated March 7,
1979, denying defendants’ motion to modify the
January 17, 1979 order .. 16a
H—Judgment, dated July 25, 1978, dismissing the ac-
Be TT ciciscttieccomeseonens : panaenidhsxaakiitit 18a
I—Opinion and Order of the District Court, dated
July 14, 1978, dismissing Original Plaintiff
Weisman’s action as MOOt oon... eeeeeeeeeeeeeeee 19a
J—Opinion and Order of the District Court, dated
May 25, 1978, denying various motions made by
Original Plaintiff Weisman 22.0... ee 25a
PAGE
K—Opinion and Order of the District Court, dated
April 19, 1978, denying Original Plaintiff Weis-
man’s motion for class certification ................... 32a
L—Opinion and Order of the District Court, dated
March 22, 1978, granting defendants’ motion for
reargument and dismissing complaint in part .... 37a
M—Opinion and Order of the District Court, dated
January 6, 1978, denying defendants’ motion to
dismiss the complaint . eae i 48a
TasLe or AUTHORITIES
Cases:
Baxter v. Palmigiano, 425 U.S. 308 (1976) o.oo 12
Board of School Commissioners v. Jacobs, 420 U.S. 128
(1975) .. i ae
California v. San Pablo & T.R.R., 149 U.S. 308 (1893) 13n
DeFumis v. Odegaard, 416 U.S. 312 (1974) oo... . a
Deposit Guaranty National Bank v. Roper, 445 U.S.
, 100 S.Ct. 1166 (1980) ow .. 6, 6n, 7, 7n, 8, 8n, 9,
9n, 10, 13, 13n
East Texas Motor Freight System, Inc. v. Rodriguez,
Re Sey Se AND eit icaeconaicdmiien le. 11
Franks v. Bowman Transportation Co., 424 U.S. 747
(1976) ..... a
Kremens v. Bartley, 431 U.S. IF REID sitieisietsssccesanns 11
Pasadena City Board of Education v. Spangler, 427
Spe I shee seckanicsadeek pitbiatibosantabieatend 12
iv
PAGE
SEC v. Medical Committee for Human Rights, 404 U.S.
7 >, sped circ dA 2 Nance ne OOOO 10
Sibron v. New York, 392 U.S. 40 (1968) .................--.... 10
Steffel v. Thompson, 415 U.S. 452 (1974) .........-.------------ 10n
Sosna v. Iowa, 419 U.S. 393 (1975) 20.22... eeeceeeeeseees 10, 11
United Airlines, Inc. v. McDonald, 432 U.S. 385 (1977)
7, 10, 11
United States v. Alaska S.S. Co., 253 U.S. 113 (1920).... 12n
United States v. Sherwood, 312 U.S. 584 (1941) .......... lin
United States Parole Commission v. Geraghty, 445 U.S.
——, 100 8.Ct. 1202 (1980) .................... 6, 6n, 7, 7n, 8, 9, 10
Weinstein v. Bradford, 423 U.S. 147 (1975) ...................- 12
Statutes:
United States Constitution, Article ITT .............. 3, 8,10
Securities Exchange Act of 1934 -..00000.2.0.....--- 2, 3,7
Rules:
ie INE 6 ccerscttintetiesiepinncioeineneniepenepmnantibain 11
) eR BAG | | SRE eaneeeo 3, 11, 11n
8 FS Ri Dare ed oN nO 5n
IN THE
Supreme Court of the United States
OctosperR Term, 1979
MIS aestaocedecs
Gzorce J. DaRnerze et al.,
Petitioners,
V.
Micuagt Cano,
Respondent.
PETITION FOR A WRIT OF CERTIORARI TO THE
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
Preliminary Statement
Petitioners George J. Darneille, F. Arnold Daum, Alex
W. Head, Beaumont Development Corporation and Web-
ster Securities Limited respectfully pray that a writ of
certiorari issue to review an order of the Court of Ap-
peals which reversed and remanded the District Court’s
order denying Respondent’s motion to intervene in an
action which had previously been dismissed as moot and
from which no appeal was then pending because the orig-
inal plaintiff had abandoned his appeal. Petitioners, to-
gether with John P. Ohl and I. L. Vosko, were the de-
fendants in the District Court and petitioners were the
appellees in the Court of Appeals. Respondent Michael
Caro was the putative intervenor in the District Court
and the appellant in the Court of Appeals.
2
Opinions and Orders Below
The order of the Court of Appeals (App.A, ifra, pp.
la to 5a) is unreported. It was rendered on January 9,
1980 and a timely petition for rehearing was denied on
February 27, 1980 (App.B., infra, pp. 6-7a). Of the several
prior orders of the Court of Appeals and the opinions and
orders of the District Court which are reprinted in appen-
dices C through M, infra, only four of the decisions of
the District Court have been published. These are re-
ported at 79 F.R.D. 389, appeal dismissed, 595 F.2d 1210;
78 F.R.D. 671; 78 F.R.D. 669; and [1977-78 Transfer
Binder] CCH Fed.Sec.L.Rep. { 96,278.
Jurisdiction
The jurisdiction of this Court is invoked under 28 U.S.C.
§ 1254(1).
Question Presented
For jurisdictional purposes, does a complaint seeking
money damages (for a violation of the securities laws),
when coupled with a class action request, survive the
abandonment of the entire action by the only named plain-
tiff during the pendency of his appeal from the District
Court’s denial of class action certification, so as to sup-
port intervention in the District Court by a new plaintiff
who seeks not to pursue the appeal from the denial of
class certification but to litigate his own claim on the
merits?
Constitutional and Statutory Provisions Involved
Constitutional and statutory provisions involved in-
elude the following:
United States Constitution, Article ITI,
Federal Rules of Civil Procedure, Rule 23, and
<
3
United States Code, Title 15, Section 78j(b) (Securi-
ties Exchange Act of 1934, Section 10(b)).
Statement of the Case
Original Plaintiff Weisman brought this action both “on
behalf of himself and all others similarly situated”, pur-
porting to state a claim under the Securities Exchange Act
of 1934 (“1934 Act”). After the District Court sustained |
the sufficiency of part of his complaint (37a; 48a),* Mr.
Weisman sought and the District Court denied class cer-
tification (32a). The denial was based on Mr. Weisman’s
gross unfitness to serve as an adequate class representa-
tive (34a) and the District Court expressly declined to
reach any of his other arguments, viz., numerosity, com-
monality, typicality, favorability, manageability, superi-
ority, desirability, predominance or any of the other requi-
sites of a class action under Rule 23, Fed.R.Civ.P. (id.).
After the District Court, making it clear that Mr. Weis-
man was pursuing his claim on his own behalf alone, denied
Mr. Weisman’s several subsequent requests for various
kinds of inappropriate relief (25a), the defendants—al-
though unwilling to concede any wrongdoing or liability—
decided it was not economical to commit significant re-
sources to the defense of a claim which the complaint
revealed to be $221.40. Accordingly, they tendered to Mr.
Weisman a bank check in the sum of his own individual
claim plus court costs. Mr. Weisman never returned or
refused this payment.
On motion of the defendants, the District Court dis-
missed Mr, Weisman’s individual complaint (which it had
declined to certify as a class action) as moot on July 14,
1978 (19a), and Mr. Weisman appealed to the Court of
* While we do not agree with the District Court’s conclusion that
the complaint states any claim upon which relief can be granted,
that question was not before the Court of Appeals and thus is not
before this Court.
4
Appeals for the Second Circuit. The appeal was fully
briefed and argued on December 8, 1978. On January 15,
1979—prior to any decision by the Court of Appeals—Mr.
Weisman requested that the appeal be dismissed; he wrote
a letter which his attorneys delivered to the Court of Ap-
peals stating “that, due to personal reasons, J wish to
withdraw as plaintiff in the [instant] lawsuit” (emphasis
added). On January 17, 1979, the Court of Appeals dis-
missed the appeal by an Order which read in pertinent part:
“[T]t is now hereby ordered . . . that, because the ap-
pellant, who has been found by the District Court to be
an inadequate class representative, has indicated that
he no longer wishes to be a plaintiff in this lawsuit,
the appeal be dismissed. This order shall not prej-
udice the right of another plaintiff to enter the suit
within 30 days” (15a) (emphasis added).*
On February 2, 1979, Putative Intervenor Caro filed a
motion to intervene in the District Court—not for pur-
poses of pursuing the appeal of the denial of class cer-
tification but to litigate his own claim—and on March 16,
1979, the District Court denied intervention in an order
which, in its entirety, read as follows:
“The motion of Michael Caro to intervene in this
action as a party plaintiff is denied without prejudice
to his right to commence a new action based on the
acts alleged in this action. Our dismissal of Weis-
man’s action has not been appealed, and there is,
therefore, no action pending in which Caro can inter-
vene. Tilley Lamp Co. v. Thacker, 454 F.2d 805 (5th
Cir. 1972). Additionally, Caro does not seek to inter-
vene to appeal the denial of Weisman’s motion for
class certification, and, thus, the Supreme Court’s deci-
* Defendants sought modification of this order and on March 7,
1979, the Court of Appeals denied their motion (16a).
5
sion in United Airlines, Inc. v. McDonald, 4382 U.S.
385 (1977), is not applicable.
“So ordered.” (9a).
Mr. Caro’s petition for a writ of mandamus compelling
the District Court to allow intervention was denied by the
Court of Appeals on June 8, 1979, but his appeal (which
had been dismissed on May 14, 1979 for failure to perfect
properly, 12a) was reinstated (10a). On January 9, 1980,
the Court of Appeals issued the order sought to be reviewed
(la).
The order of the Court of Appeals reversed and re-
manded the District Court’s order denying intervention
into an action previously dismissed for mootness and never
certified as a class action by the District Court where the
only original named plaintiff not only no longer had a
claim against any defendant, but had voluntarily with-
drawn from any further participation in the case after
the District Court had denied certification and, in fact,
had abandoned his appeal wherein he sought to challenge
the denial of class certification. Nowhere in its four page
order did the Court of Appeals address the constitutional
requirement of case or controversy, which the District
Court had held was not satisfied at the time the Intervenor
sought to intervene to assert his own claim (and not to
appeal the denial of class certification) ; instead, the Court
of Appeals invoked its “broad powers to make such dis-
position of the case before it as justice requires” (4a).* A
timely petition for rehearing was denied on February 27,
1980 (6a).
* Invoking Rule 42, Fed.R.App.P. (4a), the Court of Appeals
said that it was “empowered to impose terms upon the parties
seeking to avoid that adjudication [of mootness and the correct-
ness of the denial of class certification]” (5a) (emphasis added).
Of course, it was Mr. Weisman who sought to avoid that (or any
other) adjudication by withdrawing from his appeal, but the
defendants upon whom the Court of Appeals in effect “Imposed
terms”.
REASONS FOR GRANTING THE WRIT
The Decision Below Conflicts With Prior Supreme
Court Authority by Sanctioning ‘“Client-Less Litiga-
tion” * and Disregards the Constitutional Requirement
of a Live Controversy Throughout the Entirety of the
Litigation Because Mr. Weisman, Who Abandoned His
Action (Unlike the Plaintiffs in Roper and Geraghty),
No Longer Had a Personal Stake in the Outcome of
the Litigation and Mr. Caro (Unlike the Intervenor in
United Airlines) Did Not Seek to Intervene to Appeal
the Denial of Class Certification, Thus Leaving No One
Before the Court With Any Claimed Interest Adverse
to Any Defendant
The Decision Below Is Not Governed
by Roper and Geraghty or by United Airlines
In two decisions earlier this Term the Court confronted
the question of the mootness, vel non, of a non-certified
class action wherein the individual plaintiff who no longer
has a claim himself seeks to prosecute an appeal from the
denial of class action certification and determined that
such a plaintiff has a sufficient “personal stake” in the
outcome of class certification to satisfy the requirements
of Article IIT of the Constitution. Deposit Guaranty Na-
tional Bank v. Roper, 445 U.S. , 100 S.Ct. 1166 (1980) ;
United States Parole Commission v. Geraghty, 445 U.S.
, 100 S.Ct. 1202 (1980).** Crucial to this Court’s deci-
* Deposit Guaranty National Bank v. Roper, 445 U.S. —, 100
S.Ct. 1116, 1181 jn. 13 (1980) (Mr. Justice Powell, dissenting).
