Reply Brief — Robinson Humphrey/American Express, Inc. v. Sanders

Supreme Court, U.S,

FIL aD

JAN 4 1987

WOSEPH F. SPANIOL, JR.

No. 87-836 CLERK

Al

,

IN THE

Supreme Court of the United States

OctToBeR TERM, 1987

PAINEWEBBER GROUP, INC.,

Petitioner,

vs.

TOMMY E. PARKER, as Custodian for

KIMBERLY M. PARKER, and JAMES L. SMITH,

Respondents.

ON PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT

PETITIONER'S REPLY BRIEF

ROBERT EMANUEL ZIMET

Counsel of Record for Petitioner

RICHARD M. KirBy SKADDEN, ARPS, SLATE,

HANSELL & Post MEAGHER & FLOM

3300 First Atlanta Tower 919 Third Avenue

Atlanta, Georgia 30383 New York, New York 10022

(404) 581-8000 (212) 735-3000

Attorneys for Petitioner

Of Counsel:

JEREMY A. BERMAN

CHARLES F. WALKER

iy a ae

TABLE OF CONTENTS

TABLE OF AUTIIOMAILIES... 2... bien.

I.

II.

III.

THE ELEVENTH CIRCUIT’S OPINION IS

RIPE FOR REVIEW AND RAISES

QUESTIONS OF NATIONAL

IMPORTANCE THAT NEED TO BE

ADDRESSED BY THIS COURT...........

THE ELEVENTH CIRCUIT

CONTRAVENED THIS COURT'S

HOLDING IN GENERAL TELEPHONE

CO. OF SOUTHWEST v. FALCON AND

IMPROPERLY HELD THAT THE

RESPONDENTS’ 10b-5 CLAIMS WERE

CERTIFIABLE BASED SOLELY ON THE

ALLEGATIONS OF THE COMPLAINT ...

A. The Eleventh Circuit’s Reversal Of The

District Court’s Denial Of Class

Certification Was Based Solely On The

Allegations Of The Complaint.........

B. Oral Representations Lie At The Heart

Of Respondents’ Claims...............

THE ISSUE OF WHETHER THE COURT

OF APPEALS IMPROPERLY TOOK

JURISDICTION OF THIS APPEAL

PURSUANT TO 28 U.S.C. § 1292(b) IS

SUE eo hob Als Vea ead ew Co aw

SPI cs oe aa eee casa ee

Page

ee

TABLE OF AUTHORITIES

Cases Page

Basic, Inc. v. Levinson, 107 S.Ct. 1284 (1987) ... 3

California Brewers Ass'n v. Bryant, 444 U.S. 598

ey RA Ae oe ae 4

Carey v. Piphus, 435 U.S. 247 (1978) ........... 4

Clark v. Watchie, 513 F.2d 994 (9th Cir.), cert.

denied, 433 U.S. 641 (1973) ................. 7

Colorado River Water Conservation District v.

United States, 424 U.S. 800, 806 (1976) ....... 8

Financial General Bankshares, Inc. v. Metzger,

Ag FN ale RE... a rr 8

General Telephone Co. of Southwest v. Falcon,

ce Si kc ts cesecseeaaass 5

Glick v. E.F Hutton & Co., Inc., 106 F.R.D. 446

eg Sa ay os Gant pamek nana

~l

Grainger v. State Security Life Insurance Co..,

547 F.2d 303 (5th Cir. 1977), cert. denied, 436

sg iii ys vas dalek see 0 49 8%

~l

In re Hotel Telephone Charges, 500 F.2d 86 (9th

a oe ce es oh ly 6 Wicd ww 'a se 8 o's

~l

In re Scientific Control Corp. Securities

Litigation, 71 F.R.D. 491 (S.D.N.Y. 1976) ....

~l

Kirkpatrick v. J.C. Bradford & Co., 827 F.2d 718

ee passim

Land v. Dollar, 330 U.S. 731 (1947)............

Larson v. Domestic & Foreign Commerce Corp.,

ee eS errr (veges ae

Masri v. Wakefield, 106 F.R.D. 322 (D. Colo.

ie ee eee

ee EE pabeng RE Sn

Michael v. United States, 454 U.S. 950 (1981) ...

