# Petition for Writ of Certiorari — Robinson Humphrey/American Express, Inc. v. Sanders

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Petition for Writ of Certiorari
- **Published:** January 1, 1988
- **Citation:** 485 U.S. 959

## Text

€-8 35

NO. Supreme Court, U.S.
Froe D
IN THE NOV 238 98?

Supreme Court of the United, Staseso se
CLERK

OctToBEerR TERM, 1987

ROBINSON HUMPHREY/AMERICAN EXPRESS, INC.
and SHEARSON/AMERICAN EXPRESS INC.,

Petitioners,

V.

GLENN T. SANDERS and LESLIE D. SANDERS,

on behalf of themselves and all others similarly situated,

. Respondents.

PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT

HARVEY D. MYERSON

Counsel of Record

FINLEY, KUMBLE, WAGNER, HEINE,
UNDERBERG, MANLEY, MYERSON & CASEY

425 Park Avenue

New York, New York 10022

(212) 371-5900

LLOYD S. CLAREMAN
FINLEY, KUMBLE, WAGNER, HEINE,
UNDERBERG, MANLEY, MYERSON & CASEY

MALCOLM D. YOUNG, JR.
PETER J. ANDERSON
PETERSON YOUNG SELF & ASSELIN

Attorneys for Petitioners

EDITOR'S NOTE

THE FOLLOWING PAGES WERE POOR HARD COPY
AT THE TIME OF FILMING. IF AND WHEN A
BETTER COPY CAN BE OBTAINED, A NEW FICHE
WILL BR ISSUED,

he

QUESTIONS PRESENTED

1. Did the Court of Appeals err (a) in applying the fraud-on-
the-market doctrine which eliminates the reliance requirement
of Rule 10b-5, and (b) in extending the doctrine to cases involv-
ing the purchase of original-issue, fixed-price securities that are
not traded on an active and developed market?

2. Did the Court of Appeals err in holding that, for purposes
of deciding a motion for class certification, the District Court
is required to accept as true all the allegations of the complaint,
and may not weigh the record evidence in determining whether
the movants have satisfied their burden of proving compliance
with the requirements of Rule 23, Federal Rule; of Civil
Procedure?

ill

RULE 28.1 LIST*

Non-Wholly-Owned Subsidiaries and
Affiliates of Shearson Lehman Brothers Inc.

Active Subsidiaries

Boston Hambro Corp.
Boulevard Investors Inc.
Boulevard Real Estate Corp.
Burlington Investors Inc.

E.B. Realty

Lombard Realty Corporation
Lowell Investors Inc.

Lowell Real Estate Corp.
Shearson Dat-Cheong Company Limited
Shearson Lehman/Finanz AG
Shearson/KM, Inc.

Inactive Subsidiaries

Genex Insurance Brokerage Ltd.
Mideast-American, Inc.

Affiliates

California S.A.

Shearson Financial Services of Oklahoma, Inc.
Shearson Financial Services of Texas, Inc.
Shearson Lehman Brothers SARL

Intermodal Equipment Associates

KCC Syndicate Managers, Inc.

McLeod Young Weir Limited

New World Corporation

Rex Moor Properties Incorporated

Sovran Energy Corp.

* All parties to the proceeding below are named in the caption. Petitioner Shear-
son Lehman Brothers Inc. was named in the complaint as Shearson/American
Express Inc., and petitioner The Robinson-Humphrey Company, Inc. was named
as Robinson Humphrey/American Express Inc.

iv

Non-Wholly-Owned Subsidiaries and Affiliates
of Shearson Lehman Brothers Holdings Inc., the
Parent Company of Shearson Lehman Brothers Inc.*

American Express Asset Management Limited
American Express Asset Management N.V.
American Express Asset Management S.A.
American Express U.K. Holding Company Inc.
FGIC Corporation

Kuhn Loeb Lehman Brothers International B.V.
Lehman Brothers Internetional UK Ltd.
Lehman International Finance N.V.

Lehman Overseas N.V.

LBKL 82-1 Investors Inc.

Shearson Lehman Broadgate North Inc.
Shearson Lehman Broadgate South Inc.

— ————S

* The parent company of Shearson Lehman Brothers Holding Inc. is the
American Express Company.

TABLE OF CONTENTS

QUESTIONS PRESENTED ...................
NE I hh bio rn as kee endaus sees
py. fF he Piiygy 6 yy) + See re
SIE sooo o rk cc tcadenacvaneesses
po RARE NP Orr re ere PEPE OE eee
STATUTES AND RULES INVOLVED .........
STATEMENT OF THE CASE .................
Si, Ts Pe ek Es io ak ek eae

B. The District Court’s Class Certification
| Saher ee popes Clee i ee

C. The Opinion Of The Eleventh Circuit Court
Tis nye eA, ee

I. APPLICATION OF THE FRAUD-ON-THE-
MARKET THEORY IS AN ISSUE WHICH
THIS COURT ALREADY HAS DEEMED
TO BE OF SUFFICIENT MOMENT TO
WARRANT REVIEW ON CERTIORARI ...

II. INDEPENDENTLY, THE VALIDITY OF
THE ELEVENTH CIRCUIT'S
ABANDONMENT OF THE RULE 10b-5
RELIANCE REQUIREMENT IN THE
CONTEXT OF UNDEVELOPED, NON-
EFFICIENT MARKETS IS AN ISSUE OF
IMPERATIVE NATIONAL IMPORTANCE. .

10

Page
A. The Fraud-On-The-Undeveloped Market
Theory Lacks Even The Tenuous
Foundations Of Its Developed-Market
| Re Oy eee ll

1. There is no principled basis in law or
economics for the extension of the
fraud-on-the-market theory to
undeveloped, non-efficient markets .... 1]

2. The Eleventh Circuit’s fraud-on-the-
undeveloped-market doctrine effects an
unreasonable abandonment of the Rule
10b-5 reliance requirement ........... 14

B. The Distinction Between So-Called
“Marketable” And “Unmarketable”
Securities, Which Is The Sole Rationale
For The Shores Doctrine, Is Unprincipled
And Contrary To The Fundamental
Structure Of The Federal Securities Laws . 16

1. The notion that securities can be
“unmarketable” is alien to the federal
OE oo hon usb coccce ct ce The Eleventh Circuit, in the en banc decision Bonner v. City of Prichard,
661 F.2d 1206, 1209 (llth Cir.1981), adopted as precedent decisions of the
former Fifth Circuit rendered prior to October 1, 1981.

A-6

The district court rejected each of these theories. The court
found the characterization of the claims as involving primarily
omissions to be precluded by the interpretation in Huddleston
v. Herman ¢ McLean, 640 F.2d 534 (5th Cir. Unit A March 1981),
affd in part and rev‘d in part on other grounds, 459 U.S. 375,
103 S.Ct. 683, 74 L.Ed.2d 548 (1983), and Cavalier Carpets v.
Caylor, 746 F.2d 749 (llth Cir.1984), of the requirements for an
omissions case under Affiliated Ute. The court rejected the fraud-
on-the-market theory as insufficiently supported by the pleadings
or the evidence proffered by the plaintiffs. Finally, the court re-
fused class action treatment under the course of conduct theory
based on the court’s determination that the plaintiffs’ allegations
involve primarily individualized oral representations rather than
a common scheme by the defendants toward the plaintiff
purchasers.

We agree with the district court that under the precedent of
this circuit the plaintiffs’ complaints cannot be properly
characterized as omissions cases under the standards of Affiliated
Ute. Here, as in Cavalier Carpets, supra, and Huddleston, supra,
the complaints indicate that “[t]he defendants did not stand mute
in the face of a duty to disclose as did the defendants in Affiliated
Ute.” Cavalier Carpet, 746 F.2d at 749 n. 22 (quoting Huddleston,
640 F.2d at 548). Rather, as in those cases, the allegations con-
tend that the defendants “undertook . . . to disclose relevant in-
formation . . . now alleged to contain certain misstatements of
fact and to fail to contain other facts necessary to make the
statements made, in light of the circumstances, not misleading.”
Id. Consequently, the district court properly concluded that the
complaints at most allege mixed claims of misrepresentations and
omissions and thus that Affiliated Ute’s presumption of reliance
does not apply.

We cannot agree, however, with the court’s rejection of the
fraud-on-the-market theory as a basis for class action treatment.
In Shores v. Sklar, supra, the former Fifth Circuit sitting en banc
held that, in fraud claims asserted under Rules 10b-5(1) and (3),
the reliance element of Rule 10b-5 may be satisfied by proof that
the plaintiff relied on the integrity of the market rather than on
specific misrepresentations by the defendants. Under Shores,

A-7

reliance may be established by proof that securities not traded
on the open market could not have been issued but for a
fraudulent scheme by the defendants. 647 F.2d at 469; cf. Lip-
ton v. Documation, Inc., 734 F.2d 740, 747 (11th Cir.1984), cert.
denied, 469 U.S. 1132, 105 S.Ct. 814, 83 L.Ed.2d 807 (1985)
(adopting fraud-on-the-market theory in context of securities
traded in open market). Here, consistent with Shores, plaintiffs
alleged that the Petro-Lewis shares, which were not traded on
the open market, could not have been marketed but for the
defendants’ fraud.

In rejecting this claim as improper for class treatment, the
court relied solely on its conclusion that the plaintiffs’ allega-
tions lacked evidentiary support. Despite the court’s assertions
to the contrary, this determination was an inappropriate inquiry
into the merits of the plaintiffs’ claims. Certainly, as the court
noted in its order, a court may look beyond the allegations of
the complaint in determining whether a motion for class cer-
tification should be granted. General Telephone Co. of
Southwest v. Falcon, 457 U.S. 147, 160, 102 S.Ct. 2364, 2372,
72 L.Ed.2d 740 (1982); Love v. Turlington, 733 F.2d 1562, 1564
(1lth Cir.1984). Indeed, it is often necessary for a district court
to consider, for example, a deposition of a named plaintiff to
determine whether Rule 23(a)’s commonality and typicality re-
quirements are met. See, e.g., Falcon, supra; Nelson v. U.S. Steel
Corp., 709 F.2d 675, 679-80 (11th Cir.1983). Here, however, the
court’s rejection of the fraud-on-the-market theory was based
upon nothing other than the court’s assessment of the plaintiffs’
likelihood of success on the claims. This is an improper basis
for deciding the propriety of a class action. E.g., Eisen v. Carlisle
& Jacquelin, 417 U.S. 156, 177-78, 94 S.Ct. 2140, 2152-53, 40
L.Ed.2d 732 (1974); Nelson, 709 F.2d at 679.

Nor can the court’s rejection of the fraud-on-the-market
theory be upheld under the rationale that fraud-on-the-market
claims are improper for class treatment where, as here, the
evidence indicates that the named plaintiffs relied on the ad-
vice of their brokers rather than solely on the integrity of the
market. As the defendants note, several district courts have
denied class certification for fraud-on-the-market claims where

A-8

evidence indicates that the named plaintiffs may in fact have
relied on factors other than the market’s integrity. These cases,
however, generally have concerned fraud-on-the-market claims
involving securities traded in an open market. See Masri v.
Wakefield, 106 F.R.D. 322, 325 (D.Colo.1984); Seiler v. E.F. Hut-
ton ¢> Co., 102 F.R.D. 880, 890 (D.N.J.1984); McNichols v. Loeb
Rhoades, 97 F.R.D. 331, 334 (N.D.11L.1982). But see Shores v. Sklar,
[current] Fed.Sec.L.Rep. (CCH) { 92,874 (N.D.Ala. July 30, 1986)
(on remand, denying class certification of fraud-on-the-market
claim involving security not openly traded). That version of the
fraud-on-the-market theory focuses on the plaintiffs’ reliance on
the integrity of an open and developed market to set a price ac-
curately reflecting the security's value. See Lipton v. Documa-
tion, 734 F.2d at 743. The issue of reliance on an open market
thus turns on a matter of degree--the price of the security--and
not, as in Shores, the absolute question of whether the security
was worthy of being issued.

Because the Petro-Lewis shares were not traded on the open
market, we need not now consider the appropriateness of class
certification of traditional fraud-on-the-market claims involving
securities that are openly traded. We conclude, however, that
where as here, a complaint alleges that a security not traded on
the open market could not have been issued but for the fraud
of the defendants, class action treatment is not precluded by the
possibility that some purchasers, including the named plaintiffs,
might have relied on factors other than the integrity of the market.

