# Petition for Writ of Certiorari — Robinson Humphrey/American Express, Inc. v. Sanders > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385019_0430%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1988 - **Citation:** 485 U.S. 959 ## Text Supreme Court, U.S. FILED 8 %.°8 36 NOV 23 1987 JOSEPH F-SPANIOL, JR. CLERK IN THE Supreme Court of the United States OcrosBer TERM, 1987 PAINEWEBBER GROUP, INC., Petitioner, Vs. TOMMY E. PARKER, as Custodian for KIMBERLY M. PARKER, and JAMES L. SMITH, Respondents. PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT ROBERT EMANUEL ZIMET Counsel of Record for Petitioner RicHARD M. KIrBy SKADDEN, ARPS, SLATE, HANSELL & Post MEAGHER & FLOM 3300 First Atlanta Tower 919 Third Avenue Atlanta, Georgia 30383 New York, New York 10022 (404) 581-8000 (212) 735-3000 Attorneys for Petitioner Of Counsel: JEREMY A. BERMAN CHARLES F. WALKER QUESTIONS PRESENTED FOR REVIEW 1. It has long been established that in order to recover damages under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder, the plaintiff must establish reliance on a false and misleading statement or omission. In the context of considering whether to certify a class bringing claims under Section 10(b) and Rule 10b-5, in a case in which the securi- ty does not trade on an active market such as a stock exchange, is it proper for a district court to presume reliance on the part of all putative class members under the “fraud-on-the-market” theory? 2. Is it proper to certify a class under Rule 23(b)(3) of the Federal Rules of Civil Procedure when the complaint alleges that common issues predominate over individual issues but the district court finds that the evidence presented at the class cer- tification hearing demonstrates the predominance of individual issues? 3. Is it proper for a circuit court to review the denial of class certification under 28 U.S.C. § 1292(b) where interlocutory review cannot, as the statute requires, “materially advance the ultimate termination of the litigation”? THE PARTIES The names of the parties to the proceeding are contained in the caption! ' Petitioner PaineWebber Group, Inc. has no parent company. PaineWebber Group, Inc. has no subsidiaries or affiliates other than wholly-owned sub- sidiaries with the exception of an approximately 50-percent stock ownership interest in National Car Rental Systems, Inc. TABLE OF CONTENTS QUESTIONS PRESENTED FOR REVIEW...... ois ws oo 6 sca cosas ssa seds ns py ty ey |» EERE ee STATUTES AND RULES INVOLVED ......... STATEMENT OF THE CASE ................. REASONS FOR GRANTING THE WRIT....... I. II. PERMITTING A PRESUMPTION OF RELIANCE IN ORDER TO FACILITATE CLASS CERTIFICATION OF ACTIONS UNDER RULE 10b-5 WHERE THE SECURITY AT ISSUE IS NOT TRADED ON THE OPEN MARKET WILL OPEN THE FLOODGATES TO RULE 10b-5 CLASS RS OR re A. This Court Should Consider This Case in Conjunction with Basic a B. The Interpretation of the “Fraud-on-the- Market” Theory by the Court Below Will Open the Floodgates to Class Actions I ys eh on cde sa nascd as ALLOWING CLASS ACTIONS TO BE CERTIFIED ON THE BASIS OF THE PLEADINGS ALONE IRRESPECTIVE OF THE EVIDENCE PRESENTED AT THE CLASS CERTIFICATION HEARING WILL TRANSFORM RULE 23 INTO A BLUD- GEON NEVER ENVISIONED OR INTEND- ED BY CONGRESS OR THIS COURT...... 1] iv Page A. The Court Below Improperly Ignored The Evidence At The Class Action Hearing In Contravention of This Court’s Decision in General Telephone Company of Southwest v. Falcon ...... 11 B. There Is A Direct Conflict Between The Eleventh And The Fifth Circuits On The Certification Of Ciaims F:rought Under Rule 10b-5(b) ................. 14 III. THE COURT OF APPEALS IMPROPERLY TOOK JURISDICTION OF THIS APPEAL PURSUANT TO 28 U.S.C. § 1292(b)....... 16 oS SRI ECE DoE IT ORS oe een eS 19 APPENDIX TABLE OF AUTHORITIES Page Basic Inc. v. Levinson, 107 S. Ct. 1284 (1987), granting cert. to 786 F.2d 741 (1986) ......... 6, 7, 8 Blue Chip Stamps v. Manor Drug Stores, 421 oe Oe ere eres ere 6 Coopers & Lybrand v. Livesay, 437 U.S. 463 3 peewee Por ee Mor prey Poe err ry 6, 13, 16, 17 Eisen v. Carlisle & Jacquelin, 417 U.S. 156 CE 6c cc 5a tae eae Eo a eae Reeen ses 13 General Telephone Co. of Southwest v. Falcon, gee AE gE i 4 a age li, 18, 13 Grainger v. State Security Life Insurance Co., 547 F.2d 303 (5th Cir. 1977), cert. denied, 436 ee Fer ere foner crn ys ere 14 In re Petro-Lewis Securities Litigation, [1984-85 Transfer Binder] Fed. Sec. L. Rep. (CCH) 4 91,899 (D. Colo. Dec. 24, 1984) ........... 3 Kirkpatrick v. J.C. Bradford & Co., 827 F.2d 718 CE Ge SE ca ae ans eee eek ee oe passim Levinson v. Basic Inc., 786 F.2d 741 (6th Cir. 1986), cert. granted, 107 S. Ct. 1284 (1987) ... 6, 10 List v. Fashion Park, Inc., 340 F.2d 457 (2d Cir.), cert. denied sub nom., List v. Lerner, PF RR OPE ae ere 7 Mercantile National Bank v. Langdeau, 371 U.S. 555 (1963) Page Sanders v. Robinson Humphrey/American Express, Inc., 634 F. Supp. 1048 (N.D. Ga. PROWPETUR Pree oe eee OV TERETE passim Sanders v. Robinson Humphrey/American Express, Inc., [1986-87 Transfer Binder] Fed. Sec. L. Rep. (CCH) 4 92,880 ft oe RR yr error eer passim Santa Fe Industries v. Green, 430 U.S. 462 PEN, § 6.4 4:04.65 0addas eee Vides eae eee 9 Shores v. Sklar, 647 F.2d 462 (5th Cir. 1981) (en banc), cert. denied, 459 U.S. 1102 (1983) ..... 8 Simon v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 482 F.2d 880 (5th Cir. 1973) ........... 15 Shivangi v. Dean Witter Reynolds, Inc., 825 F.2d er a i ca nnnd bas ateuses ees 16 STATUTES, RULES AND REGULATIONS 28 U.S.C. § 1254(1) (1982) .................... 2 28 U.S.C. § 1292(b) (1982) .................... 2, 16, 17 Section 11 of the Securities Act of 1933, 15 as SPU a 466 bs ae ceeseineanesees 2,4 Section 12(2) of the Securities Act of 1933, 15 Si thas b-SORED MED 505 hbk ch. 68S s cescnceese 2,4 Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1982) .............. passim Rule 10b-5, 17 C.F.R. § 240.10b-5 (1987) ....... passim Rule 425, 17 C.F.R. § 230.425 (1987)........... 9 Rule 23 of the Federal Rules of Civil Procedure .. passim OTHER AUTHORITIES Black, Fraud On The Market: A Criticism of Dispensing With Reliance Requirements in Certain Open Market Transactions, 62 N.C.L. I SE hab nacewescasesssicecccccces Note, The Fraud-On-The-Market Theory, 95 Harv. L. Kiev. 1143 (1982) ...............--. Rapp, Rule 10b-5 And “Fraud-On-The-Market” — Heavy Seas Meet Tranquil Shores, 39 Wash. & Lee L. Rev. 861 (1982) ................... C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure § 3911 (1976)......... Page 9, 10 13 No. IN THE Supreme Court of the United States Octroser TerRM, 1987 PAINEWEBBER GROUP, INC., Petitioner, vs. TOMMY E. PARKER, as Custodian for KIMBERLY M. PARKER, and JAMES L. SMITH, Respondents. PETITION FOR A WRIT OF CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT Petitioner, PaineWebber Group, Inc. (“PaineWebber”), respectfully prays that a writ of certiorari issue to review a judg- ment of the United States Court of Appeals for the Eleventh Circuit which reversed in part, affirmed in part and remand- ed an order of the United States District Court for the Northern District of Georgia denying plaintiffs’ motion for class certification. OPINIONS BELOW The opinion of the United States Court of Appeals for the Eleventh Circuit is set forth as Appendix Exhibit A. The de- cision is reported as Kirkpatrick v. J.C. Bradford & Co., 827 F.2d 718 (11th Cir. 1987). The order of the Court of Appeals 2 y denying a petition for rehearing and suggestion of rehearing en banc is not reported and is set forth as Appendix Exhibit B. The order staying the mandate of the Court of Appeals is not reported and is set forth as Appendix Exhibit C. The opinion of the United States District Court for the Nor- thern District of Georgia denying plaintiffs’ motion for class cer- tification is set forth as Appendix Exhibit D. It is reported as Sanders v. Robinson Humphrey/American