** In both Roper and Geraghty it was ultimately determined by
the Courts of Appeals that the District Court’s denial of class cer-
tification was erroneous and that such error “related back” to the
original denial and thus preserved jurisdiction. No such determi-
7
sions was the ongoing “personal stake in the outcome” of
the named plaintiffs in these cases (Geraghty, 100 S.Ct. at
1212: “Respondent here continues vigorously to advocate
his right. to have a class certified”; Roper, 100 S.Ct. at
1173: “Respondents have maintained throughout this ap-
pellate litigation that they retain a continuing individual
interest in the resolution of the class certification ques-
tion”).*
Here, however, Original Plaintiff Weisman abandoned
his appeal from the denial of class certification and ex-
pressed his desire “to withdraw as plaintiff” in the action.
The Court of Appeals recognized his withdrawal and dis-
missed the appeal (14a), but allowed 30 days for “another
plaintiff to enter the suit” (15a). Query, what suit? Mr.
Weisman’s substantive claim had been extinguished by the
tender, and he abandoned his personal stake in the out-
come of the class certification question in the midst of the
pendency of that very appeal.
Perhaps the Court of Appeals contemplated intervention
by another plaintiff to prosecute the appeal from the denial
of class certification, as its citation of United Airlines, Inc.
v. McDonald, 432 U.S. 385 (1977), might suggest (17a).
nation was ever made here and, we submit, it is most unlikely that
an appellate court would conclude that the District Court abused
its discretion by refusing to certify a convicted securities fraud
felon as a class representative in a 10b-5 action under the 1934 Act,
pretermitting his various other character deficiencies (32-36a; see
27-29a). See Geraghty, supra, 100 S.Ct. at 1212 (“If, on appeal,
it is determined that class certification prop:rly was denied, the
claim on the merits must be dismissed as mot”).
* In Roper this Court expressly limited its consideration to only
“the private interest of the named plaintiffs” (100 S.Ct. at 1170)
which, after the tender of damages, continued only “so long as
they retained an economic interest in class certification” (td. at
1171). Contrast Mr. Weisman’s total abandonment of his “pri-
vate interests” here.
8
Roper and Geraghty would support such a result. But that
is not what happened here. Putative Intervenor Caro
(represented by Weisman’s counsel) chose to intervene in
the District Court to prosecute the action on the merits,
and not in the Court of Appeals to prosecute the appeal!
from the denial of class certification. The District Court
correctly perceived the difference between the two (9a)
as later noted by this Court in Geraghty, 100 S.Ct. at 1207,
and Roper, 100 S.Ct. at 1169 & 1171 n.5. Finding “no action
pending in which Caro can intervene” (9a), the District
Court necessarily dismissed.
What the Court of Appeals reversal did was to direct
the District Court to “consider the application . . . of Caro
[to intervene]” (5a) without explaining what it was that
Caro might intervene into. What it was not is clear: it
was not any action in which Mr. Weisman had a “personal
stake” in either the substantive merits or the procedural
outcome of class certification; Mr. Weisman had abandoned
the action in all respects.
As this Court said in Roper, supra, 100 S.Ct. at 1170:
“[T]he right of a litigant to employ Rule 23 is a pro-
cedural right only, ancillary to the litigation of sub-
stantive claims. Should these substantive claims
become moot in the Art. III sense, by settlement of all
personal claims for example, the court retains no
jurisdiction over the controversy of the individual
plaintiffs” (emphasis added).
That is precisely what happened here: the substantive
(and all other) claims became moot in the Art. ITT sense
by their abandonment by Mr. Weisman. and the court re-
tained no jurisdiction over anything.* All that was left
*In Roper, although this Court was willing to assume that the
District Court’s final judgment of mootness precluded appeal on
9
was “the definitive mootness of a case or controversy,
which ousts the jurisdiction of the federal courts and re-
quires dismissal of the case” (Roper, supra, 100 S.Ct. at
1172).
This case—unlike Roper or Geraghty—is the very
“lawsuit that has no plaintiff’ which the Chief Justice
and Justices Powell, Stewart and Rehnquist, dissenting
in Geraghty (100 S.Ct. at 1218), feared. Mr. Weisman was
no longer the client—he had withdrawn. Mr. Caro was not
yet the client, for he had not yet entered the suit. Who,
then, was the client at the time intervention was sought,
viz., after Mr. Weisman withdrew and before the advent
of Mr. Caro? The answer is inescapable: no one! The
Second Circuit’s unwillingness to recognize this extreme
ease of mootness as demonstrating the absence of “self-
interested parties vigorously advocating opposing posi-
tions” (Geraghty, 100 S.Ct. at 1212) is tantamount to aban-
doning entirely Article ITI’s requirement of a case or con-
troversy in favor of litigation by “concerned bystanders”
(Mr. Justice Powell, joined by-the Chief Justice and Jus-
tices Stewart and Rehnquist dissenting in Geraghty, 100
S.Ct. at 1217) at best or self-interested lawyers seeking
fees at worst.
Roper and Geraghty simply stand for the proposition
that Mr. Weisman could have pursued his appeal from the
that aspect, it noted that “it does not follow that this cireum-
stance would terminate the named plaintiffs’ right to take an
appeal on the issue of class certification” (100 S.Ct. at 1171)
(emphasis added), “so long as that party retains a stake in the
appeal satisfying the requirements of Art. IIT” (id.) (emphasis
added). In Roper, the named piaintiffs retained such a stake be-
cause of their stated “desire to shift part of the costs of litigation
to those who will share in its benefits if the ciass is certified and
ultimately prevails” (id. at 1173 & 1171 n. 6). Here, Mr. Weisman
never articulated such a desire and, on the contrary, abandoned
his appeal.
10
denial of class certification. Of course, he elected to do
otherwise. United Airlines simply stands for the proposi-
tion that Mr. Caro could have pursued Mr. Weisman’s
abandoned appeal from the denial of class certification.
Of course, he too elected to do otherwise. Thus, as neither
Roper nor Geraghty nor United Airlines applies, it must
be the other relevant decisions of this Court which con-
trol. These decisions were simply ignored by the Court of
Appeals, which thus entered an order in irreconcilable con-
flict with such decisions of this Court and with Article ITI
of the Constitution.
The Decision Below Conflicts With
- Prior Decisions of This Court
It was well settled prior to the order below that federal
courts may only entertain actions presenting a live case
or controversy, U.S. Const., Art. ITI, §2; e.9., DeFunis
v. Odegaard, 416 U.S. 312, 317 (1974); Sibron v. New Y ork,
392 U.S. 40, 50 n.8 (1968), and appellate courts are like-
wise constrained. E.g., Sosna v. Iowa, 419 U.S. 393, 402
(1975) ; SEC v. Medical Committee for Human Rights, 404
U.S. 403 (1972).* In the absence of such a case or con-
* It was equally well settled prior to the order below that where
a case has become moot while in the District Court, no such live
controversy exists and, accordingly, appellate jurisdiction is lack-
ing, Steffel v. Thompson, 415 U.S. 452, 459 n.10 (1974) (“an actual
controversy must be extant at all stages of review, not merely at
the time the complaint is filed”). That was precisely the situation
here.
Here, Mr. Weisman’s substantive claim became moot in the
District Court long before Mr. Caro sought to intervene. Mr.
Weisman’s controversy with the various defendants arose out of
his belief that they ought to pay him a sum of money which was
at most $221.40 and the defendants, although maintaining they
were not obligated to do so, paid Mr. Weisman this sum of money.
Accordingly, there was no live controversy between Mr. Weisman
and any defendant over his substantive claim as of a date well
prior to Mr. Caro’s motion to intervene. Similarly, there was no
live controversy between Mr. Weisman and any defendant over
11
troversy, subject matter jurisdiction is lacking and dis-
missal of the action is mandated, regardless of its pro-
cedural posture at the time. Fed.R.Civ.P. 12(h)(3). A
fortiori, where subject matter jurisdiction is lacking, in-
tervention is precluded because there is no action (over
which the Court has *1risdiction) to intervene into.
The Court of Appeals’ reference to “the intended class”
(3a) was inappropriate, for “the case was ‘stripped of
its character as a class action’ upon denial of certification
by the District Court”, United Airlines, Inc. v. McDonald,
432 U.S. 385, 393 (1977), citing Advisery Committee’s Note
on 1966 Amendments to Rule 23.* Conversely, because
the class was never certified, it never acquired a legal status
separate from that of then-plaintiff Weisman. See Sosna
v. Iowa, supra, 419 U.S. 393, 399 (1975). Thus, the class
contemplated in Mr. Weisman’s original complaint never
achieved jurisprudential existence and, therefore, could not
succeed to Mr. Weisman’s adversary position upon Mr.
Weisman’s withdrawal. See, e.g., Kremens v. Bartley, 431
U.S. 119, 132-33 (1977) (“it is only a ‘properly certified’
class that may succeed to the adversary position of a named
representative whose claim becomes moot”); East Texas
Motor Freight System, Inc. v. Rodriguez, 431 U.S. 395, 406
n.12 (1977) (“Obviously, a different case would be pre-
his procedural claim to be entitled to prosecute his action as a
class action as of the date of his withdrawal as plaintiff during
the pendency of his own appeal. Ignoring the obvious import of
this total lack of a live controversy, the Court of Appeals simply
referred to “the intended class” (3a) and “the class which Weis-
man purported to represent” (4a). This formulation, however,
wholly ignores the fact that there can be no “class” and no “class
members” unless and until a District Court certifies that all the
requirements of Rule 23 have been met. Here, there was no such
certification and, in fact, none of the requirements of Rule 23 had
been met.
* Since Rule 23 is a rule of procedure only, it cannot serve to
enlarge the jurisdiction of federal courts. See United States v.
Sherwood, 312 U.S. 584, 589-90 (1941).
12
sented if the District Court had certified a class and only
later had it appeared that the named plaintiffs were not
class members or were otherwise inappropriate class rep-
resentatives. In such a case, the class claims would have
already been tried, and, provided the initial certification
was proper and decertification not appropriate, the claims
of the class members would not need to be mooted or
destroyed because subsequent events or the proof at trial
had undermined the named plaintiffs’ individual claims”) ;
Franks v. Bowman Transportation Co., 424 U.S. 747
(1976) ; see, e.g., Board of School Commissioners v. Jacobs,
420 U.S. 128 (1975) (this Court instructed the lower court
to dismiss the complaint as moot because no class action
determination had been adequately made and the named
plaintiffs no longer had any interest in the matter in con-
troversy) ; Weinstein v. Bradford, 423 U.S. 147 (1975) (this
Court vacated the judgment below and directed the lower
court to dismiss the complaint because the case had become
moot as to the named plaintiff and class certification had
been denied) ; Baxter v. Palmigiano, 425 U.S. 308, 311 n.1
(1976) (“[w]ithout such certification and identification of
the class, the action is not properly a class action”). In
Pasadena City Board of Education v. Spangler, 427 U.S.
424 (1976), this Court again emphasized that absent a for-
mal certification of a class, the case becomes moot when
the named plaintiff no longer has a personal stake in the
case, and this is so despite the fact that the parties infor-
mally treated it as a class action and the potential class
members continued to have an interest in the outcome.*
*It is the fact of mootness and not the cause of it that counts
on the jurisdictional issue. The mootness may arise by act of the
parties or otherwise. In United States v. Alaska 8.8. Co., 253 U.S.
113, 116 (1920), this Court said:
“Where by an act of the parties, or a subsequent law, the exist-
ing controversy has come to an end, the case becomes moot and
should be treated accordingly.”
(Footnote continued on next page)
13
Accord, Deposit Guaranty National Bank v. Roper, supra,
100 S.Ct. at 1171.
Although all of the foregoing decisions of this Court
have a direct bearing on the question of just what it was
that Mr. Caro sought to intervene into, none of them was
even cited by the Court of Appeals.
To summarize, this Court is committed to these prin-
ciples: (1) a continuing live controversy is essential as
a jurisdictional base; (2) the live controversy must be one
between parties having a legal status before the Court;
(3) the mere filing of a complaint seeking class certifica-
tion does not confer legal party status on the class or on
its members; (4) without proper certification by the trial
court, the “class” does not attain legal status unless the
ease falls into the very narrow exception (not relevant
here) where the asserted wrong to the plaintiff is “cap-
able of repetition, yet evading review”, and (5) a named
plaintiff in a purported class action retains a sufficient
stake in the outcome to pursue an appeal from the denial of
class certification even when his own individual claim has
become moot.