Shores did not hold, as the defendants contend, that recovery
is possible under a fraud-on-the-market claim only when a
claimant proves reliance on the integrity of the market to the
exclusion of all other factors. Rather, Shores was based on the
premise that “(t]he securities laws allow an investor to rely on
the integrity of the market to the extent that the securities it of-
fers to him for purchase are entitled to be in the marketplace.”
647 F.2d at 471. Consequently, where a security could not have
been issued but for a fraudulent scheme, the fact that the in-
vestor may have relied on other factors in deciding to purchase
that security at a particular price does not minimize the essen-
tial fact that the purchaser relied on the market's integrity to

a et a ae

A-9

ensure that the security was worthy of being issued. Indeed, as
the court noted in Shores, under a theory that the defendants’
fraud caused securities to be issued, “it would have availed [the
plaintiff] nothing to have read the [allegedly misleading] Offer-
ing Circular.” Id. at 470-71. A Shores fraud-on-the-market claim
thus is especially suited for class action treatment, as it makes
virtually irrelevant the possibility that the various purchasers may
have relied on different representations regarding the desirabili-
ty of the particular security in question: all have relied on the
integrity of the market in the but-for sense required by Shores.*

* In remanding to the district court, Shores instructed the court to “recon-
sider the maintainability of this action as a class action as to members of a
properly defined class of Bond purchasers who did not . . . rely [on the alleged-
ly misrepresentative offering circular].” 647 F.2d at 472. This instruction should
not be misconstrued as an indication that the fraud-on-the-market claim would
be available only to those individuals who did not rely on the circular. The
district court previously had determined that a Rule 10b-5(2) misrepresenta-
tion claim could be brought as a class action on behalf of a class of purchasers
who had relied on the offering circular. The court of appeals recognized that
any member of a class so defined necessarily would satisfy one of the elements
of a 10b-5(2) claim and thus could recover if it were proven on a class-wide
basis that the defendants knowingly made materially misleading statements
in the offering circular and that the purchasers suffered losses as a result. See
647 F.2d at 468 (listing elements of 10b-5(2) misrepresentation claim). The
court realized that, under the facts alleged in that case, these class-wide
10b-5(2) issues would be contained in the proof necessary for recovery under
the 10b-5(1) and (3) fraud-on-the-market theory. See 647 F.2d at 468 (“{T]he
Offering Circular was assertedly only one step in the course of an elaborate
scheme.”). Those purchasers who did not rely could recover, however, only
by meeting the additional burden of proving, under the fraud-on-the-market
theory, that the securities could not have been issued but for the fraud of the
defendants. Thus, the instruction that the district court determine the main-
tainability of a separate class for purchasers who did not rely was based simply
upon the recognition that, as a practical matter, those purchasers would have
a greater factual burden to establish liability than would taose who relied
on the offering circular. The instruction did not imply, however, that those
who had relied on the offering circular could not also recover under the fraud-
on-the-market theory. To the extent that the district court on remand reached
a different conclusion, see Shores v. Sklar, [current] Fed.Sec.L.Rep. (CCH)
{ 92,074 (N.D.Ala. July 30, 1986), we reject that court's interpretation of the
en banc decision.

A-10

We conclude for similar reasons that the district court also
improperly found that the plaintiffs’ 10b-5(2) misrepresentation
claims were not suited for class treatment. The basis for the
court’s denial of class certification of the misrepresentation
claims was the court’s conclusion that the claims involved
primarily oral representations and thus would present individual
issues of reliance. To arrive at this conclusion, the court focused
on deposition evidence indicating that the named plaintiffs relied
not so much on prospectuses and other written materials as on
the recommendations of their individual brokers. The court fur-
ther found that the plaintiffs had uncovered no evidence to show
that their particular brokers had attended the Petro-Lewis sales
sessions or explicitly followed the standardized sales pitch.

Contrary to the court’s construction of the claims, however,
the complaints alleged that the defendant brokerage firms and
individual officers engaged in a common course of conduct to
misrepresent, by affirmative acts and by omission, the finan-
cial condition of Petro-Lewis. See, e.g., Kennedy v. Tallant, 710
F.2d at 711. Neither the complaints nor the deposition testimony
relied upon by the district court indicate that any oral repre-
sentations to the named plaintiffs varied materially from the
misleading information alleged to have been disseminated
generally as a result of the defendants’ common schemes. See
id.; cf. Simon v. Merrill Lynch, Pierce, Fennner and Smith, Inc.,
482 F.2d 880, 883 (5th Cir.1973) (“If there is any material varia-
tion in the representations made or in the degrees of reliance
thereupon, a fraud case may be unsuited for treatment as a class
action.”). Consequently, the possibility that the named plain-
tiffs or other potential class members may have obtained the
allegedly misleading information via their individual brokers
rather than through widely distributed written information can-
not transform the allegations of the complaints into claims con-
cerning primarily questions of individual reliance. The claims
essentially involve allegations that the defendants “committed
the same unlawful acts in the same method against the entire
class.” Kennedy v. Tallant, 710 F.2d at 717.

As in any 10b-5(2) misrepresentation claim, each potential
class member must prove reliance on some form of the allegedly

A-11

misleading information in order to recover. See, e.g., Shores v.
Sklar, 647 F.2d at 468. In view of the overwhelming number
of common factual and legal issues presented by plaintiffs’
misrepresentation claims, however, the mere presence of the fac-
tual issue of individual reliance could not render the claims un-
suitable for class treatment. Here, as in Kennedy v. Tallant, each
of the complaints alleges “a single conspiracy and fraudulent
scheme against a large number of individuals” and thus is “par-
ticularly appropriate for class action.” 710 F.2d at 718. Moreover,
given the numerous and substantial common issues presented
by both the fraud-on-the-market and the misrepresentation
claims, the common questions in these cases cannot legitimate-
ly be considered subordinate to the individual questions
presented by the different state statutes of limitations that may
be applicable or by the arbitration agreements contained in some
of the purchasers’ contracts.* “Rule 23 does not require that all
the questions of law and fact raised by the dispute be common.”
Cox v. American Cast Iron Pipe Co., 784 F.2d 1546, 1557 (lth
Cir.), cert. denied, _U.S._, 107 S.Ct. 274, 93 L.Ed.2d 250
(1986).

In sum, we conclude that as a result of the district court's
erroneous analysis of the fraud-on-the-market claims and its
mischaracterization of the misrepresentations claims, the court
incorrectly determined that individual issues predominated over
common issues. Contrary to the court’s conclusions, these claims
involve common issues that clearly overwhelm the individual
issues that may be present. Consequently, “[s]eparate actions
by each of the class members would be repetitive, wasteful, and
an extraordinary burden on the courts.” Kennedy v. Tallant, 710

* The presence of arbitration agreements is relevant for another factor in
determining the suitability of class treatment on the 10b-5 claims. After the
district court’s order was issued, the Supreme Court in Shearson /American
Express v. McMahon, __U.S._, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987), upheld
the enforceability of agreements requiring the arbitration of 10b-5 claims.
Those purchasers whose 10b-5 claims are subject to arbitration thus could not
be considered members of the class. In ruling on the motion for class certifica-
tion, the district court did not determine whether the potential class members
not subject to arbitration would be sufficient to satisfy the numerosity require-
ment of Rule 23(a)(2). The court should make this determination on remand.

A-12

F.2d at 718. The district court thus abused its discretion in rul-
ing that the requirements of Rule 23(b)(3) were not satisfied in
this case. See, e.g., Cox v. American Cast Iron Pipe Co., 784
F.2d at 1557-58.

B. State Law Claims

In concluding that the state law claims failed to satisfy the
requirements of Rule 23(b)(3), the district court reasoned that
the differing standards of liability required by the laws of the
various states would render class action treatment un-
manageable. We agree with the district court that the state law
claims would require application of the standards of liability
of the state in which each purchase was transacted.* The district
court thus did not abuse its discretion in denying class certifica-
tion on these claims. See, e.g., Simon v. Merrill Lynch, Pierce,
Fenner and Smith, Inc., 482 F.2d at 883.

C. Section 1] and 12(2) Claims

In explaining its denial of class certification of the section 11
and 12(2) claims, the district court stated that it “did not

* Under the Georgia law applicable to these diversity claims, see Klaxon Co.
v. Stentor Electric Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941),
the standard of liability would be determined, as an initial matter, by the
law of the state in which the purchaser acquired the security, not of the state
from which the shares were sold. See Risdon Enterprises, Inc. v. Coleman
Enterprises, Inc., 172 Ga. App. 902, 324 S.E.2d 738, 740 (1984) (explaining
Georgia's lex loci delecti choice of law rule in tort cases); see also Zandman
v. Joseph, 102 F.R.D. 924, 930 (N.D.Ind.1984) (Indiana's lex loci delecti rule
“would require use of the law of the state where each class member suffered
his or her pecuniary loss”). If a particular state does not have a controlling
statute, however, the Georgia choice of law rule requires application of the
common law as construed by the courts of Georgia. See Frank Briscoe, Inc.
v. Georgia Sprinkler Co., Inc., 713 F.2d 1500, 1503 (llth Cir.1983); Risdon
Enterprises, 324 S.E.2d at 741 (1984). Thus, although the law of Georgia might
eventually be applied on some claims involving purchases made in other states,
that could be determined only after the district court had fully surveyed the
law of the states of purchase. Moreover, even if Georgia law would require
application of its own common law rules to some claims involving purchases
in other states, the law of Georgia could be applied consistent with due pro-
cess only if the particular transaction had some significant relation to Georgia.
Phillips Petroleum Co. v. Shutts, 472 U.S. 797, 105 S.Ct. 2965, 2980, 86 L.Ed.2d
628 (1985).

A-13

address” these claims individually because to separate these
ciaims from the Rule 10b-5 and state law claims would be “un-
duly burdensome” on the court. The court consequently denied
class certification of the Rule 11 and 12(2) claims based upon
its conclusion that the 10b-5 and the state law claims did not
meet the requirements of Rule 23(b)(3). In view of our deter-
mination that the court erroneously ruled that 10b-5 claims did
not meet the requirements of Rule 23(b)(3), the court must of
course reconsider its decision regarding the Section 11 and 12(2)
claims.

Independent of our decision on the 10b-5 claims, however,
we conclude that the court erred in failing to consider separately
the appropriateness of the class action treatment of the section
11 and 12(2) claims. Although there is some overlap between
section 10(b) and sections 11 and 12(2), the provisions “involve
distinct causes of action and were intended to address different
types of wrongdoing.” Herman ¢ McLean v. Huddleston, 459
U.S. 375, 103 S.Ct. 683, 687, 688, 74 L.Ed.2d 548 (1983). The
failure of the district court to give separate consideration to class
action certification of these distinct claims thus could serve
neither the securities laws’ purpose of protecting investors, see,
e.g., id., 103 S.Ct. at 687, nor Rule 23’s purpose of protecting
the courts from needlessly repetitious litigation, see, e.g., Ken-
nedy v. Tallant, 710 F.2d at 718. By failing to consider these
claims separately, the court abused its discretion.

III. ADEQUATE CLASS REPRESENTATION

Having concluded that the district court’s ruling on the re-
quirements of Rule 23(b)(3) constituted an abuse of the court’s
discretion, we must address the court’s alternative holding that
the named plaintiffs in each of these cases did not satisfy the
adequate representation requirement of Rule 23(a)(4) because
they failed to demonstrate sufficient “vigor” to prosecute a class
suit.

Among the prerequisites to the maintenance of a class action
is the requirement of Rule 23(a)(4) that the class representatives

A-14

“will fairly and adequately protect the interests of the class.”
The purpose of this requirement, as of many other of Rule 23’s
procedural mandates, is to protect the legal rights of absent class
members. Because all members of the class are bound by the
res judicata effect of the judgment, a principal factor in deter-
mining the appropriateness of class certification is “the forth-
rightness and vigor with which the representative party can be
expected to assert and defend the interests of the members of
the class.” Mersay v. First Republic Corp., 43 F.R.D. 465, 470
(S.D.N.Y.1968); see also Shatzman v. Talley. 91 F.R.D. 270, 273
(N.D.Ga.1981) (insufficiency of funds to prosecute suit indicates
the “vigor with which the case will be pursued”); Dolgow v.
Anderson, 43 F.R.D. 472, 494 (E.D.N.Y.1968) (court “must be
assured that ‘the representatives [will] put up a real fight’ ”
(quoting J. Chafee, Some Problems in Equity 231 (1950)), revd
on other grounds, 438 F.2d 825 (2d Cir.1971); cf. Falcon, 457
U.S. at 161, 102 S.Ct. at 2372.

The inquiry into whether named plaintiffs will represent the
potential class with sufficient vigor to satisfy the adequacy re-
quirement of Rule 23(a)(4) most often has been described to “in-
volve[ ] questions of whether plaintiffs’ counsel are qualified,
experienced, and generally able to conduct the proposed litiga-
tion and of whether plaintiffs have interests antagonistic to those
of the rest of the class.” Griffin v. Carlin, 755 F.2d 1516, 1532
(11th Cir.1985). Even where these two requirements are satisfied,
however, named plaintiffs might not qualify as adequate class
representatives because they do not possess the personal
characteristics and integrity necessary to fulfill the fiduciary role
of class representative. See, e.g., Kline v. Wolf, 702 F.2d 400,
402-03 (2d Cir.1983); Armour v. City of Anniston, 89 F.R.D.
331, 332 (D.C.Ala.1980), affd, 654 F.2d 382 (5th Cir. Unit B
Aug. 1981); 7A C. Wright, A. Miller and M. Kane, Federal Prac-
tice and Procedure, Civil 2d § 1766 at pp. 308-10.

For similar reasons, some courts have found, as did the district
court here, that Rule 23(a)(4) was not satisfied where the nam-
ed plaintiffs demonstrated insufficient participation in and
awareness of the litigation. See, e.g., Darvin v. International
Harvester Co., 610 F. Supp. 255, 257 (S.D.N.Y.1985);

A-15

Massengill v. Board of Educ., 88 F.R.D. 181 (N.D.II1.1980). In
following the lead of these cases, however, the district court ap-
pears to have applied a standard that does not vindicate the
policies and purposes of Rule 23. Contrary to the district court’s
approach to the issue, adequate class representation generally
does not require that the named plaintiffs demonstrate to any
particular degree that individually they will pursue with vigor
the legal claims of the class. Although the interests of the plaintiff
class certainly would be better served if the named plaintiffs
fully participate in the litigation, see, e.g., In re Goldchip Fun-
ding Co., 61 F.R.D. 592, 594-95 (M.D.Pa.1974), the economics
of the class action suit often are such that counsel have a greater
financial incentive for obtaining a successful resolution of a class
suit than do the individual class members. See Deposit Guaranty
Nat. Bank v. Roper, 445 U.S. 326, 338-39, 100 S.Ct. 1166, 1174,
63 L.Ed.2d 427 (1980) (plurality opinion). It is not surprising,
then, that the subjective desire to vigorously prosecute a class
action, which the district court here found missing in the nam-
ed plaintiffs, quite often is supplied more by counsel than by
the class members themselves. Obviously this creates a poten-
tial for abuse. See id. at 339, 100 S.Ct. at 1174. Yet the financial
incentives offered by the class suit serve both the public interests
in the private enforcement of various regulatory schemes, par-
ticularly those governing the securities markets, and the private
interests of the class members in obtaining redress of legal
grievances that might not feasibly be remedied “within the
framework of a multiplicity of small individual suits for
damages.” Id.