Express, Inc., 634 F. Supp. 1048 (N.D. Ga. 1986). The District Court’s opinion de- nying plaintiffs’ motion for reconsideration, granting plaintiffs’ motion to certify the case for interlocutory appeal pursuar.t to 28 U.S.C. § 1292(b) (1982) and staying the District Court’s order denying class certification is set forth as Appendix Exhibit E. It is reported as Sanders v. Robinson Humphrey/American Ex- press, Inc., [1986-87 Transfer Binder] Fed. Sec. L. Rep. (CCH) { 92,880 (N.D. Ga. July 8, 1986). The order of the Court of Appeals granting plaintiffs permis- sion to appeal, pursuant to 28 U.S.C. § 1292(b)(1982), the District Court’s order denying class certification is not reported and is set forth as Appendix Exhibit F. JURISDICTION The judgment of the Court of Appeals was entered on September 15, 1987. (Appendix Exhibit A). Rehearing was denied by an order dated October 21, 1987. (Appendix Exhibit B). The mandate of the Court of Appeals was stayed on November 17, 1987. (Appendix Exhibit C). This Court’s jurisdic- tion is invoked pursuant to 28 U.S.C. § 1254(1)(1982). STATUTES AND RULES INVOLVED The statutes and rules involved in the case are Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b) (1982) (“Section 10(b)”); Securities and Exchange Commission Rule 10b-5, 17 C.F.R. § 240.10b-5 (1987) (“Rule 10b-5”); Rule 23 of the Federal Rules of Civil Procedure; 28 U.S.C. § 1292(b)(1982); and Sections 1] and 12(2) of the Securities Act of 1933. 15 U.S.C. §§ 77k, 771(2) (1982). (Appendix Exhibit G). STATEMENT OF THE CASE This case arises out of the sales of Petro-Lewis Corporation (“Petro-Lewis”) oil and natural gas limited partnership interests. From 1970 to 1983, Petro-Lewis was the nation’s largest seller of oil and natural gas investment funds. Over this period, Petro- Lewis, through numerous brokerage firms, including defendant PaineWebber, sold in excess of $3 billion in partnership interests to approximately 180,000 people. Sanders, 634 F. Supp. at 1050 (App. D-2).? Suffering from oil and natural gas price declines, in February 1984 Petro-Lewis announced that its financial condition had seriously deteriorated. Eleven class actions against Petro-Lewis, brought under various provisions of the federal securities laws, were filed between February 9, 1984 and May 9, 1984. These class actions were subsequently settled and the settlement was approved by the United States District Court for the District of Colorado. See In re Petro-Lewis Securities Litigation, [1984-85 Transfer Binder] Fed. Sec. L. Rep. (CCH) 4 91,899 (D. Colo. Dec. 24, 1984). In the wake of the settlement of these class actions, defend- ant PaineWebber and a number of other brokerage firms were sued in separate class actions involving the sale of Petro-Lewis partnership interests. This is one of those actions. Plaintiffs allege that defendant PaineWebber violated, inter alia, Section 10(b) and Rule 10b-5 by making false and misleading statements regar- ding Petro-Lewis’ financial condition. Plaintiffs seek to repre- sent a class of plaintiffs who, between January 1, 1981 and February 6, 1984, purchased, reinvested in or otherwise acquired Petro-Lewis limited partnership interests through defendant PaineWebber. Sanders, 634 F. Supp. at 1052 (App. D-5). In March, 1986, the District Court denied plaintiffs’ motion for class certification, finding that individual issues predominated 2 References to “App. ___” are to the Appendix submitted with this petition. over common issues. In September, 1987, the Eleventh Circuit reversed the District Court’s denial of class certification as to the Section 10(b) and Rule 10b-5 claims. The District Court held that the plaintiffs had failed to carry their burden under Fed. R. Civ. P. 23(b)(3) of demonstrating that individual issues predominated over common issues with respect to their Section 10(b) and Rule 10b-5 claims. The District Court found that because the putative class plaintiffs relied on oral representations of their individual account executives and plaintiffs presented insufficient evidence to establish that these account executives employed a uniform sales pitch, individual issues of reliance predominated among the class members. Sanders, 634 F. Supp. at 1061-63 (App. D-23-27). The District Court rejected the “fraud-on-the-market” theory as a basis for presuming reliance because it found (1) the limited partnerships were not sold on the open market and (2) there was no basis in the record for plaintiffs’ allegations that Petro-Lewis part- nership programs could not have been marketed but for a fraud. Sanders, 634 F. Supp. at 1063-64; [1986-87 Transfer Binder] Fed. Sec. L. Rep. (CCH) { 92,880, at 94,271 (App. D-27-29; E-10-11). The District Court also found that individual issues predominated because many of the class members had signed arbitration agreements that obligated them to arbitrate their grievances; the statute of limitations for Section 10(b) claims varied from state to state; and the common law claims of the class members differed depending on their states of residence.’ Sanders, 634 F. Supp. at 1064-69 (App. D-29-38). The Court of Appeals reversed the District Court’s denial of class certification on the Section 10(b) and Rule 10b-5 claims. Instead of deferring to the District Court’s factual finding that plaintiffs had presented insufficient evidence to demonstrate the predominance of common issues, the Eleventh Circuit * The District Court also denied class certification as to plaintiffs’ claims under Sections 11 and 12(2) of the Securities Act of 1933, 15 U.S.C. §§ 77k, 1(2)(1982) and found the plaintiffs would be inadequate class representatives. Sanders, [1986-87 Transfer binder] Fed. Sec. L. Rep. (CCH) 4 92,880, at 94,269-70 (App. E-3-6). improperly relied solely on the allegations of plaintiffs’ com- plaint in holding that common issues predominated. The Court of Appeals held that because “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,” the Rule 10b-5(a) and 10b-5(c) claims were properly subject to class ac- tion treatment under the “fraud-on-the-market” theory. Kirkpatrick, 827 F.2d at 722 (emphasis added) (App. A-7). The Court of Appeals took a similar deferential view of plain- tiffs’ complaint in concluding that the District Court improperly found that the plaintiffs’ 10b-5(b) misrepresentation claims were not suited for class treatment. Kirkpatrick, 827 F.2d at 724 (App. A-10). The Court of Appeals certified the Rule 10b-5(b) claims because “the complaints alleged that the defendant brokerage firms and individual officers engaged in a common course of conduct” to misrepresent the financial condition of Petro-Lewis. Id. (Emphasis added).* The Court of Appeals found that common issues predominated with respect to the misrepresentation claims on the basis of an alleged common course of conduct, even though the District Court had found insufficient evidence of such a common course of conduct. * The Court of Appeals also affirmed the District Court’s denial of class cer- tification as to the plaintiffs’ state law claims; reversed the District Court's denial of class certification as to the plaintiffs’ claims under Sections 11 and 12(2) of the Securities Act of 1933; held that “purchasers whose 10b-5 claims are subject to arbitration . . . [can]not be considered members of the class,” Kirkpatrick, 827 F.2d at 725 n.5 (App. A-ll n.5); and held that the District Court applied an erroneous standard in determining that the named plain- tiffs would not be adequate class representatives and remanded this issue to allow the District Court to apply the standard set out therein by the Eleventh Circuit. PaineéWebber is not petitioning for a writ of certiorari as to any of these issues. REASONS FOR GRANTING THE WRIT I PERMITTING A PRESUMPTION OF RELIANCE IN ORDER TO FACILITATE CLASS CERTIFICATION OF ACTIONS UNDER RULE 10b-5 WHERE THE SECURITY AT ISSUE IS NOT TRADED ON THE OPEN MARKET WILL OPEN THE FLOODGATES TO RULE 10b-5 CLASS ACTIONS A. This Court Should Consider This Case in Conjunction with Basic Inc. v. Levinson This case presents the same issues with regard to class cer- tification, the “fraud-on-the-market” theory and the propriety of permitting a presumption of reliance under Rule 10b-5 as are currently being considered by this Court in Basic Inc. v. Levin- son, 107 S. Ct. 1284 (1987), granting cert. to 786 F.2d 741 (1986). Reliance on a defendant's alleged deception has historically been a required element of a fraud claim under Section 10(b) and Rule 10b-5. As argued in Basic, the “fraud-on-the-market” theory, by permitting a presumption of reliance in Rule 10b-5 actions so as to facilitate class certification, ignores this long stan- ding requirement and requires only a showing that a misrepresentation or omission is material in order to obtain class certification. The “fraud-on-the-market” theory thereby great- ly increases the potential for abuse of the class action device by transforming this procedural rule into a substantive weapon which can be used by plaintiffs against issuers of securities brokerage firms.