Here, the order below violated each of these principles
of this Court’s decisions by sanctioning the possibility of
intervention into a dead litigation wherein—at the time in-
tervention was sought—no plaintiff eyisted and thus no
case or controversy was presented.
(Footnote continued from preceding page)
In California v. San Pablo & T.R.R., 149 U.S. 308 (1893), this
Court held that an action was mooted by tender of all sums which
could be recovered, despite the refusal of the plaintiff to accept
the tender. Accord, Deposit Guaranty National Bank v. Roper,
supra, 100 S.Ct. at 1171.
14
CONCLUSION
For the reasons set forth above, it is respectfully sub-
mitted that a writ of certiorari should issue to review the
order of the Court of Appeals.
Dated: New York, New York
May 2, 1980
Respectfully submitted,
THomas F.. Curnin
Attorney for Petitioners
George J. Darneille and
F. Arnold Daum
80 Pine Street
New York, New York 10005
(212) 825-0100
Of Counsel:
Tomas J. Kavaer
Canttt Gorpvon & Rernveu
Attorneys for Petitioners George J. Darneille
and F. Arnold Daum
‘THomas C. Morrison
Gene M. Baver
Patrerson Betknar Wess & TYLER
Attorneys for Petitioner
Webster Securities Limited
Perer BE. Cauamart
Hertzoc Cautamari & Gizason
Attorneys for Petitioner Alex W. Head
Greratp E. Boveri
Attorney for Petitioner
Beaumont Development Corporation
APPENDIX
Appendix A
UNITED STATES COURT OF APPEALS
For tHe Seconp Circuit
79-7408
At a Stated Term of the United States Court
of Appeals for the Second Circuit, held at
the United States Courthouse in the City
of New York, on the ninth day of January,
one thousand nine hundred and eighty.
PRESENT:
Hon. Exvisworth A. VAN GRAAFEILAND,
Hon. Amatya L. Kearse,
Circuit Judges.
Hon. Joun F. Dootrne, Jr.,*
U.S. District Judge.
MicHaEL Caro,
Intervenor-Appellant,
Vv.
Grorce J. Darnemiz, F. Arnotp Daum, Atex W. Heap,
BEAUMONT DEVELOPMENT CORPORATION and WEBSTER
Securities LimirTep,
Defendants-A ppellees,
and
Joun P. Ont and I. L. Vosxo,
Defendants.
* Hon. John F. Dooling, Jr., U.S. District Court, Eastern Dis-
trict of New York, sitting by designation.
la
2a
Appendix A
ORDER
On May 2, 1977, Samuel Weisman brought an action
against the above named defendants on behalf of all share-
holders of Westates Petroleum Corporation as of February
1, 1977. The complaint alleged violations of sections 10(b)
and 13(d) of the Securities Exchange Act of 1934, 15 U.S.C.
§§ 78j(b) and 78m(d), Commission Rule 10b-5, 17 C.F.R.
§ 240.10b-5, and Commission Regulation 13D, 17 O.F.R.
§ 240.13d-1 et seq. In essence, the complaint alleged a
scheme by the defendants to purchase the common stock of
Westates while they were in possession of inside informa-
tion that Westates would be liquidated at a much higher
price per share than they were paying. On defendants’
motion, the district court dismissed the section 13(d) claim
but held that the section 10(b) claim stated a cause of
action.
On April 19, 1978, the district court denied Weisman’s
motion for class certification on the ground that Weisman
could not thoroughly and adequately protect the interest of
the class. See Weisman v. Darneille, 78 F.R.D. 669, 670
(S.D.N.Y. 1978). Although the district court refused there-
after to certify the class certification question for inter-
locutory appeal, plaintiff, on May 16, 1978, filed a notice of
appeal to this Court from the district court’s April 19 order.
On May 18, 1978, two days after the notice of appeal was
filed, defendants moved in district court to dismiss the
action as moot on the ground that they had tendered Weis-
man a check for $271.40, the amount of his claimed indi-
vidual damages plus $50 court costs. By opinion dated
July 14, 1978, the district court held that the action was
moot, and judgment of dismissal was entered on July 27,
1978, On August 17, 1978, Weisman appealed from that
judgment.
3a
Appendia A
The appeal was heard by this Court on December 8, 1978.
Appellant’s arguments were addressed to both the denial
of class certification and the dismissal of the complaint.
Before a decision was handed down, appellant Weisman
advised the Court that for reasons of health he wished to
withdraw as plaintiff in the litigation.
On January 17, 1979, this Court entered an order dis-
missing the appeal without prejudice to the right of another
plaintiff to enter the suit within thirty days.
On February 2, 1979, Michael Caro, another member of
the intended class, moved to intervene pursuant to the leave
granted in this Court’s January 17, 1979 order. Several
defendants then moved in this Court for a modification of
the January 17 order to provide that the order was with-
out prejudice to the right of another plaintiff to file suit
based upon the facts alleged in the amended complaint.
By order dated March 7, 1979, this Court denied defen-
dants’ motion stating:
“Because class certification has been denied, ‘it does not
.. . follow that the case must be treated as if there
never was an action brought on behalf of absent class
members.’” (Citations omitted).
Despite this Court’s reiteration of its position in the
March 7, 1979 order, the district court, on March 14, 1979,
denied Caro’s motion to intervene by memorandum endorse-
ment which read as follows:
“The motion of Michael Caro to intervene in this action
as a party plaintiff is denied without prejudice to his
right to commence a new action based on the acts al-
leged in this action. Our dismissal of Weisman’s ac-
tion has not been appealed, and there is, therefore, no
action pending in which Caro can intervene. Tilley
4a
Appendix A
Lamp Co. v. Thacker, 454 F.2d 805 (5th Cir. 1972).
Additionally, Caro does not seek to intervene to appeal
the denial of Weisman’s motion for class certification,
and, thus, the Supreme Court’s decision in United Air
Lines, Inc. v. McDonald, 432 U.S. 385 (1977), is not
applicable.”
Because the district court has failed to comply with the
mandate of this Court, we reverse.
In exercising its appellate jurisdiction, this Court has
broad powers to make such disposition of the case before
it as justice requires. In re Barnett, 124 F.2d 1005, 1009
(2d Cir. 1942). It may, pursuant to Rule 42 of the Federal
Rules of Appellate Procedure, fix terms or conditions for
voluntary dismissal by an appellant. This rule is similar
to Rule 41(a)(2) of the Federal Rules of Civil Procedure,
and many of the same considerations should apply. See
In re Barnett, supra, 124 F.2d at 1013. Included among
those considerations should be the nature of the action as
one brought on behalf of an intended class, particularly
where, as here, statute of limitations problems are in-
volved. See United Airlines, Inc. v. McDonald, 432 U.S. 385,
392 (1977); Shelton v. Pargo, Inc., 582 F.2d 1298, 1304-16
(4th Cir. 1978) ; Rothman v. Gould, 52 F.R.D. 494 (S.D.N.Y.
1971); Philadelphia Electric Co. v. Anaconda American
Brass Co., 43 F.R.D. 452, 460-61 (E.D. Pa. 1968). Where
class certification is denied because of inadequacy of repre-
sentation, courts should not be unmindful of the interests
of absent members of the intended class, who may have
relied upon the ongoing litigation. See Smith v. Josten’s
American Yearbook Co., 78 F.R.D. 154, 175 (D. Kan. 1978).
It was this Court’s concern for the class which Weisman
purported to represent that prompted us to condition the
da
Appendia A
dismissal of the appeal with the proviso that the dismissal
would be without prejudice to the right of another plaintiff
to enter the suit within thirty days. At the time the order
of dismissal was entered, the issue of mootness was before
this Court on appeal together with the order denying class
certification, upon which the claim of mootness was based,
and adjudication of those issues was pending. This Court
was empowered to impose terms upon the parties seeking
to avoid that adjudication.
The order appealed from is reversed and the matter is
remanded to the district court with instructions to con-
sider the application of appellant Caro in accordance with
the provisions of Rule 24 of the Federal Rules of Civil
Procedure. Because appellees have now raised an issue
as to the adequacy of appellant’s motion papers on his
application for intervention, appellant may have leave to
file an amended and more detailed set of papers in sup-
port of his application.
Orpver dated this 9th day of January, 1980.
/s/ E.isworth A. Van GRAAFEILAND
/s/ Amatya L. Kearse
Circuit Judges.
/s/ Joun F. Doone, Jr.
District Judge.
6a
Appendix B
UNITED STATES COURT OF APPEALS
Seconp Crmovir
79-7408
At a Stated Term of the United States Court
of Appeals, in and for the Second Circuit,
held at the United States Court House, in
the City of New York, on the twenty-seventh
day of February, one thousand nine hundred
and eighty.
Present:
Hon. Exitsworta A. Van GRAAFEILAND,
Hon. Amatya L. Kearsz,
Circuit Judges,
Hon. Joun F. Dootrne, Jr.,
District Judge.
SamueL Weisman, on behalf of himself
and all others similarly situated,
Plaintiff,
MicHaEu Caro,
Appellant,
v.
Georce J. Darnemiz, F. Arnotp Daum, Joun P. Ox,
I. L. Vosxo, Bzaumonr Devetopment Corp., and
Wesster Securities Limirep,
Defendants-A ppellees.
Ta
Appendiz B
A petition for a rehearing having been filed herein by
counsel for the appellees George J. Darneille and F. Arnold
Daum
Upon consideration thereof, it is
Ordered that said petition be and hereby is Dentep.
/s/ A. Dantex Fussro
A. Daniel Fusaro, Clerk
8a
Appendix B
UNITED STATES COURT OF APPEALS
Sreconp Crrovurr
79-7408
At a Stated Term of the United States Court of
Appeals, in and for the Second Circuit, held
at the United States Court House, in the
City of New York, on the twenty-seventh
day of February, one thousand nine hundred
and eighty.
Samvue, WEIsMan, on behalf of himself
and all others similarly situated,
Plaintiff,
MicHazeL Caro,
Appellant,
v.
Grorcz J. Darnemiz, F, Arnotp Daum, Joun P. Ont,
I. L. Vosxo, Beaumont DerveLopMent Corp., and
Wesster Securities Limirtep,
Defendants-A ppellees.
A petition for rehearing containing a suggestion that the
action be reheard in banc having been filed herein by coun-
sel for the appellees George J. Darneille and F. Arnold
Daum, and no active judge or judge who was a member of
the panel having requested that a vote be taken on said
suggestion,
Upon consideration thereof, it is
Ordered that said petition be and it hereby is Denmp.
/s/ Irvine R. KavrmMan
Irving R. Kaufman, Chief Judge
9a
Appendix C
Weisman v. Darneille
ENDORSEMENT
77 Civ 2110 (LFM)
The motion of Michael Caro to intervene in this action
as a party plaintiff is denied wthout prejudice to his right
to commence a new action based on the acts alleged in this
action. Our dismissal of Weisman’s. action has not been
appealed, and there is, therefore, no action pending in which
Caro can intervene. Tilley Lamp Co. v. Thacker, 454 F.2d
805 (5th Cir. 1972). Additionally, Caro does not seek to
intervene to appeal the denial of Weisman’s motion for
class certification, and, thus, the Supreme Court’s decision
in United Air Lines, Inc. v. McDonald, 432 U.S. 385 (1977),
is not applicable.
So ordered.
Dated: New York, N. Y.
March 14, 1979
/s/ Luoyp F. MacManon
Lloyd F. MacMahon
United States District Judge
10a
Appendix D
UNITED STATES COURT OF APPEALS
Seconp Crrcuir
79-8258
At a Stated Term of the United States Court
of Appeals, in and for the Second Circuit,
held at the United States Court House, in
the City of New York, on the eighth day
of June, one thousand nine hundred and
seventy-nine.
SaAMvuEL WEIsMAN, on behalf of himself
and all others similarly situated,
Plaintiff,
MicHaEL Caro,
Appellant,
v.
Grorcz J. Darnemie, F. Arnotp Daum, Jonn P. Ont,
I. L. Vosxo, Beaumont Devetopment Corp., and
Wesster Securities Limite,
Defendants-A ppellees.
