Opposition Brief — Robinson Humphrey/American Express, Inc. v. Sanders
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No. 87-836 \Z)
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; IN THE
Supreme Court of the Huited
OcTOBER TERM, 1987
PAINEWEBBER GROUP, INC.,
Petitioner,
if WIE ne ee Hi Ca
int 15 ike pinag vee tna
VS.
Tommy E. Parker, as Custodian for
KIMBERLY M. Parker, and James L. SMITH,
Respondents.
ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
RESPONDENTS’ BRIEF IN OPPOSITION TO
PETITION FOR WRIT OF CERTIORARI
KENNETH A. JACOBSEN*
RICHARD D. GREENFIBLD
NICHOLAS E. CHIMICLES
GREENFIELD & CHIMICLES
One Haverford Centre
361 West Lancaster Avenue
Haverford, PA 19041-0100
(215) 642-8500
Attorneys for Respondents
* Counsel of Record for Respondents
yee eer ke
D. LAKE Rumsey, Jr.
DrieBE & RUMSEY
152 Nassau Street
Atlanta, GA 30309
(404) 688-4800
Of Counsel o
Zz \ of
i
COUNTERSTATEMENT OF THE QUESTIONS
PRESENTED FOR REVIEW
1. Is it appropriate for this Court to exercise its certiorari
jurisdiction to review a decision of the United States Court of
Appeals for the Eleventh Circuit which neither granted nor
denied a motion for class certification in an action arising under
the federal securities laws but, rather, remanded the matter to
the District Court for further proceedings consistent with its
decision?
2. Did not the Court of Appeals for the Eleventh Circuit
properly conclude that the District Court, in ruling on a motion
for class certification, was not permitted to disregard the
allegations of respondents’ Complaint and recharacterize the
case in a manner which respondents neither pleaded nor intend
to prove?
3. Did not the Court of Appeals for the Eleventh Circuit
properly conclude that respondents were entitled to a presump-
tion of reliance under the “fraud on the market” theory
adopted by an en banc panel of the predecessor to that Circuit
in Shores v. Sklar, 647 F.2d 462 (Sth Cir. 1981) (en banc),
cert. denied, 459 U.S. 1102 (1983)?
li
PARTIES TO THE PROCEEDING
The petitioner in this action is PaineWebber Group, Inc.
The respondents are Tommy E. Parker, as custodian for his
minor daughter Kimberly M. Parker, and James L. Smith.
iil
TABLE OF CONTENTS
Page
COUNTERSTATEMENT OF THE QUESTIONS
PRESEN FEL FOR REVIEW. .........0.cecccscscesscerccseseseees i
PARTIES TO THE PROCEEDINGS .....................scee000000 li
TP I a icciccccvcccccccccssaccscsscccscccccsssesesooes iii
TR ED votisncncccccsnesecccccrccsccsccsssscesscoees Vv
a, cscassanbansensecsnnsconecesssces 2
I a ccs nacsnsccccesesnccacoccesecessaseoecs 2-3
STATUTES AND RULES INVOLVED.......................... 3
COUNTERSTATEMENT OF THE CASE...................... 3
SUMMARY OF ARGUMENT ................ccccccccesessesseeeeees 14
REASONS FOR DENYING THE PETITION............... 15
I. THE ISSUES RAISED IN THE PETITION
ARE NOT RIPE FOR DETERMINATION
WITH RESPECT TO ALL OF THE QUES-
TIONS PRESENTED FOR REVIEW .................. 15
II. THE DECISION OF THE COURT OF AP-
PEALS IS FIRMLY ROOTED IN WELL-
SETTLED PRINCIPLES OF LAW AND
PROCEDURE AND IS FULLY CONSISTENT
WITH EXISTING PRECEDENT ......................... 19
A. The Court of Appeals Properly Concluded
That The District Court, In Ruling On A
Motion For Class Certification, Was Not Per-
mitted To Disregard The Allegations Of Re-
spondents’ Complaint and Recharacterize
The Case In A Manner Which Respondents
Neither Pleat Nor Intend To Prove............. 19
B. The Court of Appeals Did Not Ignore The
Evidence At The Class Hearing But, Rather,
Viewed The Entire Record In Its Proper
einai ctintatiihanieiciccinsctainasenninscrsascesceee 23
C. The Decision Of The Court of Appeals Falls
Squarely Within The Holding Of Shores v.
Sklar And The Unbroken Line Of Authority
Which Has Followed In its Wake..................... 26
D. The Court Of Appeals Did Not Establish An
Irrebutable Presumption Of Reliance In
Shores-Type “Fraud On the Market” Cases.... 29
iV
i
III. THE DISTRICT COURT AND THE COURT
OF APPEALS PROPERLY EXERCISED
THEIR DISCRETION UNDER 28 US.C.
§ 1292(b) IN CERTIFYING AND ACCEPT-
ING, RESPECTIVELY, THE CLASS ISSUE
FOR INTERLOCUTORY REVIEW AND, IN
ANY EVENT, THIS ISSUE HAS BEEN REN-
DERED MOOT BY THE ISSUANCE OF THE
CIRCUIT COURT'S DECISION ON THE
MERITS OF THE APPERAL...............c-coceccosseseseesees 29
CON CL UBIO ...ccccocccssccsssssssccscenssenascatoostenssosseccssccesscosenes 30
v
TABLE OF AUTHORITIES
Cases
American Construction Co. v. Jacksonville, Tampa &
Key West Ry. Co., 148 U.S. 372 (1893) .........eeeeeeee
Arthur Young & Co. v. United States District Court,
549 F.2d 686 (9th Cir. ), cert. denied, 434 U.S. 829
CR ET J sitesi biaiiiclednscinapbingdalidanasphdtiallpaininsiiatiinseenseess
Basic Inc. v. Levinson, 107 S.Ct. 1284 (1987), grant-
ing cert. to, 786 F.2d 741 ( 6th Cir. 1986).................
Bateman Eichler, Hill Richards, Inc. v. Berner, 472
Se ee cradles athe tcehetnduiscccntesnsensntnemeccees
Blackie v. Barrack, 524 F.2d 891 (9th Cir. 1975),
cert. denied, 429 U.S. 816 (1976) ..............ccccccccceeeeee
Bonner v. City of Prichard, 661 F.2d 1206 (11th Cir.
og | SEE AEA Se NR RE A ta a
Brotherhood of Locomotive Firemen & Enginemen v.
Bangor & Aroostook R.R. Co., 389 U.S. 327 (1967)
Dekro v. Stern Bros. & Co., 540 F. Supp. 406 ( W.D.
SU MPI alte co dietreeriatshepsceveensenenncstdnesindisentenannosscsees
Eisen v. Carlisle & Jacquelin, 417 U.S. 156 (1974)...
Eisenberg v. Gagnon, 766 F.2d 770 (3d Cir.), cert.
I ee te 0 FD P. canccsctnsncccsescscsteccenepessecee
Esplin v. Hirschi, 402 F.2d 94 (10th Cir. 1968), cert.
pe VEY
Fox v.- Prudent Resources Trust, 69 F.R.D. 74 (E.D.
i iar hcinincitccewiepbteapninntitnnsiantinlinesesuncace
Frankel v. Wyllie & Thornhill, Inc., 537 F. Supp. 730
es UE lacs d dies cadiiccnantinchidabslbnénnensewecnsces
General Telephone Co. of Southwest v. Falcon, 457
ek Se ailliidiiinslcksdidtathinkiiinnepnstiesidnesounsicarhonseccess
Green v. Wolf Corp., 406 F.2d 291 (2d Cir. 1968),
cert. denied, 395 U.S. 977 ( 1969) ...........cccccseeseeeeeeees
Hamilton-Brown Shoe Co. v. Wolf Bros. & Co., 240
al aca inched nile ahtsicisindnpance
Harris v. Union Electric Co., 787 F.2d 355 (8th Cir.
1986), cert. denied, No. 85-2036 (Oct. 6, 1986) ......
if
16-17
21,26
27
28
18,24,25,
27
26
15-16
26
13,25
18,21
21
22
26
24
18,25
17
27
In re Baldwin-United Corp. Litigation, MDL No.
581, M21-35 (CLB) (S.D.N.Y. June 27, 1986
Memorandum Opinion and Order Granting Class
Certification )
In re Home-Stake Production Co. Securities Litiga-
tion, 76 F.R.D. 351 (N.D. Okla. 1977)....................
In re Petro-Lewis Securities Litigation, [1984-85
Transfer Binder] Fed. Sec. L. Rep. (CCH)
1 91,899 (D. Colo. Dec. 24, 1984) 20. eeeeeeeee
Jenson v. Continental Financial Corp., 404 F. Supp.
RRR eee
Kennedy v. Tallant, 710 F.2d 711 (11th Cir. 1983) .....
Kirkpatrick v. J.C. Bradford & Co., 827 F.2d 718
Tg SRE Sat pie eee
Lipton v. Documation, Inc., 734 F.2d 740 (11th Cir.
1984), cert. denied, 469 US. ET
List v. Fashion Park, Inc., 340 F.2d 457 (2d Cir.),
cert. denied, 382 U.S. 811 (1965) ...........cccccecceereeeees
Miller v. Mackey Int’l Inc., 452 F.2d 424 (Sth Cir.
197'T ) .......cccersntonnnessosnsensessosenpncsasssstocnesesessssusncssssssoossees
ate terra eS METIS ss
Panzirer v. Wolf, 663 F.2d 365 (2d Cir. 1981),
vacated as moot after cert. granted, 459 U.S. 1027
C BGIEE } cccesesscssstesesestsenentstamininniiediilinismeniitaeetiamesnesscees
Peil v. Speiser, 860 F.2d 1154 (3d Cir. a
Rose v. Arkansas Valley Environmental & Utility
Authority, 562 F. Supp. 1180 (W.D. Mo. 1983)......
Ross v. A. H. Robins Co., 607 F.2d 545 (2d Cir.
1979), cert. denied, 446 U.S. 946 (1980) ...........000+--
Sanders v. John Nuveen & Co., 619 F.2d 1222 (7th
a Ra EE ERC eran an
Sanders v. Robinson Humphrey/ American Express,
Inc., 634 F. Supp. 1048 (N.D. Ga. 1986) ................
Sanders v. Robinson Humphrey/ American Express,
Inc., [1986-87 Transfer Binder] Fed. Sec. L. Rep.
(CCH) ¥ 92,880 (N.D. Ga. July 8, 1986) ...............
Seidman v. Stauffer Chemical Corp., {1986-87 Trans-
fer Binder] Fed. Sec. L. Rep. (CCH) 4 92,868 (D.
KADER, RIPUIP F scocecentnsereeccaciossshesitiionsnintnhateunnénscensnatenassene
—-
passim
26
Shankroff v. Advest, Inc., 112 F.R.D. 190 (S.D.N.Y.
REE SS ee Oe OO oO 19-20
Sharp v. Coopers & Lybrand, 70 F.R.D. 544 (E.D.