As the district court aptly noted, a potential class is entitled
to “more than blind reliance upon even competent counsel by
uninterested and inexperienced representatives.” In re Goldchip
Funding Co., 61 F.R.D. at 594. For where the named plaintiffs
“have abdicated their role in the case beyond that of furnishing
their names as plaintiffs,” the attorneys, in essence, are the class
representative. Helfand v. Cenco, 80 F.R.D. 1, 7-8 (N.D.III.1977).
Several district courts thus have properly denied class certifica-
tion where the class representatives had so little knowledge of
and involvement in the class action that they would be unable

A-16

or unwilling to protect the interests of the class against the
possibly competing interests of the attorneys. See, e.g. Efros v.
Nationwide Corp., 98 F.R.D. 703, 707 (S.D.Ohio 1983); Hel-
fand v. Cenco, supra; see also 7A Wright, Miller & Kane at §
1766 pp. 310-11 (the “inquiry into the knowledge of the represen-
tative is to ensure that the party is not simply lending his name
to a suit controlled entirely by the class attorney.”)

In concluding that the named plaintiffs in these cases do not
satisfy the adequate representation requirement of Rule 23(a)(4),
the district court noted that neither this court nor the Supreme
Court has set forth standards for determining the adequacy of
class representatives.’ Because the issue of adequate class
representation arises in a wide variety of contexts, it would be
inappropriate for us to establish a standard for general applica-
tion. We conclude, however, that in securities cases such as these,
where the class is represented by competent and zealous counsel,
class certification should not be denied simply because of a
perceived lack of subjective interest on the part of the named
plaintiffs unless their participation is so minimal that they vir-
tually have abdicated to their attorneys the conduct of the case.
To require less would permit attorneys essentially to serve as class

7 In support of its conclusion that the named plaintiffs in these cases are in-
adequate class representatives, the court cited Rothenberg v. Security Manage-
ment Co., Inc., 667 F.2d 958 (llth Cir. 1982). Rothenberg upheld the dismissal
of a Rule 23.1 derivative shareholders’ action where the named plaintiff had
been found not to be an adequate representative of the other shareholders.
In making this determination, the district court and the panel on appeal relied
on factors similar to those relied upon by the district court here. Rothenberg,
however, is not entirely apposite to the determination of adequacy of a class
representative under Rule 23(a)(4). A derivative suit poses inherent conflicts
between those minority shareholders who are bringing the suit and the ma-
jority shareholders whose administration is being challenged either directly
or indirectly. See 7C C. Wright, A. Miller & M. Kane, Federal Practice and
Procedure § 1833 at pp. 137-39. In contrast, a class suit by definition serves
to benefit the members of the class. Consequently, a different degree of par-
ticipation might well be required of a named plaintiff in a Rule 23.1 derivative
than of a named plaintiff in a Rule 23 class action. The case before us does
not involve a Rule 23.1 certification, and we express no opinion as to what
the standard for such cases should be.

A-17

representatives; to require more could well prevent the vindica-
tion of the legal rights of the absent class members under the
guise of protecting those rights.

Although we conclude that the district court applied an er-
roneous standard in determining that the named plaintiffs would
not be adequate class representatives, it would be inappropriate
for us to make an independent application of the correct stan-
dard in this case. In contrast to the more strictly legal questions
presented by the district court’s characterization of the plain-
tiffs’ claims in its rulings on the Rule 23(b)(3), the adequacy
of class representation is primarily a factual issue that is best
left for determination by the district court. Consequently, we
remand the Rule 23(a)(4) issue for the district court to apply
the standard we have set forth above.

IV. CONCLUSION

For the foregoing reasons, the order of the district court is
REVERSED IN PART, AFFIRMED IN PART, and REMAND-
ED with instructions.

B-1

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION

GLENN T. SANDERS, on behalf of himself and
all others similarly situated,

Plaintiffs,
vs.

ROBINSON HUMPHREY/AMERICAN EXPRESS, INC.,
et al.,

Defendants.
CIVIL ACTION No. C 85-172 A

TOMMY E. PARKER, as custodian for KIMBERLY M.
PARKER, and JAMES L. SMITH, on behalf of themselves
and others similarly situated,

Plaintiffs,
vs.
PAINE WEBBER GROUP, INC.,
Defendant.
CIVIL ACTION No. C 85-1586 A

SUZANNE KIRKPATRICK, DOROTHY D. CASLER,
and CHARLES H. LINDSEY,

Plaintiffs,
vs.
J.C. BRADFORD & CO.,
Defendants.
CIVIL ACTION No. C 85-1891 A

July 8, 1986

B-2

OPINION OF VINING, DISTRICT JUDGE
ORDER

In these federal securities actions, three motions are now before
the court. The facts of these cases are set forth in this court's re-
cent order, filed on March 28, 1986 (“the previous order”). The
first motion is the plaintiffs’ motion to reconsider the previous
order, which denied their motion for class certification under Rule
23, Federal Rules of Civil Procedure. Second, the plaintiffs have
asked this court to amend the previous order to certify it for in-
terlocutory appeal, pursuant to Rule 5 of the Federal Rules of
Appellate Procedure and 28-U:S.C. § 1292(b). Last, the plain-
tiffs have moved for an ora.t staying the previous order until the
date when the Eleventh Circuit Court of Appeals rules on the
plaintiffs’ interlocutory appeal. The court addresses each of these
motions in turn.

I. MOTION FOR RECONSIDERATION

The court’s denial of class certification in each of these cases
was based upon an extensive review of the record presented to
the court through pleadings, discovery, and oral hearings. Five
areas of concern required that the court deny class certification
to the named plaintiffs. These areas of concern and the reason-
ing behind the court’s treatment of each area are set out in com-
plete detail in the previous order. The first of these is that the
plaintiff cannot adequately represent the class as a whole as re-
quired by Rule 23(a)(4), Federal Rules of Civil Procedure. The
remaining four bases for denial of class cei dfication address the
requirements of Rule 23(b)(3), that common questions of law and
fact do not predominate over individual issues. These individual
issues involve the requirement of proof of reliance as an element
in actions under section 10(b) of the Securities Exchange Act of
1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated under that
Act; the fact that arbitration agreements signed by potential class
members provide for a better, more efficient method of ad-
judicating the claims by many of the potential class participants;
and the fact that many potential class members are from various
states throughout the country, thus requiring application of their
individual state statutes of limitations as well as the need to apply
the law of each state in which potential class members reside.

B-3

The plaintiffs disagree with the court’s finding in each of these
areas and have requested the court to reconsider the class cer-
tification based upon these findings as well as the court’s failure
to address Counts I and II, brought pursuant to sections 11 and
12(2) of the Securities Act of 1933, 15 U.S.C. §§ 77k, 771(2). Each
of these areas addressed by the plaintiffs will be discussed seriatim
below. However, the court at this juncture believes it necessary
to inform the plaintiffs of its method of handling the class cer-
tification issue.

First, the plaintiffs request that the court consider each in-
dividual issue, count, or other separate determination as a single
issue not tied to any other issue for purposes of class certifica-
tion. Although some courts have opted to bifurcate class actions,
this court finds that to do so in this case wou'vi be unduly burden-
some and would not be the best method of handling the cases.
Therefore, the court has looked at each requirement of Rule 23,
then combined its findings on each element of Rule 23 to deter-
mine whether class certification is appropriate for each case as
a whole. For this reason, the court did not address the counts
brought under sections 11 and 12(2) of the Securities Act of 1933.
After reviewing the requirements for class certification under sec-
tion 10(b) and Rule 10b-5 and the state law claims, the court
determined that the plaintiffs had not met their burden of prov-
ing the elements necessary to meet the class certification re-
quirements for these claims and did not, nor does it now, believe
the section 11 and section 12(2) claims needed to be addressed
in determining whether the plaintiffs’ actions as a whole war-
rant class certification.

As to the remainder of the issues addressed by the plaintiffs
in their motions to reconsider, the court believes that some
clarification is necessary. After carefully considering each of the
plaintiffs’ contentions, the court finds them all without merit.

A. Rule 23(a)(4): Adequacy of Representation

In the previous order, the court held that the plaintiffs failed
to satisfy the second requirement of Rule 23(a)(4) because they
failed to convince the court that they would vigorously prosecute
these class actions. Order at p. 22. First, the plaintiffs did not

B-4

attend the hearing. In the motion for reconsideration the plain-
tiffs contend that they did not appear at the hearing because the
court quashed subpoenas seeking to compel their attendance.
While the plaintiffs are correct that they were not required to
attend the hearing, the court views their unwillingness to do so
as one indication of a lack of interest in these lawsuits. Contrary
to the plaintiffs’ contentions, their failure to appear at the hear-
ing was not determinative. As the court stated in its previous
order, the “totality of the circumstances” surrounding this litiga-
tion led the court to its decision. Id.; see id. at 23-26 (setting out
the other reasons that the plaintiffs are inadequate
representatives).

The plaintiffs also contend that the court placed undue em-
phasis on their lack of familiarity with the complaint and the
case as a whole. This court has stated that “the knowledge and
involvement of plaintiff with the suit . . . [are] some of the fac-
tors relevant to a determination of a plaintiff's adequacy as a
class representative.” Schatzman v. Talley, 91 F.R.D. 270, 273
(N.D. Ga. 1981). Again, under the totality of the circumstances,
the plaintiffs’ lack of familiarity with these cases is another in-
dication of their uncertain commitment to these lawsuits. The
plaintiffs cite Surowitz v. Hilton Hotels Corp., 383 U.S. 363, 86
S. Ct. 845 (1966), for the proposition that their lack of familiarity
is not a critical issue. Surowitz is inapposite because it does not
address the degree of interest that a plaintiff must display to satisfy
Rule 23(a)(4). Surowitz dealt with the question of whether a
derivative plaintiff must personally investigate the facts underly-
ing the complaint.

In the reply brief in Parker, the plaintiffs criticize the defen-
dant for citing deposition testimony indicating that the defen-
dant’s broker, as opposed to the defendant, did not conceal the
truth about Petro-Lewis. According to the plaintiffs, this lawsuit
is against Paine Webber, not its brokers. Plaintiff Parker, however,
does not have any reason to believe that either the defendant or
its broker defrauded him:

Q. Do you think that Lee Smith [Parker's broker] in-
tended to deceive you?

B-5

A. No.

Q. Do you know of anybody at Paine Webber who in-
tended to deceive you?

A. No, sir, I don’t.

Q. Do you have any basis for believing that anybody
at Paine Webber intended to deceive you?

A. No, sir, I don't.

Q. Do you believe that Lee Smith was part of a fraud
or conspiracy to deceive you?

A. No, sir.

Q. Do you know of anybody at Paine Webber who was
part of a fraud or conspiracy to deceive you?

A. No, sir.
Deposition of Tommy E. Parker, pp. 81-82.

Finally, the plaintiffs assert that courts have tolerated wide
variances in the named plaintiffs’ understanding of and involve-
ment in class action lawsuits. They quote from Ross v. BankSouth,
N.A., [1985-86 Transfer Binder] Fed. Sec. L. Rep. (CCH) { 92,
526 (N.D. Ala. 1986), which takes a particularly lenient view of
the threshold necessary to meet Rule 23(a)(4). Some courts,
however, have been much more demanding of class represen-
tatives. For example, in Greenspan v. Brassler, 78 F.R.D. 130,
133-34 (S.D.N.Y. 1978), the court found that putative class
representatives failed to satisfy Rule 23(a)(4) for some of the same
reasons mentioned in this court’s previous order:

Although plaintiffs appear willing and able to bear
the costs of this litigation, they have demonstrated an
alarming unfamiliarity with the suit. They did not
meet with their attorney until the basic groundwork

B-6

of the action had been laid. Neither could identify any
of the defendants other than NJB. Neither was aware
of certain elements of the complaint. Indeed, plain-
tiffs appear to place undue emphasis on their counsel's
ability to conduct the litigation. Plaintiffs’ limited per-
sonal knowledge of the facts underlying this suit, as
well as their apparently superfluous role in this litiga-
tion to date, indicate their inadequacy as class represen-
tatives. (citations to deposition testimony and cases
omitted).

The court also finds that the analysis in In re Goldchip Funding
Co., 61 F.R.D. 592, 594 (M.D. Pa. 1974), which is quoted with

approval in Greenspan, applies in this case:

The class is entitled to more than blind reliance upon
even competent counsel by uninterested and inex-
perienced representatives. A proper representative can
offer more to the prosecution of a class action than
mere fulfillment of the procedural requirements of Rule
23. He can, for example, offer his personal knowledge
of the factual circumstances, and aid in rendering deci-
sions on practical and non-legal problems which arise
during the course of litigation. An attorney who pro-
secutes a class action with unfettered discretion
becomes, in fact, the representative of the class. This
is an unacceptable situation because of the possible con-
flicts of interest involved. (citation omitted).

Neither the Supreme Court nor the Eleventh Circuit has
established specific guidelines for district courts to follow in mak-
ing factual findings under Rule 23(a)(4). Determinations relating
to the adequacy of a class representative are factual in nature--
their resolution “depends on all the facts and circumstances of
a particular case and is entrusted to the discretion of the trial
court.” Dudo v. Schaffer, 93 F.R.D. 524, 531 (E.D. Pa. 1982) (cita-
tions omitted); see Freeman v. Motor Convoy, Inc., 700 F.2d 1339,
1347 (llth Cir. 1983). The plaintiffs have failed to point out any
new facts or theories that would lead this court to change its
holding.