It is hereby ordered that the motion made herein by
counsel for the appellant by notice of motion dated May
23, 1979 to reinstate the appeal herein be and it hereby
is granted.
lla
Appendix D
It is further ordered that the petition for mandamus
is denied.
/s/ Irvine R. KaurmMan
Irving R. Kaufman, Chief Judge.
/s/ J. JosepH SmirxH (Per IRK)
J. Joseph Smith
/8/ EvutswortH Van GrRaAaFEILAND
(Per IRK)
Ellsworth Van Graafeiland
Circuit Judges.
12a
Appendix E
UNITED STATES COURT OF APPEALS
Seconp Circuit
Temporary Docket No. 79-8258
At a Stated Term of the United States Court
of Appeals, in and for the Second Circuit,
held at the United States Court House, in
the City of New York, on the 14th day of
May, one thousand nine hundred and
seventy-nin[e].
SAMUEL WEIsMAN, on behalf of himself
and all others similarly situated,
Plaintiff,
MicHaEt Caro,
Appellant,
V.
Grorce J. Darneriie, F. Arnotp Daum, Jonn P. Ont,
I. L. Vosko, BEauMont DEVELOPMENT CORPORATION and
Wesster Securities Limirten,
Defendants-A ppellees.
The Civil Appeals Management Plan of this court having
been promulgated on April 9, 1974 providing that within
ten (10) days after filing a notice of appeal the appellant
shall docket an appeal, by filing and serving a pre-argu-
ment statement (Form C), by ordering from the court
reporter a transcript of the proceedings and filing and
13a
Appendia E
serving a statement concerning same (Form D) and by
paying the docket fee and that in default of either of which
the Clerk may dismiss the appeal without further notice,
And the appeal herein not having been so docketed,
Upon consideration thereof, it is
Ordered that the appeal from the judgment dated:
3-16-79 of the United States District Court for the Southern
(7702110) District of New York be and it hereby is dis-
missed.
A. Danret Fvusaro
Clerk
/s/ Sara Piovia
By: Sara Piovia
Deputy Clerk
l4a
Appendix F
UNITED STATES COURT OF APPEALS
Seconp Circuit
78-7422
At a Stated Term of the United States Court
of Appeals, in and for the Second Circuit,
held at the United States Court House,
in the City of New York, on the seventeenth
day of January, one thousand nine hundred
and seventy-nine.
Present:
HonorasB_e Irvine R. KaurMan,
Chief Judge.
HonoraB_e J. JOSEPH SMITH,
HonoraBLeE ELtswortH VAN GRAAFEILAND,
Circuit Judges.
SaMvuEL WEISMAN,
Plaintiff-Appellant,
v.
Grorce J. Darneme, F. Arnotp Daum, Atex W. Heap,
BeauMont DEVELOPMENT CORPORATION and WEBSTER
Securities LimitTep,
Defendants-A ppellees,
and
Joun P. Out and I.L. Vosxo,
Defendants.
lida
Appendix F
Appeal from the United States District Court for the
Southern District of New Xork.
This cause came on te-be heard on the transcript of
record from the United States District Court for the South-
ern District of New York, and was argued by counsel.
On Consiperation Wuenreor, it is now hereby ordered,
adjudged, and decreed that, because the appellant, who has
been found by the District Court to be an inadequate class
representative, has indicated that he no longer wishes to
be a plaintiff in this lawsuit, the appeal be dismissed. This
order shall not prejudice the right of another plaintiff to
enter the suit within 30 days.
/8/ Irvine R. KaurmMan
Irving R. Kaufman, Chief Judge.
/8/ J. JosepH Smiru (Per IRK)
J. Joseph Smith
/s/ E.uswortnH Van GRraaFEILAND
Ellsworth Van Graafeiland,
Circuit Judges.
16a
Appendix G
UNITED STATES COURT OF APPEALS
Sreconp CircvulirT
78-7422
At a Stated Term of the United States Court
of Appeals, in and for the Second Circuit,
held at the United States Court House,
in the City of New York, on the 7th day
of March, one thousand nine hundred and
seventy-nine.
Samvuet WetsMan, on behalf of himself
and all others similarly situated,
Plaintiff-Appellant,
v.
Grorce J. Darnemiz, F. Arnotp Daum, Atex W. HeEap,
Joun P. Ont, I.L. Vosxo, Beaumont DEVELOPMENT
Corporation, a Delaware Corporation, and WerssTER
Srourities Limirep, a Bahamas Corporation,
Defendants-Appellees.
It is hereby ordered that the motion made herein by
counsel for the Darneille and Daum appellees by notice
of motion dated February 15, 1979 to modify the Court’s
decision of January 16, 1979 be and it hereby is denied.
Because class certification has been denied, “it does not
... follow that the case must be treated as if there never
was an action brought on behalf of absent class members,’ ”
17a
Appendia G
United Airlines, Inc. v. McDonald, 432 U.S. 385, 393 (1977),
quoting Philadelphia Electric Co. v. Anaconda American
Brass Co., 43 F.R.D. 452, 461 (E.D. Pa. 1968).
/s/ Irvine R. KaurmMan
Irving R. Kaufman, Chief Judge.
/s/ J. JosepH SmitH
J. Joseph Smith
/s/ ExiswortH Van GRAAFEILAND
(Per IRK)
Ellsworth Van Graafeiland
Circuit Judges
18a
Appendix H
UNITED STATES DISTRICT COURT
SoutHern District or New York
77 Civ. 2110 (LFM)
SaMvEL Weisman, on behalf of himself
and all others similarly situated,
Plaintiff,
—against—
Grorce J. Darnemiz, F. Arnotp Daum, Atex W. Heap,
Joun P. Ont, I. L. Vosxo, Beaumont DeveLopMENntT
Corporation, a Delaware Corporation, and Wesster
Securities Limrrep, a Bahamas Corporation,
Defendants.
JUDGMENT
This action came on for hearing before the Court, Hon-
orable Lloyd F. MacMahon, District Judge, presiding, and
the motion to dismiss as moot having been duly heard and
a decision having been duly rendered,
It is Ordered and Adjudged
that the plaintiff take nothing and that the action be
dismissed as moot.
Dated: New York, New York
July 25, 1978
/8/ Luoyp F. MacManon
U.S.D.J.
JUDGMENT ENTERED 7/27/78
/8/ Raymonp F, Burcuarptr
Clerk
19a
Appendix I
UNITED STATES DISTRICT COURT
ScutHern District or New York
77 Civ. 2110 (LFM)
SAmvueEL WEIsMAN, on behalf of himself
and all others similarly situated,
Plaintiff,
—against—
Gzrorce J. Darnemiz, F. Arnotp Daum, Atex W. Heap,
JoHn P. Ont, I. L. Vosxko, Beaumont DEVELOPMENT
Corporation and WesstER Securities LimirTep,
Defendants.
OPINION
APPEARANCES:
Kaufman Taylor Kimmel & Miller
By: Stanley L. Kaufman and
Irving Malchman, Esqs.
41 Hast 42 Street
New York, N. Y. 10017
—and—
Bernstein & Kirby
By: Roger W. Kirby, Esq.
41 Hast 42nd Street
New York, N. Y. 10017
Attorneys for Plaintiff
20a
Appendia I
Cahill Gordon & Reindel
By: Thomas F. Curnin and
Thomas J. Kavaler, Esqs.
80 Pine Street
New York, N. Y. 10005
Attorneys for defendants
Darneille and Daum.
Hertzog And Calamari
By: Peter E. Calamari, Esq.
99 Park Avenue
New York, N. Y. 10016
Attorneys for defendant Head.
Bodell & Magovern
By: Gerald E. Bodell, Esq.
102 East 35th Street
New York, N. Y. 10016
Attorneys for defendant
Beaumont Development Corporation.
Patterson, Belknap, Webb & Tyler
By: Thomas C. Morrison, Esq.
30 Rockefeller Plaza
New York, N. Y. 10020
Attorneys for defendant
Webster Securities Limited.
MacManon, District Judge.
Defendants move to dismiss the complaint for lack of
jurisdiction over the subject matter. Rule 12(b)(1), Fed.
R.Civ.P. Plaintiff moves for an order compelling produc-
tion of documents. Rules 34 and 37, Fed.R.Civ.P.
This is an action for securities fraud which was brought
as a class action, seeking damages for alleged violations
of Section 10(b) of the Securities Exchange Act of 1934
21a
Appendia I
and Rule 10b-5 thereunder. On April 19, 1978, we denied
plaintiff's motion to certify the action as a class action,
holding, inter alia, that plaintiffs status as a convicted
felon, and his reticence in disclosing this fact to his counsel
and his adversaries, demonstrated a lack of “honesty, con-
scientiousness, and other affirmative personal qualities re-
quired of a class representative.” Weisman v. Darneille,
77 Civ. 2110 (S.D.N.Y. Apr. 19, 1978), opinion at 4. There-
after, we refused to certify the class certification question
for an interlocutory appeal pursuant to 28 U.S.C. § 1292(b).
See Wetsman v. Darneille, 77 Civ. 2110 (S.D.N.Y. May 25,
1978). Undaunted, plaintiff, nevertheless, filed a notice of
appeal from our order refusing to certify the class, basing
appellate jurisdiction upon 28 U.S.C. § 1291.
Subsequently, defendants tendered to plaintiff the full
amount of plaintiff’s individual damages sought in the com-
plaint. The instant motion to dismiss the complaint fol-
lowed, defendants contending that the action has been
mooted and that we, consequently, lack jurisdiction over
the subject matter.
Before turning to the merits of defendants’ motion, we
must examine our jurisdiction. Plaintiff contends that his
filing of a notice of appeal from our order denying class
certification deprives us of jurisdiction to decide the instant
motion.
Generally, the taking of an appeal does indeed deprive
the district court of jurisdiction to take any further action
in the case, except in aid of the appeal or to correct clerical
1 Claims alleging violations of Section 13 of the Securities Ex-
change Act of 1934 and of Regulation 13D, 17 C.F.R. §§ 240.13d-1
—240.13d-4, were dismissed in a memorandum and order on March
_ 178) See Weisman v. Darneille, 77 Civ. 2110 (S.D.N.Y. Mar.
,1 .
22a
Appendia I
errors. See, e.g., Hast Hampton Dewitt Corp. v. State Farm
Mut. Auto. Ins. Co., 490 F.2d 1234, 1246 (2d Cir. 1974) ;
Segal v. Gordon, 467 F.2d 602, 608 n.12 (2d Cir. 1972). This
rule, however, presupposes the existence of a valid appeal
from an appealable order. Lowenschuss v. Kame, 392 F.
Supp. 59, 60 (S.D.N.Y. 1974). Where a notice of appeal
refers to an order which is clearly non-appealable, the
mere taking of the appeal is insufficient to divest the dis-
trict court of jurisdiction. In such circumstance, the dis-
trict court may ignore the notice of appeal and may proceed
with the case. See, e.g., Arthur Andersen & Co. v. Fine-
silver, 546 F.2d 338, 340-41 (10th Cir. 1976), cert. denied
sub nom. Arthur Andersen & Co, v. Ohio, 429 U.S. 1096
(1977).
In the absence of certification under § 1292(b), our order
refusing to certify this action as a class action is clearly
unappealable. See Coopers & Lybrand v. Livesay, 46 U.S.
L.W. 4757 (U.S. June 21, 1978). Thus, plaintiffs pur-
ported appeal in this case does not divest us of jurisdiction
to adjudicate the instant motion to dismiss the complaint.?
Turning to the merits of the motion, we can only con-
clude that the instant case has been mooted. Defendants
have chosen not to contest plaintiff’s claims and have ten-
dered the full measure of plaintiff’s damages. Plaintiff’s
claim is, therefore, satisfied, and he no longer has a stake
in the resolution of the issues raised in the complaint.
Thus, no live controversy exists between the parties, and
the case is moot. A moot case presents no “e~%e or con-
troversy” cognizable under Article III of the Constitution,
2 Subsequent to the drafting of this opinion, we were informed
by counsel for plantiff that, in light of Iivesay, plaintiff intended
to consent to defendants’ motion to dismiss the appeal. Such con-
sent by plaintiff in no way alters our decision here, since, at the
moment, the appeal remains pending in the Court of Appeals.