NEES SENATE ee ee ee 18,21-22
Shores v. Sklar, 647 F.2d 462 (Sth Cir. 1981) (en
banc), cert. denied, 459 U.S. 1102 ( 1983) ............... passim
Simon v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,
GE te ee Ca BED DP cccccctcccccenectecsccsetecncccccece “an
T. J. Raney & Sons, Inc. v. Fort Cobb Oklahoma
Irrigation Fuel Authority, 717 F.2d 1330 ( 10th Cir.
1983), cert. denied, 465 U.S. 1026 ( 1984) ............... 26,27
Vernon J. Rockler v. Graphic Enterprises, Inc., 52
Pe Se eS UPTO D cctcenetenetbissdlicctnsncectecccece 18
Westlake v. Abrams, 565 F. Supp. 1330 (N.D. Ga.
i ancciacinteiinlebashbalbiapencinilndsttidtemepsiatantnbennent pcscastipensoneens 25
Wigand v. Flo-Tek, Inc., 609 F.2d 1028 (2d Cir.
EET ELE SR A ce 17
STATUTES, RULES & REGULATIONS
pope ks ee 3
po, eT 2,3,13,29
Section 11 of the Securities Act of 1933, 15 U.S.C.
§ 77k ( 1982)...... A 3,8,10,13
Section 12(2) of the Securities Act of 1933, 15 U.S.C.
ke. Es © heh
Section 10( b) of the Securities Exchange Act of 1934,
ee) ee passim
Rule 10b-5, 17 C.F.R. § 240.10b-5 ( 1987)... passim
Rule 23 of the Federal Ruies of Civil Procedure ......... passim
EEL ee ee rE 17,22
OTHER AUTHORITIES
H.R. Rep. No. 1383, 73d Cong. 2d Sess. 11 ( 1934)... 28
L. Loss, Securities Regulation, 1430-32 (2d ed. 1961) 26
Note, Fraud On The Market—An Emerging Theory of
Recovery Under SEC Rule 106-5, 50 Geo. Wash. L.
eo ir iccianntipniectisbepbsanateninsetaonsnees 26
Note, The Fraud On The Market Theory, 95 Harv. L.
SESE RR eC iene 28
‘
No. 87-836
IN THE
OcTOBER TERM, |987
PAINEWEBBER GroupP, INC.,
Petitioner,
vs.
Tommy E. Parker, as Custodian for
KimMBeRLY M. Parker, and James L. SmITH,
Respondents.
ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
PETITION FOR WRIT OF CERTIORARI
Respondents Tommy E. Parker and James L. Smith
(“respondents”) respectfully request that the Court deny the
Petition for a Writ of Certiorari to the United States Court of
Appeals for the Eleventh Circuit ( the “Petition”) submitted by
Paine Webber Group, Inc. (“PaineWebber” or “petitioner”) to
review a judgment of the United States Court of Appeals for
the Eleventh Circuit which reversed in part, affirmed in part
and remanded an order of the United States District Court for
the Northern District of Georgia denying respondents’ motion
for class certification.
2
OPINIONS BELOW
The opinion of the United States Court of Appeals for the
Eleventh Circuit (App. Exhibit A)! is reported as Kirkpatrick v.
J.C. Bradford & Co., 827 F.2d 718 (11th Cir. 1987). The order
of the Court of Appeals denying PaineWebber’s petition for
rehearing and suggestion of rehearing en banc is not reported
and is set forth in the Appendix as Exhibit B. The order staying
the mandate of the Court of Appeals is not reported and is set
forth in the Appendix as Exhibit C.
The opinion of the United States District Court for the
Northern District of Georgia denying respondents’ motion for
class certification (App. Exhibit D) is reported as Sanders v.
Robinsqn Humphrey/ American Express, Inc., 634 F. Supp. 1048
(N.D. Ga. 1986). The District Court’s opinion denying re-
spondents’ motion for reconsideration, granting respondents’
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 (App. Exhibit E) is reported as
Sanders v. Robinson Humphrey/ American Express, Inc., { 1986-
87 Transfer Binder] Fed. Sec. L. Rep. (CCH) 4 92,880 (N.D.
Ga. July 8, 1986).
The order of the Court of Appeals accepting the appeal
pursuant to 28 U.S.C. § 1292(b) (1982) is not reported and is
set forth in the Appendix as Exhibit F.
JURISDICTION
The judgment of the Court of Appeals was entered on
September 15, 1987. (App. Exhibit A). Rehearing and
rehearing en banc were denied by order dated October 21,
1987. (App. Exhibit B). The mandate of the Court of Appeals
was stayed on November 17, 1987. (Appendix Exhibit C).
' Citations herein to material printed in the Appendix appear as either
“Appendix” or “( App. ).” Such citations are to the Appendix to the
Petition filed by PaineWebber on or about November 23, 1987.
3
Petitioner purports to invoke this Court’s jurisdiction pursuant
to 28 U.S.C. § 1254(1) (1982).
STATUTES AND RULES INVOLVED
The statutes and rules involved in the case are Sections | |
and 12(2) of the Securities Act of 1933, 15 U.S.C. §§ 77k, 77/
(2) (1982); Section 10(b) of the Securities Exchange Act of
1934, 15 U.S.C. § 78j(b) (1982); Securities and Exchange
Commission Rule 10b-5, 17 C.F.R. § 240.10b-5 (1987); Rule
23 of the Federal Rules of Civil Procedure; and 28 U.S.C.
§ 1292(b) (1982). (App. Exhibit G).
COUNTERSTATEMENT OF THE CASE
Introduction and Overview
Between January |, 1981 and February 6, 1984 (the “class
period”), PaineWebber disseminated a series of documents to
the investing public which failed to disclose numerous adverse
facts concerning the then-existing, extremely precarious finan-
cial condition of Petro-Lewis Corporation (“‘Petro-Lewis” or
the “Company”) and the numerous limited partnerships or-
ganized by the Company, facts about which PaineWebber was
fully aware. In these public documents, PaineWebber— which
underwrote the sale of partnership interests to public investors
such as respondents—falsely portrayed the partnerships as
entities which had highly valuable and proven oil and gas
reserves which would generate income to limited partners for
twelve or more years when, as PaineWebber well knew, Petro-
Lewis had borrowed heavily to sustain distributions to limited
partners and to repurchase limited partnership interests ten-
dered by investors under their redemption options. Paine Web-
ber—who as Petro-Lewis’ investment banker also orchestrated
public offerings of preferred stock and debt in an attempt to
salvage the Company—knew that Petro-Lewis’ borrowing
practices seriously jeopardized the partnerships’ holdings, yet
fearing a loss of the Company’s lucrative investment banking
————
4
business, PaineWebber continued to tout the limited partner-
ships as being virtually risk free, relatively liquid, and suitable
for individual retirement accounts and other conservative in-
vestments. Petitioner, whose senior management privately
discussed the dangerous financial condition of Petro-Lewis and
its partnerships, repeatedly reassured its account executives and
other “front line” personnel that PaineWebber’s “due dili-
gence” department had conducted detailed, ongoing in-
vestigations of the partnerships and stood behind those in-
vestments. Little did those individual brokers—and their
customers—know that at least one senior Paine Webber official,
in 1981, had labeled the Petro-Lewis partnership programs a
“Ponzi scheme,” and several others had secretly expressed
concern that candid disclosure of adverse facts about Petro-
Lewis would create a “run on the bank” by limited partners.
Knowing that Petro-Lewis’ very survival depended on the
Company’s ability to raise money through sales of new partner-
ship interests, PaineWebber suppressed any and all negative
information which might jeopardize those sales, and sold more
than $200 million of limited partnership interests during the
class period.
Generali Background ~
From 1970 through 1983, Petro-Lewis was the nation’s
largest seller of oil and natural gas “income funds.” These
programs raised money from investors, who became limited
partners, and used the proceeds to purchase producing oil and
gas properties. Sanders v. Robinson Humphrey/ American Ex-
press, Inc., 634 F. Supp. 1048, 1050 (N.D. Ga. 1986) ( App. D-
2).2 Petro-Lewis and PaineWebber lured new investors to the
Petro-Lewis partnership programs with enticements of stable
annual returns of 12% or more earned by previous partnerships,
and by the apparent liquidity provided by Petro-Lewis’ pledge
to repurchase any partnership interest tendered by investors.
Petro-Lewis formed a new partnership each month. As soon as
2 The Petro-Lewis partnerships conducted no drilling operations on the
properties. PaineWebber highlighted the elimination of the risks associated
with development drilling as one of the unique safety features of Petro-Lewis’
programs in the written sales literature which it distributed to public investors.
5
one monthly partnership “closed,” another partnership
“opened” for sale to investors. When subscriptions in an entire
partnership program were sold out, a new program was imme-
diately offered for subscription. The particular monthly part-
nership an investor joined was primarily a function of when his
or her subscription was accepted and the money invested, not
any choice of the investor. The average initial investment by a
limited partner was $8,600. Sanders, 634 F. Supp. at 1050
(App. D-2).
The partnership programs were primarily income-oriented
investments with only modest tax shelter features. Limited
partners were paid quarterly distributions which they could
either receive in cash or reinvest in new partnerships. Those
who chose to reinvest their distributions received partnership
interests in later partnerships. Cash distributions to the limited
partners began almost immediately after each partnership was
formed and were to continue for 10 to 15 years or more until
the wells were depleted. Except during unusual periods of
temporary cash shortages, funds to pay partnership dis-
tributions were supposed to come from profits realized from the
sale of oil and‘gas produced by the partnership properties.
Sanders, 634 F. Supp. at 1050 (App. D-2).
PaineWebber sold the partnership interests pursuant to
Sales Agreements with Petro-Lewis. In the Sales Agreements,
Paine Webber (identified as the “Dealer” ) expressly warranted
and represented as follows:
By accepting this Sales Agreement, each Dealer agrees
that all applications will be based and all sales of
interests will be made, solely on information con-
tained in the current prospectus. Upon request,
Distributor will furnish without charge additional
copies of the current prospectus in reasonable
quantity.
Paine Webber also represented and warranted that it would use
“only the prospectus relating to [the partnership program |] as it
is then currently effective” in connection with the sale of any
Petro-Lewis partnership interest, “and to make no offer of
6
interests unless such offer is preceded or accompanied by such a
current prospectus.”
PaineWebber received sales commissions of up to 7% on
each partnership interest sold, plus special “sales incentive
payments” when its aggregate sales exceeded a particular
dollar figure. These commissions far exceeded the commissions
it received on transactions involving similar types of securities.
Sanders, 634 F. Supp. at 1052-53 (App. D-6).
As noted above, crucial to the success of this marketing
scheme was the apparent steady flow of cash to the limited
partners commencing almost immediately after the formation
of the partnerships. Petro-Lewis and PaineWebber touted this
“regular, reasonably predictable pattern of distributions” in
prospectuses for the partnerships and in other written material
distributed to prospective investors. Investors hoping to take
advantage of those returns invested over $2 billion in various
partnerships established between January 1981 and February
1984. Sanders, 634 F. Supp. at 1050-53 (App. D-2 to 8).
Unbeknownst to these investors, however, the impression
of financial strength and success created by Petro-Lewis and
PaineWebber was wholly unfounded. This impression was
designed specifically to attract new investors, and to deter
existing partners from exercising their redemption options. The
truth was that by at least the beginning of 1981, Petro-Lewis
and its partnerships were experiencing serious financial
problems.