B-7

B. Reliance and Fraud on the Market

The issue of reliance is central to a section 10(b) and Rule 10b-5
claim. The plaintiffs allege that the court’s consideration of the
issue of reliance at this point in the litigation process is an im-
proper intrusion into the merits of the case. Although the court
acknowledges that a consideration of the case on its merits is not
always appropriate in determining class certification, it is general-
ly accepted law in this circuit that the court may inquire into
the merits of the case provided the granting or denial of class
certification is not based upon whether the court believes the
plaintiff may or may not prevail in its suit. Huff v. N.D. Cass
Co. of Alabama, 485 F.2d 710 (5th Cir. 1973). Indeed, the
Supreme Court has acknowledged the need for investigation in-
to the merits of the case because “actual, not presumed, confor-
mance with Rule 23(a) remains, however, indispensable,” General
Telephone Co. of Southwest v. Falcon, 457 U.S. 147, 160, 102
S. Ct. 2364, 2372, 72 L.Ed.2d 740 (1982); in that “the class deter-
mination generally involves considerations that are ‘enmeshed in
the factual and legal issues comprising the plaintiffs cause of ac-
tion, ” Coopers & Lybrand v. Livsey, 437 U.S. 463, 469, 98 S.
Ct. 2454, 2458, 57 L.Ed.2d 351 (1978) quoting Mercantile Na-
tional Bank v. Langdeau, 371 U.S. 555, 558, 83 S. Ct. 520, 522,
9 L.Ed.2d 523 (1963)).

The plaintiffs allege that the presumption of reliance in Af-
filiated Ute Citizens v. United States, 406 U.S. 128, 92S. Ct. 1456,
31 L.Ed.2d 741 (1972), should be applied to the cases at bar. This

' The court notes that the plaintiffs are likely to assert that the reliance issue
falls within Rule 23(b)(3), as discussed by this court, as opposed to Rule 23(a)
in Falcon and that conformance with Rule 23(b) is not indispensable. However,
one of the three sections of Rule 23(b) must be met for class certification pur-
poses. Additionally, many courts have treated the issue of reliance as a typicality
or commonality requirement, ¢.g., Nelson v. U.S. Steel Corp., 709 F.2d 675
(llth Cir. 1983), which treatment would necessarily thwart class action status
as plaintiffs would fail to meet the indispensable requirements of Rule 23(a),
reliance being an issue to be handled on an individual basis. This court,
however, feels that some elements of typicality and commonality are present
in each of the class representatives and has chosen to treat the issue of reliance
under Rule 23(b).

B-8

court has thoroughly dealt with this presumption of reliance in
its previous order and will not delve into the matter further. In
an attempt to sway this court away from its prior decision deny-
ing to the plaintiffs the presumption of reliance based on the fraud
on the market theory, the plaintiffs have brought to the court's
attention several cases permitting this use of the fraud on the
market theory. See Ross v. BankSouth, N.A., Fed. Sec. L. Rep.
(1985-86 Transfer Binder] { 92,526 (N.D. Ala. 1986); Klein v. A.C.
Becker Paribas, Inc., 83 Civ. 6456 (GLG) (S.D.N.Y. March 19,
1986); Dekro v. Stern Bros. & Co., 540 F. Supp. 406 (W.D. Mo.
1982); Arthur Young ¢> Co. v. United States District Court, 549
F.2d 686 (9th Cir. 1977).

The Klein case sets forth the elements of a fraud on the market
case. The elements necessary to establish a rebuttable presump-
tion of reliance, as set out in Klein, are “that (1) an affirmative
representation affected the price of a security traded on the open
market, (2) the plaintiff relied to his detriment on the integrity
of the market price, and (3) the price of the security ‘reacted
adversely’ when the truth was revealed concerning the issuer of
the security.”

With the exception of Arthur Young, the cases cited by the
plaintiffs allowing the fraud on the market theory to stand met
the first element in Klein in that they involved sales of stocks or
bonds on the open market. Arthur Young involved securities not
traded on the open market. In fact, the securities were interests
in five oil joint ventures similar to the interests sold in the in-
stant cases. In Arthur Young, the parties were before the court
on a motion by the defendants for a writ of mandamus requir-
ing the district court to set aside its order and strike the class
allegations from the complaint. The district court in Arthur Young
had bifurcated the case allowing some issues to be certified for
class action and other issues to be held for individual adjudica-
tion. One of the issues to be tried individually was that of reliance
or causation. Arthur Young, 549 F.2d at 690. Additionally, the
misrepresentations and omissions in Arthur Young did not involve
oral misrepresentations. In fact, all claims based upon oral
misrepresentations were withdrawn by the plaintiffs from the
suit. Arthur Young, 549 F.2d at 689, n.5. Also, the court in

ail SOE LL A OLED a EN LE EE Be Maw ee

B-9

Arthur Young considered that case to be one involving only omis-
sions, where reliance can be inferred under the Ute decision,
rather than an oral misrepresentations and omissions case as are
the cases at bar. Arthur Young, 549 F.2d at 694. The fact that
reliance was held to be an individual issue, the fact that oral
misrepresentations claims were withdrawn by the plaintiffs
because of difficulties inherent in such claims in determining class
action status, and the fact that the case was an omissions case
are supportive of this court’s position denying the class action
in the instant cases and cannot be used to support the plaintiffs
in their search for a theory on which to base class action status.

The remaining cases cited by the plaintiffs in support of the
fraud on the market theory, viz., Dekro, Klein, and Ross, involved
securities sold on the open market, differentiating them from the
cases at bar, where the securities were not sold on the open
market. In Ross, the only case cited by the plaintiffs within the
jurisdiction of the Eleventh Circuit, the court went to great
lengths to outline instances where the fraud on the market
presumption of reliance cannot be allowed. That court then,
without sufficient factual analysis to support its decision, found
the fraud on the market theory viable for purposes of determin-
ing reliance. It can only be assumed by this court that Judge
Propst first determined the requirement that ihe securities be trad-
ed on the open market had been met before allowing the
presumption of reliance under the fraud on the market theory.

Shores v. Sklar, 647 F.2d 462 (5th Cir. 1981), cert. denied, 459
U.S. 1102 (1983), obviates the need for trading on the open market
if the security would not have been marketed at all but for the
fraud. The plaintiffs alleged in their complaints that “but for
the false and misleading statements contained in the registration
statements and prospectuses and material information omitted
therefrom, the Petro-Lewis partnership programs could not have
been marketed and sold to plaintiffs and members of the class.”
The plaintiffs assert that these allegations must be accepted as

* Robinson-Humphrey Amended Complaint, { 55; J.C. Bradford Amended
Complaint, * 52; Paine Webber Second Amended Complaint, { 50.

B-10

true for purposes of ruling on the class status motion but cite
no support for this assertion. The court, however, is not required
to look at and accept as true allegations of the complaint for pur-
poses of Rule 23 class certification. Huff v. N.D. Cass Co. of
Alabama, 485 F.2d 710, 713 (5th Cir. 1973). The plaintiffs’ only
support for the allegation, that but for the fraud and misleading
statements the securities would not have been sold, lies in their
reliance upon the suit filed by the Securities and Exchange Com-
mission against Petro-Lewis, see In re Petro-Lewis Securities
Litigation, (1984-85 Transfer Binder] { 91,899 (D. Colo. 1984),
and the assumption that the SEC never would have approved
the offerings had the misrepresentations been discovered prior
to approval.

First, it should be noted that the SEC does not approve nor
disapprove securities for sale; it merely reviews the prospectus
for compliance with SEC regulations. The issue then is not
whether the SEC would have approved the offerings but whether
the securities could have been sold but for the fraud. The reliance
upon In re Petro-Lewis is misplaced as that case was settled out
of court with the opinion of the court being that “in my view,
after reviewing the entire matter, there are serious questions of
law and fact which place the outcome of this action, if tried rather
than settled, in substantial doubt.” In re Petro-Lewis, { 91,899
at p. 90,470. The support for the allegations that the securities
would not have been sold but for the misrepresentations is not
present, insofar as this court can determine, in the pleadings and
evidence admitted by plaintiffs to the extent necessary to satisfy
this court that the allegation has some basis and is not just a shot
in the dark attempt to bring the case within the purview of a
fraud on the market theory.

In addition to the element requi:ing sales on the open market,
a fraud on the market claim under Klein requires that a plain-
tiff rely upon the integrity of the market in purchasing the
securities. The court is aware of no evidence presented by the
plaintiffs supporting this element. Indeed, the only information
relied upon by each of the plaintiffs was information supplied

we amt ea ne

:
e |
;
3

B-11

to them orally by their brokers.’

In light of the foregoing the court finds that the elements
necessary to support a fraud on the market theory which would
allow for a rebuttable presumption of reliance in a section 10(b)
and Rule 10b-5 action are not present. The court has determin-
ed that reliance is paramount to the cases at bar. Due to the
nature of these cases as oral misrepresentations cases the reliance
must be proven on an individual basis. This requirement is, as
stated in the court’s previous order, one more obstruction to the
granting of class status to these actions.

C. Arbitration

A third issue discussed by the court in its previous order is that
of possible arbitration of claims against the defendants. In each
of the three cases at bar the defendants have asserted that a
number of potential class members have signed arbitration
agreements with the defendants for handling of possible claims
against them. Some of the defendants have presented no con-
crete evidence of arbitration agreements with the named plain-
tiffs. However, because of the general practice of brokerage firms
to procure such agreements, the court is satisfied for purposes
of class certification that each of the defendants is able to substan-
tiate arbitration claims with some potential class members which
could greatly disrupt these proceedings should class certification
be granted.

The plaintiffs have referred the court to two recently decided
cases concerning arbitration which the court feels compelled to
address and distinguish. First, plaintiffs submit that this court
should follow the decision in McMahon v. Shearson/American

* The plaintiffs in Paine Webber have asserted in separate pleadings that they
did not rely upon oral misrepresentations of the brokers but in fact relied upon
prospectuses presented to them. However, the evidence as presented by the
plaintiff and defendants on the issue of reliance and oral versus written
misrepresentations is a defense which could be raised against these plaintiffs.
Such a defense would be atypical of defenses which could be raised against
other plaintiffs in Paine Webber and therefore would not allow for the
presumption of reliance in Paine Webber.

B-12

Express, Inc., 788 F.2d 94 (2d Cir. 1986), where Shearson sought
to compel arbitration of Rule 10b-5 claims pursuant to arbitra-
tion agreements signed by the plaintiffs in that case. In McMahon,
the Second Circuit, because of the failure of the Supreme Court
in Dean Witter Reynolds, Inc. v. Byrd, ____ U.S. ___,, 105 S.
Ct. 1238 (1985) to rule on the arbitrability of 10(b) and 10b-5
claims, ruled that that circuit would not depart from its previous
decisions that these claims are not arbitrable. While this court
acknowledges the position of the Second Circuit in following the
precedents in its circuit, it is not bound by that decision. This
court holds that arbitration agreements signed by the plaintiffs
and potential class members in the cases at bar are enforceable.
See Schultz v. Robinson-Humphrey/American Express, Inc., [Cur-
rent] Fed. Sec. L. Rep. (CCH) ¢ 92,515 (M.D. Ga. 1986);
Chandler v. Drexel Burnham Lambert, Inc., No. C85-1585A
(N.D. Ga. Oct. 28, 1985); Raiford v. Merrill Lynch, Pierce, Fenner
dz Smith, Inc., Civ. No. C83-685A (N.D. Ga. May 16, 1985). This
holding is based upon the national policy adhered to in Byrd of
favoring arbitration agreements. See also Mitsubishi Motors Corp.
v. Soler Chrysler-Plymouth, Inc., US. , 105 S. Ct. 3346
(1985). That these arbitration agreements may be readily en-
forceable leads this court to the determination that yet another
individual issue predominates over common issues of law and fact.
Additionally, these agreements provide what this court perceives
to be a better method of adjudicating a large number of claims
by potential plaintiffs against the defendants.

In a second attempt to bar the potential use of arbitration
clauses by the defendants the plaintiffs draw the court’s atten-
tion to Smokey Greenhaw Coton Co., Inc. v. Merrill Lynch,
Pierce, Fenner ¢> Smith, Inc., 785 F.2d 1274 (5th Cir. 1986). The
plaintiffs cite this case to support the proposition that Byrd can-
not be applied retroactively. The plaintiffs, however, fail to
acknowledge the bold distinction between Smokey Greenhaw and
the cases at bar. In Smokey Greenhaw, the questions to be sub-
mitted to arbitration had already been decided by a jury prior
to Byrd. To apply Byrd in that instance would have required ar-
bitration of issues already decided by a competent court of law.
The court in fact states,

B-13

Without so deciding, we might be more inclined to
direct the parties to the arbitration room had this case
been awaiting trial when the Dean Witter Reynolds
opinion was handed down. However, equity demands
that, where the trial has been completed, the propos-
ed judgment rendered, and only the relative ministerial
task of approving the form of the judgment remains,
Greenhaw should not be denied his victory and forc-
ed once again to do battle in a different forum.

Smokey Greenhaw, 785 F.2d at 1279-80. Had the cases at bar
been tried on their merits prior to the decision in Byrd, this court
might well hold that the Byrd analysis was not retroactive.
However, these cases have not yet even passed the preliminary
procedural stages. For these reasons, the court adheres to its posi-
tion as enunciated in its previous order with respect to the ar-
bitrability issue of these class certifications.