23a
Appendia I
and we, therefore, lack jurisdiction over the subject mat-
ter.2 See Winokur v. Bell Fed. Sav, & Loan Ass’n, 560 F.2d
271, 276-77 (7th Cir. 1977), cert. denied, 46 U.S.L.W. 3586
(U.S. Mar. 21, 1978). See also Lasky v. Quinlan, 558 F.2d
1133, 1136-37 (2d Cir. 1977) ; Vun Cannon v. Breed, 565 F.2d
1096, 1099 (9th Cir. 1977).
There is no merit to plaintiff’s argument that a dismissal
here would undermine the policies behind Rule 23, Fed.R.
Civ.P. To be sure, our decision may well obviate review
of our refusal to certify the class. See Winokur v. Bell
Fed. Sav. & Loan Ass’n, supra, 5€0 F.2d at 276-77, on re-
hearing, 562 F.2d 1034, 1034 & n.* (7th Cir. 1977) (Swy-
gert, J., dissenting from denial of petition for rehearing
en banc). Nevertheless, a dismissal for mootness does no
real damage to the members of the putative class. Any
putative class member may now institute an action, on his
own behalf or on behalf of a class, seeking recovery for
the seme transactions and occurrences sued upon here.
The availability of such an action is certainly sufficient to
protect the interests of the absent putative class members,
and we find nothing in Rule 23 which demands more than
this,
Accordingly, defendants’ motion to dismiss the complaint
is granted. In view of this disposition, plaintiff’s motion
We do not understand plaintiff to argue that he cannot be
“forced” to accept “involuntarily” the tender of damages. How-
ever, to the extent plaintiff challenges the propriety and the efficacy
of such practice, his challenge is without merit. Whether or not
plaintiff “accepts” a tender of damages, the case becomes moot upon
tender. At that point, full-blown litigation would yield no recovery
greater than that voluntarily offered by defendants, and a live
controversy no longer exists between the parties. The authorities
cited by plaintiff are not to the contrary. See Williams v. Sinclair,
529 F.2d 1383 (9th Cir.), cert. denied, 426 U.S. 936 (1976) ; Cam-
eron v. E.M. Adams & Co., 547 F.2d 473 (9th Cir. 1976).
24a
Appendia I
for an order compelling production of documents is denied
as moot.
Settle judgment within ten (10) days.
Dated: New York, N. Y.
July 14, 1978
/s/ Luoyp F. MacManon
Lloyd F. MacMahon
United States District Judge
25a
Appendix J
UNITED STATES DISTRICT COURT
SoutHERN District or New Yorxk
77 Civ. 2110 (LFM)
SamvueL WEIsMAN, on behalf of himself
and all others similarly situated,
Plaintiff,
—against—
Grorce J. Darnemiz, F. Arnotp Daum, Atex W. Heap,
JoHn P. Ont, I.L. Vosko, Beaumont DrveLopMEeNntT
Corporation and Wesster Securities Limirtep,
Defendants.
APPEARANCES:
Bernstein & Kirby
By: Roger W. Kirby, Esq.
41 East 42nd Street
New York, N. Y. 10017
—~angd—
Kaufman Taylor Kimmel & Miller
By: Stanley L. Kaufman and
Irving Malchman, Esqs.
41 Hast 42nd Street
New York, N. Y. 10017
Attorneys for Plaintiff
26a
Appendix J
Cahill Gordon & Reindel
By: Thomas F. Curnin, Thomas J. Kavaler and
John C. Koutsos, Esqs.
80 Pine Street
New York, N. Y. 10005
Attorneys for defendants
Daum and Darneille
Hertzog And Calamari
By: Peter E. Calamari, Esq.
99 Park Avenue
New York, N. Y. 10016
Attorney for defendant Head
Bodell & Magovern, P.C.
By: Gerald E. Bodell, Esq.
102 East 35th Street
New York, N. Y. 10016
Attorneys for defendant
Beaumont Development Corporation
OPINION
MacManon, District Judge.
Plaintiff moves for (1) the appointment of a guardian
ad litem for the putative class, or (2) certification pursu-
ant to 28 U.S.C. § 1292(b) of our opinion and order dated
April 19, 1978. He also moves, in a separate motion, for
(1) a list of the “class” members and (2) an order com-
pelling the production of certain documents.
Plaintiff brought this direct action under Section 10(b)
of the Securities Exchange Act of 1934' and Rule 10b-5?
to recover the allegedly illegal profits defendants gained
115 U.S.C. § 78j(b).
217 C.F.R. § 240.10b-5.
27a
Appendix J
from the liquidation of Westates Petroleum Company.’*
In our opinion and order dated April 19, 1978, we denied
plaintiff's motion for class certification on the sole ground
that he did not meet the requirements of Rule 23(a) (4),
Fed.R.Civ.P. We found that plaintiff was not an adequate
class representative because he had a prior felony convic-
tion under Section 10(b), his conduct in this action did
not comport with the high standards of honesty and in-
tegrity required of a fiduciary, and his knowledge of, and
participation in, this litigation was not that required of a
proper representative. See Weisman v. Darneille, No. 77
Civ. 2110 (S.D.N.Y. Apr. 19, 1978) (denial of motion for
class certification).
Guardian Ad Litem
Plaintiff’s motion for the appointment of a guardian ad
litem is grounded on the premise that the guardian could
“oversee plaintiff's conduct as a class representative and
. insure that plaintiff does in fact adhere to the high-
est standards of honesty and integrity in this case.” He
further argues that defendants will escape liability for
their alleged wrongdoing unless a guardian is appointed.
The arguments are frivolous.
Plaintiff has cited no authority, and our research has
disclosed none, supporting the proposition that a guardian
may be appointed to protect the interests of a putative
class. In every instance in which a guardian has been
appointed, the interests of a certified class were incon-
3 Plaintiff also sought recovery under Section 13 of the Securities
Exchange Act of 1934, 15 U.S.C. § 78m, and under Regulation 13D
thereunder, 17 C.F .R. §§ 240.13d-1—240.13d-4. We dismissed those
claims pursuant to Rule 12(b)(6), Fed.R.Civ.P., on March 22,
1978, however.
28a
Appendix J
sistent with those of its representative or his counsel. Our
prior denial of certification here is thus a critical distine-
tion between this case and those cited by plaintiff. In the
absence of certification, there is no “class” whose inter-
ests need to be protected by a guardian ad litem.
Plaintiff’s argument that denial of this motion vill allow
defendants to escape liability for their allegedly illegal
acts is also unpersuasive. Rejection of one plaintiff as an
adequate class representative does not preclude our grant-
ing class certification to another representative plaintiff.‘
Rule 23(a)(4), moreover, requires that the class repre-
sentative himself be an adequate fiduciary for the class.
That requirement cannot be satisfied by a patently inade-
quate representative supervised by an individual with no
stake in the litigation. What plaintiff attempts in this
motion is an end-run around Rule 23. We refuse to per-
mit that circumvention of the rule’s principles and deny
the motion insofar as it seeks the appointment of a guardian
ad litem for the putative class.
§ 1292(b) Certification
Certification of an interlocutory order to the Court of
Appeals cannot be granted unless the “district judge...
shall be of the opinion that such order involves a con-
trolling question of law as to which there is substantial
ground for difference of opinion and that an immediate
appeal from the order may materially advance the ulti-
mate termination of the litigation.”* Plaintiff has not
specified the question of law which he considers control-
*See Brick v. CPC International, Inc., 547 F.2d 185 (2d Cir.
1976).
§ 28 U.S.C. § 1292(b).
29a
Appendix J
ling. His memoranda, however, attack both of the grounds
on which our order of April 19 rested: that plaintiff had
not demonstrated the personal integrity required in the
fiduciary role he sought and that his knowledge of, and
participation in, this litigation were insufficient to satisfy
Rule 23(a) (4).
Neither of those grounds, however, can serve as the
basis for the certification of our order. Both involve mixed
questions of law and fact and therefore cannot give the
Court of Appeals jurisdiction to hear an interlocutory
appeal.®
Moreover, there is not “substantial ground for difference
of opinion” regarding either of those grounds. Plaintiff
has cited no authority directly supporting his contention
that a felon can be a proper class representative when he
has been convicted under the very statute invoked in the
purported class action.’ Nor has he cited any decisions
by our Court of Appeals or by courts in the Southern Dis-
trict of New York rejecting our second ground for deny-
ing certification. Indeed, that ground is supported by sub-
stantial preceden' in this district. We therefore deny
plaintiff’s motion insofar as it seeks § 1292(b) certification
of our April 19 order.
6 See Link v. Mercedes-Benz of North America, Inc., 550 F.2d
860 (3d Cir.), cert. denied, 431 U.S. 933 (1977); Johnson vy. All-
redge, 488 F.2d 820 (3d Cir. 1973), cert. denied, 419 U.S. 882
(1974).
7 Plaintiff's argument that the courts allow prisoners to maintain
class actions on behalf of other prisoners is specious. No one but a
prisoner could be a proper class representative in such a case.
8 See Weisman v. Darneille, supra, and cases there cited; Green-
span v. Brassler, 77 Civ. 1573 (S.D.N.Y. Feb. 14, 1978), and cases
there cited.
30a
Appendix J
Class List
Plaintiff also seeks a list of the “class members” in this
action so that he can “alert the class to its rights and to
the fact that these rights are in serious jeopardy.”
The simple and dispositive answer to this request, how-
ever, is that class certification has been denied in this
action. There are therefore no class members and no class
rights to be protected.’ Plaintiff’s attempt to communi-
cate with non-parties to induce them to intervene here,
moreover, poses serious ethical problems for his counsel.
We therefore deny this motion insofar as it seeks a class
list.
Document Production
Plaintiff finally seeks an order compelling defendants
and others to produce documents sought in prior discov-
ery requests.’°
Rule 9(f), General Rules for United States District
Courts for the Southern and Hastern Districts of New
York, requires, however, that every motion for an order
compelling production must be accompanied by the mov-
® Plaintiffs authorities cited in support of this aspect of his mo-
tion are inapposite. In Lowenschuss v. Bluhdorn, 73 Civ. 2021
(S.D.N.Y. Apr. 20, 1978), Judge Bonsal ordered that the disquali-
fied class representative in a certified class action be given a class
list to seek substitute representation. N.Y. Business Corporation
~ Law § 624(b) (McKinney 1963) deals with the rights of certain
shareholders to inspect the books of a corporation and to seek in the
state courts an order allowing such inspection. Section 627 of that
law and Weisfeld v. Spartan Industries, Inc., 58 F.R.D. 570, 578-79
(S.D.N.Y. 1972), allow a plaintiff in a derivative action to inspect
the corporation’s shareholder list to find other shareholders willing
to intervene and thereby obviate the uecessity of his posting secu-
rity for his state law claims.
10 Rule 37(a), Fed.R.Civ.P.
3la
Appendix J
ant’s affidavit that he has conferred with opposing counsel
in an attempt to resolve the dispute informally. Plaintiff
has not submitted such an affidavit, and this failure ap-
pears especially significant here, in light of defendants’
representations that they are ready to comply with any
proper discovery request. We therefore deny plaintiff’s
request for a production order without prejudice to re-
newal upon his compliance with General Rule 9(f).
One final matter must be resolved. On January 6, 1978,
we stayed all discovery in this action pending the deter-
mination of the class certification motion. There may have
been some confusion among the parties as to whether
plaintiff’s motion for § 1292(b) certification extended that
stay. To eliminate that confusion, we hold that the stay
is vacated as of this date. «
Accordingly, our prior stay of discovery in this action
is vacated as of this date. Plaintiff’s motion for an order
compelling production of documents is denied without
prejudice to renewal after compliance with General Rule
9(f). Plaintiff's motions are otherwise denied in all re-
spects.
So ordered.
Dated: New York, N. Y.
May 25, 1978
/8/ Lioyp F, MacManon
Lloyd F. MacMahon
United States District Judge
32a
Appendix K
UNITED STATES DISTRICT COURT
SouTHERN District or New York
77 Civ. 2110 (LFM)
SaMvuEL WEIsMAN, on behalf of himself
and all others similarly situated,
Plaintiff,
—against—-
Grorce J. Darnemiz, F. Arnotp Daum, Atex W. Heap,
JoHn P. Ont, I. L. Vosxo, Beaumont DrvELOPMENT
Corporation and Wesster Securities Limirep,
Defendants.
OPINION
APPEARANCES:
Bernstein & Kirby
By: Roger W. Kirby, Esq.