‘ Indeed, affording a presumption of reliance for purposes of class certification is far less supportable in this case than in Basic. * In Coopers & Lybrand v. Livesay, 437 U.S. 463, 476 (1978), this Court noted its concern with the potential abuse of class actions, stating: “Certifica- tion of a large class may so increase the defendant’s potential damages liabili- ty and litigation costs that he may find it economically prudent to settle and _ to abandon a meritorious defense.” Similarly, in Blue Chip Stamps v. Manor ' Drug Stores, 421 U.S. 723, 747-48 (1975) — a securities fraud action under Rule 10b-5 — this Court stated that “the inexorable broadening of the class of plaintiff who may sue in this area of the law will ultimately result in more harm than good.” In Basic, the argument that reliance should be presumed was arguably plausible because the securities at issue were actively trad- ed on an open market, thereby permitting the contention that plaintiffs relied on the market price of those securities. No similar argument can be made where, as here, there was no developed market in which to trade the limited partnership interests. The long-standing requirement under Rule 10b-5 that a plain- tiff show actual reliance on the defendant’s alleged deception in making the decision to purchase or sell the security at issue insures the existence of a causal relation between that conduct and the plaintiff's injury so as to prevent Rule 10b-5 from becom- ing a “scheme of investors’ insurance”. List v. Fashion Park, Inc., 340 F.2d 457, 463 (2d Cir.), cert. denied sub nom., List v. Lerner, 382 U.S. 811 (1965). As in common-law fraud, the reliance re- quirement of Rule 10b-5 insures that the defendant’s actions were in fact the actual cause of plaintiffs injury. This requirement plays an even more important role in limiting and defining the scope of liability of securities issuers and brokerage firms under Rule-0b-5 as they market and sell securities in the national and international economic sphere. In Basic, the Sixth Circuit permitted a presumption of reliance under Rule 10b-5, in the form of the “fraud-on-the-market” theory, in order to “facilitate” the class action against an issuer of securities. Under this theory, a plaintiffs reliance on the purported fraud is presumed, on the grounds that, in an open and developed securities market, the price of a company’s stock is determined by the publicly available information regarding the company and that the plaintiff “relied” on the “integrity” of the market when dealing in that stock. Basic, 786 F.2d at 750. This presumption facilitates certification of class actions by pretermitting an other- wise necessary finding that common questions of reliance predominate over individual questions under Fed. R. Civ. P. 23(b). As argued to this Court in Basic, this use of a presumption of reliance as a substitute for the otherwise required showing by a plaintiff of actual reliance on the alleged deception in mak- ing the decision to purchase or sell the security, has led to an abuse of the class action device by expanding the class of plain- tiffs who may sue by means of a class action under Rule 10b-5. This case presents those same issues and, should this Court re- ject the “fraud-on-the-market” theory in Basic, that holding will be dispositive in this case. On this basis alone, this Court should grant this petition. However, even if the “fraud-on-the-market” theory at issue in Basic were to be accepted by this Court, this case presents nationally important issues that should be considered and de- cided in conjunction with that case. The court below: held that the District Court was required to apply a presumption of reliance in the form of a “fraud-on-the-market” theory to securities not traded on an open market. Kirkpatrick, 827 F.2d at 723 (App. A-8-9). Thus, the present case takes the “fraud- on-the-market” theory a step further and creates an even greater potential for abuse of the class action device than that created by the court in Basic by even further expanding the class of plain- tiffs who may take advantage of the class action device. This Court should therefore consider, in conjunction with its consideration of Basic, the propriety of applying the “fraud-on- the-market” theory to undeveloped securities markets, as the con- tinued expansion of this theory presents an issue of growing na- tional importance to securities issuers and brokerage firms which ought to be resolved. B. The Interpretation of the “Fraud-on-the-Market” Theory by the Court Below Will Open the Floodgates to Class Actions Under Rule 10b-5 The court below applied the “fraud-on-the-market” theory to plaintiffs’ claims to facilitate class certification, even though the Petro-Lewis partnership interests purchased were not trad- ed on the open market, on the grounds that “plaintiffs alleged that the Petro-Lewis shares . . . could not have been marketed but for the defendants’ fraud.” Kirkpatrick, 827 F.2d at 722 (App. A-7). The court purported to reached this conclusion on the basis of Shores v. Sklar, 647 F.2d 462 (5th Cir. 1981) (en banc), cert. denied, 459 U.S. 1102 (1983). Shores and the decision below both erred in applying the “fraud-on-the-market” theory to the con- text of the undeveloped market. This error is likely to significantly impact securities issuers and brokerage firms. Moreover, the decision below went beyond Shores and other Cir- cuit Court opinions which have interpreted the “fraud-on-the- market” theory, and has improperly created an irrebuttable presumption of reliance in class certification motions under Rule 10b-5. Shores’ application of the “fraud-on-the-market” theory to the undeveloped market has been repeatedly and consistently criticized, and for good reason.° First, the decision of the court below brings the concept of substantive fairness into the domain of Rule 10b-5 — a concept that is foreign to the federal securities laws. The federal securities laws and Rule 10b-5 are not intended to insure the general fairness of securities issuances and the Securities and Exchange Commission does not pass on the quality or soundness of any new securities issuances. See, e.g., 17 C.F.R. § 230.425 (1987). Rather, as settled by this Court a decade ago, the federal regulatory scheme and Rule 10b-5 govern only the adequacy of disclosure. See Santa Fe Industries v. Green, 430 USS. 462, 478 (1977). The decision below — extending Rule 10b-5 to allow an action to proceed because a security would have been “unmarketable” “but for” the fraud — brings the issue of substan- tive fairness back into the sphere of the federal securities laws. See Note, The Fraud-On-The-Market Theory, 95 Harv. L. Rev. 1143, 1158 (1982). Second, the rationale of the decision below and Shores eliminates the requirement of proximate cause — effectively creating a strict liability standard once materiality and scienter are shown. As one commentator has stated: the “but for” causation rationale begs the ultimate question of proximate or legal cause. As is apparent from the Shores decision itself, a mechanical standard * See, e.g., Note, The Fraud-On-The-Market Theory, 95 Harv. L. Rev. 1143, 1156-58, 1161 (1982); Black, Fraud On The Market: A Criticism of Dispens- ing With Reliance Requirements in Certain Open Market Transactions, 62 N.CLL. Rev. 435, 453, 472 (1984); Rapp, Rule 10b-5 And “Fraud-On-The- Market”— Heavy Seas Meet Tranquil Shores, 39 Wash. & Lee L. Rev. 861, 881-88 (1982). 