Petro-Lewis had paid premium prices for the partnership
properties and had borrowed heavily from banks to help
finance the acquisitions.? The funds to repay those loans, like
the cash distributions to the partners, were supposed to come
from the profits generated by the sale of oil and gas produced
by the partnership properties. However, the advent of the
world oil glut and attendant collapse of oil and gas prices in the
early 1980’s, coupled with, among other things, increased
3 The partnership properties were used as collateral to secure the bank
debt.
OO eee
7
operating costs and competition from other petroleum in-
vestment programs, resulted in a severe reduction in cash flow
‘from the partnership properties. These conditions put Petro-
Lewis in a serious cash bind and jeopardized the partnership
holdings. Nevertheless, in an effort to perpetuate the false
impression of financial strength and to continue paying cash
distributions, Petro-Lewis continued to borrow heavily from
banks (thereby further encumbering the partnership proper-
ties) and shifted funds among the accounts of various affiliated
companies. Meanwhile, PaineWebber accelerated its sales
efforts with respect to the partnership interests. See Sanders,
634 F. Supp. at 1050-53 (App. D-2 to 6).
In 1984, the charade collapsed. Petro-Lewis suspended its
partnership syndication operations and sold almost one-third of
the oil and gas reserves held by the partnerships in order to
achieve a $1 billion reduction in bank debt. Petro-Lewis also
cut distributions to limited partners, imposed a cap on redemp-
tions of partnerships, and reduced the prices at which it would
repurchase those interests to a fraction of previous levels.
Investors who elected to retain their partnership interests now
hold, instead, units in a royalty trust, which was created as part
of a complicated settlement of a securities class action against
Petro-Lewis and its principal officers and directors arising out of
their role in the scheme described above. See In re Petro-Lewis
Securities Litigation, [1984-85 Transfer Binder] Fed. Sec. L.
Rep. (CCH) 491,899 (D. Colo. 1984). Even taking into
account the proceeds of the Perro-Lewis settlement, most
members of the class have lost more than half of their original
investment. Sanders, 634 F. Supp. at 1050, 1052 (App. D-2,
6).
Course Of Proceedings And Disposition In The Courts Below
On February 14, i985, respondents filed a Class Action
Complaint (the “Complaint” )4¢ against Paine Webber for viola-
4 The Complaint subsequently was amended in respects not material to
the issues raised in the Petition.
8
tions of the federal securities laws and common law arising out
of its participation in the scheme outlined above. The Com-
plaint asserts claims against PaineWebber under Sections |!
and 12(2) of the Securities Act of 1933 (the “Securities Act”),
15 U.S.C. §§ 77k and 77] (2), Section 10(b) of the Securities
Exchange Act of 1934 (the “Exchange Act”), 15 U.S.C.
§ 78j(b), Rule 10b-5 promulgated thereunder, 17 C.F.R.
§ 240.10b-5 (1987), and for common law fraud, fraudulent
concealment, negligence and breach of fiduciary duty. The
thrust of the Complaint is that PaineWebber violated these
statutory and common law provisions: |) by disseminating
virtually identical prospectuses for the partnership programs
during the class period which omitted materially adverse
information concerning Petro-Lewis and its partnerships; and
2) by perpetrating a scheme and common course of conduct at
the highest levels of PaineWebber’s corporate management
which had the purpose and effect of suppressing the truth about
the precarious financial condition of Petro-Lewis and its part-
nership programs. Kirkpatrick v. J.C. Bradford & Co., 827 F.2d
718, 721 (11th Cir. 1987) (App. A-5).
Among the material information which respondents con-
tend was omitted from the prospectuses was the following:
1. That the partnership properties were over-
leveraged;
2. That Petro-Lewis had engaged in a protracted
pattern of bolstering cash distributions to previous partner-
ships by paying those distributions not from cash from
operations but, rather, with borrowed funds;
3. That distributions were being inflated in order to
ensure that sales in new partnerships continued;
4. That declines in the price of oil would make it
impossible to adequately service the partnerships’ debt and
would result in forced liquidation of the partnership hold-
ings, rendering the investments little more than a rank
gamble on the price of oil;
5. That Petro-Lewis utilized improper or highly ques-
tionable accounting practices and policies; and
9
6. That the repurchase prices which Petro-Lewis
would pay to limited partners who tendered their interests
under the redemption options were extremely volatile, and
that Petro-Lewis lacked sufficient funds to handle redemp-
tions, which were coming at steadily increasing rates.5
The conspiracy and common course of conduct about
which respondents complain is alleged to have been per-
petrated at the highest levels of PaineWebber’s corporate
management. Respondents do not complain of, nor have they
ever asserted any claim based upon, any oral statements made
to them or any other class member by any individual
Paine Webber broker. Kirkpatrick, 827 F.2d at 721, 724 (App.
A-5, 10 to 11). See also Sanders, 634 F. Supp. at 1053-54
(App. D-6 to 9).
The hearing on respondents’ motion for class certification
took place on February 27, 1986 following briefing and dis-
covery. In its papers opposing the motion, PaineWebber
consistently mischaracterized respondents’ case to the District
Court, arguing that it was one based solely on “oral mis-
representations.” This self-serving characterization was reached
only by totally ignoring respondents’ Complaint in this case,
and through a gross distortion of the record which had been
developed on the class issue.
5 Significantly, seven months after respondents filed their original Com-
pilaint in this action, the Securities and Exchange Commission (“SEC”) filed a
complaint against Petro-Lewis and others for alleged violations of the federal
securities laws. In that action, the SEC charged that the prospectuses for the
Petro-Lewis partnership programs contained the same material omissions and
nondisciosures as those alleged in the Complaint in this action.
6 With the exception of filing transcripts of respondents’ depositions,
Paine Webber offered no evidence at the hearing in opposition to the class
motion. Rather, petitioner’s entire presentation consisted of the legal
arguments of its counsel. PaineWebber, which requested the opportunity to
present evidence at the hearing in the first place, has overstated both the
nature and importance of the “evidentiary hearing”.
Respondents made detailed written submissions to the District Court on
the class motion prior to the hearing. This included, in addition to extensive
briefs, numerous items of documentary evidence and other factual material.
The record also consists of documents filed with the District Court in
connection with PaineWebber’s earlier (and largely unsuccessful) dismissal
motions.
10
In an order dated March 27, 1986, the District Court
denied respondents’ motion for class certification. The District
Court refused to give separate consideration to class treatment
of respondents’ Securities Act claims. Indeed, the District Court
subsequently would rule that it could ignore those claims in
their entirety. Sanders v. Robinson Humphrey/ American Ex-
press, Inc., [1986-87 Transfer Binder] Fed. Sec. L. Rep.
(CCH) 4 92,880 at 94,269 (N.D. Ga. 1986) (App. E-3).
Turning to respondents’ Exchange Act claims, the District
Court specifically found that the case “clearly” satisfied the
“commonality” requirement of Rule 23(a)(2) of the Federal
Rules of Civil Procedure, because all members of the class
shared the following numerous common legal and factual
issues:
(1) whether the prospectuses and other sales liter-
ature distributed by the defendants to the plaintiffs
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 con-
cealed material information about the precarious
financial condition of Petro-Lewis and its partner-
ships; (3) whether the defendants concealed the truth
about the historical performance of the Petro-Lewis
partnerships; (4) whether the defendants mis-
represented 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 pro-
grams during the class period.
Sanders, 634 F. Supp. at 1056 (App. D-13). Similarly, the
District Court found that the “typicality” requirement of Rule
23(a)(3) was easily satisfied in the case in light of the
allegations that Paine Webber had engaged in a common course
11
of conduct which affected each member of the class in the same
manner.
The complaints allege that the defendant 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. Even though class members
purchased different Petro-Lewis limited partnership
interests, the plaintiffs allege that the defendants
engaged in a uniformly fraudulent course of conduct,
disseminated virtually identical faise prospectuses,
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 sch a
common course of conduct, courts consistently have
found no bar to class certification... .
Sanders, 634 F. Supp. at 1057 (App. D-15) (emphasis added ).
When it reached the “predominance” element of Rule
23(b)(3), however, the District Court took an entirely different
view of the case. In a totally inexplicable reversal of position,
and disregarding its own findings on “commonality” and
“typicality,” the District Court inconsistently ruled that re-
spondents’ Section 10(b) and Rule 10b-5 claims were
grounded solely upon “oral misrepresentations” between mem-
bers of the class and their individual brokers—a formulation of
the case which respondents’ had neither pleaded nor intend to
prove. The District Court adopted that characterization despite
the absence from the Complaint of any allegation that respond-
ents’ claims were grounded on any such oral statements. In this
connection, the District Court declared that it was not even
obligated to “look at,” let alone accept as true, the allegations
of the Complaint for purposes of ruling on the “predominance”
issue. Sanders, {1986-87 Transfer Binder] { 92,880 at 94,271
(App. E-10).”7 Having thus recast the case, the District Court
7 Respondents simply are unable to reconcile this statement with the
District Court’s discussion of the “commonality” and “typicality” elements of
Rule 23, which involved a proper summary of respondents’ claims in this case.
*
. x
12
ruled that class certification of the Section 10(b) and Rule 10b-
5 claims would be appropriate only if respondents were able to
demonstrate that PaineWebber had engaged in a uniform
“presentation” or standardized “sales pitch” directed to each
and every member of the class. Finding the “evidence” on this
issue to be deficient,® the District Court refused to grant class
action status to respondents’ Exchange Act claims. Sanders,
634 F. Supp. at 1061-63 (App. D-23 to 27).
The District Court, in a position which has been soundly
rejected by virtually every court which has addressed the issue,?
also ruled that the mere possibility that each member of the
class might have to prove his or her individual reliance
constituted a per se bar to class certification. Sanders, 634 F.
Supp. at 1061, 1063 (App. D-23, 27). The District Court,
therefore, focused its inquiry on whether reliance may be
presumed under the “fraud on the market” theory adopted in
Shores v. Sklar, 647 F.2d 462 (Sth Cir. 1981) (en banc), cert.
denied, 459 U.S. 1102 (1983). Ignoring numerous paragraphs
of respondents’ Complaint which contain this precise allegation,
the District Court held that respondents “do not allege that the
securities would not have been sold had the misrepresentations
not been present”—a necessary predicate to the Shores pre-
sumption. Sanders, 634 F. Supp. at 1063 (App. D-28)
(emphasis added). Based on this and its other findings, the
District Court denied class certification.
Respondents filed a timely motion fer reconsideration
which, in an order dated July 8, 1986, the District Court also
denied. Sanders, { 1986-87 Transfer Binder] 4 92,880 at 94,267
(App. Exhibit E). As they had done previously, respondents
pointed out, in their motion for reconsideration, that they had,
indeed, clearly and unambiguously alleged in their Complaint
that “but for” the presence of the misrepresentations and
omissions the partnership interests could not have been sold.