41 East 42nd Street
New York, N. Y. 10017
—and—
Kaufman Taylor Kimmel & Miller
By: Stanley L. Kaufman, Esq.
41 East 42nd Street
_New York, N. Y. 10017
Attorneys for Plaintiff
33a
Appendia K
Cahill Gordon & Reindel
By: Thomas F. Curnin, Thomas
J. Kavaler and George
Wailand, Esqs.
80 Pine Street
New York, N. Y. 10005
Attorneys for defendants
Daum and Darneille
Patterson, Belknap, Webb & Tyler
By: Thomas C. Morrison and
Gene M. Bauer, Esqs.
30 Rockefeller Plaza
New York, N. Y. 10020
Attorneys for defendant
Webster Securities Limited
MacManon, District Judge.
Plaintiff moves, pursuant to Rule 23(c), Fed.R.Civ.P.,
for class certification in this action.
The complaint alleges that certain officers and directors
of Westates Petroleum Company (Westates) and other in-
dividuals used their inside knowledge and made false S.E.C.
filings to profit illegally from Westates’ liquidation. Plain-
tiff, a Westates shareholder, brought this direct action
under Section 10(b)' of the Securities Exchange Act of
1934 and Rule 10b-5? to recover the wrongful profits.* He
115 U.S.C. § 778j(b).
217 C.F.R. § 240.10b-5.
’The complaint also alleged violations of Section 13, 15 U.S.C.
§ 78m, and of Regulation 13D, 17 C.F.R. §§ 240.13d-1—240.13d-4.
In a memorandum and order dated March 22, 1978, however, we
dismissed those claims under Rule 12(b) (6), Fed.R.Civ.P., with
leave to replead. Plaintiff has informed us py letter dated March
29, 1978 that he will not file an amended complaint.
34a
Appendix K
now seeks to represent “all persons, exclusive of defen-
dants, who owned shares of Westates ... on February 1,
1977, the record date for determining the shareholders of
Westates who are entitled to share in the proceeds of the
liquidation of Westates.”
Certification is dependent on plaintiff’s proof that each
of the requirements of Rule 23(a), Fed.R.Civ.P., has been
met. Fruchthandler v. Blakely, 73 F.R.D. 318 (S.D.N.Y.
1976). We conclude that plaintiff cannot “fairly and ade-
quately protect the interests of the class,” Rule 23(a) (4),
Fed.R.Civ.P., and therefore do not consider his other
arguments.
Plaintiff is a felon convicted of violating Section 10(b),
the very statute he invokes here. On November 27, 1974,
a Southern District of New York jury found him guilty of
stock fraud (in violation of 15 U.S.C. §§ 78j(b) and 78f(‘)),
mail fraud (in violation of 18 U.S.C. §§2 and 1341), and
conspiracy (in violation of 18 U.S.C. § 371), in connection
with the sale of stock in Automated Information Systems,
Ine. (Automated). He subsequently was fined $5,000 by
Hon. Charles M. Metzner, who departed from his “normal
practice in such cases [of imposing] a sentence of incar-
ceration” only because plaintiff was aged and in poor health.
Plaintiff, an attorney, was also censured by the Appellate
Division as a result of his felony conviction. Under ecur-
rent standards, however, he would have been disbarred
automatically. In re Chu, 42 N.Y.2d 490, 369 N.E.2d 1, 398
N.Y.S.2d 1001 (1977).
Plaintiff, moreover, did not reveal the fact of his con-
viction to counsel here until the day before his deposition.
During the deposition, he expressed an inability to under-
stand a question concerning his experience as a litigant
and then testified falsely that his conviction was for a mis-
35a
Appendiz K
demeanor. His testimony regarding an unrelated S.E.C.
inquiry and other litigation was similarly evasive.
Plaintiff's conviction and subsequent conduct here con-
vince us that he lacks the “ ‘honesty, conscientiousness, and
other affirmative personal qualities’” required of a class
representative. Ash v. Brunswick Corp., 1974-75 Fed. Sec.
L. Rep. (CCH) 95,109 at 97,950-51 (D. Del. 1975), quoting
7 C. Wright & A. Miller, Federal Practice and Procedure
§ 1766. As a fiduciary for the class, he would be required
to adhere to the highest standards of honesty and integrity.
See Cohen v. Beneficial Industrial Loan Corp., 337 U.S.
541, 549-550 (1949). He clearly failed to meet those stan-
dards in the Automated transaction and has similarly failed
to do so in this suit. That conduct is sufficient to dictate
the denial of class certification here. Amswiss Int’l Corp.
v. Heublein, Inc., 69 F.R.D. 663 (N.D. Ga. 1975); Ash v.
Brunswick Corp., supra.*
Plaintiff's unfamiliarity with this suit also requires the
denial of certification. Greenspan v. Brassler, No. 77 Civ.
1573 (LFM) (S8.D.N.Y. Feb. 14, 1978). Plaintiff did not
meet with his counsel in the ten months between the filing
of the complaint and the day preceding his deposition. He
cannot describe his claim or name the defendants. He was
not even certain that he had seen a copy of the complaint
before his deposition. Apart from his awareness that he
must bear the costs of the suit, plaintiff knows none of the
duties and responsibilities of a class representative. In-
deed, he has done little more in this action than write an
* Plaintiff's conviction and deposition testimony also may subject
him to discrediting cross-examination at trial that could prejudice
the claims of the class. Cf. Koos v. First Nat’l Bank, 496 F.2d 1162
(7th Cir. 1974) (certification should be denied when the putative
representative is subject to an unique defense).
36a
Appendia K
initial letter to his counsel, sign a retainer and submit to
a deposition.
Plaintiff's superfluous role here does not meet the re-
quirements of Rule 23(a)(4). The class is entitled under
’ that rule to more than competent counsel. It must also be
assured that it will have an adequate representative, one
who will check the otherwise unfettered discretion of coun-
sel in prosecuting the suit and who will provide his per-
sonal knowledge of the facts underlying the complaint.
Greenspan v. Brassler, supra. The class is entitled to a
representative who is more than “a key to the courthouse
door dispensable once entry has been effected.” Saylor v.
Lindsley, 456 F.2d 896, 900 (2d Cir. 1972). Plaintiff’s evi-
dent willingness to rely on counsel’s ability to protect the
interests of the class is inconsistent with the participation
required of an adequate class representative. Greenspan
v. Brassler, supra, and cases cited at pp. 8-9. See also Citron
v. Marine Midland Banks, Inc., No. 77 Civ. 2557 (CMM)
(S.D.N.Y. Mar. 27, 1978).
Accordingly, plaintiff’s motion for class certification is
denied.
So ordered.
Dated: New York, N. Y.
April 19, 1978
/s/ Luoyp F. MacManon
Lloyd F. MacMahon
United States District Judge
37a
Appendix L
UNITED STATES DISTRICT COURT
SouTtTHERN District or New York
77 Civ. 2110 (LFM)
SAMUEL WEIsMAN, on behalf of himself
and all others similarly situated,
Plaintiff,
—against—
Grorce J. Darnemiz, F. Arnotp Daum, Atex W. Heap,
Joun P. Ont, I. L. Vosxo, Beaumont DEVELOPMENT
Corporation and WessteR Securities LimirTep,
Defendants.
MEMORANDUM
MacManon, District Judge.
Defendants move for 28 U.S.C. §1292(b) certification
of our order dated January 6, 1978, or, alternatively, for
reargument under Local Rule 9(m) of their motion to
dismiss the complaint.
Plaintiff brought this direct action on behalf of himself
and all other shareholders (excluding defendants) of
Westates Petroleum Company (‘“‘Westates”) at the time
of its liquidation. The complaint seeks damages for al-
leged violations of Sections 10(b)? and 13? of the Securi-
115 U.S.C. § 78j(b), which states:
“Tt shall be unlawful for any person, directly or indirectly,
by the use of any means or instrumentality of interstate com-
merce or of the mails, or of any facility of any national securi-
ties exchange—
38a
Appendia L
(b) To use or employ, in connection with the purchase or
sale of any security registered on a national securities ex-
change or any security not so registered, any manipulative or
deceptive device or contrivance in contravention of such rules
and regulations as the Commission may prescribe as necessary
or appropriate in the public interest or for the protection of
investors.”
215 U.S.C. § 78m, which states :
“(d)(1) Any person who, after acquiring directly or in-
directly the beneficial ownership of any equity security of a
class which is registered pursuant to section 781 of this title
.. . is directly or indirectly the beneficial owner of more than
5 per centum of such class shall, within ten days after such
acquisition, send to the issuer of the security at its principal
executive office, by registered or certified mail, send to each
exchange where the security is traded, and file with the Com-
mission, a statement containing such of the following informa-
tion, and such additional information, as the Commission
may by rules and regulations prescribe as necessary or ap-
propriate in the public interest or for the protection of
investors—
(A) the background and identity of all persons by whom
or on whose behalf the purchases have been or are to be
effected ;
(B) the source and amount of the funds or other con-
sideration used or to be used in making the purchases... ;
(C) if the purpose of the purchases or prospective pur-
chases is to acquire control of the business of the issuer of
the securities, any plans or proposals which such persons
may have to liquidate such issuer, to sell its assets to or
merge it with any other persons; or to make any other major
change in its business or corporate structure ;
(D) the number of shares of such security which are
beneficially owned, and the number of shares concerning
which there is a right to acquire, directly or indirectly, by
(i) such person, and (ii) by each associate of such person,
giving the name and address of each such associate ; and
(E) information as to any contracts, arrangements, or
understandings with any person with respect to any secu-
rities of the issuer .. . naming the persons with whom such
contracts, arrangements, or understandings have been en-
tered intd, and giving the details thereof.”
39a
Appendix L
ties Exchange Act of 1934 and of Rule 10b-5* and Regula-
tion 13D‘ promulgated thereunder.
Our January 6 opinion and order denied defendants’
motion to dismiss the complaint under Rule 12(b) (6),
Fed.R.Civ.P. That motion attacked the complaint’s alle-
gations of damages, causation and scienter, as well as
217 C.F.R. § 240.10b-5, which states:
“Tt shall be unlawful for any person, directly or indirectly,
by the use of any means or instrumentality of interstate com-
merce, or of the mails, or of any facility of any national secu-
rities exchange,
(1) to employ any device, scheme, or artifice to defraud,
(2) to make any untrue statement of a material fact or to
omit to state a material fact necessary in order to make the
statements made, in the light of the circumstances under which
they were made, not misleading, or
(3) to engage in any fact, practice, or course of business
which operates or would operate as a fraud or deceipt upon
any person,
in connection with the purchase or sale of any security.”
£17 C.F.R. §§ 240.13d-1—240.13d:4, the relevant portion of
which states :
“Any person who, after acquiring directly or indirectly the
beneficial ownership of any security of a class which is regis-
tered pursuant to section 12 of the Act, .. . is directly or in-
directly the beneficial owner of more than 5 per-centum of such
class shall, within 10 days after such acquisition, send to the
issuer of the security at its principal executive office, by
registered or certified mail, send to each exchange where the
security is traded, and file with the Commission, a statement
containing the information required by Schedule 13D
(§ 240.13d-101). Eight copies of the statement shall be filed
with the Commission. Where an acquisition, not heretofore
subject to this rule, was made subsequent to December 22,
1970, but prior to January 18, 1971, the specified statement
shall be sent to the issuer and any exchange and filed with the
Commission not later than January 28, 1971.
** * At the time of filing the statement, the person making
the filing shall pay to the Commission a fee of $100, no part of
which shall be refunded.”
A
40a
Appendia L
plaintiff’s standing to bring the action. We construed the
complaint favorably to plaintiff’ and accepted as true‘
the following allegations:
Samuel Weisman owned 100 shares of Westates from
sometime prior to August 9, 1974 continuously to the com-
pany’s liquidation. Defendants (certain officers and direc-
tors of Westates and other individuals) had learned that
Westates’ stock was substantially undervalued in the open
market and that it would bring a higher price upon the
company’s liquidation. They also had learned, through the
use of inside and non-public information, that Westates
might seek liquidation.