10 of “but for” causation would allow recovery no mat- ter how attenuated the connection between defendant and plaintiff. Note, supra, 95 Harv. L. Rev. at 1158. Whether a defendant’s action bears any relation to a plaintiff's decision to engage in the transaction resulting in his loss is now irrelevant. The common-law concept of fraud is now removed from Rule 10b-5 jurisprudence. Moreover, the decision below goes even further than Shores and creates an irrebuttable presumption of reliance and causa- tion in deciding whether to certify Rule 10b-5 cases. Under the holding of the court below, one need only allege that a security could not have been marketed but for the fraud in order to show that common questions predominate on a motion for class cer- tification under Fed. R. Civ. P. 23. This position directly con- flicts with other Courts of Appeals’ decisions regarding the “fraud-on-the-market theory,” which permit only a rebuttable presumption of reliance under Rule 10b-5. See, e.g. Levinson v. Basic Inc., 786 F.2d 741, 750 (6th Cir. 1986), vert. granted, 107 S. Ct. 1284 (1987). If allowed to stand, the decision below will open the floodgates to class action litigation because, in every instance where the price of a security falls, class certification will be assured whenever a plaintiff alleges that the securities could not have been marketed but for a fraud. In short, the decision below is a radical departure from prior Rule 10b-5 jurisprudence. Class actions under Rule 10b-5 will now be brought and certified every time an issuer issues or a brokerage firm markets a security that subsequently drops in price. The substantive fairness of securities issuances will be regulated under federal law. And business corporations and financial institutions will be the ones to bear the burden of this new jurisprudence. 11 Il ALLOWING CLASS ACTIONS TO BE CERTIFIED ON THE BASIS OF THE PLEADINGS ALONE IRRESPECTIVE OF THE EVIDENCE PRESENTED AT THE CLASS CERTIFICATION HEARING WILL TRANSFORM RULE 23 INTO A BLUDGEON NEVER ENVISIONED OR INTENDED BY CON- GRESS OR THIS COURT A. The Court Below Improperly Ignored The Evidence At The Class Action Hearing In Contravention of This Court’s Decision in General Telephone Company of Southwest v. Falcon The decision of the court below contravenes an entire body of Rule 23 jurisprudence. Under the Eleventh Circuit’s analysis, a plaintiff need only allege that common issues predominate over individual issues under Rule 23(b)(3) and that allegation must be accepted as true by the District Court for purposes of the class certification motion. Adoption of the Eleventh Circuit's analysis will lead to abuse of the class action device because it will encourage plaintiffs with little hope of ultimately prevail- ing on the merits, but with knowledge that their lawsuit will invoke massive discovery and fear of large damages liability by the defendant, in their attempts to extort huge settlement sums from defendants. In holding that common issues predominated on plaintiffs’ Rule 10b-5 claims, the Court of Appeals relied solely on the allegations of the complaint and ignored the evidence presented at the class certification hearing. The court below required that a class be certified on the claims brought pursuant to Rule 10b-5(a) and 10b-5(c) under the “fraud-on-the-market” theory because “plaintiffs alleged that the Petro-Lewis shares, which were not traded on the open market, could not have been marketed but for defendants’ fraud.” Kirkpatrick, 827 F.2d at 722 (emphasis added) (App. A-7). 12 Similarly, the decision of the court below required that a class action be certified under Rule 10b-5(b) because the complaint alleged that the defendant engaged in a common course of con- duct, without regard to the sufficiency of the evidence. Kirkpatrick, 827 F.2d at 724 (emphasis added) (App. A-10). The District Court had specifically found that there was no evidence of a common course of fraudulent conduct by defendant ap- plicable to the putative class. Sanders, 634 F. Supp. at 1062 (App. D-25). The Eleventh Circuit improperly ignored the factual fin- ding of the District Court and relied solely on the allegations of the complaint. The decision of the court below effectively eliminates the need for any evidentiary showing on a class certification motion. It creates a standard contrary to policy and precedent — including this Court's decision in General Telephone Co. of Southwest v. Falcon, 457 U.S. 147, 160 (1982), requiring a “rigorous analysis” of motions under Fed. R. Civ. P. 23 ~ and is likely to lead, as here, to unjust results. A “rigorous analysis” of a class certification motion under Rule 10b-5 must include an analysis of whether plaintiffs have met their burden of proving that common questions of law and fact predominate over individual questions affecting only individual members. The court below failed to take this approach. Instead, it ended its Rule 23 analysis at the four corners of the complaint. Such a failure to examine the evidence on a motion under Fed. R. Civ. P. 23 was specifically criticized by this Court in Falcon. The Court there reversed the Court of Appeals’ affir- mance of an order granting a motion for class certification where the District Court did not conduct an evidentiary hearing and [the] complaint provided an insufficient basis for con- cluding that the adjudication of [plaintiff s] claim .. .. would require the decision of any common ques- tion . . . . Without any specific presentation identi- fying the questions of law or fact that were comuon to the claims of respondent and of the members of the class he sought to represent, it was error for the 13 District Court to presume that [the plaintiff's) claim was typical of other claims against [defendant by other purported class members. ] General Telephone Co. of Southwest v. Falcon, 457 U.S. at 158-59. Falcon reaffirmed this Court's longstanding position that “the class determination generally involves considerations that are ‘enmeshed in the factual and legal issues comprising the plaintiff's cause of action. ” Coopers & Lybrand v. Livesay, 437 US. at 469 (quoting Mercantile National Bank v. Langdeau, 371 U.S. 555, 558 (1963)). As stated in Livesay: Evaluation of many of the questions entering into determination of class action questions is intimately involved with the merits of the claims. The typicali- ty of the representative's claims or defenses, the ade- quacy of the representative, and the presence of com- mon questions of law or fact are obvious examples. The more complex determinations required in Rule 23(b)(3) class actions entail even greater entanglement with the merits... . Id. at 469 n.12 (quoting 15 C. Wright, A. Miller & E. Cooper, Federal Practice and Procedure § 3911, at 485 n.45 (1976)). In reaching the conclusion that the District Court had con- ducted an “inappropriate inquiry into the merits,” the Court of Appeals purported to rely on this Court's decision in Eisen v. Carlisle ¢ Jacquelin, 417 U.S. 156, 177-78 (1974). However, Eisen held that the District Court erred in imposing the cost of notice to class members on the defendant on the basis of a finding, after “a preliminary hearing on the merits of the case, that petitioner was ‘more than likely’ to prevail on his claims.” Eisen, 417 U.S. at 177. The Court criticized this procedure because it “allow{s] a representative plaintiff to secure the benefits of a class action without first satisfying the requirements for it.” Id. In the present case, the District Court took specific cognizance of Eisen and examined the evidence solely in terms of the Rule 23 issues and not in terms of the merits of plaintiffs’ claims. Eisen does not preclude this sort of inquiry. 