Apparently mindful of its previous erroneous ruling on this
8 This is hardly surprising. Since respondents were not basing their
claims on any such oral misrepresentations, it was unnecessary to offer any
evidence of any standardized “sales pitch” at the class certification hearing.
% See note 12 infra and accompanying text.
13
issue, the District Court, in its July 8th order, shifted its analysis
to an evaluation of the “support” for that allegation. Paying
mere lip service to Eisen v. Carlisle & Jacquelin, 417 U.S. 156
(1974), the District Court conducted a selective analysis of
what it considered to be the “evidence” for that allegation and
determined that it was insufficient to support the theory.
Sanders, {1986-87 Transfer Binder] { 92,880 at 94,271-72
(App. E-9 to 11). However, the District Court specifically
found that the issue of class certification involved several
controlling questions of law about which substantial grounds
existed for differences of opinion and that an immediate appeal
from its two orders would materially advance the ultimate
termination of the litigation. Sanders, [1986-87 Transfer
Binder] 4 92,880 at 92,274-75 ( App. E-17 to 19). Accordingly,
the District Court certified the class issue for interlocutory
appeal pursuant to 28 U.S.C. § 1292(b) (1982). The Eleventh
Circuit Court of Appeals accepted the appeal in an order dated
August 21, 1986 (App. Exhibit F).
In a unanimous opinion, the Court of Appeals reversed the
denial of class certification with respect to respondents’ federal
securities law claims. The Court of Appeals ruled that the
District Court had erred in refusing to give any consideration
whatsoever to possible class treatment of respondents’ claims
under Sections 11 and 12(2) of the Securities Act. Kirkpatrick,
827 F.2d at 725-26 (App. A-12 to 13).
Turning to respondents’ Section 10(b) and Rule 10b-5
claims, the Court of Appeals observed that the District Court’s
entire analysis of the “predominance” issue was “based directly
on [its] interpretation of the substance of the plaintiffs’ claims.”
Kirkpatrick, 827 F.2d at 721 (App. A-4). Accordingly, the
Eleventh Circuit reviewed respondents’ Complaint to determine
whether the District Court had properly construed those claims.
The Court of Appeals concluded that the District Court had
not. The Eleventh Circuit unanimously held that the District
Court had “mischaracterized” the case as one involving
“primarily individualized oral representations rather than a
common scheme by the defendants toward the plainuff pur-
chasers.” Kirkpatrick, 827 F.2d at 722, 725 (App. A-6, 11).
Having placed the case in its proper context, the Court of
14
Appeals carefully reviewed the entire record in the case, and
determined that the “predominance” requirement of Rule
23(b)(3) was easily satisfied. Kirkpatrick, 827 F.2d at 724
(App. A-10). The Eleventh Circuit, following a long and
unbroken line of authority, held that, “[i]Jn view of the
overwhelming number of common factual and legal issues
presented by plaintiffs’ misrepresentation claims, ... the mere
presence of the factual issue of individual reliance could not
render the claims unsuitable for class treatment.” Kirkpatrick,
827 F.2d at 724-25 (App. A-11). The Eleventh Circuit also
held that the case fell squarely within the principles announced
in Shores v. Sklar, and that respondents were entitled to a
presumption of reliance afforded by the “fraud on the market”
theory recognized in that case. In so doing, the Court of
Appeals ruled that the District Court could not, as it had done,
base its findings on class certification “upon nothing other” than
the District Court’s assessment of the likelihood of success on
the merits of respondents’ claims. Kirkpatrick, 827 F.2d at 723
(App. A-7) (emphasis added).
Having corrected the numerous legal and factual errors
which plagued the District Court’s orders, the Court of Appeals
remanded the class issue to the District Court for application of
the correct standards. Kirkpatrick, 827 F.2d at 720, 728 ( App.
A-2, 17).
SUMMARY OF ARGUMENT
The issues raised in the Petition present no novel or unique
questions of constitutional or statutory interpretation worthy of
review by this Court. The decision of the Court of Appeals is
firmly rooted in the precedents of this Court, follows a long and
unbroken line of authority in the Eleventh Circuit, and is fully
consistent with the case law in other Circuits. The alleged
“conflict” which PaineWebber strives mightily to create is
nonexistent.
‘© The other broker-dealer defendants in the companion cases to this one
also have filed petitions for writs of certiorari to review the Eleventh Circuit's
decision. See Robinson Humphrey/ American Express, Inc., et al. v. Sanders,
No 87-835 ( petition filed November 23, 1987) and J. C. Bradford & Co. v.
Kirkpatrick, et al., No. 87-932 ( petition filed December 7, 1987).
15
REASONS FOR DENYING THE PETITION
L
THE ISSUES RAISED IN THE PETITION ARE NOT RIPE
FOR DETERMINATION WITH RESPECT TO ALL OF
THE QUESTIONS PRESENTED FOR REVIEW
As noted above, the Court of Appeals neither granted nor
denied class certification. Rather, the Eleventh Circuit re-
manded the class issue to the District Court for further proceed-
ings consistent with its decision. Thus, the class motion remains
undecided. Under these circumstances, it is unnecessary for this
Court to exercise its certiorari jurisdiction at this time to render
what essentially would be an advisory opinion.
In Brotherhood of Locomotive Firemen and Enginemen v.
Bangor & Aroostook R.R. Co., 389 U.S. 327 (1967), the Court
denied a petition for writ of certiorari where the court of
appeals had remanded the case to the district court for further
proceedings. In Brotherhood, the district court had issued a
temporary restraining order against a union prohibiting a strike.
The union nevertheless went on strike, and the district court
entered contempt orders, imposing substantial fines for alleged
violations of its restraining order. On appeal, the court of
appeals ruled on many of the legal issues presented to it, but
remanded the case to the district court to determine whether
there had been substantial compliance with the restraining
order and, if not, whether any such violation of the order was
deliberate and flagrant. Bangor & Aroostook R.R. Co. v.
Brotherhood of Locomotive Firemen and Enginemen, 380 F.2d
570 (D.C. Cir. 1967). The union sought certiorari to review the
adverse rulings made by the court of appeals. This Court,
noting that the court of appeals had remanded the case, held
the issues were “not yet ripe for review by this Court,” and
denied the petition, 389 U.S. at 328.
Just as the court of appeals in Brotherhood did not make
findings on critical issues but, rather, remanded the case to the
District Court for further proceedings, so the Eleventh Circuit
here did not certify a plaintiff class but, rather, remanded the
case to the District Court for further findings. The issues
16
involved in this case, as in Brotherhood, simply are “not yet ripe
for review.”
There is no particular exigency which would attend the
denial of certiorari in this case. PaineWebber will be free to
challenge, as part of the normal appellate process after final
judgment, any class which the District Court ultimately might
certify in this case. In the interim, numerous developments
might occur which could significantly alter or entirely moot the
issues raised in the Petition. For example, the District Court
might certify a class different from the class pleaded in respond-
ents’ Complaint. The District Court also may subsequently
alter or amend any certification order which it might enter in
this case. See Fed. R. Civ. P. 23(c)(1) (district court retains
authority to alter or amend a class order until a “decision on the
merits”). The jury may return a verdict in favor of PaineWeb-
ber on the merits of respondents’ claims, thereby effectively
mooting all of the issues raised-in the Petition.'' The issues
simply are entirely too distant and speculative to warrant
review at this time.
As the Court held almost a century ago in American
Construction Co. v. Jacksonville, Tampa & Key West Ry. Co.,
148 U.S. 372 (1893):
Whether an interlocutory order may be separately
reviewed by the appellate court in the progress of the
suit, or only after and together with the final decree, is
matter of procedure rather than of substantive right;
and many orders made in the progress of a suit become
quite unimportant by reason of the final result or of
intervening matters. Clearly, therefore, this court
should not issue a writ of certiorari to review a decree
of the circuit court of appeals on appeal from an
interlocutory order, unless it is necessary to prevent
extraordinary inconvenience and embarrassment in the
conduct of the cause.
11 Indeed, in that event, Paine Webber undoubtedly would argue in favor
of maintaining a class so that it could receive the res judicata benefit of any
such favorable decision on liability.
17
Id. at 384 (emphasis added). The Court reaffirmed these
principles two decades later in Hamilton-Brown Shoe Co. v.
Wolf Bros. & Co., 240 U.S. 251 (1916), when it stated:
[ Certiorari] is a jurisdiction to be exercised sparingly,
and only in cases of peculiar gravity and general
importance, or in order to secure uniformity of deci-
sion .... And except in extraordinary cases, the writ is
not issued until final decree .... The decree that was
sought to be reviewed by certiorari at complainant’s
instance was not a final one, a fact that of itself alone
furnished sufficient ground for the denial of the appli-
cation. ...
Id. at 258 (emphasis added) (citations omitted). See also
Supreme Court Rule 17.1. Here, review of the class issue
should await not just a ruling on the class motion itself, but final
judgment in this case.
There is another, equally compelling, reason for denying
the Petition. The centerpiece of PaineWebber’s argument
unquestionably is its frontal assault on the “fraud on the
market” theory enunciated in Shores v. Sklar. While that
theory may have some bearing on some of respondents’ claims,
it is undisputed that the “fraud on the market” theory is not
implicated at all with respect to several of respondents’ other
claims. For example, as noted above, among the determina-
tions made by the Court of Appeals was its ruling that the
District Court abused its discretion by failing to give “separate
consideration” to class certification of respondents’ claims
under Sections 11 and 12(2) of the Securities Act. See
Kirkpatrick, 827 F.2d at 726 (App. A-12 to 13). The Eleventh
Circuit remanded this issue to the District Court for such a
determination. That determination, however, concededly does
not and will not involve any consideration of the “fraud on the
market” theory, since reliance simply is not an issue with
respect to those claims. See, e.g., Shores v. Sklar, 647 F.2d at
470 n.7; Sanders v. John Nuveen & Co., 619 F.2d 1222, 1225
(7th Cir. 1980); Wigand v. Flo-Tek, Inc., 609 F.2d 1028, 1034
(2d Cir. 1979). Similarly, the Court of Appeals ruled that the
District Court “improperly found that the plaintiffs’ Rule 10b-
18
5(2) misrepresentation claims were not suited for class treat-
ment.” Kirkpatrick, 827 F.2d at 724 (App. A-10). In so doing,
the Court of Appeals held that “the mere presence of the
factual issue of individual reliance could not render the claims
unsuitable for class treatment.” Kirkpatrick, 827 F.2d at 724-25
(App. A-11).12 Thus, respondents need not rely on the pre-
sumption of reliance afforded by the “fraud on the market”
theory for class certification of their Rule 10b-5(2) mis-
representation claims. That theory, under the circumstances of
this case, is simply inapplicable to those claims.
In summary, the District Court, on remand, must recon-
sider the issue of class certification irrespective of the outcome
of the issues raised in the Petition. Under these circumstances,
granting the writ will serve merely to the delay resolution of this
case without any concomitant contribution to the preservation
of judicial resources. To the contrary, the judicial process will
be ill-served by such piecemea!, fragmented litigation.