Pursuant to a conspiracy to influence the company to
sell its assets and dissolve, defendants purchased approxi-
mately 293,900 Westates shares’ in the open market at
an average price of $3.24 per share from August 9, 1974
through January 1, 1975. The Schedules 13D filed by de-
fendants pursuant to Regulation 13D were false or mis-
leading in that they failed to disclose defendants’ inside
knowledge, their conspiracy and their intent to benefit
from Westates’ dissolution. Seven weeks after defendants’
purchases had been made, Westates publicly invited offers
to purchase its assets. A sale of substantially all of the
company’s assets, with the approval of the stockholders,
was consummated on January 21, 1977. As a concomitant
of the sale, Westates will redeem all of its stock for ap-
proximately $10.70 to $11.10 per share. Defendants will
thus net a wrongful profit of $2,251,735.00 as a result of
5 Scheur v. Rhodes, 416 U.S. 232 (1974).
® Cruz v. Beto, 405 U.S. 319, 322 (1972).
7™These purchases gave defendants ownership of approximately
6% of Westates’ stock.
4la
Appendia L
the differential between the market and redemption values
of their August 9, 1974 through January 1, 1975 stock
purchases.
Motions for Reargument
In their original motion to dismiss, defendants argued
that plaintiff lacked standing to bring this action because
he had not purchased or sold stock in connection with their
alleged fraud. We held, however, that plaintiff might be
able to prove that the Westates redemption constituted a
“forced sale” of his stock under Vine v. Beneficial Finance
Co., 374 F.2d 627 (2d Cir.), cert. denied, 389 U.S. 970
(1967), and Crane Co. v. Westinghouse Air Brake Co., 419
F.2d 787 (2d Cir. 1969), cert. denied, 400 U.S. 822 (1970),
and therefore refused to dismiss his Section 10(b) and
Rule 10b-5 claims.* We grant defendants’ motion for re-
argument of that portion of our order, and, upon reargu-
ment, adhere to our prior decision.
Our January 6 order also denied defendants’ motion to
dismiss plaintiff’s Section 13 and Regulation 13D claims
under Rule 12(b)(6). We held that plaintiff’s status as
a forced seller might enable him to maintain those claims
under Section 18 of the Securities Exchange Act of 1934.”
8 See Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723
(1975) (plaintiff must purchase or sell stock in connection with the
alleged fraud to have standing under Section 10(b) or Rule 10b-5).
® See Conley v. Gibson, 355 U.S. 41, 45-46 (1957).
1015 U.S.C. § 78r, which states:
“(a) Any person who shall make or cause to be made any
statement in any application, report, or document filed pur-
suant to this chapter or any rule or regulation thereunder or
any undertaking contained in a registration statement as pro-
vided in subsection (d) of section 780 of this title, which state-
ment was at the time and in the light of the circumstances
under which it was made false or misleading with respect to any
42a
Appendix L
It appears now that we were misled on this point. While
defendants superficially briefed plaintiff’s standing under
Section 18, they failed completely to mention that section’s
pleading requirements. As a result, we did not consider
those requirements and must now waste time considering
issues that should have been raised and_resolved weeks
ago. We grant the motion for reargument of this portion
of our order, and, upon reargument, reverse our order of
January 6, 1978 to the extent that we grant defendants’
motion to dismiss plaintiff’s Section 13 and Regulation
13D claims.
Section 13(d) requires any person" acquiring more than
a 5% beneficial ownership of a securities class to file with
the SEC a statement disclosing certain background infor-
mation. Section 13(d) does not imply or expressly grant
a right to bring a private damage action for its violation.”
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 damages
caused by such reliance, unless the person sued shall prove that
he acted in good faith and had no knowledge that such state-
ment was false or misleading. A person seeking to enforce such
liability may sue at law or in equity in any court of competent
jurisdiction.
* * *
(ce) No action shall be maintained to enforce any liability
created under this section unless brought within one year after
the discovery of the facts constituting the cause of action and
within three years after such cause of action accrued.”
11 “Person” includes “two or more persons act[ing] as a .
group for the purpose of acquiring, holding, or disposing of secu-
rities... .” Section 13(d) (3).
12 Myers v. American Leisure Time Enterprises, Inc., 402 F.
Supp. 213 (S.D.N.Y. 1975), aff'd without opinion, 538 F.2d 312
(2d Cir. 1976) ; In re Penn Central Securities Litigation, 494 F.2d
528 (3d Cir. 1974). Cf., GAF v. Milstein, 453 F.2d 709 (2d Cir.
1971), cert. denied, 406 U.S. 910 (1972) (action seeking only in-
junctive relief).
43a
Appendix L
Such an action, however, may be brought under Section
18, which permits certain individuals to maintain a dam-
ages action against any person who has made a false or
misleading filing under, inter alia, Section 13(d).
Plaintiff, however, has not met the pleading require-
ments of Section 18. Essential elements of a sufficient
claim for relief under that section are allegations that the
plaintiff actually read and relied on defendants’ fraudulent
13D schedules; that those schedules affected the sale price
of his stock; and that he has commenced the action within
one year after discovery of the fraud, in compliance with
Section 18’s statute of limitations.’® Plaintiff has failed
to allege any of these essential facts, and his claims under
Section 13 and Regulation 13D must be dismissed.
Motions for § 1292(b) Certification
Defendants’ certification motions are now moot insofar
as they seek review of our January 6 order’s denial of the
motion to dismiss plaintiff’s Section 13 and Regulation
13D claims. The motions require further discussion, how-
ever, to the extent that they seek certification of the re-
mainder of the order.
Defendants assert that two aspects of the January 6
order merit interlocutory review: (1) our conclusion that
the forced seller doctrine has survived Blue Chip Stamps
v. Manor Drug Stores, 42Y U.S. 723 (1975), and (2) our
alleged abandonment of the “in connection with” require-
ment of Section 10(b) and Rule 10b-5."
18 Gross v. Diversified Mortgage Investors, 4388 F. Supp. 190
(S.D.N.Y. 1977); Rich v. Touche Ross & Co., 415 F. Supp. 95
(S.D.N.Y. 1976).
14'Webster Securities Limited also renews defendants’ attack on
the sufficiency of plaintiff's allegations of damages. Plaintiff has
44a
Appendia L
It was established in Vine v. Beneficial Finance Co., su-
pra, and Crane Co. v. Westinghouse Air Brake Co., supra,
that a stockholder has standing to maintain a Section
10(b) action if the defendant’s fraud or illegal manipula-
tion indirectly compels the divestiture of his stock. We
concluded in our January 6 opinion that those cases re-
main viable interpretations of the purchaser/seller require-
ment of Section 10(b) announced in Birnbaum v. Newport
Steel Corp., 193 F.2d 461 (2d Cir.), cert. denied, 343 U.S.
956 (1952), and adopted in Blue Chip Stamps v. Manor
Drug Stores, supra.
Defendants argue that this conclusion conflicts with
recent Supreme Court decisions strictly interpreting the
federal securities laws. Those decisions, however, do not
dictate the restrictive interpretation of Section 10(b)
urged by defendants. Blue Chip Stamps left open the
boundaries of the purchaser/seller requirement but indi-
cated possible approval of a flexible construction of the
‘requirement.’® Indeed, the Court has said that Section
10(b) “ ‘must be read flexibly, not technically and restric-
tively.’” 1® And although a private cause of action under
the securities laws should not be implied “where it is ‘un-
necessary to ensure the fulfillment of Congress’ pur-
alleged that defendants reaped wrongful profits of some $214 mil-
lion. These wrongful profits are recoverable in a Rule 10b-5 action
upon proper proof. Affiliated Ute Citizens v. United States, 406
U.S. 128, 155 (1972). See Gould v. American-Hawaitian 8.8. Co.,
535 F.2d 761 (3d Cir. 1976) ; Gerstle v. Gamble-Skogmo, Inc., 478
F.2d 1281, 1304-05 (2d Cir. 1973).
18 Blue Chip Stamps v. Manor Drug Stores, supra, 421 U.S. at
751.
16 Santa Fe Industries, Inc. v. Green, 430 U.S. 462, 475-76
(1977), quoting Superintendent of Insurance v. Bankers Life &
Cas. Co., 404 U.S. 6, 12-13 (1971).
45a
Appendia L
poses,’”?7 Section 10(b) was intended to protect pur-
chasers and sellers of securities’® by ensuring “full dis-
closure” of relevant information.’®
Lower court decisions similarly provide no direct sup-
port for defendants’ argument. The Second Circuit has
refused to adopt a restrictive reading of the purchase/sale
requirement of Blue Chip Stamps” or of Section 10(b) in
general.” Moreover, the only other court to consider the
question has approved the forced seller doctrine in light
of Blue Chip Stamps.** These decisions and defendants’
inability to cite authority directly supporting their inter-
pretation of Section 10(b)** convince us that there is not
17 Santa Fe Industries, Inc. v. Green, supra, 430 U.S. at 477,
quoting Piper v. Chris-Craft Industries, Inc., 430 U.S. 1, 41 (1977).
18 Blue Chip Stamps v. Manor Drug Stores, supra, 421 U.S. at
733-736.
19 Santa Fe Industries, Inc. v. Green, supra, 430 U.S. at 477.
20See Mallis v. F.DI.C., 1976-77 Fed. Sec. L. Rep. (CCH)
7 95,823 (2d Cir.), cert. granted sub nom. Bankers Trust Co. v.
Mallis, 431 U.S. 928 (1977); Arthur Lipper Corp. v. S.E.C., 547
F.2d 171 (2d Cir. 1976), cert. denied, 46 U.S.L.W. 3436 (U.S. Jan.
aac See also United States v. Brown, 555 F.2d 336 (2d Cir.
1977).
21 See Rolf v. Blyth, Eastman Dillon & Co., Current Fed. See. L.
Rep. (CCH) {[ 96,275 (2d Cir. 1978). See also Gross v. Diversified
Mortgage Investors, 431 F. Supp. 1080, 1093 (S.D.N.Y. 1977).
22 Houlihan v. Anderson-Stokes, Inc., 434 F. Supp. 1330 (D.D.C.
1977).
28 The two Southern District of New York cases cited by defen-
dants on this point are inapposite. Bio-Medical Sciences, Inc. v.
Weinstein, 407 F. Supp. 970 (S.D.N.Y. 19776), did not involve a
forced sale of stock. Judge Ward’s denial of standing to the plain-
tiff in Crane Co. v. American Standard, Inc., 439 F. Supp. 945
(S.D.N.Y. 1977), was based on his conclusion that the expressly
limited holding of Piper v. Chris-Craft Industries, Inc., supra, 480
U.S. at 42, n.28, precluded the maintenance of a Rule 10b-5 action
46a
Appendia L
“substantial ground for difference of opinion,” 28 U.S.C.
§ 1292(b), concerning our adherence to the forced seller
doctrine.
We also reject defendants’ argument that our opinion
abandons the “in connection with” requirement of Section
10(b) and Rule 10b-5. That argument rests on the premise
that the Westates redemption could not have been accom-
plished without board and shareholder approval and the
negotiation of a purchase agreement. Fraud may be “in
connection with” a forced sale of securities, however, even
though the two are separated by intermediate steps.** The
connection requirement is satisfied if the fraud “touches”
the sale.*® Plaintiff here has alleged that defendants’ fraud
was in furtherance of their conspiracy to effect Westates’
dissolution and wrongfully to profit from the resulting
stock redemption. The fraud thus may be “intrinsic to the
securities transaction itself.”** Defendants, therefore,
by a “defeated contestant in a takeover battle.” Crane Co. v.
American Standard, Inc., supra, 439 F. Supp. at 953. Plaintiff,
here, however, is a shareholder who might be able to prove himself
a “hoodwinked investor” with standing under Section 10(b). Piper
v. Chris-Craft Industries, Inc., supra, 430 U.S. at 45. Moreover,
Westates’ stock redemption is an “objectively demonstrable fact,”
Blue Chip Stamps v. Manor Drug Stores, supra, 421 U.S. at 747,
that allows plaintiff to avoid the proof of causation problems faced
by Crane Co. See Crane Co. v. American Standard, Inc., supra,
439 F. Supp. at 955.
24 Crane Co. v. Westinghouse Air Brake Co., 419 F.2d 787, 795-
798 (2d Cir. 1969), cert. denied, 400 U.S. 822 (1970); Vine v.