Sanders v. Robinson Humphrey/American

Express, Inc., 634 F.Supp. 1048 (N.D. Ga.

RU Sp kbs wee hd a ae ed & ae

Sanders v. Robinson Humphrey/American

Express, Inc., [1986-87 Transfer Binder] Fed.

Sec. L. Rep. (CCH) 492,880 (N.D. Ga. July 8,

Mc. eee

Seiler v. E.F. Hutton & Co., Inc., 102 F.R.D.

a a oi. y Lg eee wt eS th

Shivangi v. Dean Witter Reynolds, Inc., 825 F.2d

See My ae ET as a aes eee eeak es

Simon v. Merrill Lynch, Pierce, Fenner & Smith,

Inc., 482 F.2d 880 (5th Cir. 1973) ...........

Tidewater Oil Co. v. United States, 409 U.S. 151

SONU soca coe make ca a ee abet an

United States v. General Motors Corp., 323 U.S.

2 ACES Sper intd mini nctten APA bates

Page

4,8

iv

Page

Statutes, Rules and Regulations

| ig tom 8) |): | err rrr ys ere rr cree 4

ik Fo | er re ee passim

Rule 23 of the Federal Rules of Civil Procedure... passim

Section 10(b) of the Securities Exchange Act of

1934, 15 U.S.C. § 78j(b).......------ 6+ eee: passim

Securities and Exchange Commission Rule 10b-5,

17 C.F.R. § 240.10b-5 (1987)........-------- passim

ae Sh oe

No. 87-836

IN THE

Supreme Court of the United States

Octroser TERM, 1987

PAINEWEBBER GROUP, INC.,

Petitioner,

VS.

TOMMY E. PARKER, as Custodian for

KIMBERLY M. PARKER, and JAMES L. SMITH,

Respondents.

ON PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE ELEVENTH CIRCUIT

PETITIONER’S REPLY BRIEF

I.

THE ELEVENTH CIRCUIT'S OPINION IS

RIPE FOR REVIEW AND RAISES QUESTIONS

OF NATIONAL IMPORTANCE THAT NEED

TO BE ADDRESSED BY THIS COURT

Contrary to respondents’ assertions (see Respondents’ Brief

in Opposition to Petition for Writ of Certiorari (“Response”) at

15-18), the Eleventh Circuit’s decision reversing the District

Court’s denial of class certification as to respondents’ claims pur-

suant to Section 10(b) of the Securities Exchange Act of 1934,

15 U.S.C.-§ 78j(b), and Securities and Exchange Commission

Rule 10b-5, 17 C.F.R. § 240.10b-5 (1987), as well as its deter-

mination that it had jurisdiction pursuant to 28 U.S.C. § 1292(b)

to review the District Court’s denial of class certification, are

ripe for review by this Court. The Eleventh Circuit made a

number of final determinations that (a) are fundamental to the

further conduct of the case; (b) raise issues of national impor-

tance concerning the class action device, the federal securities

laws and federal appellate jurisdiction; and (c) have created a

split between the Fifth and Eleventh Circuits on the question

of certifying a class. The Eleventh Circuit’s final determinations

include:

(a) Respondents’ complaint alone was sufficient to

satisfy their burden under Fed. R. Civ. P. 23(b)(3)

of proving common factual issues predominated

over individual ones.

(b) Petitioner’s evidence relating to the predominan-

cy requirement of class certification is irrelevant

in ruling on respondents’ motion for class

certification.

(c) Respondents’ actual reliance on factors other

than the integrity of the market is irrelevant to

their fraud-on-the-undeveloped-market claims

under Rule 10b-5(a) and 10b-5(c) because they

have alleged that the Petro-Lewis limited part-

nership interests could not have been marketed

but for a fraud.

(d) Respondents’ reliance on the oral representations

of their broker is irrelevant because they have

alleged a common course of conduct and,

therefore, common issues predominate on the

Rule 10b-5(b) claims.

See Kirkpatrick v. J. C. Bradford & Co., 827 F.2d 718, 721-25

(11th Cir. 1987)(App. A-5-12). The Eleventh Circuit, without any

explanation, has also finally determined that it had discretionary

jurisdiction to review the District Court’s denial of class cer-

tification under 28 U.S.C. § 1292(b).

