Petition for Writ of Certiorari — J.C. Bradford & Co. v. Kirkpatrick (Nos. 87-932, 87-835, 87-836)
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87 =9 82
No. |
| JOSEPH F. SPANIOL, Jp
IN THE
Supreme Court of the Gnited States
OCTOBER TERM, 1987
J. C. BRADFORD & Co..,
Petitioner,
v.
SUZANNE KIRKPATRICK; DorotHy D. CASLER;
and CHARLES H. LINDSEY, on behalf of themselves
and all others similarly situated,
Respondents.
PETITION FOR WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
AMES DAVIS
Counsel of Record for Petitwoner
JOHN C. GRAY ROBERT E. BOSTON
GRAY, GILLILAND & GOLD, P.C. WALLER LANSDEN DORTCH
Richmond 400 Building, Suite 300 & DAVIS
975 Johnson Ferry Road, N.E. 2100 One Commerce Place
Atlanta, Georgia 30342 Nashville, Tennessee 37239
(404) 843-2800 (615) 244-6380
Attorneys for Petitioner
PRESS OF BYRON S. ADAMS, WASHINGTON, D.C. (202) 347-8203
QUESTIONS PRESENTED
1. In an action under Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder
which is sought to be maintained as a class action,
can the commonality requirement of Rule 23(b\X3),
Federal Rules of Civil Procedure, be satisfied by use
of the so-called ‘‘fraud-on-the-market’’ theory where
the securities were neither traded in an established
market nor fraudulently issued?
The Court of Appeals answered this question af-
firmatively.
2. In an action under Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5(2), based upon
oral representations, which is sought to be maintained
as a class action, is the commonality requirement of
Rule 23(b\3), Federal Rules of Civil Procedure, sat-
isfied if the record fails to demonstrate that the rep-
resentations to class members were uniform?
The Court of Appeals held that since the record
failed to demonstrate that the oral representations
were not uniform, the District Court abused its dis-
cretion in ruling that the requirements of Rule 23(b\3)
had not been satisfied.
3. In a securities fraud action which is sought to
be maintained as a class action, must the Court con-
sider class certification of claims under Sections 11
and 12 of the Securities Act of 1933 if the named
plaintiffs’ claims under these sections have been dis-
missed as time barred?
The Court of Appeals ruled that the District Court
abused its discretion in failing to consider class cert-
ification of such claims.
ii
4. In an action under Section 10(b) of the Securities
Exchange Act of 1934 and Rule 10b-5 thereunder,
which is sought to be maintained as a class action,
must the named plaintiffs be considered adequate rep-
resentatives under Rule 23(aX4) unless they virtually
abdicate to their attorneys the conduct of the case?
The Court of Appeals held that since plaintiffs were
represented by competent and zealous counsel, their
lack of interest in the litigation would not disqualify
them as class representatives, absent such virtual ab-
dication.
te
ili
THE PARTIES
The names of the parties to the proceeding are
contained in the caption.
iv
TABLE OF CONTENTS
Page
QUESTIONS PRESENTED FOR REVIEW ............00000000 i
Pe I iid aiid tstecipathatdadiennhindseninisabissaiuaicenna iil
TABLE OF CONTENTS ..........0...cccesceees GRO ae em ER iv
Be II aikiics ines nscensiieahicieadlaiddesns vi
I I ia 1
PBR RA REID Ae eC ODL ODD DOTA 2
STATUTES AND RULES INVOLVED .........ccccsceceeeeeeeees 2
UATE GC TIE GOA iitcvciccsccncscssnicctsesonaiscesns 2
REASONS FOR GRANTING THE WRIT ........ccccccceeseeees 8
1. The Court of Appeals’ use of the fraud-
on-the-market theory to supply the com-
monality requirement of Rule 23(b\X3)
where the securities were neither traded
on an efficient market nor fraudulently
issued conflicts with many opinions of
other Courts of Appeal which have inter-
preted or applied this theory. ................ 8
2. The Court of Appeals’ ruling that common
issues predominated with respect to the
alleged oral misrepresentations, without
requiring a showing that such misrepre-
sentations were identical or at least sim-
ilar, conflicts with the holdings of the
Fifth Circuit Court of Appeals and nv-
merous District Court opinions from other
IN siniiscinditintccidaaiulssabcniastasenciccccene 13
3. In ruling that the District Court must con-
sider class certification of claims under
Sections 11 and 12(2) of the Securities Act
of 1933, when all of the plaintiffs’ claims
under such Sections were time-barred, the
Court of Appeals radically departed from
the usual course of judicial proceedings,
and such ruling is in conflict with opinions
of this and other courts. ..............ccccceeee 16
4. The standard announced by the Court of
Appeals for adequacy of representation
under Rule 23(aX'4) of the Federal Rules
of Civil Procedure represents such a de-
parture from the usual and ye
course of judicial ee as to call
for the exercise of this Court’s supervi-
SOFY POWYS. .........ccccccscssccccccessceresecsssoreees 17
re i a aka deiale 19
RE iis cauridiineniceandebaianddeacamdabdeaeenoneas A-1
TABLE OF AUTHORITIES
CASES Page
Affiliated Ute Citizens v. United States, 406 U.S.
128, 92 S. Ct. 1456, 31 L. Ed. 2d 741
(1972) scencetnovstaiadintniniaieanesadiaiaiimiaidiakisdanes 5
Basic v. Levinson, 786 F.2d 741 (6th Cir. 1986),
cert. granted, 107 S. Ct. 1284 (1987) .......... 9,13
Blackie v. Barrack, 524 F.2d 891 906 (9th Cir.