D. Rule 10b-5: Statute of Limitations

In its previous order, this court held that because the statute
of limitations is taken from state law, the claims are inappropriate
for treatment as class actions. Order at pp. 42-43; see Elster v.
Alexander, 76 F.R.D. 440, 442 (N.D. Ga. 1977), appeal dismiss-
ed, 608 F.2d 196 (5th Cir. 1979). In arguing that this court er-
red, the plaintiffs contend that the general rule in securities class
actions involving a national class is that the court should apply
a single statute of limitations for Rule 10b-5 claims. See, e.g.,
State Teachers Retirement Board v. Fluor Corp., 80 F.R.D. 142,
144-45 (S.D.N.Y. 1978); In re National Student Marketing Litiga-
tion [1981 Transfer Binder], Fed. Sec. L. Rep. (CCH) 4 97,926
(D.D.C. 1981). The plaintiffs, however, cite no circuit court
authority for this proposition,‘ and they do not attempt to
distinguish, or even discuss, Elster. Because the court continues
to believe that the analysis in Elster is correct, this court adheres

* In fact, In re National Marketing relies on the reasoning in State Teachers.
No other federal court has ever followed State Teachers.

B-14

to its prior holding. The plaintiffs have failed to cite any appellate
or Supreme Court authority that dictates another result.

E. State and Common Law Claims

The plaintiffs next argue that this court failed to engage in
the analysis mandated by Phillips Petroleum Co. v. Shutts, ___
U.S. ___, 105 S. Ct. 2965 (1985), and misapplied the holding
in that case.’ In part III of the Shutts opinion, the Supreme Court
began by establishing that Kansas contract and equity law dif-
fered from Texas and Oklahoma contract and equity law. See id.
at___, 105 S. Ct. at 2977-78. Similarly, this court outlined the
differences in the elements of a fraud claim in numerous jurisdic-
tions in this country. See Order at pp. 49-51. Like the Supreme
Court in Shutts, this court concluded that, based on the dif-
ferences in the laws of the various states, it would be unconstitu-
tional for the court to apply Georgia law to transactions in which
investors had no contact with Georgia, nor any reasonable ex-
pectation that Georgia law would apply to their purchases.* Shutts
holds that a court “may not take a transaction with little or no

‘ The plaintiffs do not address Simon v. Merrill Lynch, Pierce, Fenner & Smith,
Inc., 482 F.2d 880, 883 (5th Cir. 1973), in which the court held:

[T]he geographic dispersion of the alleged representations would
bring into issue various state common law standards. With no
single law governing the entire class, common issues of law can-
not be shown to warrant Rule 23 treatment.

That decision is binding on this court. See Bonner v. City of Prichard, 661
F.2d 1206, 1209 (llth Cir. 1981) (en banc) (adopting the law of the Fifth Cir-
cuit prior to October 1, 1981, as binding precedent). In addition, the plain-
tiffs once again failed to distinguish or even address Elster v. Alexander, 76
F.R.D. 440, 442 (N.D. Ga. 1977), appeal dismissed, 608 F.2d 196 (5th Cir.
~ 1979). See Order at pp. 48-49 (citing decisions that follow the reasoning in
Simon and Elster).

* In Sanders the defendants’ attorney indicates that his examination of client
mailing lists taken from the defendants’ business files shows that the defen-
dants sold Petro-Lewis limited partnership interests to clients maintaining ad-
dresses in 32 states, the District of Columbia, and West Germany. Supplemental
Affidavit of Peter J. Anderson, { 3.

ee ot

B-15

relationship to the forum and apply the law of the forum in order
to satisfy the procedural requirement that there be a ‘common
question of law. ” Shutts, ___ U.S. at ___, 105 S. Ct. at 2980.

The Supreme Court in Shutts also quoted from Allstate In-
surance Co. v. Hague, 449 U.S. 302, 312-13, 101 S. Ct. 633, 640
(1981), in which it had stated, “For a State’s substantive law to
be selected in a constitutionally permissible manner, that State
must have a significant contact or significant aggregation of con-
tacts, creating state interests, such that choice of its law is neither
arbitrary nor fundamentally unfair.” In the instant case, the
named plaintiffs are residents in this district and the defendants
do business here. Based on these facts alone, the court fails to
see how Georgia has “a significant contact or significant aggrega-
tion of contacts, creating siate interests” such that Georgia law
should apply to investors from other parts of the country. As the
Supreme Court stated, “Given [Georgia’s] lack of ‘interest’ in
claims unrelated to that State, and the substantive conflict with
jurisdictions such as Texas, we conclude that application of
[Georgia] law to every claim in this case is sufficiently arbitrary
and unfair as to exceed constitutional limits.” Shutts, ____ U.S.
at ___, 105 S. Ct. at 2980 (footnote omitted).

The plaintiffs contend that this court should adopt the reason-
ing in In re Pizza Time Theatre Securities Litigation, No.
C-84-20048 (A), Order Certifying Plaintiff Class (N.D. Cal.
March 18, 1986), in which a California district court interpreted
Shutts to mean that plaintiffs “must demonstrate only that
California has a sufficient aggregation of contacts to their claims
to insure that the application of California law would not be ar-
bitrary or unfair.” Slip op. at 4 (emphasis in criginal). The Pizza
Time court explained California’s interest in applying its own
law to the pendent claims in the class action:

In the instant action, California has a considerably
greater aggregate of contacts with plaintiffs’ claims
than did Kansas in the Shutts case. Here, che defen-
dant corporation was incorporated and headquartered
in California, all the non-underwriter defendants were
California residents, the alleged misrepresentations
emanated from California, and many of the plaintiffs

B-16

were California residents. The non-resident under-
writer defendants received millions of dollars in fees
from the California corporation, and the plaintiffs
allege that the underwriter defendants conspired with
the California defendants to defraud the plaintiffs. Not
only are the contacts evident, but California has a
strong interest in the allegedly fraudulent conduct of
its corporations and residents, and in protecting its
residents and others from such fraud. The application
of California law to the pendent claims in this case
would not be arbitrary. Id. at Slip Op. at 4-5.

In this case, however, Georgia has nowhere near the number of
contacts that California had with the plaintiffs’ claims in Pizza
Time: Robinson-Humphrey is the only defendant that is either
incorporated or headquartered in Georgia; the alleged
misrepresentations emanated from all over the country because
the putative class members purchased partnership interests from
brokerage houses all over the country; and many of the putative
class members are not Georgia residents. While California may
have had a sufficient aggregation of contacts to the plaintiffs’
claims in Pizza Time, that is clearly not the case here. The facts
in this action more closely resemble the facts in Shutts than Piz-
za Time.

A second reason that this court will not follow Pizza Time is
that Shutts does not overrule the reasoning in Simon, 482 F.2d
at 883, or Elster, 76 F.R.D. at 442. This court will follow these
decisions.

Finally, the Shutts court held that an important element in
deciding whether to certify a class is the expectation of the par-
ties. As in Shutts, there is no indication that when the investors
purchased the limited partnership interests outside of Georgia
they had any idea that Georgia law would control. Shutts,
U.S. at ___, 105 S. Ct. at 2980.’

7 Another reason that Pizza Time is inapposite is that the California court
concluded that “California’s aggregate contacts with, and interest in, the events
(footnote continued)

B-17

II. INTERLOCUTORY APPEAL

The plaintiffs have asked this court to amend its earlier order
to certify it for interlocutory appeal, pursuant to Rule 5, Federal
Rules of Appellate Procedure. Rule 5 provides that an order may
be amended at any time to include the statement prescribed by
28 U.S.C. § 1292(b). This statute states in part:

When a district judge, in making in a civil action
an order not otherwise appealable under this section,
shall be of the opinion that such order involves a con-
trolling question of law as to which there is substan-
tial ground for difference of opinion and that an im-
mediate appeal from the order may materially advance
the ultimate termination of the litigation, he shall so
state in writing in such order. The Court of Appeals
may thereupon, in its discretion, permit an appeal to
be taken from such order... .

First, the court finds that several controlling questions of law
exist about which substantial grounds exist for differences of opin-
ion. While a section 1292(b) review is inappropriate for challenges
to a judge's discretionary rulings, Garner v. Wolfinbarger, 433
F.2d 117, 120 (Sth Cir. 1970), the court finds that the legal issues
that it has discussed under Rule 23(b), see Order at pp. 27-51,
are by no means settled.

As to the issues of reliance and fraud on the market, the
Eleventh Circuit has accepted a presumption of reliance based
upon a fraud on the market theory, Lipton v. Documation, Inc.,
734 F.2d 740 (lth Cir. 1984); Shores v. Sklar, 647 F.2d 462 (5th
Cir. 1981) (en banc), cert. denied, 459 U.S. 1102, 103 S. Ct. 722
(1983). However, the fraud on the market presumption of reliance
has presented some ambiguities as to its application to securities
not sold on the open market; furthermore there is no clear

alleged in the complaint were self-evident at the time and sufficient to give
notice to the parties that California law might apply in any subsequent litiga-
tion.” Pizza Time, Slip op. at 5.

B-18

definition of what the “open market” actually is. See Arthur Young
¢> Co. v. United States District Court, 549 F.2d 686 (9th Cir.
1977); Ross v. BankSouth, N.A., Fed. Sec. L. Rep. [1985-86
Transfer Binder] { 92,526 (N.D. Ala. 1986). An interlocutory ap-
peal of this court’s ruling on this issue is thus warranted by the
facts of the case at bar.

In addition, while this court has held that section 10(b) and
Rule 10b-5 claims under the Securities Exchange Act of 1934 are
arbitrable, see Raiford v. Merrill Lynch, Pierce, Fenner & Smith,
Inc., C83-685A (N.D. Ga. May 16, 1985); Chandler v. Drexel
Burnham Lambert, Inc., C85-1585A (N.D. Ga. Oct. 28, 1985),
the Eleventh Circuit, sitting en banc, just heard oral argument
on this issue. Wolfe v. E.F. Hutton, No. 85-3352 (lith Cir.) (en
banc). District court decisions in this circuit are conflicting. Com-
pare Ross v. Mathis, 624 F. Supp. 110 (N.D. Ga. 1986) (holding
Rule 10b-5 claims arbitrable) with GMO V.A. Del Castillo v.
Paine Webber, Inc., C85-2A10A (N.D. Ga. Dec. 12, 1985) (holding
Rule 10b-5 claims not arbitrable).

Another reason why this case should be certified for in-
terlocutory appeal is that some courts have held that securities
class actions involving a national class require a court to apply
a single statute of limitations for Rule 10b-5 claims of the entire
class. See, e.g., State Teachers Retirement Board v. Fluor Corp.,
80 F.R.D. 142, 144-45 (S.D.N.Y. 1978); In re National Student
Marketing Litigation, [1981 Transfer Binder], Fed. Sec. L. Rep.
(CCH) { 97, 926 (D.D.C. 1981). Although this court disagrees
with the holding in those cases, the court does recognize that
this is a controlling »; estion of law as to which there is substan-
tial ground for difference of opinion.

Finally, the plaintiffs contend that this court has misinterpreted
the holding in Phillips Petroleum Co. v. Shutts, __. U.S. ___.,

105 S. Ct. 2965 (1985), and misapplied it to the facts at bar. Again,
the court believes its decision is correct but also recognizes that
there is substantial ground for difference of opinion.

The court finds that an immediate appeal from its previous
order and this order will materially advance the ultimate

B-19

termination of this litigation. Resolving the class certification on
interlocutory appeal will prevent any duplicative effort by both
sides of this litigation if investors individually proceed to bring
the same or similar claims against the defendants. An appeal will
provide an efficient mechanism for the prompt resolution of many
of the issues in this case.

For these reasons, the plaintiffs’ motion to amend this court’s
previous order to certify it for interlocutory appeal is GRANTED,
and the court hereby certifies this order for interlocutory appeal
also.

Ill. MOTION TO STAY

The final motion before this court is the plaintiffs’ motion for
an order staying this court’s previous order until the date when
the Eleventh Circuit rules on the plaintiffs’ interlocutory appeal.
The plaintiffs seek to toll the statute of limitations concerning
all claims of all putative class members. This motion is made
pursuant to 28 U.S.C. § 1292(b), which provides in part: “. . . ap-
plication for an appeal hereunder shall not stay proceedings in
the district court unless the district judge or the Court of Ap-
peals or a judge thereof shall so order.”

Under Local Rule 300-4 and this court's previous order, the
plaintiffs’ attorneys were prevented from communicating with
putative class members who contacted them concerning possi-
ble lawsuits against the defendants. These potential class members
have been deprived of the opportunity to assert their claims dur-
ing the pendency of the motions for class certification. The com-
bined effect of the Local Rule and this court’s order may be to
effectively prevent these individuals from pursuing their legal
claims. If the court does not stay its previous order, many in-
dividuals may unknowingly lose their right to bring certain causes
of action. A stay may provide additional protection for putative
class members until the Eleventh Circuit determines whether the
class action device is available. (This court does not decide
whether the stay will, in fact, toll the statute of limitations.)

In addition, many putative members of the class have not been
in contact with the plaintiffs’ attorneys and may be unaware of

B-20

the potential prejudice to their rights that may result from this
court’s previous order. Many of these individuals may be unaware
of the impending limitations deadline. This court recognizes the
potential prejudice to putative class members from its previous
order and does not want to deny these individuals due process
of law or a day in court. Accordingly, the motion to stay is
GRANTED.

IV. SUMMARY

The plaintiffs’ motion to reconsider this court’s order filed on
March 28, 1986, denying the plaintiffs’ motion for class certifica-
tion under Rule 23, Federal Rules of Civil Procedure is DENIED.
The plaintiffs’ motion to amend this court's previous order to cer-
tify this case for interlocutory appeal pursuant to Rule 5, Federal
Rules of Appellate Procedure and 28 U.S.C. § 1292(b) is
GRANTED. The plaintiffs’ motion for an order staying its
previous order is GRANTED, and proceedings are hereby
STAYED until the date on which the Eleventh Circuit denies the
plaintiffs’ request for an interlocutory appeal or, if granted, the
date on which the Eleventh Circuit issues its mandate following

the appeal.