12 This principle has received such widespread and uniform acceptance
by the Circuits that it is no longer subject to serious dispute. See, ¢.z.,
Eisenberg v. Gagnon, 766 F.2d 770, 786 (3d Cir.), cert. denied, 106 S.Ct. 342
(1985); Blackie v. Barrack, $24 F.2d 891, 902 (9th Cir. 1975), cert. denied,
429 U.S. 816 (1976); Green v. Wolf Corp., 406 F.2d 291, 301 (2d Cir. 1968),
cert. denied, 395 U.S. 977 (1969). As the Second Circuit observed in Green:
Wolf earnestly argues that each person injured must show that he
personally relied on the misrepresentations in order to recover and
thus any common issues of misrepresentations do not predominate
over the individual questions of reliance. Even if Wolf is correct in
its assertion of the need for proof of reliance, and we express no
views on that issue, we must still reject the argument. Carried to
its logical end, it would negate any attempted class action under
Rule 10b-5, since as the District Courts have recognized, reliance
is an issue lurking in every 10b-5 action.
406 F.2d at 301. Accord, In re Home-Stake Production Co. Securities
Litigation, 76 F.R.D. 351, 372 (N.D. Okla. 1977); Sharp v. Coopers &
Lybrand, 70 F.R.D. 544, 547-48 (E.D. Pa. 1976); Vernon J. Rockler v.
Graphic Enterprises, Inc., 52 F.R.D. 335, 345-46 (D. Minn. 1971).
19
IL.
THE DECISION OF THE COURT OF APPEALS IS
FIRMLY ROOTED IN WELL-SETTLED PRINCIPLES OF
LAW AND PROCEDURE AND IS FULLY CONSISTENT
WITH EXISTING PRECEDENT
A. The Court Of Appeals Properly Concluded That The
District Court, In Ruling On A Motion For Class Certifi-
cation, Was Not Permitted To Disregard The Allegations
Of Respondents’ Complaint And Recharacterize The Case
In A Manner Which Respondents Neither Pleaded Nor
Intend To Prove
The Court of Appeals—far from according blind deference
to respondents’ Complaint, as petitioner suggests—merely held
that the District Court could not disregard respondents’ Com-
plaint in its entirety and unilaterally reformulate respondents’
case in a manner which they neither pleaded nor intend to
prove. The Eleventh Circuit adopted a view of the case which
the District Court itself had adopted in analyzing the “com-
monality” and “typicality” requirements of Rule 23—one
grounded on a common course of fraudulent conduct which
affected each member of the class in the same manner, and
involving widely distributed uniform written material. The
Court of Appeals held that the evidence presented both prior to
and during the class certification hearing, viewed in its proper
context, supported certification of the Section 10(b) and Rule
l( 5 claims. The Court of Appeal’s decision is legally correct,
factually sound, and does not merit review by this Court. One
need only read respondents’ Complaint (something which the
District Court stated it was not required to do) to reach the
same conclusion.
PaineWebber has only itself to blame for leading the
District Court astray through its persistent mischaracterizations
of respondents’ case. Such tactics frequently are employed by
those who would deny any relief to a class of defrauded
investors. Typical is Shankroff v. Advest, Inc., 112 F.R.D. 190
(S.D.N.Y. 1986). Shankroff is particularly instructive, for it
involves identical claims against another brokerage firm—
20
Advest, Inc.—which sold the Petro-Lewis partnerships. The
court in Shankroff granted plaintiff's motion for class certifica-
tion in that case and (unlike the District Court here), refused to
succumb to the arguments of defense counsel that it reformulate
plaintiffs case:
Advest contends that common questions of law or fact
neither exist nor predominate. Advest maintains, first,
that there is no common nexus between the different
Petro-Lewis partnerships, which are described in a
number of different prospectuses; and second, that
each potential class member’s claim is distinct because
the alleged frauds are based on oral, not written,
representations. Thus, Advest argues, the nonuni-
formity of the representations characterize the issues
as highly individual in nature.
Advest’s argument, however, mistakes plaintiff’s claim.
The premise of plaintiff's complaint is that Advest,
whose business consists of analyzing investment pros-
pects and providing financial advice to its clients,
engaged in a “course of conduct” designed to encour-
age investment in Petro-Lewis limited partnerships
while failing to disclose Petro-Lewis’ deplorable
financial condition. Where the facts as alleged show
that defendant’s course of conduct concealed material
information from an entire putative class, the com-
monality requirement is met.
Since plaintiffs allegations focus on overall manage-
rial decisions which affected all Advest clients, ques-
tions of oral representations or individual reliance do
not overwhelm the issues common to the class.
112 F.R.D. at 193 (citations omitted). To the same effect is Jn
re Baldwin-United Corp. Litigation, MDL No. 581, M21-35
(CLB) (S.D.N.Y., June 27, 1986 Memorandum Opinion and
Order Granting Class Certification ).13 There, the same defen-
13 A copy of the decision in Baldwin-United, which is unreported, is
included in the Appendix hereto (““Res. App.”) as Exhibit A.
21
dant involved in this case—Paine Webber—attempted to defeat
class certification by using the same, time-worn argument that
the claims in that case were grounded upon oral mis-
representations.'4 The court gave that argument short shrift,
and certified the class. (Resp. App. A-4 to 7).
As the Eleventh Circuit specifically found, the focus of this
case is on the prospectuses and other written material dis-
tributed to members of the class and on the fraudulent conduct
of PaineWebber’s senior management, nor on any ancillary oral
statements made by individual PaineWebber brokers to their
clients.15 Under such circumstances, courts have uniformly
held that mere presence of oral statements will not render
individual questions of reliance predominate over the common
issues of fraud and materiality. See, e.g., Kennedy v. Tailant,
710 F.2d 711, 717-18 (llth Cir. 1983) (presence of oral
statements does not defeat certification since “substance of the
oral communications... is not an issue in the suit.”); Esplin v.
Hirschi, 402 F.2d 94, 97 (10th Cir. 1968), cert. denied, 394 U'S.
928 (1969) (“[u]ndoubtedly the possibility exists that there
will be questions of individual oral misrepresentations to each
of the potential plaintiffs,” but “having alleged ... that there
was omissions and half truths common to all purchasers . . . it is
apparent that the issue of liability ... was to be the same as to
all purchasers”); Arthur Young & Co. v. United States District
Court, 549 F.2d 686, 695 (9th Cir.) cert. denied, 434 U.S. 829
(1977) (alleged reliance on oral statements was of “question-
able evidentiary significance for purposes of making a Rule 23
determination” in case involving primarily written mis-
representations ); Eisenberg v. Gagnon, 766 F.2d 770, 786 (3d
Cir.), cert. denied, 106 S.Ct. 342 (1985) (denial of class
certification under similar facts was an “abuse of discretion”);
Sharp v. Coopers & Lybrand, 70 F.R.D. 544, 548 (E.D. Pa.
14 The products involved in Baldwin-United were annuity-type securities
sold to the public through PaineWebber’s network of account executives.
'S The Eleventh Circuit also specifically found that the record in this case
was devoid of any evidence that class members were even exposed to
differing oral communications, let alone that any such communications
“varied materially from the misleading information alleged to have been
disseminated generally as a result of the defendants’ common schemes.”
Kirkpatrick, 827 F.2d at 724 (App. A-10). This is uncontroverted.
22
1976) ( presence of oral statements does not defeat certification
when claims based on uniform written documents); Fox v.
Prudent Resources Trust, 69 F.R.D. 74, 82 (E.D. Pa. 1975)
( possible variations in oral statements made to limited partners
in oil and gas investment programs did not defeat class
certification when a fraudulent prospectus was also the basis of
plaintff’s claim); In re Home-Stake Production Co. Securities
Litigation, 76 F.R.D. 351, 369-73 (N.D. Okla. 1977) (same);
Jenson v. Continental Financial Corp., 404 F. Supp. 806, 813
(D. Minn. 1975) (same); Mulcahey v. Petrofunds, 79 F.R.D.
272, 278-80 (S.D. Tex. 1978) (same).
The Simon case, relied upon so heavily by Paine Webber, is
so easily distinguishable that it has virtually no precedential
value beyond its limited facts. (See Petition at 15, discussing
Simon v. Merrill Lynch, Pierce, Fenner & Smith, Inc.., 482 F.2d
880 (Sth Cir. 1973)). In Simon, the plaintiff purchased the
securities entirely on the basis of information provided to him
by a corporate insider, and, admittedly, did not rely upon any
representations by the defendant broker. Thus, the court quite
properly found that the case involved “unique” oral statements
which were not common to the class. Here, by contrast, any
oral statements were based on standardized written materials
and were merely ancillary to those documents, a distinction
which the Simon court specifically noted would make class
treatment appropriate. Jd. at 882-83.
These courts have adopted a common sense approach, and
recognize that it is the rare securities transaction which is not
accompanied by some type of oral communication between an
investor and his or her broker. Adoption of a per se bar to class
certification whenever a securities transaction involves oral
communications—the very position advocated by Paine Webber
and adopted by the District Court here—would totally evisce-
rate the class action device in the securities context. It is
undoubtedly for this reason that the courts have consistently
rejected such an approach.
Straining to bring this case within one of the categories of
Supreme Court Rule 17, PaineWebber, grasping for straws,
argues that there is a “direct conflict” between the Eleventh and
23
Fifth Circuits over the issue of class certification of claims
arising under Section 10(b) and Rule 10b-5. (Petition at 14-
16). PaineWebber contends that class treatment of such claims
is appropriate only if plaintiffs are able to demonstrate a
“uniform sales pitch” or other standardized presentation to the
class. This argument, of course, is a replay of the same false
premise which PaineWebber urged on the District Court and
which the Eleventh Circuit expressly rejected—i.e., that re-
spondents’ claims in this case are grounded on “oral mis-
representations”. In this connection, PaineWebber apparently
refuses to recognize the difference between “oral representa-
tions” and “oral misrepresentations.” The former may be
entirely consistent with the written—materials and their mere
presence in a case, as the Eleventh Circuit found here and as the
cases cited previously uniformly hold, will not defeat certifica-
tion. Oral misrepresentations, by contrast, may give rise to
liability under the federal securities laws, and present a
problematic situation for class certification, i/—but only if—the
class’ claims are grounded on those oral misstatements. In those
types of cases, the plaintiff must come forward with evidence of
a standardized sales pitch in order to satisfy the requisite
“commonality” and “predominance” elements of Rule 23.
That is not this case. There is no conflict.
B. The Court Of Appeals Did Not Ignore The Evidence At
The Class Hearing But, Rather, Viewed The Entire
Record In Its Proper Context
PaineWebber argues that the Court of Appeals dis-
regarded the evidence presented at the class hearing and based
its decision on the class issue solely on “the four corners of the
[C]omplaint.” (Petition at 12). An examination of the Elev-
enth Circuit’s decision belies this contention.
The Eleventh Circuit was mindful of the necessity, in
particular cases, of looking beyond the face of pleadings in
connection with the class action determination to see whether
the requirements of Rule 23 have been satisfied. The Eleventh
24
Circuit’s position on this issue—fully consistent with the prece-
dents of this Court—could not be more clear:
Certainly, as the [District Court] noted in its order, a
court may look beyond the allegations of the com-
plaint in determining whether a motion for class
certification should be granted.