These determinations by the Eleventh Circuit are undoubtedly

fundamental to the further conduct of this case. The District

Court denied class certification because it found that common

issues did not predominate. The Eleventh Circuit held that, as

a matter of law, common issues did predominate and that the

District Court therefore “abused its discretion in ruling that the

requirements of Rule 23(b)(3) were not satisfied in this case.”

Kirkpatrick, 827 F.2d at 725 (App. A-12).

The Eleventh Circuit’s decision is not only fundamental to

the further conduct of this case, it also raises issues of paramount

national importance. Indeed, this Court has already expressed

its concern with the class certification and “fraud-on-the-market”

issues presented in this case in granting certiorari in Basic, Inc.

v. Levinson, 107 S. Ct. 1284 (1987). As set forth in the Petition

at 6-8, this Court should therefore consider the present case in

conjunction with its consideration of Basic. Indeed, the necessity

for reviewing the fraud-on-the-market theory is more compell-

ing in this case than in Basic since this case involves a claim of

fraud on an “undeveloped market.”

Moreover, the Eleventh Circuit in the present case held that

a securities fraud case may be certified as a class action whenever

the complaint invokes the proper litany, irrespective of the

evidence regarding whether the requirements of Rule 23 have

been satisfied. Would-be plaintiffs are much more likely to bring

class action lawsuits knowing that they will not be put to the

test of proving that common issues predominate. Allowing the

certification of a class on the basis of mere allegations wil!

thereby spawn a new wave of securities litigation targeted at

securities issuers and brokerage firms, and Rule 23 of the Federal

Rules of Civil Procedure will become a substantive club in the

hands of plaintiffs.

The Eleventh Circuit’s exercise of jurisdiction under 28 U.S.C.

§ 1292(b) also raises an important question of appellate jurisdic-

tion: should a denial of class certification be reviewable under

28 U.S.C. § 1292(b)? As this Court has recognized, the scope

of jurisdiction under 28 U.S.C. § 1292(b) “raises an important

question of federal appellate jurisdiction.” Tidewater Oil Co.

v. United States, 409 U.S. 151, 153 (1972) (interlocutory orders

in Expediting Act cases not reviewable under 28 U.S.C.

§ 1292(b)).

Given the substantial impact of the Court of Appeals deci-

sion on petitioner, and the nationally important issues it raises,

respondents’ argument that the issues presented herein are not

“ripe” for review is unavailing. 28 U.S.C. § 1254(1) specifically

provides for review by certiorari “before or after rendition of

judgment or decree.” In the exercise of this power, the Court

has often reviewed interlocutory decisions, “[w here there is an

important and clear-cut issue of law which is fundamental to

the further conduct of the case and which would otherwise

qualify as a basis for certiorari. . . .” Michael v. United States,

454 U.S. 950, 951 (1981) (White, J. dissenting). See, e.g., Califor-

nia Brewers Ass'n v. Bryant, 444 U.S. 598, 604-05 (1980) (Court

reviewed order by appeals court reversing dismissal and reman-

ding for further proceedings); Carey v. Piphus, 435 U.S. 247,

252-53 (1978) (Court reviewed order by appeals court reman-

ding for factual determinations by District Court):

' See also Larson v. Domestic ¢> Foreign Commerce Corp., 337 U.S. 682, 685

n.3 (1949); Land v. Dollar, 330 U.S. 731, 734 n.2 (1947); United States v.

General Motors Corp., 323 U.S. 373, 377 (1945).

Il.

THE ELEVENTH CIRCUIT CONTRAVENED

THIS COURT'S HOLDING IN GENERAL

TELEPHONE CO. OF SOUTHWEST v.

FALCON AND IMPROPERLY HELD THAT

THE RESPONDENTS’ 10b-5 CLAIMS WERE

CERTIFIABLE BASED SOLELY ON THE

ALLEGATIONS OF THE COMPLAINT

A. The Eleventh Circuit’s Reversal Of The District

Court’s Denial Of Class Certification Was Bas-

ed Solely On The Allegations Of The Complaint

Respondents incorrectly claim that the Eleventh Circuit gave

“careful consideration of the entire record in this case, including

the evidence offered at the class action hearing” and that the

Court of Appeals “simply viewed the record differently than did

the District Court.” (Response at 24). In fact, the Eleventh Cir-

cuit intentionally ignored the record. It clearly intended that

the mere allegation of a “scheme to defraud” should be suffi-

cient to satisfy the predominancy requirement of Fed. R. Civ.