SO ORDERED.

C-1

IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION

GLENN T. SANDERS, on behalf of himself and
all others similarly situated,

Plaintiffs,
VS.
ROBINSON HUMPHREY/AMERICAN EXPRESS, INC.,
et al.,
Defendants.

CIVIL ACTION No. C 85-172 A

TOMMY E. PARKER, as custodian for KIMBERLY M.
PARKER, and JAMES L. SMITH. on behalf of themselves
and others similarly situated,

Plaintiffs,
vs.
PAINE WEBBER GROUP, INC.,
Defendant.
CIVIL ACTION No. C 85-1586 A

SUZANNE KIRKPATRICK, DOROTHY D. CASLER,
and CHARLES H. LINDSEY,

Plaintiffs,
VS.
J.C. BRADFORD & CO.,

Defendants.
CIVIL ACTION No. C 85-1891 A

March 27, 1986

C-2

ORDER

VINING, District Judge.

In these federal securities actions, the plaintiffs have filed mo-
tions for class certification, pursuant to Rule 23 of the Federal
Rules of Civil Procedure. The court already has considered and
ruled on the defendants’ motions to dismiss and numerous
discovery and procedural motions. These cases are now ripe for
a determination of whether they may proceed as class actions.’
An understanding of the history of the Petro-Lewis cases is
necessary before the court considers the motions for class
certification.

I. HISTORY OF THE PETRO-LEWIS LITIGATION

From 1970 to 1983, Petro-Lewis was the nation’s largest seller
of oil and gas income funds. These programs raised money from
investors, who became limited partners, and used the proceeds
to purchase oil and gas producing properties. Cash distributions
to the limited partners, which were paid quarterly, began almost
immediately after each partnership was formed and were to con-
tinue for 10 to 15 years or more until the wells were depleted.
Petro-Lewis, an independent oil and gas producer and manager
of petroleum investments for public and private partners, ac-
quired oil and gas properties for public limited partnerships,
shared ownership of those properties, and managed the limited
partnerships as a general partner. Over a 14-year period, Petro-
Lewis sold, through securities brokerage firms, in excess of $3
billion worth of partnerships to approximately 180,000 people.

As oil and gas prices began to decline in 1981 and 1982, Petro-
Lewis was forced to borrow funds to pay partnership distribu-
tions, service the debt it was incurring, and promote the sale
of additional programs. In February 1984 Petro-Lewis revealed
that it would sustain a substantial loss, that it was cutting

' On October 28, 1985, this court held that a companion case, Chandler v.
Drexel Burnham Lambert, Inc., C85-1585A (N.D. Ga. 1985), should be sent
to arbitration. The plaintiff has appealed that decision to the Eleventh Cir-
cuit Court of Appeals.

C-3

distributions to limited partners by as much as 50 percent, that
the company would have to sell between one quarter and one
third of its total reserves to reduce bank debt, and that Petro-
Lewis was immediately terminating all sales of partnership
programs. Numerous lawsuits against Petro-Lewis followed.

In In re Petro-Lewis Securities Litigation [1984-85 Transfer
Binder], Fed. Sec. L. Rep. ¢ 91,899 (D. Colo. 1984), the court
set forth the history of the Petro-Lewis litigation that lead to
these class actions.’ In that case, the court consolidated eleven
class actions filed between February 9, 1984, and May 9, 1984.
The defendants were the Petro-Lewis Corporation, the Petro-
Lewis Funds, Petro-Lewis Securities Corporation, and the seven
directors of Petro-Lewis Corporation. The amended consolidated
class action compiaint set forth claims under the Securities Ex-
change Act of 1934, as amended, 15 U.S.C. §§ 78a, et seq., and
the Securities Act of 1933, as amended, 15 U.S.C. §§ 77a, et seq.
The plaintiffs in the original Colorado action sought to repre-
sent two classes: (1) a “securities class,” consisting of the pur-
chasers of securities, including common stock, warrants, and
preferred stock, and (2) a “partnership class,” consisting of per-
sons who purchased, reinvested in, or otherwise acquired limited
partnership interests in over 100 partnerships formed by Petro- -
Lewis to purchase oil and natural gas producing properties be-
tween August 1975, and February 1984, and in the Petro-Lewis
deferred income program formed in 1981. The Petro-Lewis com-
plaint alleged that during the relevant times the defendants
made, or caused to be made, statements in Petro-Lewis prospec-
tuses, periodic shareholder and investor reports, filings with the
Securities and Exchange Commission, press releases, investor
letters, and other documents, that were materially false and
misleading and that the defendants omitted to disclose certain
material facts and adverse information about Petro-Lewis and
the partnerships that it managed. Some plaintiffs sought relief
in the form of rescission of their purchases of limited partner-
ship interests. All plaintiffs sought damages, interest, costs, and
disbursements.

* The facts set forth in part I are taken from Judge Carrigan’s opinion in the
Colorado litigation.

C-4

On July 3, 1984, co-lead counsel for the plaintiffs and counsel
for the defendants in the Colorado litigation executed an agree-
ment in principle to settle all eleven class actions. The settle-
ment agreement consisted of two primary components: (1) for-
mation of a royalty trust, and (2) creation by the defendants
of a settlement fund consisting of cash and non-cash considera-
tions valued at $23.5 million. Notices were sent to approximately
180,000 holders of limited partnership interests in 45 limited
partnerships, plus approximately 7,000 members of the
stockholder class. In addition, 40,000 notices were sent to brokers
for forwarding to persons on whose behalf interests were held.
According to a public announcement made December 26, 1984,
all 45 affected limited partnerships voted, by very substantial
margins, in favor of the settlement. The settlement required
Petro-Lewis, on behalf of all defendants, to contribute considera-
tion of $23.5 million to a settlement fund, which included $10
million in cash plus approximately 720,000 trust units valued
at $13.5 million.

The class members who participated in the settlement were
to sign a release form which provided that all the defendants,
and any subsidiary or affiliate of Petro-Lewis, would be released
with respect to all claims, demands, and causes of action. The
release form, however, was not intended to release any broker-
dealer in its capacity as an agent for Petro-Lewis or any of its
affiliates in connection with the issuance, purchase, or sale of
any of the securities of, or interest in, Petro-Lewis, or any of
the limited partnerships of which Petro-Lewis or any subsidiary
or affiliate of Petro-Lewis was a general partner. Counsel for
all parties agreed that the purpose and intent of the release was
solely to protect the defendants in the Colorado action and that
it was intended that all the plaintiff class members retain any
rights that they might have to proceed against and collect from
broker-dealers or other nondefendants who might be liable to
them.

The court conditionally certified the partnership class and
the securities class for purposes of settlement only. The court
indicated that there were serious questions of law and fact which

C-5

placed the outcome of the class actions, if tried rather than set-
tled, in substantial doubt. One such question was:

In view of the substantial number of distinct part-
nerships and the variations in facts relevant to, and
potential conflicts among, the claims of those part-
nerships, there is doubt whether this action could be
certified under Fed. R. Civ. P. 23 (except conditionally,
for settlement purposes) and, if certified, whether the
partnership class would have to be splintered into
numerous subclasses.

{ 91,889 at 90,470.

After carefully examining the proof of claim and release forms
and the notices to be sent out, the court approved the proposed
settlement as fair, reasonable, and adequate for all members of
the plaintiff classes.

Il. THE INSTANT LITIGATION

The plaintiffs seek to represent individuals who purchased,
reinvested in, or acquired from the defendants limited partner-
ship interests in Petro-Lewis income programs from January 1,
1981, to February 6, 1984. The amended complaints in these
three proposed class actions are divided into three parts. The
plaintiffs spend 30 pages setting forth the alleged wrongdoings
by Petro-Lewis. For example, the amended complaint alleges
that statements made in the Petro-Lewis prospectuses from 1981
to 1984 were false and misleading because they did not disclose
the risks inherent in purchasing Petro-Lewis partnership inter-
ests. Amended Complaint { 22.° Petro-Lewis also allegedly failed
to disclose excessive leveraging of all partnerships, made
unsecured loans to partnerships to inflate distributions to limited
partners and to attract new sales, made false and misleading
financial statements, annual and periodic reports, press releases

* References to paragraphs in this part of the order refer to the Sanders v.
Robinson-Humphrey amended complaint, although the other two amended
complaints are substantially similar.

C-6

and newsletters, and failed to disclose that substantial tax
benefits expected to be received by limited partnership investors
were likely to be disallowed. Id. at {4 22-23. Petro-Lewis also
allegedly failed to inform the investing public of the risks in-
volved in the Petro-Lewis method of operation, including com-
petition in the industry by less risky investment programs and
the severe difficulty of obtaining debt servicing. Id. at { 23.

A Wall Street Journal article on April 5, 1983, reported that
Petro-Lewis was “facing an apparent cash squeeze that might
lead to nasty surprises for holders.” The article stated that Petro-
Lewis had “ ‘leveraged’ or invested in a larger value of oil pro-
perties than the original cash put up.” Id. at { 24. Petro-Lewis
issued a press release denying substantially all of the statements
made in the Wall Street Journal article and allegedly maintained
artificially high distribution to the partnerships to attract new
partnership sales. Id. Finally, on February 6, 1984, Petro-Lewis
allegedly revealed the following: that it had severe losses, that
it was cutting its distribution by 50 percent, that it was reduc-
ing the price at which Petro-Lewis agreed to repurchase part-
nership interests, that it was drastically reducing its work force,
and that it was immediately terminating all sales of partner-
ship programs. Id. at {{ 35-36. At the time Petro-Lewis made
these revelations, reserves bought by many partnerships were
worth only 1/3 to 1/2 what the partnerships paid for them. Jd.
at ¢ 36.

In the second part of the complaints, the plaintiffs set forth
the defendants’ alleged roles in the sales scheme. According to
the complaints, Petro-Lewis partnership interests were marketed
by selected members of the National Association of Securities
Dealers, including the defendants in this action, pursuant to
selling agreements with Petro-Lewis securities corporation, a
wholly owned subsidiary of Petro-Lewis. Each brokerage house
allegedly received sales commissions of up to seven percent on
each partnership interest sold, plus a special sales incentive pay-
ment of 1-1/2 percent when the brokerage house’s sales in a
program exceeded $400,000. Id. at { 38. Sales of the Petro-Lewis
partnership interests allegedly were a significant source of

C-7

revenue and profit to the defendants. Id. at { 40. The plaintiffs
contend that the defendants trained and instructed their account
representatives in standard techniques to promote, solicit, sell,
and induce customers to purchase Petro-Lewis partnership in-
terests. During the class period, the defendants allegedly pro-
vided to the plaintiffs and the proposed classes the prospectuses,
financial statements, annual and periodic reports, press releases,
and other statements described in part I of the complaints. In
addition, the plaintiffs assert that the defendants made numerous
uniform statements of fact and verbal assurances to the plain-
tiffs and the members of the proposed classes to the effect that
Petro-Lewis’ public statements were worthy of the plaintiffs’ trust
and belief, that Petro-Lewis was operating soundly, and that
Petro-Lewis partnerships were good investments from which
high long-term yields could be expected at minimal risk. Id. at
q 41.

The defendants allegedly knew or recklessly disregarded in-
formation available to them which disclosed or would have
disclosed the financial problems of Petro-Lewis and its partner-
ships as described in part I of the complaints. Id. at 43. Even
though the defendants allegedly knew or should have known
these facts, they continued to market and sell Petro-Lewis part-
nership interests to the plaintiffs and members of the proposed
classes during the class period without disclosing any of the facts
asserted in part I of the complaints. The plaintiffs assert that
the defendants characterized the Petro-Lewis partnership in-
terests as relatively low risk investments when they were clear-
ly known to be high risk investments and that the defendants
uniformly dissuaded and discouraged customers, including the
plaintiffs and the members of the proposed classes, from sell-
ing or liquidating their interests in the Petro-Lewis partnership
programs. Id. at { 44. The plaintiffs allege that the defendants
knew or recklessly disregarded facts contributing to Petro-Lewis’
financial problems, the vulnerability of Petro-Lewis’ partner-
ship programs caused by the pattern of excessive leveraging in-
stituted by Petro-Lewis management, and the high degree of
risk involved in any investment in the Petro-Lewis partnership

C-8

programs. Id. at { 45. The plaintiffs and their proposed classes
allege that as a result of the foregoing, they were damaged. Id.
at { 46.