14 The Eleventh Circuit's policy permits class certification on the mere filing of the “well pled” complaint with no showing that the requirements of Rule 23 have been met. Adoption of the Eleventh Circuit's view will therefore undoubtedly spawn more securities fraud class actions against securities issuers and brokerage firms. These cases — often initiated for their settle- ment value or in terrorem effect — rarely reach trial, much less review in this Court. The stakes are too high to permit the risks of final adjudication of these claims no matter how little ac- tual merit the suit may have. And it is the certification of a class of plaintiffs which raises those stakes to that intolerable level. Extensive abuse of this procedural device — with large reper- cussions on the national economy — is inevitable under the stan- dard set forth by the Eleventh Court. B. There Is A Direct Conflict Between The Eleventh And The Fifth Circuits On The Certification Of Claims Brought Under Rule 10b-5(b) Not only is the decision of the court below — that class cer- tification is proper as to claims brought under Rule 10b-5(b) where the complaint alleges a common course of conduct although the evidence does not show a common course of con- duct — in conflict with Supreme Court precedent, but it is also in direct conflict with the holdings of the Fifth Circuit on this precise issue. The Fifth Circuit requires that a plaintiff demonstrate, not merely allege, the predominance of common issues. In Grainger v. State Security Life Insurance Co., 547 F.2d 303 (5th Cir. 1977), cert. denied, 436 U.S. 932 (1978), the Fifth Circuit held, in the context of a putative 10b-5 class action in- volving alleged oral misrepresentations, that the plaintiff must meet his burden of proving that standardized class representa- tions were made, and that otherwise certification should be denied: the key concept in determining the propriety of class action treatment is the existence or nonexistence of material variations in the alleged misrepresentations. 15 It is possible, although unlikely, that oral misrepres- entations can be uniform, e.g., through use of a stan- dardized sales pitch by all the company’s salesmen. Plaintiffs in the present case should be given the op- portunity to demonstrate the existence and use of such a device. If plaintiffs cannot do this, then the district court may quite properly refuse to certify a class on the grounds that common questions of law or fact do not predominate. 547 F.2d at 307-08. Similarly, in Simon v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 482 F.2d 880 (5th Cir. 1973), also a class action against a brokerage firm alleging Rule 10b-5 misrepresentations which were not demonstrated to be standardized, the Fifth Circuit af- firmed the denial of class certification, stating: If there is any material variation in the representa- tions made or in the degrees of reliance thereupon, a fraud case may be unsuited for treatment as a class action. See Rule 23, Advisory Committee's Official Note, 39 F.R.D. 98, 107 (1966). Thus, courts usually hold that an action based substantially, as here, on oral rather than written misrepresentations cannot be maintained as a class action. Even if plaintiff had established that the alleged misrepresentations were primarily written, a class ac- tion would not be appropriate unless he could prove the similarity of the writings. His failure to prove any standardized representations by Merrill Lynch bars a class action whether it is based on Rule 10b-5 or the state common law. 482 F.2d at 882-83. a 16 The Fifth Circuit, subsequent to the split between the Fifth and the Eleventh Circuit, has adhered to its holdings in Simon and Grainger. In Shivangi v. Dean Witter Reynolds, Inc., 825 F.2d 885 (5th Cir. 1987), the court properly affirmed the district court’s denial of class certification in an oral representations case under Rule 10b-5 where the plaintiffs failed to prove standar- dized representations by the defendant brokerage firm. 825 F.2d at 890. Given the District Court’s factual finding (undisputed by the Court of Appeals (see Kirkpatrick, 827 F.2d at 724 (App. A-10)) that the plaintiffs relied on the oral representations of their in- dividual account executives and that there was insufficient evidence of standardized representations, the Court of Appeals’ legal conclusion that common issues predominated — made solely on the basis of the allegations of the complaint — directly con- travenes the Fifth Circuit’s holdings in Grainger, Simon and Shivangi. This split in the circuits highlights the Court of Ap- peals’ error in its Rule 23 analysis and mandates this Court’s intervention to restore uniformity and coherence to this area of the law. Il THE COURT OF APPEALS IMPROPERLY TOOK JURISDICTION OF THIS APPEAL PURSUANT TO 28 U.S.C. § 1292(b) The Court of Appeals improperly took jurisdiction of this case pursuant to 28 U.S.C. § 1292(b). Under that statute, certifica- tion of a non-final order is proper only if that order “involves a controlling question of law as to which there is substantial ground for difference of opinion and...an immediate appeal from the order may materially advance the ultimate termination of the litigation.” (Emphasis added) This Court has unequivocally stated that “an order denying class certification is subject to effective review after final judg- ment at the behest of the named plaintiff or intervening class 17 members” and that only “exceptional circumstances justify a departure from the basic policy of postponing appellate review until after entry of a final judgment.” Coopers & Lybrand v. Livesay, 437 U.S. at 469, 475 (citation omitted). Accordingly, interlocutory appeals from denials of class certification should be granted only under the most unusual circumstances. The essence of a class action is that the representative plain- tiffs’ claims are typical of the claims of the class and that the questions of law or fact common to the members of the class predominate over questions affecting only individual members. Accordingly, if a class is properly certifiable under Rule 23, the representative plaintiffs’ proof at trial as to their claims must be identical to the class’s proof as to the class claims. Inter- locutory review by a court of appeals of the denial of class ac- tion certification therefore cannot materially advance the ultimate termination of the litigation. Suppose, arguendo, that class certification is improperly denied by the district court. Under Section 1292(b), the order denying class certification would be properly appealable only if that appeal “may materially advance the ultimate termina- tion of the litigation.” However, the litigation of the case could not be advanced by interrupting the normal litigation process with an interlocutory appeal because such an appeal would result in no more than transposing the appellate review of this limited issue of certification from the end of the process to the very middle. There would be no net advancement of the litiga- tion because if the plaintiffs’ claims were typical and common questions predominated, plaintiffs’ proof would have to typify the class’s proof. It would be more expeditious if plaintiffs first pursued their individual claims, which would bethe same as the class’s claim, and thereafter — without the lengthy interim delay of an interlocutory appeal — appealed the denial of class certification. Indeed, at that point, with the benefit of a trial record, a court of appeals would be in a better position to assess whether the case should have been maintained as a class action. On the other hand, if class action status is properly denied by the district court, an appeal of that denial pursuant to Section 18 1292(b) would by definition delay the ultimate termination of the litigation. The District Court in this case properly denied class certifica- tion on the grounds that individual questions predominated over common questions. Thus, the standard under Section 1292(b) was not (and could not have been) met and this case was im- properly accepted for review by the Court of Appeals under Sec- tion 1292(b). Petitioner briefed and argued this point to the court below. However, the Court of Appeals did not address this issue in its opinion. 