Kirkpatrick, 827 F.2d at 722 (App. A-7), citing General
Telephone Co. of Southwest v. Falcon, 457 U.S. 147 (1982).
Indeed, the Eleventh Circuit specifically recognized that such
inquiries—such as depositions of the named plaintiffs—
routinely are employed in connection with the “adequacy” and
“typicality” determinations of Rule 23(a). Kirkpatrick, 827
F.2d at 723 (App. A-7).
Here, the decision of the Court of Appeals, on its face,
reveals careful consideration of the entire record in this case,
including the evidence offered at the class hearing. The
Eleventh Circuit simply viewed the record differently than did
the District Court, a view which gave proper recognition to the
claims as pleaded by respondents, not as unilaterally reformu-
lated by the court below at the behest of PaineWebber. In this
connection, the following observation in Blackie v. Barrack, 524
F.2d 891 (9th Cir. 1975), cert. denied, 429 US. 816 (1976) is
instructive:
[T]he district judge is necessarily bound to some
degree of speculation by the uncertain state of the
record on which he must rule. An extensive eviden-
tiary showing of the sort requested by defendants is
not required. So long as he has sufficient material
before him to determine the nature of the allegations,
and rule on compliance with the rule’s requirements,
and he bases his ruling on that material, his approach
cannot be faulted because plaintiffs’ proof may fail at
trial. Of course, whether he applied correct legal
principles in making the ruling, and whether the ruling
was within the permissible boundaries of the discretion
vested in him, is another question....
Id. at 901 (emphasis added ).
25
Furthermore, as the Eleventh Circuit specifically found, the
District Court—far from conducting a simple inquiry into the
merits to assist it in understanding the class issues—instead
evaluated the evidence and based its class determination “upon
nothing other than the [District Court]’s assessment of the
plaintiffs’ likelihood of success on the claims.” Kirkpatrick, 827
F.2 at 723. (App. A-7) (emphasis added). In essence, the
District Court, at the class certification stage, demanded not
merely factual support for respondents’ claims but virtually
conclusive evidence of petitioner’s guilt. The Eleventh Circuit
properly held that such a weighing of the evidence constituted
an impermissible intrusion into the merits. 16
In any event, even if the Court of Appeals, as PaineWeb-
ber complains, took a “deferential view” of respondents’ Com-
plaint (Petition at 5), such an approach would have been
entirely consistent with the cases which hold that the substan-
tive allegations of the complaint must be accepted as true for
purposes of ruling on a class motion. See, e.g., Blackie v.
Barrack, 524 F.2d at 901 & n.17; Miller v. Mackey Int'l Inc.,
452 F.2d 424, 427-28 ( Sth Cir. 1971); Green v. Wolf Corp., 406
F.2d 291, 294 n.1 (2d Cir. 1968), cert. denied, 395 U.S. 977
(1969). The correct rule was summarized in Westlake v.
Abrams, 565 F. Supp. 1330, 1337 (N.D. Ga. 1983), where the
court stated:
[T]here is absolutely no support in the history of Rule
23 or legal precedent for turning a motion under Rule
23 into a Rule 12 motion to dismiss or a Rule 56
motion for summary judgment by allowing the district
judge to evaluate the possible merits of the plaintiff’s
claims at this stage of the proceedings.
Id. (emphasis added) (citations omitted). See also Eisen v.
Carlisle & Jacquelin, 417 U.S. 156, 177 (1974) (district court is
not “to conduct a preliminary inquiry into the merits of a suit to
determine whether it may be maintained ‘as a class action”);
‘6 Such an approach, if permitted, also would fly squarely in the face of
Rule 23 (c)( 1), which requires that the class determination be made “as soon
as practicable after the commencement of an action brought as a class
action. .. .” Fed. R. Civ. P. 23(c)(1).
26
Seidman v. Stauffer Chemical Corp., {1986-87 Transfer Bind-
er] Fed. Sec. L. Rep. (CCH) 9 92,868 at 94,228 (D. Conn.
1986) (allegation of common scheme or plan to defraud
sufficient for ruling on class motion: “It was not necessary to
establish its existence.”’).
C. The Decision Of The Court Of Appeals Falls Squarely
Within The Holding Of Shores v. Sklar And The Un-
broken Line Of Authority Which Has Followed In Its
Wake
The Court of Appeals correctly held, as has every other
court which addressed the issue,'” that a plaintiff alleging fraud
under Rule 10b-5 may, in circumstances where it is alleged that
securities could not have been marketed “but for” the fraud,
invoke a rebuttable presumption of reliance upon the integrity
of the marketplace. Kirkpatrick, 827 F.2d at 722-23 (App. A-6
to 7), citing Shores v. Sklar, supra.'*
~ Reliance is generally part of the logical chain needed to
establish that a defendant’s misrepresentation or omission in
fact caused the plaintiff’s injury. See List v. Fashion Park, Inc.,
340 F.2d 457, 462 (2d Cir. ), cert. denied, 382 U.S. 811 (1965).
Although the requirement is easily met by showing the plain-
tiffs actual subjective reliance on the defendant’s misstatement
(see 3 L. Loss, Securities Regulation, at 1430-32 (2d ed.
1961) ), courts have held that proof of such direct reliance is not
necessary in certain cases, including those alleging a Shores-
type “fraud on the market.”
17 See, e.g., TJ. Raney & Sons, Inc. v. Fort Cobb Oklahoma Irrigation
Fuel Authority, 717 F.2d 1330, 1333 ( 10th Cir. 1983), cert. denied, 465 U.S.
1026 (1984); Shores v. S/iwr, supra; Arthur Young & Co. v. United States
District Court, 549 F.2d 60, 695 (%h Cir.), cert. denied, 434 US. 829
(1977); Rose v. Arkansas Valley Environmental & Utility Authority, 562
F. Supp. 1180, 1201-03 (W.D. Mo. 1983); Frankel v. Wyllie & Thornhill, Inc.,
537 F. Supp. 730, 735-37 (W.D. Va. 1982); Dekro v. Stern Bros. & Co., 540
F. Supp. 406, 410-11 (W.D. Mo. 1982). See also Note, Fraud On the
Market—An Emerging Theory Of Recovery Under SEC Rule 10b-5, 50 Geo.
Wash. L. Rev. 627, 645-55 (1982).
18 The Eleventh Circuit, in the en banc decision Bonner v. City of
Prichard, 661 F.2d 1206 ( 1 ith Cir. 1981), adopted as precedent the decisions
of the former Fifth Circuit, including Shores, rendered prior to October |,
1981.
:
4
i
£
3
4
:
4
4
z
27
The “fraud on the market” theory recognized in Shores
(and reaffirmed by the Eleventh Circuit here) is grounded 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
offers to him for purchase are entitled to be in the market-
place.” Shores, 647 F.2d at 471. Under Shores, the requisite
causation is provided by proof that “securities not traded on the
open market could not have been issued but for a fraudulent
scheme by the defendants.” Kirkpatrick, 827 F.2d at 722 ( App.
A-7), citing Shores, 647 F.2d at 469. Allegations to that effect
allow a rebuttable presumption that investors who purchased
the securities and relied on the integrity of the market were
harmed by the defendant’s fraud.
The logic underlying the theory is manifest. If securities
could not have been marketed but for a fraudulent scheme, it
follows that an investor satisfies the requisite causal link by
evidence that he or she purchased the securities in reliance, in
whole or in part, on the integrity of the market. Indeed, as the
Eleventh Circuit noted here, recognition of the “fraud on the
market” theory is as compelling in a Shores-type case as it is in
a so-called “open market” '® context. Kirkpatrick, 827 F.2d at
718 (App. A-9) (footnote omitted ).
There is no conflict on this issue in the lower courts. And
the Eleventh Circuit’s holding in this case is not, as petitioner
suggests, a departure from any of those cases. To the contrary,
it falls squarely within the holding of Shores. Even the so-
called “critics” of the theory (see Petition at 9) concede its
applicability, as the Eleventh Circuit applied it here, to claims
'® See Basic Inc. v. Levinson, 107 S.Ct. 1284 (1987), granting cert. to,
786 F.2d 741 (6th Cir. 1986). See also Peil v. Speiser, 806 F.2d 1154 ( 3d Cir.
1986); Harris v. Union Electric Co., 787 F.2d 355, 367 & n.9 ( 8th Cir. 1986),
cert. denied, No. 85-2036 ( Oct. 6, 1986); Lipton v. Documation, Inc., 734 F.2d
740 (Lith Cir. 1984), cert. denied, 469 U.S. 132 (1985); TJ. Raney & Sons,
Inc. v. Fort Cobb Oklahoma Irrigation Fuel Authority, 717 F.2d 1330 ( 10th
Cir. 1983), cert. denied, 465 U.S. 1026 (1984); Panzirer v. Wolf, 663 F.2d
365 (2d Cir. 1981), vacated as moot after cert. granted, 459 U.S. 1027
(1982); Ross v. A.H. Robins Co., 607 F.2d 545, 553 (2d Cir. 1979), cert.
denied, 446 U.S. 946 (1980); Blackie v. Barrack, $24 F.2d 891 (9th Cir.
1975), cert. denied, 429 U.S. 816 (1976).
28
under subsections (1) and (3) of Rule 10b-5. See Note, The
Fraud On The Market Theory, 95 Harv. L. Rev. 1143, 1157-58
n.56 (1982). Respondents clearly alleged that the Petro-Lewis
securities could not have been marketed “but for” the fraudu-
lent scheme, and respondents came forward with uncon-
troverted evidence that they relied on the integrity of the
market when they made their purchases. No more is required
at the class certification stage.
Nor is certiorari warranted, as petitioner contends ( Peti-
tion at 10, 14), to limit the potential abuse of class actions.
Contrary to petitioner’s assertion, the presumption of reliance in
a “fraud on the market” case is grounded in characteristics of
securities markets and investor behavior that are present in
both class actions and individual actions. The presumption is
not applied to facilitate class status in cases that would not
otherwise be amenable to prosecution as class actions. Shores
did not open the floodgates to class action litigation in securities
cases, and the strict application of Shores by the Eleventh
Circuit here likewise will have no such effect. The speculative
horrors imagined by Paine Webber are contrived.
Furthermore, the presumptions underlying the “fraud on
the market” theory promote important policies under the
federal securities laws. The federal securities laws were
adopted in large measure to restore integrity to, and investor
confidence in, the securities markets.2° A fundamental premise
of the Exchange Act is that, since the markets are affected by
information, “[t]here cannot be honest markets without honest
{information ].” H.R. Rep. No. 1383, 73d Cong., 2d Sess. 11
(1934). An equally fundamental premise is that iivestors rely
on the integrity of the markets. A defendant if a case brought
under the federal securities laws who contends that these
fundamental premises are not true in a particular case should
bear the burden of proving it.
2° This Court has “repeatedly emphasized that implied private actions
{under Rule 10b-5] provide a most effective weapon in the enforcement ‘of
the securities laws and are a necessary supplement to Commission action.’ ™
Bateman Eichler, Hill Richards, Inc. v. Berner, 472 US. 299, 310 (1985),
quoting J.1. Case Co. v. Borak, 377 U.S. 426, 432 ( 1964).