Part III of the amended complaints sets forth the seven counts
that form the basis of this lawsuit. Count I, brought pursuant
to section ll of the Securities Act of 1933, 15 U.S.C. § 77k, alleges
that the defendants issued, caused to be issued, participated in
the issuance of, or aided and abetted the issuance of materially
false and misleading statements to the investing public that ap-
peared in publicly disseminated materials relating to Petro-Lewis
and its partnership programs during the class period, including
the registration statements and the prospectuses that
misrepresented and failed to disclose the facts set forth in part
I of the complaints. Id. at { 53. Count II, brought pursuant to
section 12(2) of the Securities Act, 15 U.S.C. § 771(2), alleges that
the defendants made untrue statements of material fact or omit-
ted toe state material facts in the prospectuses, newsletters,
releases, and instruction booklets. The defendants also allegedly
used the means and instruments of transportation or com-
munication in interstate commerce or the mails to perform these
violations of section 12(2). Id. at 58.* Count III, brought pur-
suant to section 15 of the Securities Act, 15 U.S.C. § 770, the
“controlling person” liability provision for sections 11 and 12,
alleges that the named defendants directly or indirectly con-
trolled the activities of the brokerage houses as underwriters of
the Petro-Lewis partnership interests and programs and were
responsible for the content of the Petro-Lewis registration state-
ment and prospectuses during the class period, or directly or

* In all three class action cases, the defendants filed motions to dismiss, con-
tending that section 13 of the Securities Act, 15 U.S.C. § 77m, the statute of
limitations for sections ll and 12(2), barred these counts. In Sanders ov.
Robinson-Humphrey, the court dismissed the plaintiffs’ claims for their 1981
purchases. See Order filed Sept. ll, 1985. In Kirkpatrick v. J. C. Bradford,
the court dismissed Counts I and II since the claims were barred by the statute
of limitations. The court allowed the plaintiffs’ attorneys to communicate with
potential class members in an attempt to find plaintiffs not barred by the
statute of limitations. See Order filed Sept. Ll, 1985. In Parker v. Paine Webber,

(Footnote continued)

A ne Rt Ss nate ht

Ve io oat Sasitaa D1.

C-9

indirectly induced tke acts alleged in Counts I and II. Id. at
{ 64.* Count IV alleges a cause of action under sections 10 and
20 of the Securities Exchange Act of 1934, 15 U.S.C. § 78j and
§ 78t, and Rule 10b-5, 17 C.F.R. § 240.10b-5.°

In addition to the federal securities claims, the plaintiffs allege
common law fraud and deceit (Count V), negligence and
negligent misrepresemtation (Count VI), and fraudulent con-
cealment and breach of fiduciary duty (Count VII). The amend-
ed complaint in Parker v. Paine Webber also alleges a cause of
action under the Racketeer Influenced and Corrupt Organiza-
tions Act (RICO), 18 U.S.C. § 1962(c).

Each of the complaints demand judgment against the defen-
dants for compensatory damages, the costs and disbursements
of the action, including reasonable attorneys’ fees, and punitive
and exemplary damages in the amount of $10 million. In addi-
tion, the plaintiffs requested that this court determine that these
complaints may proceed as class actions under Rule 23 of the
Federal Rules of Civil Procedure.

the court dismissed Counts I and II. See Order filed Sept. 11, 1985. The plain-
tiffs amended their complaint, and the court denied the defendant’s motion
to dismiss Counts I and II of the amended complaint. See Order filed Feb.
14, 1986.

* A claim against a controlling person is governed by the same limitations period
that applies to the Securities Act claim against the controlled person. This
court held that section 13, therefore, also applied to the plaintiffs’ section 15
claim. See Herm v. Stafford, 663 F.2d 669, 679 (6th Cir. 1981). As a result,
Count III in Kirkpatrick was dismissed. See Order filed Sept. 11, 1985. The
amended complaint in Parker v. Paine Webber did not allege a cause of ac-
tion under section 15.

* The cause of action under section 20 was dismissed in Kirkpatrick v. J. C.
Bradford and not alleged in the amended complaint in Parker v. Paine Webber.

The defendants, in their motions to dismiss this count, alleged that the plain-
tiffs failed to plead fraud with sufficient particularity to satisfy Rule 9(b) of
the Federal Rules of Civil Procedure. The court declined to dismiss on this
ground. See Orders filed Sept. Ll, 1985.

C-10

The parties have engaged in extensive preliminary discovery
on the class certification question. The court held an eviden-
tiary hearing on Febraury 27, 1986, and the parties submitted
briefs before and after the hearing.

Ill. FRAMEWORK OF ANALYSIS

A party that seeks to invoke Rule 23 has the burden of prov-
ing that all of the prerequisites to utilizing the class action pro-
cedure have been satisfied. Zeidman v. J. Ray McDermott &
Co., 651 F.2d 1030, 1038 (5th Cir. 1981).’ The burden of satis-
fying the requirements of Rule 23 falls on the party who seeks
to maintain a class action. Amswiss International Corp. w.
Heublein, Inc., 69 F.R.D. 663, 665 (N.D. Ga. 1975). Questions
concerning class certification are left to the sound discretion of
the trial court. Freeman v. Motor Convoy, Inc., 700 F.2d 1339,
1347 (llth Cir. 1983).

The question of class certification is a procedural one, distinct
from the merits of the action. Garcia v. Gloor, 618 F.2d 264,
267 (5th Cir. 1980), cert. denied, 449 U.S. 1113, 101 S.Ct. 923,
66 L.Ed.2d 842 (1981). The court may not inquire into the merits
of this case because the Supreme Court has held that “nothing
in either the language or history of Rule 23 . . . gives a court
any authority to conduct a preliminary inquiry into the merits
of a suit in order to determine whether it may be maintained
as a Class action.” Eisen v. Carlisle & Jacquelin, 417 U.S. 156,
177, 94 S. Ct. 2140, 2152, 40 L.Ed.2d 732 (1974). “[T]he ques-
tion is not whether the plaintiff or plaintiffs have stated a cause
of action or will prevail on the merits, but rather whether the
requirements of Rule 23 are met.” Jd. at 178, 94S. Ct. at 2153.*

” In Bonner v. City of Prichard, 661 F.2d 1206, 1209 (lith Cir. 1981)(en banc),
the Eleventh Circuit adopted the law of the Fifth Circuit prior to October
1, 1981, as binding precedent.

* After citing Eisen, however, Professor Arthur Miller points out that “there
is no way the judge can make the .. . findings required by Rule 23 without
(Footnote continued)

a Pht RADNOR A PBDI I vaheg e o

C-ll

The court must make seven affirmative findings before this
case may be certified as a class action. First, the plaintiffs must
establish two prerequisites not expressly stated in Rule 23 that
have been developed by the courts. Then, the plaintiffs must
demonstrate that they have met the requirements of Rule 23(a).
Finally, the plaintiffs must prove that these cases fall within one
of the three categories of class actions in Rule 23(b).

Although not specifically mentioned in Rule 23, the first essen-
tial prerequisite of a class action is that there must be a class.
7 C. Wright & A. Miller, Federal Practice and Procedure: Civil
§ 1760 at 579 (1972). The class action complaints allege that these
actions were brought on behalf of individuals who purchased,
reinvested in, or acquired limited partnership interests in Petro-
Lewis income programs from January 1, 1981, to February 6,
1984. These individuals form the class. Once a court determines
that a class exists, it then must ascertain whether the named
representatives are members of the class they purport to repre-
sent. Id. at § 1761, at 584; see East Texas Motor Freight v.
Rodriguez, 431 U.S. 395, 403, 97 S. Ct. 1891, 1896, 52 L.Ed2d
453 (1976)(holding that “a class representative must be part of
the class and ‘possess the same interest and suffer the same

at least a preliminary exploration of the merits. This will not be to ascertain
who is going to win and who is going to lose, but simply to develop some feel
for the contours of the case.” A. Miller, An Overview of Federal Class Actions:
Past, Present and Future, 15 (Federal Judicial Center 2 ed. 1977). The Eleventh
Circuit agrees with Miller:

While it is true that a trial court may not properly reach the
merits of a claim when determining whether class certification
is warranted, Miller v. Mackey International, Inc., 452 F.2d 424,
428 (5th Cir. 1971), this principle should not be talismanically
invoked to artifically limit a trial court’s examination of the fac-
tors necessary to a reasoned determination of whether a plaintiff
has met her burden of establishing each of the Rule 23 class ac-
tion requirements. Love v. Turlington, 733 F.2d 1562, 1564 (llth
Cir. 1984).

C-12

injury’ as the class members”). Because the plaintiffs clearly pur-
chased their limited partnership interests within the class period,
they are clearly members of the class.

Having satisfied the two implied prerequisites for a class ac-
tion, the plaintiffs have the burden of making a positive show-
ing that they fulfill all the requirements of Rule 23(a) and that
the action falls within one of the categories of Rule 23(b). See
Amswiss International Corp. v. Heublein, Inc., 69 F.R.D. 663,
665-66 (N.D. Ga. 1975). The court now turns to Rule 23.

IV. RULE 23(a)

A class action “may only be certified if the trial court is
satisfied, after a rigorous analysis, that the prerequisites of Rule
23(a) have been satisfied.” General Telephone Co. of the
Southwest v. Falcon, 457 U.S. 147, 161, 102 S. Ct. 2364, 2372,
72 L.Ed.2d 740 (1982). Rule 23(a) provides:

Prerequisites to a Class Action. One or more
members of a class may sue or be sued as represen-
tative parties on behalf of all only if (1) the class is
so numerous that joinder of all members is imprac-
ticable, (2) there are questions of law or fact common
to the class, (3) the claims or defenses of the represen-
tative parties are typical of the claims or defenses of
the class, and (4) the representative parties will fair-
ly and adequately protect the interests of the class.

The court addresses each of these subdivisions in turn.
A. Rule 23(a)(1): Numerosity

Numerosity is not in dispute in this case. Joinder of all class
members clearly would be impracticable. A plaintiff need not
specify an exact number of class members, but must show only
that joinder is impracticable through “some evidence or
reasonable estimate of the number of purported class members.”
See Zeidman v. J. Ray McDermott & Co., 651 F.2d 1030, 1038

C-13

(5th Cir. 1981). The plaintiffs in Kirkpatrick and Sanders have
offered evidence showing that there are approximately 8,000 in-
dividuals who are potential class members. None of the de-
fendants contends that the plaintiffs have not met the numerosity
requirement.

B. Rule 23(a)(2): Commonality

To satisfy Rule 23(a)(2) the plaintiff must establish the ex-
istence of questions of law or fact common to the class. This
provision does not require that all class members share the ex-
act same legal claims. Johnson v. American Credit Co. of
Georgia, 581 F.2d 526, 532 (5th Cir. 1978). The commonality
requirement is satisfied where the questions of law or fact link-
| ing the class members are substantially related to the resoiu-
tion of the litigation even though the individuals are not iden-
tically situated. See Kleiner v. First National Bank of Atlanta,
97 F.R.D. 683, 691 (N.D. Ga. 1983). The court notes that because
Rule 23(a)(2) requires “questions of law or fact,” more than one
issue of law or fact must be common to the members of the class.

The plaintiffs list numerous questions of law or fact that clear-
ly satisfy this requirement: (1) whether the prospectuses and
other sales literature distributed by the defendants to the plain-
tiffs and the class contain material misrepresentations of fact
or omit material facts concerning the safety and investment
worth of the Petro-Lewis partnerships; (2) whether, during the
class period, the defendants concealed material information
about the precarious financial condition of Petro-Lewis and its

partnerships; (3) whether the defendants concealed the truth
about the historical performance of the Petro-Lewis partner-
ships; (4) whether the defendants misrepresented the future
business prospects of Petro-Lewis and its partnerships programs;
and (5) whether the defendants violated the federal securities
laws and the common law in connection with their sales of
limited partnership interests in the Petro-Lewis programs dur-
ing the class period.

In most cases, neither the parties nor the courts spend much
time discussing the commonality requirement. In general, courts

aes ieeninademnisiinnaall

C-14

that have focused on Rule 23(a)(2) have given it a permissive
application so that common questions have been found to exist
in a wide range of contexts. 7 C. Wright & A. Miller, Federal
Practice and Procedure: Civil § 1763 at 604 (1972).°

C. Rule 23(a)(3): Typicality

Rule 23(a)(3) insists that the class representatives have typical
claims or defenses.” A representative's claim is typical of the class
if it arises from the same event, practice; or course of conduct
that gives rise to the claims of the absent class members and
if the individual claims are based on the same legal or remedial
theory. Davis v. Northside Realty Associates, Inc., 95 F.R.D. 39,
43 (N.D. Ga. 1982); see Gonzales v. Cassidy, 474 F.2d 67, 71
n.7 (5th Cir. 1973)(holding that representative was “typical of
the class within the meaning of Rule 23(a)(3) because he did
not have interests which conflicted with those of the class, . . ”).
The Supreme Court has heid that typicality is met when a “class
representative [is] part of the class and ‘possess{ es] the same in-
terests and suffer[s] the same injury’ as the class members.” East
Texas Motor Freight System, Inc. v. Rodriguez, 431 U.S. 395,
403, 97 S. Ct. 1891, 1896, 52 L.Ed.2d 453 (1976).

* It is important to distinguish betweer Rule 23(a)(2) and Rule 23(b)(3). Rule
23(b)(3) provides that common questions must predominate to have a class
action under Rule 23(b)(3). This requirement is discussed more fully in part V.

* Professor Arthur Miller is skeptical about the usefulness of this requirement:

But in the case of subdivision (a)(3), there does not seem to be
any function it performs that is not accomplished by some other
portion of the Rule... . But if the plaintiffs are class members
(an implied requirement), and there are common questions (Rule
23(a)(2)), and the class is adequately represented (Rule 23(a)(4)),
it is very, very difficult to identify anything that is added by
“typicality.” The other prerequisites will ensure “typicality” among
the class members’ claims or defenses.

A. Miller, An Overview of Federal Class Actions: Past, Present and Future,
26 (Federal Judicial Center 2 ed. 1977) (emphasis in original).

———————————

C-15

The degree of investment experience or sophistication of the
class representatives is irrelevant. Kennedy v. Tallant, 710 F.2d
711, 717 (1th Cir. 1983). The complaints allege that the defen-
dant committed the same unlawful acts by the same method
against an entire class. All members of the class, therefore, may
have similar claims. Thus, the plaintiffs have met the typicality
requirement. See id. Even though class members purchased dif-
ferent Petro-Lewis limited partnership interests, the plaintiffs
allege that the defendants engaged in a uniformly fraudulent
course of conduct, disseminated virtually identical false prospec-
tuses, financial statements, and other financial information, and
failed to disclose material information regarding the operations
of Petro-Lewis to purchasers during the class period. When
plaintiffs have alleged such a common course of conduct, courts
consistently have found no bar to class certification even though
members of a class may have purchased different types of
securities or interests, or purchased similar securities at different
times.