19 CONCLUSION For the foregoing reasons, petitioner respectfully requests that this Court issue a writ of certiorari to review the decision of the United States Court of Appeals for the Eleventh Circuit. Dated: New York, New York November 23, 1987 RoBERT EMANUEL ZIMET Counsel of Record for Petitioner RicHARD M. Kirsy SKADDEN, ARPS, SLATE, HANSELL & Post MEAGHER & FLOM 3300 First Atlanta Tower 919 Third Avenue Atlanta, Georgia 30383 New York, New York 10022 (404) 581-8000 (212) 735-3000 Attorneys for Petitioner Of Counsel: JEREMY A. BERMAN CHARLES F. WALKER APPENDIX + ih CPC ss TABLE OF CONTENTS Opinion of the Court of Appeals for the Eleventh Circuit (September 15, 1987) ................ Order of the Court of Appeals Denying Petition for Rehearing and Suggestion of Rehearing en S| ae Order Staying the Mandate of the Court of Appeals (November 17, 1987) ................ Opinion of the District Court for the Northern District of Georgia Denying Plaintiffs’ Motion for Class Certification (March 27, 1986)....... Opinion of the District Court Denying Plaintiffs’ Motion for Reconsideration, Granting Plaintiffs’ Motion to Certify the Case for Interlocutory Appeal Pursuant to 28 U.S.C. § 1292(b) (1982) and Staying the District Court’s Order Denying Class Certification (July 8, 1986) ............. Order of the Court of Appeals Granting Plaintiffs Permission to Appeal Pursuant to 28 U.S.C. § 1292(b) (1982) (August 21, 1986) ........... ee a aa eleee's B-1 C-1 D-1 F-] G-1l Suzanne KIRKPATRICK; Dorothy D. Casler and Charles H. Lindsey, on behalf of themselves and alfothers similarly situated, Plaintiffs-Appellants, v. J.C. BRADFORD & CO., Defendant-Appellee. Glenn T. SANDERS on behalf of himself and all others similarly situated, and Leslie D. Sanders, Plaintiffs-Appellants, V. ROBINSON HUMPHREY/ AMERICAN EXPRESS, INC., and Shearson/ American Express, Inc., Defendants-Appellees. Tommy E. PARKER, as custodian for Kimberly M. PARKER and James L. Smith, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, v. PAINE WEBBER GROUP, INC., Defendant-Appellee. Nos. 86-8624 to 86-8626. United States Court of Appeals, Eleventh Circuit. Sept. 15, 1987. A-2 Appeals from the United States District Court for the Northern District of Georgia. Before VANCE and KRAVITCH, Circuit Judges, and BROWN’, Senior Circuit Judge. KRAVITCH, Circuit Judge: Plaintiffs in these companion cases filed certified interlocutory appeals pursuant to 28 U.S.C. § 1292(b) challenging the district court’s denial of class certification under Rule 23 of the Federal Rules of Civil Procedure. The district court denied class certifica- tion in each case on the alternative grounds that the named plaintiffs were not adequate class representatives as required by Fed.R.Civ.P. 23(a)(4) and that individual questions of fact predominated over common questions of law and fact in con- travention of Fed.R.Civ.P. 23(b)(3). Concluding that the district court applied erroneous legal standards, we reverse and remand for further consideration. I. BACKGROUND These are a few of the many cases arising out of the virtual collapse in 1984 of the Petro-Lewis oil and natural gas invest- ment funds. From 1970 to 1984, about 180,000 people purchased more than $3 billion worth of Petro-Lewis securities and limited partnerships. When the price of oil and gas declined in 1981 and 1982, Petro-Lewis began borrowing funds to pay partner- ship distributions, to service its debt, and to promote the sale of additional programs. In February 1984, revealing for the first time that it was in dire financial straits, Petro-Lewis announced that it would implement a series of drastic economy measures, including cutting partnership distributions by as much as 50 per cent and selling between one quarter and one third of its reserves. Numerous lawsuits followed. In In re Petro-Lewis Securities Litigation, [1984-85 Transfer Binder], Fed.Sec.L.Rep. { 91,899 (D.Colo.1984), the U.S. District Court for the district of Colorado approved a settlement of eleven * Honorable John R. Brown, Senior U.S. Circuit Judge for the Fifth Circuit, sitting by designation. eT A-3 consolidated class suits brought under various provisions of the federal securities laws against the directors and certain corporate entities of the Petro-Lewis organization. Under the terms of the settlement, the participating class members agreed to release the defendants and all Petro-Lewis subsidiaries in return for the formation of a royalty trust and a settlement fund valued at $23.5 million. The settlement agreement expressly provided that the plaintiff class members retained the right to file suit against any nondefendants, including broker-dealers of Petro-Lewis securi- ties and limited partnerships. In these cases, plaintiffs allege that the actions of the de- fendant brokerage firms and individuals in selling and promoting interests in Petro-Lewis violated sections 11 and 12(2) of the Securities Act of 1933, 15 U.S.C. §§ 77k, 771(2), section 10 of the Securities Exchange Act of 1934, 15 U.S.C. § 78j, Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10b-5, and various common law and statutory obligations under state law! Claiming to represent classes of plaintiffs who, between January 1, 1981 to February 6, 1984, purchased, reinvested in, or otherwise ac- quired Petro-Lewis limited partnership interests from the de- fendant firms, the plaintiffs alleged that the defendants know- ingly or recklessly participated with Petro-Lewis in disseminating materially misleading information regarding Petro-Lewis’ fi- nancial condition and failed to provide other information that would have made the statements not misleading. After discovery and hearings, the district court issued an order and an amended order denying certification of the classes under Rule 23 of the Federal Rules of Civil Procedure. Although the court determined that each suit satisfied the class action prereq- uisites of Fed.R. 23(a)(1), (2), and (3), the court denied certifica- tion on the ground that the named plaintiffs were not adequate class representatives as required by Rule 23(a)(4). The basis for this determination was that the named plaintiffs did not ‘Additional claims were asserted in some of the complaints. The district court's ruling on these other claims were not challenged on appeal. Accordingly, the district court’s denial of class certification as to those claims will not be disturbed. A-+ demonstrate that they would pursue the litigation with suffi- cient vigor to protect the interests of the class. As an alternative ground of decision, the court held that individual questions of law and fact outweighed common questions and thus that the actions did not satisfy the standards of Rule 23(b)(3). Concluding that its ruling was based upon determinations of law as to which there may be substantial ground for difference of opinion and that an immediate appeal from the denial of class certification would materially advance the ultimate determination of the ac- tions, the court certified its order for an interlocutory appeal pursuant