P. 23(b)(3) in holding that the denial of certification was im-

proper because “the complaints alleged that the defendant

brokerage firms and individual officers engaged in a common

course of conduct to misrepresent, by affirmative acts and omis-

sions, the financial condition of Petro-Lewis,” Kirkpatrick, 827

F.2d at 724 (App. A-10), and the “complaint alleges that a securi-

ty not traded on the open market could not have been issued

but for the fraud of defendants.” Kirkpatrick, 827 F.2d at 723

(App. A-8). Respondents’ attempt to rehabilitate the Eleventh

Circuit’s decision by arguing that the Court looked beyond the

complaint is unavailing on this record.

Accordingly, it was unprecedented and contrary to this Court’s

holding in General Telephone Co. of Southwest v. Falcon, 457

U.S. 147 (1982), for the Eleventh Circuit, on the basis of just

the allegations in the complaint, to have reversed the District

Court’s holding that individual issues predominated on

respondents’ Section 10(b) and Rule 10b-5 claims. The District

Court reached this legal conclusion on the basis of its factual

finding that respondents relied on oral representations of their

broker and not on the integrity of the market.? See Sanders v.

Robinson Humphrey/American Express, Inc., 634 F.Supp. 1048,

1062-63 (N.D. Ga. 1986) (App. D-25-26); Sanders v. Robinson

Humphrey/merican Express, [1986-87 Transfer Binder] Fed.

Sec. L. Rep. (CCH) 492,880, at 94,272 (N.D. Ga. July 8, 1986)

(App. E-10-11). The Eleventh Circuit did not find error in the

District Court’s factual finding. Rather, it faulted the District

Court’s legal analysis because the District Court examined the

deposition testimony and other evidence and did not rely sole-

ly upon the allegations in the complaint. See Kirkpatrick, 827

F.2d at 724 (App. A-10).

B. Oral Representations Lie At The Heart Of

Respondents’ Claims

Respondents argue that the statements made to them by their

individual broker are not part of their case and that those

statements are, therefore, irrelevant. See Response at 19, 21.

However, respondents’ complaint specifically alleges that peti-

tioner “made numerous uniform statements of fact and

assurances to plaintiffs and members of the class . . .” Second

Amended Complaint 437. Accordingly, it is the respondents who

put these statements in issue. The District Court thereafter found

? Although respondents have represented to this Court that it is “uncon-

troverted” that the oral representations of individual brokers did not vary from

the prospectuses (see Response at 2] n.15) and that “respondents came for-

ward with uncontroverted evidence that they relied on the integrity of the

market when they made their purchases” (see Response at 28), this is not the

case. In fact, petitioner has argued throughout this litigation that the oral

representations relied upon by the respondents varied from those in the pro-

spectuses and that there is strong evidence that respondents did not rely on

the integrity of the market. In addition, the District Court found no evidence

that the representations made by the brokers were uniform throughout the

putative class, see Sanders, 634 F. Supp. at 1062 (App. D-25-26), or that

respondents relied on the integrity of the market. See Sanders, [1986-87 Transfer

Binder] Fed. Sec. L. Rep. (CCH), $92,880, at 94,272 (App. E-10-11).

that respondents relied on the representations of their broker

and not on the Petro-Lewis prospectus. Sanders, 634 F. Supp.

at 1062 (App. D-25-26). Respondents cannot logically claim that

these representations — which they put in issue and on which

(according to their own testimony) they relied — are not part

of their claim for fraud.

Contrary to respondents’ statement of the law (see Response

at 2]-22), the vast majority of courts have denied class certifica-

tion in cases such as this one, where the potential class relied

primarily on oral representations. See, e.g., Shivangi v. Dean

Witter Reynolds, Inc., 825 F.2d 885, 890 (5th Cir. 1987); Gra-

inger v. State Security Life Insurance Co., 547 F.2d 303 (5th

Cir. 1977), cert. denied, 436 U.S. 932 (1978); Clark v. Watchie,

513 F.2d 994, 999 (9th Cir.), cert. denied, 423 U.S. 841 (1975);

In re Hotel Telephone Charges, 500 F.2d 86, 88-89 (9th Cir.