When weighing the prerequisites of Rule 23, the Eleventh Cir-
cuit has held that “subsection (a)(3) primarily directs the district
court to focus on whether named representatives’ claims have
the same essential characteristics as the claims of the class at
large. Moreover, “the typicality requirement may be satisfied
even if there are factual distinctions between the claims of the
named plaintiffs and those of other class members.” Appleyard
v. Wallace, 754 F.2d 955, 958 (llth Cir. 1985)(citations omit-
ted). The court clearly finds that the plaintiffs’ claims are typical
of the classes they seek to represent. “[T]he typicality require-
ment is not so rigid as to comprehend only similar fact situa-
tions ... it would be a better test of typicality to consider
whether the types of facts or evidence were typical of the class.”
Walker v. Jim Dandy Co., 638 F.2d 1330, 1336 (5th Cir. 1981).

D. Rule 23(a)(4): Adequacy of Representation

Rule 23(a)(4) is the most important prerequisite in Rule 23(a).
See A. Miller, An Overview of Federal Class Actions: Past, Pre-
sent and Future, 27 (Federal Judicial Center 2 ed. 1977). This
provision requires a showing that the class representative will

C-16

fairly and adequately protect the interests of the class. By far
it is the most heavily litigated of the prerequisites. Jd. at 28.
Professor Miller states:

The class or representative action represents an ex-
ception to the principle of an individual right to a day
in court. The justification for permitting it is that con-
siderations of efficiency and economy and good prac-
tice permit issuing an order or rendering a judgment
that binds everyone in a defined group who was pro-
perly represented before the court and therefore has
had a day in court vicariously. It is Rule 23(a)(4) that
ensures the quality of that representation and the in-
tegrity of the system. Unless there has been fair and
adequate representation, due process has not been
satisfied and any attempt at binding the absentee is
improper. Id.

See Hansberry v. Lee, 311 U.S. 32, 44-46, 61 S. Ct. 115, 119-20,
85 L.Ed. 22 (1940) (discussing due process under Rule 23(a)(4)).

Courts traditionally hold that to satisfy Rule 23(a)(4) the
plaintiff must meet two tests. First, the plaintiff's attorney must
be qualified, experienced, and generally able to conduct the pro-
posed litigation. Gonzales v. Cassidy, 474 F.2d 67, 73 n.10 (5th
Cir. 1973); Schatzman v. Talley, 91 F.R.D. 270, 273 (N.D. Ga.
1981). Based on the plaintiffs’ attorneys’ performance in these
cases thus far, as seen through the discovery, briefs, and mo-
tions, and the hearing before the court, the court has no reason
to question the competency of the plaintiffs’ attorneys. They have
demonstrated a clear understanding of the issues in these cases
and the competence and ability to conduct sophisticated
securities litigation.

The second requirement under Rule 23(a)(4) is that the plain-
tiffs must not have interests antagonistic to those of the class.
Gonzales, 474 F.2d at 73 n.10; Schatzman, 91 F.R.D. at 373.
Courts interpreting this prerequisite have held that “the primary
criterion is the forthrightness and the vigor with which the
representative party can be expected to assert and defend the

C-17

interests of the members of the class.” See Schatzman, 91 F.R.D.
at 273. The named plaintiffs have failed to impress the court
that they will vigorously prosecute these class actions. The
representatives are not sufficiently interested in the outcome of
these actions to protect adequately the rights of the potential
class members. The plaintiffs’ failure in this respect is fatal to
their motions for class certification.

The court notes that while each of the reasons given below
is not determinative, the “totality of the circumstances” indicates
that the plaiatiffs have failed to satisfy Rule 23(a)(4).

First, in the hearing the court stated: It concerns me
deeply today that as far as I know none of the named
plaintiffs showed up for this hearing and in fact when
a subpoena was issued for them they resisted. I did
not require them to appear simply because I thought
if they were interested in the litigation they ought not
to have to be subpoenaed to appear. Transcript of
hearing, Feb. 27, 1986, at 114-15.

The plaintiffs contend that the defendants subpoenaed the plain-
tiffs merely to harass them. At the hearing, the court was not
concerned with the potential for harassment, but rather with
the plaintiffs’ reluctance to vigorously prosecute these class ac-
tions. The plaintiffs’ failure to show up for the hearings indicates
a lack of interest.

Second, the plaintiffs cannot act as representatives for the state
and common law claims because these claims vary from state
to state. In addition, different state statutes of limitation govern
the section 10(b) claims. These differences are discussed more
fully in part V, sections C and D.

In Sanders, Glenn Sanders stated that he had little or no in-
volvement in preparing the complaint, which was investigated
and drafted exclusively by his attorneys. Deposition of Glenn
Sanders, pp. 85-86, 92-93. Sanders also was uncertain whether
to proceed with this action if the class was not certified. Id. at

C-18

p. 114. Sanders did not know the identity of the ind‘vidual defen-
dants named in the complaint. Jd. at pp. 94-96.

Leslie Sanders, the other named plaintiff in the Sanders case,
indicated that she did not want to be involved in this case and
did not agree to become one of the named plaintiffs until counsel
for the plaintiffs called her one month before her deposition.
Deposition of Leslie Sanders, pp. 49-52. Ms. Sanders did not
contribute to the complaint or the amended complaint, and she
never saw the amended complaint until a couple of days before
the deposition. Id. at p. 50. In addition, Ms. Sanders did not
know the name of one of the firms that was representing her.
Id. at p. 3. Furthermore, Ms. Sanders stated that her claim does
not concern her initial decision to purchase securities, as the
complaint alleges, but that in 1983 Robinson-Humphrey pur-
portedly told her not to sell her securities. Id. at pp. 43, 54. Ms.
Sanders also did not know the identity of the individual defen-
dants. Id. at pp. 55-56. Chip Traynor, the broker who alleged-
ly fraudulently sold securities to Ms. Sanders, stil] acts as a broker
for her and almost all her family. Deposition of Chip Traynor,
p. 232. If the Sanders truly felt that their broker defrauded them,
presumably he would no longer be their broker. —

In Kirkpatrick, plaintiff Charles Lindsey purchased limited
partnership interests through his brother, a broker for J.C. Brad-
ford. In deposition, Lindsey stated:

Q. Is it your belief that they [the defendants] tried
to defraud the investing public, or do you think they’re
just guilty of mismanagement, or do you have —

A. I don’t know. I don’t think you can say that
somebody was really planning to defraud me. Petro-
Lewis was a reputable firm and was on the New York
Stock Exchange and what have you. Petro-Lewis is
not a fly-by-night. I mean, they were a pretty
reputable firm. I don’t think Bradford’s people kept
up with it. That’s pure and simple what happened.

Si te il

C-19

Q. You think they were negligent?
A. Absolutely, positively. . . .

Deposition of Charles Lindsey, pp. 60-61. Lindsey was careful
to point out that the allegations of paragraph 5 of the complaint
—to the effect that he purchased pursuant to a prospectus —
were in error. While insisting that he would let the chips fall
where they might against his brother, Lindsey admitted that
his family would be upset if he sued his brother. Id. at p. 57.

Similarly, plaintiff Suzanne Kirkpatrick still has an account
with the person from whom she purchased her partnership in-
terests in Petro-Lewis, although he no longer works for J. C.
Bradford. Deposition of Suzanne J. Kirkpatrick, p. 6. In her
deposition, Kirkpatrick stated:

Q. .. .Is it your belief or your contention that Brad-
ford was trying to defraud you or was trying to sell
you something they knew or should have known was

no good?

A. No, sir, but I think they should have done their
homework before they made the sales.

Q. You think they were negligent in failing to find this
out?

A. Yes.
Id. at p. 69.

The other named plaintiff in Kirkpatrick, Dorothy Casler,
purchased her interests in Petro-Lewis from her son. In deposi-
tion, she testified:

Q. Have you sued your son over his selling you this
Petro-Lewis?

A. No.

C-20 =

Q. Well, you sued Bradford and I was wondering if
you sued him since he’s the one that put you into it?

A. No.
"
Q. Is there any reason why you haven't?

A. Because I think he — in his mind he thought it was
the best thing that I could do.

Deposition of Dorothy Casler, p. 8. In addition, Casler’s son did
not disclose to her the risks which, as the complaint alleges, were
disclosed in the prospectus concerning a possible decline in the
price of oil and the fact that Petro-Lewis was borrowing money
to make the property acquisitions. Id. at pp. 48-49. In fact,
Casler says she thought there were virtually no risks involved
because her son knew that she could not take risks. Id. at p.
38. Casler expressed shock at the possibility that her claim might
give rise to a lawsuit against her son. Id. at p. 42.

In summary, the court finds that the plaintiffs in their deposi-
tion testimony in Sanders and Kirkpatrick demonstrate a lack
of interest in the vigorous prosecution of this lawsuit. Glenn and
Leslie Sanders are not involved or knowledgeable enough to ef-
fectively prosecute a class action. See Schatzman v. Talley, 91
F.R.D. 270, 273 (N.D. Ga. 1981). The plaintiffs in Kirkpatrick
do not believe, or are unwilling to prosecute, their fraud claims.
For these reasons, the plaintiffs would not fairly and adequate-
ly represent the other class members. See Rothenberg v. Security
Management Co., 667 F.2d 958, 962-63 (llth Cir. 1982).

V. RULE 23(b)

If the four prerequisites of Rule 23(a) are satisfied, a suit may
be maintained as a class action only if it falls within one of the
three categories set forth in Rule 23(b). See George v. United
Federal Savings and Loan Association, 63 F.R.D. 631, 636 (N.D.
Ga. 1974). Even assuming that the plaintiffs satisfy Rule 23(a)(4),
the court holds that they cannot satisfy Rule 23(b).

C-21

Rule 23(b) prescribes the various types of class actions that
are permitted under the Federal Rules. It provides:

(b) Class Actions Maintainabie. An action may be
maintained as a class action if the prerequisites of sub-
division (a) are satisfied, and in addition:

(1) the prosecution of separate actions by or against
individual members of the class would create a risk of

(A) inconsistent or varying adjudications with
respect to individual members of the class which
would establish incompatible standards of conduct for
the party opposing the class, or

(B) adjudications with respect to individual
members of the class which would as a practical mat-
ter be dispositive of the interests of the other members
not parties to the adjudications or substantially im.
pair or impede their ability to protect their interests; or

(2) the party opposing the class has acted or refus-
ed to act on grounds generally applicable to the class,
thereby making appropriate final injunctive relief or
corresponding declaratory relief with respect to the
class as a whole; or

(3) the court finds that the questions of law or fact
common to the members of the class predominate over
any questions affecting only individual members, and
that a class action is superior to other available
methods for the fair and efficient adjudication of the
controversy. The matters pertinent to the findings in-
clude: (A) the interest of members of the class in in-
dividually controlling the prosecution or defense of
separate actions; (B) the extent and nature of any
litigation concerning the controversy already com-
menced by or against members of the class; (C) the
desirability or undesirability of concentrating the
litigation of the claims in the particular forum; (D)
the difficulties likely to be encountered in the manage-
ment of a class action.

At the outset, the court notes that the parties do not rely on
or discuss Rule 23(b)(1) or (b)(2). Because the plaintiffs do not

mamma ha

C-22

allege that these subdivisions apply, " the court turns to sub-
division (b)(3).

Rule 23(b)(3) sets out two prerequisites that the plaintiffs must
satisfy to maintain a class action under this subdivision: (1) ques-
tions of law or fact common to the members of the class must
predominate over any questions affecting only individual
members; and (2) the class action must be superior to other
available methods for the fair and efficient adjudication of the
controversy. A plaintiff must satisfy Rule 23(b)(3) to have a class
action that involves securities fraud.

The court holds that because common questions of law and
fact do not predominate, the plaintiffs cannot satisfy Rule
23(b)(3). The court arrives at this conclusion for four reasons.
First, and most importantly, the alleged statements upon which
the plaintiffs relied in purchasing Petro-Lewis securities were
primarily oral rather than written and misrepresentations rather
than omissions. The court, therefore, cannot imply the element
of reliance central to the issue of this case. “[T]he most signifi-
cant problem facing the [class] representatives under subdivi-
sion (b)(3) is to demonstrate that the representations made to
and the reliance by each of the class members is not so divergent
that common questions do not predominate.” 7A C. Wright &
A. Miller, Federal Practice and Procedure: Civil, § 1781 at 90
(1972). The plaintiffs have failed to overcome this problem.
Second, many of the potential class members have signed ar-
bitration agreements that oblige them to arbitrate their
grievances. Third, the statute of limitations for section 10(b)
varies from state to state, and in some states it is unknown. Last,
because the purchasers of Petro-Lewis limited partnerships are from
most of the 50 states, this court would be forced to apply the state
and common law from each state in which a potential class member
resides. The court addresses each of these problems in turn.

" The plaintiffs may not rely on Rule 23(b)(2) because this subdivision only
applies to injunctive or declaratory relief. “The subdivision does not extend
to cases in which the appropriate final relief relates exclusively or predominate-
ly to money damages.” Rule 23, Notes of Advisory Committee. The plaintiffs
seek money damages.

C-23

A. Oral Representations and Reliance

The principal claims asserted by the plaintiffs are based upon
alleged violations of section 10(b) and Rule 10b-5 of the Securities
Exchange Act of 1934. To support a claim under section 10(b)
and Rule 10b-5 the plaintiff must establish the following
elements: (1) that a misstatement or omission has been made,
(2) that the mis

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385019_0429%3A1. Public record. Not legal advice.