to 28 U.S.C. § 1292(b). We accepted jurisdiction. See id. II. RULE 23(b)(3): PREDOMINANCE OF COMMON OR INDIVIDUAL QUESTIONS The district court’s conclusion that individual questions predominate over common questions is based directly on the court's interpretation of the substance of the plaintiffs’ claims. Consequently, we will consider first that aspect of the court's denial of class certification. In holding that certification was improper under Rule 23(b)(3),? the court concluded that common questions of law and fact in the 10(b) and 10b-5 claims were dominated by in- dividual questions of reliance on the part of the particular . A suit may be maintained as a class action only if the four prerequisites of Rule 23(a) are satisfied and, in addition, the case satisfies one of the requirements of Rule 23(b). See Fed.R.Civ.P. 23(b). In this case, there is no dispute that subsections (1) and (2) of Rule 23(b) do not apply. Rule 23(b)(3) permits class action treatment if: (3) the court finds that the questions of law or fact common to the members of the class predominate over any questions af- fecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy. The matters pertinent to the findings include: (A) the interest of members of the class in individually control- ling the prosecution or defense of separate actions: (B) the extent and nature of any litigation concerning the controversy already commenced by or against members of the class; (C) the desirability or undesirability of concentrating the litigation of the claims in the particular forum; (D) the difficulties likely to be encountered in the management of a class action. A-5 purchasers, statutes of limitations in each state in which there may be class members, and arbitration agreements in many of the purchase contracts. The court viewed the state law claims to be inappropriate for class action treatment because liability would depend upon the substantive law of the different states. Finally, the court refused to consider certifying classes limited to the section ll and 12(2) claims after concluding that the 10(b) and state law claims were the dominant claims asserted in the complaints. A. Section 10(b) and Rule 10b-5 The complaints allege that the defendants violated section 10(b) and Rule 10b-5 by engaging in two related but different courses of conduct. First, the complaints contend that the defen- dants participated with Petro-Lewis in disseminating misleading prospectuses and in engaging in a standardized promotion by the individual brokers. Second, the plaintiffs claim that the firms continued to sell and promote Petro-Lewis shares despite the firms’ awareness or reckless disregard of Petro-Lewis’ severe financial difficulties. Based on these allegations, the plaintiffs assert three theories of liability under which common issues of law and fact necessarily would outweigh individual issues. They first contend that their claims concern primarily acts of omission and thus that reliance on the part of individual purchasers should be presum- ed under the rule of Affiliated Ute Citizens v. United States, 406 US. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1975). Second, they argue that the claims fall under the fraud-on-the-market theory adopted by our predecessor court in Shores v. Sklar, 647 F.2d 462 (5th Cir. May 1981) (en banc), cert. denied, 459 U.S. 1102, 103 S.Ct. 722, 74 L.Ed.2d 949 (1983).’ Finally, they argue that the allega- tions involve a common course of conduct toward all defendants, and thus that any issues of individual reliance could not predominate over common questions of facts. See e.g., Kennedy v. Tallant, 710 F.2d 711 (Lith Cir. 1983). ’ 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 revd 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 (lth 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 (11th 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 d> 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 > ae) AS 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.I1.1982). 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, inciuding 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-9 a eh 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) misrepresenia- 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 those 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, giver: 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 (11th 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 ll 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 soid. 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 (lth 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 claims 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 ll 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 1] 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 ll and 12(2) claims. Although there is some overlap between section 10(b) and sections 1] 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), aff'd, 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.III.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.I1.1977). 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 ». 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 a SS ee! he ” 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 (Lith 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. hi oeeeeerereeeeenennanmanmaimaaniaaadiiaiaaaaaamaael tN i alt —— ins 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 UNITED STATES COURT OF APPEALS Eleventh Circuit 56 Forsyth Street, N.W. Atlanta, Georgia 30303 October 21, 1987 Miguel J. Cortez In Replying Give Number Clerk Of Case and Names Of Parties MEMORANDUM TO COUNSEL OR PARTIES LISTED BELOW: NOS. 86-8624, 86-8625 & 86-8626 SUZANNE KIRKPATRICK, et al. v. J.C. BRADFORD & CO. (Nos. C85-1891A, C85-172A & C85-1586A) The enclosed order has been entered on petition(s) for rehearing. See Rule 41, Federal Rules of Appellate Procedure, and Eleventh Circuit Rule 41-1 for information regarding issuance and stay of mandate. Sincerely, MIGUEL J. CORTEZ, Clerk By: /s/ Pam Holloway Deputy Clerk Encl. Brenda M. Nelson Robert E. Boston Kenneth A. Jacobsen Lloyd S. Clareman Richard D. Greenfield Harvey D. Myerson Richard M. Kirby Bradley C. Twedt Robert E. Zimet Timothy J. Carey Glenn Delk Peter J. Anderson Ames Davis Mack Young B-2 IN THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT No. 86-8624 SUZANNE KIRKPATRICK; DOROTHY D. CASLER and CHARLES H. LINDSEY, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, versus J.C. BRADFORD & CO., Defendant-Appellee. No. 86-8625 GLENN T. SANDERS on behalf of himself and all others similarly situated, and LESLIE D. SANDERS, Plaintiffs-Appellants, versus ROBINSON HUMPHREY/AMERICAN EXPRESS, INC., and SHEARSON/AMERICAN EXPRESS, INC., Defendants-Appellees. ———— eee La NO. 86-8626 TOMMY E. PARKER, as custodian for KIMBERLY M. PARKER and JAMES L. SMITH, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, versus PAINE WEBBER GROUP, INC., Defendant-Appellee. Appeals from the United States District Court for the Northern District of Georgia ON PETITION(S) FOR REHEARING AND SUGGESTION(S) OF REHEARING IN BANC (Opinion September 15, 11 Cir., 1987, __.. F.2d ___). (October 21, 1987) Before VANCE and KRAVITCH, Circuit Judges, and BROWN’, Senior Circuit Judge. PER CURIAM: (x) The Petition(s) for Rehearing are DENIED and no member of this panel nor other Judge in regular active service on the Court having requested that the Court be polled on rehearing in banc (Rule 35, Federal Rules of Appellate Procedure; Eleventh Circuit Rule 35-5), the Suggestion(s) of Rehearing In Banc are DENIED. : ( ) The Petition(s) for Rehearing are DENIED and the Court having been polled at the request of one of the members of the Court and a majority of the Circuit Judges who are in regular active service not having voted in favor of it (Rule 35, Federal B-4 Rules of Appellate Procedure; Eleventh Circuit Rule 35-5), the