1975); Simon v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,

482 F.2d 880, 882 (5th Cir. 1973); Glick v. E.F. Hutton & Co.,

106 F.R.D. 446, 450-55 (E.D. Pa. 1985); Seiler v. E.F. Hutton

¢ Co., 102 F.R.D. 880, 889 (D.N.J. 1984); Masri v. Wakefield,

106 F.R.D. 322, 324-25 (D. Colo. 1984); McHan v. Grandbouche,

99 F.R.D. 260, 266 (D. Kan. 1983); In re Scientific Control Corp.

Securities Litigation, 71 F.R.D. 491, 501-05 (S.D.N.Y. 1976). The

rationale underlying these many decisions is that where a class

of putative plaintiffs relies on oral representations there are

bound to be individual issues of materiality, falsity and reliance.

There was no reason for the Eleventh Circuit to depart from

this firmly established precedent and create a split in the Cir-

cuits in ruling on respondents’ motion for certification.

Respondents failed to present any evidence that similar oral

representations were made to the purported class. See Sanders,

634 F. Supp. at 1062 (App. D-25). In light of that failure, the

District Court properly found that respondents had failed to

carry their burden of demonstrating the predominance of com-

mon issues.

III.

THE ISSUE OF WHETHER THE COURT OF

APPEALS IMPROPERLY TOOK JURISDIC-

TION OF THIS APPEAL PURSUANT TO 28

U.S.C. § 1292(b) IS NOT MOOT

This Court has previously recognized that the scope of the

courts of appeals’ jurisdiction under 28 U.S.C. § 1292(b) presents

an important issue of federal appellate jurisdiction. See

Tidewater Oil Co. v. United States, 409 U.S. 151 (1972). Avoiding

this issue, respondents state, without argument, that the “en-

tire issue” of whether the Court of Appeals improperly took

jurisdiction of this appeal pursuant to 28 U.S.C. § 1292(b) “was

rendered moot when the Eleventh Circuit rendered its decision

on the merits of the appeal.” Response at 30. That statement

is simply wrong. Petitioner has argued both in the Court of Ap-

peals and in this Court that interlocutory review by a court of

appeals of the denial of class certification cannot materially ad-

vance the ultimate termination of the litigation and that it was

therefore improper for the Eleventh Circuit to assert jurisdic-

tion over this appeal pursuant to 28 U.S.C. § 1292(b). See Peti-

tion at 16-18. The fact that the Court of Appeals rendered a deci-

sion despite the impropriety of its exercising such jurisdiction

does not, of course, make this appeal moot. To the contrary, a

reviewing court is always free to examine the exercise of jurisdic-

tion by a lower court and should vacate the lower court’s deci-

sion if its exercise of jurisdiction was improper. See, e.g., Col-

orado River Water Conservation District v. United States, 424

U.S. 800, 806 (1976) (reviewing and reversing discretionary ruling

of court of appeals which held that abstention was inappropriate

and affirming the district court’s dismissal of the complaint);

Financial General Bankshares, Inc. v. Metzger, 680 F.2d 768

(D.C. Cir. 1982) (reviewing and reversing district court’s exer-

cise of discretionary pendent jurisdiction). Accordingly, if the

Court of Appeals improperly asserted jurisdiction, a challenge

to that assertion of jurisdiction is not mooted by the court’s hav-

ing already rendered a decision.

CONCLUSION

For the foregoing reasons, and for the reasons set forth in the

Petition for a Writ of Certiorari, respondents’ arguments in op-

position to the Petition should be rejected, and the writ should

issue.

Dated: New York, New York

January 4, 1988

ROBERT EMANUEL ZIMET

Counsel of Record for

Petitioner

RICHARD M. KIRBY SKADDEN, ARPS, SLATE,

HANSELL & POST MEAGHER & FLOM

3300 First Atlanta Tower 919 Third Avenue

Atlanta, Georgia 30383 New York, New York 10022

(404) 581-8000 (212) 735-3000

Attorneys for Petitioner

Of Counsel:

JEREMY A. BERMAN

CHARLES F. WALKER