Beneficial Finance Co., 374 F.2d 627, 635 (2d Cir.), cert. denied,
389 U.S. 970 (1967).
25 Superintendent of Insurance v. Bankers Life & Cas. Co., supra,
404 U.S. at 12-13.
26 Rich v. Touche Ross & Co., supra, 415 F. Supp. at 100. See
also Drachman v. Harvey, 453 F.2d 722 (2d Cir. 1972) (en banc) ;
Houlihan v. Anderson-Stokes, Inc., supra. Cf. Ketchum v. Green,
47a
Appendix L
have not shown that there is “substantial ground for differ-
ence of opinion” concerning our conclusion that the alleged
fraud may be proved to be “in connection with” the West-
ates redemption.
Accordingly, defendants’ motions for certification pursu-
ant to 28 U.S.C. § 1292(b) are denied. Defendants’ motions
for reargument of their motion to dismiss the complaint
are granted. Upon reargument, we grant the motion to
dismiss plaintiff’s Section 13 and Regulation 13) claims
pursuant to Rule 12(b)(6), Fed.R.Civ.P., but otherwise
adhere to our opinion and order dated January 6, 1978.
Plaintiff is granted leave to file and serve within twenty
(20) days an amended complaint alleging a claim under
Section 18," if plaintiff is so advised.
So ordered.
Dated: New York, N. Y.
March 22, 1978
/s/ Luoyp F. MacManon
Lloyd F. MacMahon
United States District Judge
557 F.2d 1022 (3d Cir.), cert. denied, 46 U.S.L.W. 3306 (U.S.
Nov. 8, 1977) (fraud was in connection with internal management
dispute rather than securities transaction).
27 We doubt that plaintiff can meet Section 18’s requirements.
He stated in his deposition that he had not read the disputed
Schedules 13D. Moreover, his assertion that defendants’ wrongful
profits would have gone to the Westates shareholders absent de-
fendants’ fraud does not satisfy Section 18’s requirement that
defendants’ fraud have affected the sale price of plaintiff's stock.
See Rich v. Touche Ross & Co., supra, 415 F. Supp. at 102-104.
Leave to amend is granted, however, because we cannot conclude as
a matter of law that plaintiff is unable to allege a valid Section 18
claim.
48a
Appendix M
UNITED STATES DISTRICT COURT
SoutHERN District or New YorK
77 Civ. 2110 (LFM)
SAMUEL WEISMAN, on behalf of himself
and all others similarly situated,
Plaintiff,
—against—
Grorce J. Darnemiz, F. Arnotp Daum, Atex W. Heap,
Joun. P. Ont, I. L. Vosko, Beaumont DEVELOPMENT
Corporation and Wesster Securities LIMitTeD,
Defendants.
APPEARANCES:
Cahill Gordon & Reindel
Attorneys for defendants
Darneille, Daum, Head
and Beaumont Development
Corporation
80 Pine Street
New York, N. Y. 10005 Se
By: Thomas F. Curnin, Esq.
Bernstein & Kirby
Attorneys for Plaintiff
41 East 42nd Street
New York, N. Y. 10017
By: Roger W. Kirby, Esq.
49a
Appendix M
MacManon, District Judge.
Defendants move to dismiss this action for lack of sub-
ject matter jurisdiction, Rule 12(b)(1), Fed.R.Civ.P., and
for failure to state a claim upon which relief ean be
granted, Rule 12(b)(6), Fed.R.Civ.P.
Construing the complaint favorably to plaintiff,’ we ac-
cept as true the following allegations :?
Samuel Weisman owned 100 shares of Westates Pe-
troleum Company (“Westates”) from sometime prior to
August 9, 1974, continuously to the company’s liquidation.
Defendants (c2rtain officers and directors of Westates and
other individuals) had learned that Westates’ stock was
substantially undervalued in the dfen market and that it
would bring a higher price upon the company’s liquidation.
They also had learned, through the use of inside and non-
public information, that Westates might seek liquidation.
Pursuant to a conspiracy to influence the company to
sell its assets and dissolve, defendants purchased Westates
stock in the open market at an average price of $3.24 per
share from August 9, 1974 through January 1, 1975. Seven
weeks after these purchases had been made, Westates pub-
licly invited offers to purchase its assets. With the ap-
proval of the stockholders, a sale of substantially all of
the company’s assets was consummated on January 21,
1977. As a concomitant of the sale, Westates would re-
deem all of its stock for approximately $10.70 to $11.10
per share. Defendants would thus net a wrongful profit
of $2,251,735.00 as a result of the differential between the
1 Scheur v. Rhodes, 416 U.S. 232 (1974).
2 Murray v. City of Milford, 380 F.2d 468 (2d Cir. 1967); Sha-
piro v. Merrill Lynch, Pierce, Fenner & Smith Inc., 353 F. Supp.
264 (S.D.N.Y. 1972).
50a
Appendix M
market and redemption values of their August 9, 1974
through January 1, 1975 stock purchases.
Plaintiff brought this direct action on behalf of himself
and all other Westates shareholders (excluding defendants)
entitled to share in the proceeds of the company’s liquida-
tion.? The complaint seeks damages for alleged violations
of Sections 10(b)* and 13° of the Securities Exchange Act
of 1934 and of Rule 10b-5*° and Regulation 13D’ promul-
gated thereunder. Plaintiff also asserts claims for breach
of fiduciary duty by the Westates directors and officers and
for fraud.
Defendants’ challenge to our subject matter jurisdiction
is unpersuasive. Plaintiff alleges violations of the federal
securities laws, and the allegations are not “insubstantial,
implausible . . . or otherwise devoid of merit.” * We there-
fore have jurisdiction to determine whether those allega-
tions state a claim upon which relief can be granted.* More-
over, the federal and state law claims are so closely related
to a “common nucleus of operative fact” that plaintiff
“would ordinarily be expected to try them all in one judi-
cial proceeding.” ’° We may therefore exercise our pendent
* The suit has not been certified as a class action. See Rule 23(c),
Fed.R.Civ.P.
415 U.S.C. § 78j(b).
515 U.S.C. § 78m.
617 C.F.R. § 240.10b-5.
717 C.FR. §§ 240.13d-1—240.13d-4.
8 Hagans v. Lavine, 415 U.S. 528, 543 (1974).
* Levin v. Great Western Sugar Co., 406 F.2d 1112 (3d Cir.
1969) ; Rosen v. Albern Color Research, Inc., 218 F. Supp. 473
(E.D. Pa. 1963). See Romero v. International Terminal Operating
Co., 358 U.S. 354, 359 (1959).
1° United Mine Workers v. Gibbs, 383 U.S. 715, 725 (1966).
ola
Appendix M
jurisdiction over plaintiff’s common law fraud and fidu-
ciary claims.
Reaching this conclusion, we address defendants’ Rule
12(b)(6) motion. We reject the motion outright insofar as
it attacks the complaint’s allegations of damages, causation
and scienter. The allegations of each are sufficient to allow
proof of facts entitling plaintiff to relief.‘ Defendants’
attacks on plaintiff’s standing, however, are substantial
and merit discussion.
Defendants argue that plaintiff did not sell or purchase
Westates stock “in connection with” their alleged decep-
tion, and that he consequently lacks standing to bring a
damages action under Section 10(b) or Rule 10b-5," or
under Section 13(d) or Regulation 13D."* Plaintiff admits
that he owned his Westates stock “prior to August 9, 1974
continuously to the date of dissolution and liquidation of
Westates,” ** but advances numerous arguments in support
of his standing. We conclude that plaintiff may be able to
prove himself a “forced seller” within the meaning of Vine
v. Beneficial Finance Co., 374 F.2d 627 (2d Cir.), cert. de-
mied, 389 U.S. 970 (1967), and Crane Co. v. Westinghouse
Air Brake Co., 419 F.2d 787 (2d Cir. 1969), cert. denied,
400 U.S. 822 (1970), and therefore do not discuss his other
contentions.
11 See Conley v. Gibson, 355 U.S. 41, 45-46 (1957).
12 Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975).
13 Myers v. American Leisure Time Enterprise, Inc., 402 F.
Supp. 213 (S.D.N.Y. 1975), aff'd without opinion, 538 F.2d 312
(2d Cir. 1976) ; In re Penn Central Securities Litigation, 494 F.2d
528 (3d Cir. 1974). Cf., GAF v. Milstein, 453 F.2d 709 (2d Cir.
1971), cert. denied, 406 U.S. 910 (1972) (purchaser/seller status
not required in an action seeking only injunctive relief).
14 Complaint f 8.
52a
Appendix M
Defendants argue that Blue Chip Stamps v. Manor Drug
Stores, 421 U.S. 723 (1975), has vitiated the holdings of
Vime and Crane. Vine and Crane established that stock-
holders forced to sell their shares as an indirect result of
the defendant’s fraud or illegal manipulation have stand-
ing to maintain a Section 10(b) action. Those forced seller
cases accordingly define, rather than reject, the purchaser/
seller requirement announced in Birnbaum v. Newport
Steel Corp., 193 F.2d 461 (2d Cir.), cert. denied, 343 U.S.
956 (1952), and adopted in Blue Chip Stamps.* Indeed,
language in Blue Chips Stamps suggests approval of the
forced seller doctrine.’* Vine and Crane thus remain viable
interpretations of the purchaser/seller requirement.””
Defendants attempt to distinguish the forced seller cases
from the present action by arguing that their ownership
of only 6% of Westates stock at the time of the sale dem-
onstrates that they could not have compelled the sale and
stock exchange."* Plaintiff, however, may be able to show
that defendants’ control of other stock made approval of
the merger a certainty or that defendants fraud precluded
plaintiff’s ability effectively to oppose the sale. A show-
ing of either would be sufficient to establish plaintiff’s
|
165See Judge Hufstedler’s dissent in Manor Drug Stores v. Blue
Chip Stamps, 492 F.2d 136, 144-45 n.4 (9th Cir. 1973).
16 See Blue Chip Stamps v. Manor Drug Stores, supra, 421 U.S.
at 733.
17 See Note, Standing Under Rule 10b-5 After Blue Chip Stamps,
75 Michigan L. Rev. 413 (1976).
18 We note that the Crane defendant owned approximately 10%
of the stock there. Crane Co. v. Westinghouse Air Brake Co., 419
F.2d 787, 792-93 (2d Cir. 1969), cert. denied, 400 U.S. 822 (1970).
53a
Appendix M
standing to maintain his Section 10(b) or Rule 10b-5
claims.’®
Plaintiff also may be able to prove facts sufficient to
support his standing under Section 13(d) and Regulation
13D. Section 13(d) implies no private cause of action
for damages.” Plaintiff must therefore meet the pur-
chaser/seller requirement of Section 18.21 Our research
has disclosed no decision applying the forced seller doc-
trine to a Section 18 damages action. However, the intent
of Congress to afford broad disclosure of material infor-
mation to investors through Section 13(d) filings*® is best
served by applying to Section 18 the broad definition of
“sale” and “purchase” applicablz to a Section 10(b) action.
Stockholders forced to sell their holdings pursuant to a
corporate merger obtained through the filing of a fraudu-
lent Schedule 13D suffer harm within the contemplation
of Section 18. Such stockholders should have standing to
invoke the protection of that section. Plaintiff may be
able to prove that stockholder approval of the Westates
sale was obtained by defendants’ deception, and that the
deception affected the price of the stock. Such proof,
coupled with the forced sale of his stock, will be sufficient
to give him standing to maintain his Section 13(d) and
Regulation 13D claims. The possibility of plaintiff’s prov-
ing himself a “forced seller,” thus, precludes our dismiss-
19 See Vine v. Beneficial Finance Co., 374 F.2d 627, 635 (2d Cir.),
cert. denied, 389 U.S. 970 (1967), and Crane Co. v. Westinghouse
Air Brake Co., supra, 419 F.2d at 795-98.
20 Myers v. American Leisure Time Enterprise, Inc., supva.
2115 U.S.C. § 78r.
22 See, e.g., H.R. Rep. No. 1711, 90th Cong., 2d Sess., reprinted
in 1968 U.S. Code Cong. & Admin. News 2811-2819.
o4a
Appendix M
ing any of his federal securities laws claims for lack of
standing.
Accordingly, defendants’ motion under Rules 12(b) (1)
and 12(b)(6), Fed.R.Civ.P., is denied.
So ordered.
Dated: New York, N. Y.
January 6, 1978
/s/ Liuoyp F. MacManon
Lloyd F. MacMahon
United States District Judge
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