Suggestion(s) of Rehearing In Banc are also DENIED. ( ) Amember of the Court in active service having requested a poll on the reconsideration of this cause in banc, and a ma- jority of the judges in active service not having voted in favor of it, Rehearing In Banc is DENIED. ENTERED FOR THE COURT: /s/ Phyllis Kravitch United States Circuit Judge * Honorable John R. Brown, Senior U.S. Circuit Judge for the Fifth Circuit, sitting by designation. a a nn el 7 a C-l UNITED STATES COURT OF APPEALS Eleventh Circuit 56 Forsyth Street, N.W. Atlanta, Georgia 30303 Miguel J. Cortez In Replying Give Number Clerk Of Case And Names Of Parties November 17, 1987 TO: ALL COUNSEL LISTED BELOW: No. 86-8624, 86-8625 & 86-8626 KIRKPATRICK, et al. v. BRADFORD, et al. MANDATE STAYED TO AND INCLUDING November 23, 1987. The court has this day granted a stay of the mandate to the date shown above. If during the period of the stay there is filed in this court a notice from the Clerk of the Supreme Court that the party who has obtained the stay has filed a petition for writ of certiorari in the Supreme Court, the stay shall continue un- til final disposition by the Supreme Court. Upon the filing of a copy of an order of the Supreme Court denying the petition for writ of certiorari, the mandate shall issue forthwith. See Fed.R.App.P. 41. The Clerk of the Supreme Court has requested the clerks of the federal courts of appeal to retain the record on appeal until the Supreme Court requests that it be transmitted. Parties will be advised when this occurs. Accordingly, please refrain from routinely requesting transmittal of the record. See Supreme Court Rule 19.1. A copy of this court’s opinion (or Rule 36-1 decision), the judg- ment, and any order on rehearing should be attached as an ap- pendix to any petition for writ of certiorari (or jurisdictional statement) filed. See Supreme Court Rules 21(k), 15(j). C-2 ( ) This court has also directed recall of the mandate. By copy of this letter the clerk of the district court is requested to return the opinion and judgment previously issued as mandate. Sincerely, MIGUEL J. CORTEZ, Clerk By: /s/ Pam Holloway Deputy Clerk Glenn Delk Kenneth A. Jacobsen Richard D. Greenfield Ames Davis Robert E. Boston Lloyd S. Clareman Harvey D. Myerson Bradley C. Twedt Timothy J. Carey Peter J. Anderson Mack Young Brenda M. Nelson Richard M. Kirby _ Robert E. Zimet MDT-2 7/87 C-3 IN THE UNITED STATES COURT OF APPEALS FOR THE ELEVENTH CIRCUIT No. 86-8624 SUZANNE KIRKPATRICK; DOROTHY D. CASLER and CHARLES H. LINDSEY, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, versus J.C. BRADFORD & CO., Defendant-Appellee. 7 | No. 86-8625 GLENN T. SANDERS on behalf of himself and all others similarly situated, and LESLIE D. SANDERS, Plaintiffs-Appellants, versus ROBINSON HUMPHREY/AMERICAN EXPRESS, INC., and SHEARSON/AMERICAN EXPRESS, INC., Defendants-Appellees. C-4 No. 86-8626 TOMMY E. PARKER, as custodian for KIMBERLY M. PARKER and JAMES L. SMITH, on behalf of themselves and all others similarly situated, Plaintiffs-Appellants, versus PAINE WEBBER GROUP, INC., Defendant-Appellee, FILED U.S. COURT OF APPEALS ELEVENTH CIRCUIT NOV 17 MIGUEL J. CORTEZ, CLERK Appeal from the United States District Court for the Northern District of Georgia ORDER: ( ) The motion of Appellees, J.C. BRADFORD & CO., et al. for (xx) stay (__) recall and stay of the issuance of the mandate pending petition for writ of certiorari is DENIED. (x) The motion of Appellees, J.C. BRADFORD & CO., et al. for (xx) stay (_) recall and stay of the issuance of the man- date pending petition for writ of certiorari is GRANTED to and including Nov. 23rd 1987, the stay to continue in force until the final disposition of the case by the Supreme Court, provided that within the period above mention- ed there shall be filed wtih the Clerk of this Court the ot abe ticle stl teas. Veer ( ) C-5 certificate of the Clerk of the Supreme Court that the cer- tiorari petition has been filed. The Clerk shall issue the mandate upon the filing of a copy of an order of the Suprer ‘e Court denying the writ, or upon expiration of the stay granted herein, unless the above mentioned cer- tificate shall be filed with the Clerk of this Court within that time. The motion of for a further stay of the issuance of the mandate is GRANTED to and including , under the same conditions as set forth in the preceding paragraph. IF IS ORDERED that the motion of for a further stay of the issuance of the mandate is DENIED. /s/ Phyllis Kravitch UNITED STATES CIRCUIT JUDGE ee ee Poet ae ae hn oi spt a ie de D-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 D.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. we D-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 complaint 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. D-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 wen tabs ——— D-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 pumerous 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. D-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 {{ 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.” Jd. 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. Id. at 4 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 tor SL Reh Eee A att Mi a abe D-7 revenue and profit to the defendants. Jd. 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. Jd. 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 D-8 programs. Id. at { 45. The plaintiffs and their proposed classes allege that as a result of the foregoing, they were damaged. Id. at 4 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 11 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 4 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 to 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 ll 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 11 and 12(2), barred these counts. In Sanders v. Robinson-Humphrey, the court ¢‘smissed the plaintiffs’ claims for their 1981] purchases. See Order filed Sept. il, 1985. In Kirkpatrick v. J. C. Bradford, the court dismissed Counts I and IL 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. 11, 1985. In Parker v. Paine Webber, (Footnote continued) D-9 indirectly induced the acts alleged in Counts I and II. Id. at { 64.5 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 misrepresentation (Count VI), and fraudulent con- cealment and breach of fiduciary duty (Count Vil). 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. 11, 1985. D-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).”7 The burden of satis- fying the requirements of Rule 23 falls on the party who seeks to maintain a class action. Amswiss International Corp. v. 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.” Id. at 178, 94 S. Ct. at 2153.° 7 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) D-1l 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 Fet+:re, 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- tiog requirements. Love v. Turlington, 733 F.2d 1562, 1564 (11th Cir. 1984). alii aticietaeaeaaail D-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 See et senna. ales ig laes ) { D-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 resolu- 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 D-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 held 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 between 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). D-15 The degree of investment experience or sophistication of the class representatives is irrelevant. Kennedy v. Tallant, 710 F.2d 711, 717 (11th 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 D-16 fairly and adequately protect the interests of the class. By far it is the most heavily litigated of the prerequisites. Id. 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 tradi [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385019_0430%3A1. Public record. Not legal advice.