29
D. The Court Of Appeals Did Not Establish An Irrebutable
Presumption Of Reliance In Shores-type “Fraud On the
Market” Cases
Contrary to PaineWebber’s argument, the Eleventh Circuit
did not create a broad rule of general applicability which
establishes an irrebuttable presumption of reliance in Shores-
type “fraud on the market” cases. Nor did the Court of
Appeals lay down any such rule in this particular case.
Paine Webber is free to rebut the presumption by establishing
that no fraud occurred; that even if the offerings were tainted
with fraud, full disclosure of the true facts nevertheless would
not have prevented the securities from being marketed at some
price ( albeit lower than they were); or that respondents did not
rely at all on the integrity of the market. Shores, 647 F.2d at
470.
IIL.
THE DISTRICT COURT AND THE COURT OF APPEALS
PROPERLY EXERCISED THEIR DISCRETION UNDER
28 U.S.C. § 1292(b) IN CERTIFYING AND ACCEPTING,
RESPECTIVELY, THE CLASS ISSUE FOR INTER-
LOCUTORY REVIEW AND, IN ANY EVENT, THIS ISSUE
HAS BEEN RENDERED MOOT BY THE ISSUANCE OF
THE CIRCUIT COURT'S DECISION ON THE MERITS
OF THE APPEAL
PaineWebber’s criticism of the propriety of the District
Court’s certifying, and the Eleventh Circuit’s accepting, inter-
locutory review of the class certification order hardly menits
serious discussion. In the wake of the denial of class certifica-
tion, several members of the putative class filed individual
protective actions against Paine Webber asserting claims similar
| to those asserted in the class case.?' The District Court specific-
ally found that “[rJesolving the class certification on inter-
locutory appeal wil! prevent any duplicative effort” on the part
of the parties to the various cases and would conserve judicial
; resources. Sanders, {1986-87 Transfer Binder] 9 92,880 at
;
‘
:
;
;
)
|
A) ie li ai Tt EO wed
21 Those actions have been stayed pending resolution of the class motion
im this case.
:
Silicones
30
94,274-75 (App. E-17 to 19). The District Court also was
mindful of the rights of members of the class, many of whom
are counting on the class action to vindicate their rights, but
most of whom lack sufficient funds or incurred sufficient losses
to justify pursuing their claims on an individual basis. (Jd.)
These were uniquely discretionary rulings by the District Court,
accepted by the Court of Appeals, which should not be
reviewed by this Court. Indeed, this entire issue was rendered
moot when the Eleventh Circuit rendered its decision on the
merits of the appeal.
CONCLUSION
For the foregoing reasons, the Petition for a Wnit of
Certiorari to review the decision of the United States Court of
Appeals for the Eleventh Circuit should be denied.
Dated: Haverford, Pennsylvania Respectfully submitted,
December 23, 1987
KENNETH A. JACOBSEN*
RICHARD D. GREENFIELD
NICHOLAS E. CHIMICLES
GREENFIELD & CHIMICLES
One Haverford Centre
361 West Lancaster Avenue
Haverford, PA 19041-0100
(215) 642-8500
Attorneys for Respondents
*Counsel of Record for
Respondents
D. LAKE RUMSEY, JR.
DriEBE & RUMSEY
152 Nassau Street
Atlanta, GA 30309
(404) 688-4800
Of Counsel
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APPENDIX A
UNITED STATES DISTRICT COURT
SOUTHERN DISTRICT OF NEW YORK
MDL 581-IN RE BALDWIN-UNITED M 21-35 (CLB)
CORPORATION LITIGATION
MEMORANDUM DECISION
{Class Certification ]
This Document Relates To:
ALFRED LINTON and JEROME W.
EICHELSBACHER,
Plaintiffs,
-against- 83 Civ. 8476 (CLB)
SHEARSON LEHMAN/ AMERICAN
Express, INc., ef al,
Defendants.
VINCENT Ertl, ef ai,
Plaintiffs,
-against- 83 Civ. 9085 (CLB)
PAINEWEBBER JACKSON &
Curtis, INC., ef ai.,
Defendants.
(caption continues)
2a
(caption continued)
Oscar J. Woops,
Plaintiff,
-against- 84 Civ. 2235 (CLB)
W.H. NEWBOLD’s SONS &
Co., INC., et al.
Defendants.
STEVEN A. PEREL,
Plaintiff,
-against- 4 84 Civ. 8879 (CLB)
ROTAN MOSLE, INC., et al,
Defendants.
Brieant, J.
By motion fully argued and submitted on March 7, 1986,
plaintiffs in this multidistrict litigation seek class certification
pursuant to Rule 23, F.R Civ.P., in each of the above-captioned
four actions, which have been consolidated in this Court by
transfer orders on the Judicial Panel on Multidistrict Litigation.
Familiarity of the reader with all prior proceedings in this
litigation is assumed, although the Court directs special atten-
tion to its decision Jn Re Baldwin-United Corp., 105 F.R.D. 475
(S.D.N.Y. 1984), in which the Court certified tentative classes
in fourteen related cases against different defendants on similar
claims, for the purpose of settlement. Subsequently, a total of
twenty-four consolidated class actions against that many
broker-dealer defendants in the Baldwin-United securities liti-
gation were certified and each was settled.
Plaintiffs in these four remaining actions allege that the
defendant broker-dealers and Planco, Inc. engaged in a com-
mon course of fraudulent conduct in omitting material informa-
tion in connection with their sales of certain investment con-
tracts to the plaintuffs. These contracts, known as single
3a
premium deferred annuities (SPDAs), were issued from 1979
to 1983 by two insurance subsidiaries of Baldwin-United and
were marketed to the public nationwide by various means,
including sale through broker-dealers such as the defendants in
these four actions. In 1983, the two issuing insurance com-
panies and four other subsidiaries that reinsured the SPDAs
were placed in rehabilitation, and the parent corporation,
Baldwin-United, entered bankruptcy. Thereafter, SPDA pur-
chasers, including the class plaintiffs herein, commenced the
federal civil actions that eventually were consolidated into this
-multidistrict litigation.
Jurisdiction is conferred over the federal law claims by
Section 22 of the Securities Act of 1933 (“1933 Act’), 15
U.S.C. § 77(v), Section 27 of the Securities Exchange Act of
1934 (“1934 Act”), 15 U.S.C. § 78aa, and Section 4 of the
Racketeer Influenced and Corrupt Organizations Act
(“RICO”), 18 U.S.C. § 1964. The Court is likewise empow-
ered to hear the state statutory and common law claims pleaded
by virtue of diversity of citizenship and under principles of
pendent jurisdiction.
The amended consolidated complaints in the Linton, Erti
and Woods actions and the complaint in Perel each recite nine
separately denominated claims for relief alleging violations of
Sections 5, 12(1) of the Act, 15 U.S.C. § 78j(b) and Rule
1@b-5 promulgated thereunder, and Section 1962(c) of RICO,
as well as common law fraud and deceit and violations of state
securities, consumer and fiduciary responsibility laws. The
plaintiffs also assert claims premised on common law negli-
gence, breach of contract and breach of fiduciary duty against
all defendants except Pianco, Inc. (““Planco”). Except for
variations in the pleadings to account for facts peculiar to each
plaintiff, the complaints are identical in all respects pertinent to
these class certification motions. Therefore, the Court will not
distinguish among them when examining their suitability for
class certification, except as may be required to consider
specific, fact-oriented arguments raised by a particular broker-
dealer that call for individualized analysis.
4a
Numerosity
In order to qualify for class action treatment, plaintiff must
demonstrate that each of the four prerequisites set forth in Rule
23(a) has been satisfied and, in addition, that at least one of
the factors described in Rule 23(b) is present. The first
requirement, that the classes be so numerous that joinder of all
the aggrieved individuals would be impracticable, is not con-
tested here. Over several years, each broker-dealer sold SPDAs
having an aggregate face value well in excess of a million
dollars to purchasers throughout the country. The identity and
exact number of prospective class members are ascertainable
from defendants’ records and those of the state rehabilitators of
the issuers, and it is reasonable to conclude in view of the
magnitude of this marketing effort that the number of affected
persons would justify class certification.
Commonality
The second requirement, commonality, is more probiema-
tic. Under Rule 23(a)(2), plaintiffs must show that common
questions of law and fact susceptible to class treatment pre-
dominate among the putative class members’ claims. The
gravamen of plaintiffs’ complaints is that the defendants, in
connection with their business of analyzing investment opportu-
nities and providing financial services to clients, each engaged
in a similar unified course of conduct to promote and sell
Baldwin-United’s SPDAs to the public without disclosing that
the issuer was experiencing financial and regulatory difficulties.
Plaintiffs contend that the defendants, at the corporate, policy
making level, knew or recklessly disregarded evidence of
Baldwin-United’s precarious financial condition and that they
elected to implement or maintain standardized marketing prac-
tices that concealed the true investment risks of the SPDAs.
Those practices, plaintiffs allege, emphasized the safety, liquid-
ity and promising investment aspects of the SPDAs even
though information available to the defendants foretold
Baldwin-United’s collapse. Plaintiffs contend that the defen-
dants’ failure to investigate and ascertain the solidity of the
SPDAs’ financial backing, their practice of using uniformly
deceptive promotional materials to solicit purchases, and their
Sa
failure or refusal to disclose the material omissions and half-
truths embodied in their marketing strategy together caused
SPDA holders to sustain substantial injury when their in-
vestments deteriorated.
The broker-dealers, for their part, deny that common
issues Of law and fact predominate. They maintain that the
core issues submitted by plaintiffs in their complaints turn
largely on oral rather than written representations, or on non-
uniform documents that will require greater investigation and
analysis of individual facts than class treatment will allow. For
example, defendants assert, the threshold issue—whether the
SPDAs are in fact securities—invites inquiry into the manner in
which the SPDAs were sold and how they were described to
prospective investors. Similarly, allegations of statutory and
common law fraud would require the Court to make findings as
to the parties’ state of mind, the information disclosed, and also
the fluctuating fortunes of Baldwin as of the time a particular
investor made his or her purchase. The defendants therefore
conclude that the highly individualized character of these
transactions, affecting some 50,000 investors, makes class
certification inappropriate.
This Court disagrees. The nub of plaintiffs’ claims is that
material information was withheld from the entire putative
class in each action, either by written or oral communication.
Essentially, this is a course of conduct case, which as pled
satisfies the commonality requirement of Rule 23, F,R.Civ.P.
See, Green v. Wolf Corp., 406 F.2d 291, 300 (2d Cir. 1968),
cert. denied, 395 U.S. 977 (1969). Although their circum-
stances may vary slightly, the class members are united in
attempting to establish the defendants’ liability for fraudulently
creating an illusion of profitability and a false sense of security
when the undisclosed facts suggest otherwise. The fact that the
Planco marketing brochures may have varied slightly from
broker to broker and customer io customer is not controlling
here. Plaintiffs allege not that the promotional materials
themselves were uniform, but rather that the information they
contained—and hence that the _ broker-dealers. dis-
seminated—was uniformiy misleading. Thus, at the very
outset, the common issue of fact uniting all SPDA purchasers is
6a
whether the Planco sales literature to which they were exposed
was distorted by identical half-truths and omissions that mate-
rially affected their investment decisions. Following closely are _
common questions of the broker-dealers’ own culpability in
utilizing these materials and in failing to detect and disclose
information that would have revealed the SPDAs’ shaky foun-
dations. Liability in this case does not depend on proof of the
individual, face-to-face dealings between the class members
and the registered representatives of the broker-dealers, and
slight differences in the class members’ positions will not defeat
their common status as alleged victims of similar mis-
representations. See Blackie v. Barrack, 524 F.2d 801, 902
(9th Cir. 1975), cert. denied, 429 U.S. 816 (1976). The
wrongful conduct alleged by plaintiffs occurred at the manage-
ment level, if it did, and manifested itself in the defendants’
course of promoting and selling the SPDAs. As a result, the
relevant questions are readily susceptible to class-wide proof.
Indeed, inquiries into the actual sales process are of
secondary importance. Plaintiffs are not required to establish
how each and every SPDA was sold in order to prove that the
SPDAs were securities. Similarly, it is not fatal to class
certification that a particular investor did not receive or rely
upon the contents of a Planco brochure. In a case such as this
where liability would rest primarily on a failure to disclose
material facts, positive proof of reliance is not a prerequisite to
recovery. Affiliated Ute Citizens v. United States, 406 U.S. 128,
153-54 (1972). Similarly, the presence of oral representations
or embellishments proffered by an account representative will
not rend this class, even if they were the sole basis for an
individual’s decision to purchase an SPDA. Unlike Jn Re
Scientific Control Corp. Securities Lid, 71 F.R.D. 491
(S.D.N.Y. 1979), and other cases where claims based on oral
representations were denied class status, in this case the repre-
sentations related to objective factors—the issuer’s financial
stability or the safety, yield and liquidity of the SPDAs—that
originated from a common source: the Planco documents or the
broker-dealers’ alleged refusal to conduct their own in-
vestigations. See Korn v. Franchard Corporation, 456 F.2d
1206, 1212 (2d Cir. 1972). Even proof of a material variance
a
Raneeeereewen waver Oo reg
r
7a
among the representations will not defeat the class if certain
omissions, inferred from their absence in the Planco literature,
were common to all. See Esplin v. Hirschi, 402 F.2d 94, 99-100
(10th Cir. 1968), cert. denied, 394 U.S. 928 (1969).
The defendants also argue that individual questions relat-
ing to the timeliness of certain securities claims predominate
over any common issues that may exist. The Court disagrees.
Camouflaged as an attack on commonality, this argument in
fact invites the Court to examine and accept in the course of
these class certification motions an affirmative defense that is
potentially dispositive of several claims in this litigation. Such
inquiry is outside the scope of Rule 23 and indeed defies the
principle enunciated in Eisen v. Carlisle & Jacquelin, 417 U.S.
156 (1974), that a court may not review the substantive issues
raised in a class complaint when determining the claims’
suitability for class treatment. See, e.g., Chevalier v. Baird
Savings Association, 72 F.R.D. 140, 150 (E.D. Pa. 1976); see
also Mersay v. First Republic Corporation of America, 43
F.R.D. 465, 471 (S.D.N.Y. 1968) (class certified notwithstand-
ing individual questions as to statute of limitations).
Accordingly, the Court concludes that common issues of
fact predominate in these actions and that the requirements of
Rule 23(a)(2) have been satisfied.
Typicality
The third prerequisite for maintaining a class action under
Rule 23 is that the individual claims advanced by the named
plaintiffs are sufficiently typical of those asserted by the class
members they purport to represent. Rule 23(a)(3), F.R.Civ.P.
As a general rule, a plainuff’s claim meets the typicality
requirement if it arises from the same events or course of
conduct that gives rise to the claims of other class members and
if it is based on evidence and legal theories consistent with the
other members’ claims. Dura-Bilt Corporation v. Chase
Manhattan Corp., 89 F.R.D. 87, 99 (S.D.N.Y. 1981). The test,
ultimately, is whether the class representative will promote the
interests of the class as he protects his own.
Because this inquiry focuses on the nature of the claims
asserted, factual differences involving the date, type and man-
ner of the purchase, the investor’s perception of the transaction,
or even the information furnished to him at the time will not
destroy typicality if each class member was the victim of the
same material omissions and the same consistent course of
conduct. See Dura-Bilt, supra; Oscar Gruss & Son v. Geon
Industries, Inc., 75 F.R.D. 531, 534-35 (S.D.N.Y. 1977). This
is so even though, as the defendants claim, the amount and type
of information available to the public changed constantly
throughout the class period, and the named plaintiffs suppos-
edly had purchased their SPDAs at a time when Baldwin-
United enjoyed good financial health. The lynchpin of plain-
tiffs’ claim is the alleged nondisclosure of material facts relating
to Baldwin-United’s solvency; whether the named plaintiffs can
prove an actionable omission to sustain their claims invites
comment on the merits, which is forbidden in the context of this
_ Ciass certification motion. See Eisen, 417 U.S. at 178. More-
over, this Court fimds that the putative class representatives will
have a strong incentive to develop evidence pertaining to the
entire class period because their claims rely on proof of a
consistent course of conduct that extended beyond the instances
of alleged fraud umique to them.
Similarly, the presence of common law issues in these
complaints does not destroy typicality, even though the named
plainuffs will be called upon to represent individuals of many
different states if a class is certified. Common law fraud
substantially includes the 10b-5 claims, and the Court can order
separate hearings to resolve the question of damages, if the
need arises.
Notwithstanding certain variations in proof among mem-
bers of the prospe:ctive class, the Court finds that the plaintiffs
have satisfied the typicality requirement by showing that the
same allegedly umlawful conduct affected all members of the
prospective class.
A a
9a
Adequacy of Representation
Finally, before certifying the named plaintiffs as class
representatives, the Court must be convinced that they will
fairly and adequately protect the interests of the absent class
members. Rule 23(a)(4), F.R.Civ.P. Although it is not
necessary that the putative representatives’ claims are identical
to those of the class, the constraints of due process preclude
class certification if the named plaintiffs possess other, poten-
tially conflicting interests that would impair the vigorous prose-
cution of the class claims. See Hansberry v. Lee, 311 U.S. 32
(1940). As set forth above, factual differences involving the
sales transaction, for example, the type of promotional material
used by the various account representatives and the extent to
which the purchaser relied on it, will not defeat class certifica-
tion. Similarly unpersuasive is the argument, also proffered
above, that the plaintiffs who purchased their SPDAs early in
the class period have no incentive to prove facts relevant to a
purported fraud committed on a subsequent purchaser. Nor
caa there by any question as to the qualifications, industry and
commitment of plaintiffs’ counsel. All class members stand or
fall on the issue whether material information was mis-
represented or withheld from SPDA purchasers, and the Court
believes that the named plaintiffs will pursue this issue
vigorously.
The Court therefore concludes that each of the pre-
requisites of Rule 23(a) is satisfied. In addition, the Court
finds pursuant to Rule 23(b)( 3) that questions of law and fact
common to the members of the class predominate over any
questions affecting only individual members, and that a class
action is the superior method of adjudicating this controversy
fairly and adequately.
Shearson Lehman argues that arbitration, which is avail-
able upon request to each putative class plaintiff in the Shearson
Lehman track of cases, is a less expensive, more efficient—and
hence superior—alternative to class litigation on certain arbi-
trable securities claims. Even assuming for the argument that
our Court of Appeals’ decision in McMahon v. Shearson/
American Express, Inc., 788 F.2d 94, 96 (2d Cir. 1986), was
10a
wrong, cf Dean Witter Reynolds, Inc. v. Byrd, _._. US.
——, 105 S.Ct. 1238, 1240 n. | (1985), and that Shearson
Lehman enjoys, as it claims, an absolute right to compel
arbitration pursuant to sales agreements it entered into with its
SPDA customers, this Court does not agree that class treatment
is perforce inappropriate as to those claims. The fairness and
completeness of class litigation, in contrast to the scattered and
fairly random solution suggested by individual arbitration,
persuades this Court that fraud claims such as these are often
best resolved by class action. Not only are interests of
consistency, efficiency and completeness served, but there is
also the assurance that most if not all potential claimants will be
apprised of their mghts and of the named plaintiffs’ com-
paratively inexpensive efforts to vindicate them. This Court
finds it hard to believe that any class action defendant so
situated would prefer separate arbitration of each of thousands
of potential claims that might otherwise be decided by class
action at far less transactional cost. At least under the
circumstances of this case, arbitration cannot be regarded as a
serious alternative to the class action, which is so ideally suited
to securities fraud claims.
The standards of Rule 23, at once fair and flexible,
reaffirm the known truth that for all its pretensions, law is
meant to be practical. The willingness of tweny-four sophis-
ucated broker-dealers, advised by experienced counsel, to settle
their companion actions for a record $183 million eloquently
bespeaks the appropriateness of class certification among those
actions that remain.
Accordingly, plaintiffs’ motions for class certification in
each of the four litigation tracts is granted. Each class shall be
composed of those persons and entities (a) who purchased
SPDAs (i) that were issued by National Investors Life Insur-
ance Company and University Life Insurance Company of
America and/or reinsured by National Investors Pension Insur-
ance Company, Mt. Hood Pension Insurance Company, Na-
uonal Equity Life Insurance Company, and S & H Life
Insurance Company, all of which are affiliated with Baldwin-
United Corporation, and (ii) that were purchased through the
respective broker-dealer defendants in each such action during
the period January |, 1979 through July 13, 1983, each in his,
her or its individual capacity and any and all collective
representatives, assigns, heirs, executors, administrators, custo-
dians, predecessors or successors in interest and any other
person having any legal or beneficial interest in any of such
SPDAs, and (b) who continued to hold such SPDAs on July
13, 1983.
The respective representatives of the Class as to each of the
above-captioned actions shall be and hereby are certified to be
as follows:
1. Linton v. Shearson Lehman/American Express,
Inc., et al., 83 Civ. 8476 (CLB), Alfred Linton and Jerome
W. Eichelsbacher,;
2. Ertiv. Paine Webber Jackson & Curtis, Inc., et al.,
83 Civ. 9085 (CLB), Vincent Erti, Joseph and Elizabeth
Chupke, George and Margaret Ledney, William Neil
Aicholtz and Janet Aicholtz, and Genevieve Novicky;
3. Woods v. W.H. Newbold’s Sons & Co., Inc., et al.,
84 Civ. 2235 (CLB), Oscar J. Woods; and
4. Perel v. Rotan Mosle, Inc., 84 Civ. 8879, Steven A.
Perel.
Settle a formal order on notice, which shall declare the
classes as hereinbefore set forth and provide for notice and an
opportunity to the members of the classes to exclude them-
selves.
Dated: White Plains, New York
- June 27, 1986
/s/ CHaRLEs L. BrRigaNT
Charles L. Brieant
ae Seek
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