1975), cert. denied, 429 U.S. 816, 97 S. Ct. 57,
50 L. Ed. 2d 75 (1976) eiiaduehadeseiiniianiasenones 9
Crasto v. Estate of Kaskel, 63 F.R.D. 18, 23
Gna ire CPE abbieibeincalain etal 15
East Texas Motor Freight v. Rodri 431 U. S.
395, 403, 97 S. Ct. 1891, 52 L. Ed. 2d 453
CRUCTD sechunsginicdchscsnsctunbighenideitadaaaan anna. 16
Finkel v. Docutel/Olivetti Corp., 817 F.2d 356, 363
Gs Cae. BUG Wie = ekiisieriaicbandlinideiins 12
Grainger v. State Sec. Life Ins. Co., 547 F.2d 303,
307 (1977), cert. denied, 436 U.S. 932 (1978)
eoocscoqnesoncnusoncesspenbunepansebanonngequsbtebetentecussinensenneiie 14
Hansberry v. Lee, 311 U.S. 32, 45, 61 S. Ct. 115,
85 L. Ed. 22 GUE << aetacseanincdinhetntaveiitibstnshes 18
In re Scientific Control Corp. Securities Lit., 71
F.R.D. 491 (S.D.NLY. 1976) seheeehiidiandaldaisnnesioneds 15
Kirkpatrick v. J.C. Bradford & Co., 827 F.2d
fat eT passim
Lipton v. Documation, Inc., 734 F.2d 740 (11th Cir.
1984), cert. denied, 469 U.S. 1182, 105. S.Ct.
O26 GORE eacciensccedieen ed eee 12
McMerty v. Burtness, 72 F.R.D. 450, 455 (D. Minn.
SOUR | sivsnnviisistetnnisdibitaninadaiasaainabaeaaaaceats 15
Moscarelli v. Stamm, 288 F. Supp. 453, 462-463
St A RRR aise he toe 15
Peil v. Speiser, 806 F.2d 1154 (8d Cir. 1986) .... i)
vii
Table of Authorities Continued
Page
Penzirer v. Wolf, 663 F.2d 365 (2d Cir. 1981),
vacated as moot sub nom. Price er" v.
Penzirer, 459 U.S. 1027, 103 S. Ct. 434, 74
BS ti ff a, u
Ross v. A.H. Robbins, 607 F.2d 545, 553 (2d Cir.
1979), cert. denied, 446 U.S. 946 (1980) _ ...... 4
Sanders v. Robinson Humphrey/American Express,
Inc., 634 F. Supp. 1048 (N.D. Ga.
BOD cnncissceectintintdchsniniteighctiipisnsteinsansaenencresenese passim
Sanders v. Robinson Humphrey/American Express,
Inc., [1986-87 Transfer Binder] Fed. Sec. L.
Rep. (CCH) 492,880 (N.D. Ga. 1986) ............. passim
Shores v. Sklar, 647 F.2d 462 (5th Cir. 1981) (in
banc), cert. denied, 459 U.S. 1102, 103 S. Ct.
722, 74 L. Ed. 2d 949 SE 9,10,11,12
Simon v. Merrill Lynch, Pierce, Fenner & Smith, _
Inc., 482 F.2d 880, 882-883 (1973) ............... 14
TJ. os & Sons v. Fort Cobb, Okl. Irr. Fuel,
717 F.2d 1330 (10th Cir. 1983), cert. denied,
at & 6S le 11
Vervaecke v. Chiles, Heider & Co., Inc., 578 F.2d
&. 2 | paar 9,16,17
STATUTES, RULES AND REGULATIONS
RS | ee” ee Eee 3
BS ar 3
, ik Toa. Ts) nee 2
BB CET, Ge CI | cccwececcencecccessszcncczsenscccecsens 3
Section 11 of the Securities Act of 1933, 15 U.S.C.
OTe CI sisithrtltnctestensecsninnsnnensencensenesesenss 2,3,5,7,16
Section 12(2) of the Securities Act of 1933, 15
is Coe, een 2,3,5,7,16
Section 10(b) of the Securities Exchange Act of
1934, 15 U.S.C. §78j(b) (1928) ..............cceeeeee passim
Table of Authorities Continued
Rule 10b-5, 17 C.F.R. §240.10b-5 a
Rule 23 of the Federal Rules of Civil Pro-
I ee
OTHER AUTHORITIES
Note, The Fraud-on-the-Market Theory, 95 Harv. L.
eR ec eEE
ee ee ee
eeu ee
IN THE
Supreme Court of the Gnited States
OCTOBER TERM, 1987
J.C. BRADFORD & Co.,
Petitioner,
Vv.
SUZANNE KIRKPATRICK, DoROTHY D. CASLER and
CHARLES H. LINDSEY, on behalf of themselves and
all others similariy situated,
Respondents.
PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
Petitioner, J. C. Bradford & Co. (‘Bradford’), prays
that a Writ of Certiorari issue to review the judgment
of the United States Court of Appeals for the Elev-
enth Circuit entered on September 15, 1987, in a case
captioned Kirkpatrick, et al. v. J. C. Bradford & Co.,
No. 86-8624.
OPINIONS BELOW
The Opinion of the Court of Appeals is reported at
827 F. 2d 718 and is also reported in (Current Binder]
Fed. Sec. L. Rep. (CCH) at 492,548; a copy of the
Opinion is reproduced at Appendix A to this Petition.
The Order of the United States District Court for the
Northern District of Georgia denying class certifica-
tion is reported sub. nom. Sanders v. Robinson Hum-
phrey/American Express, Inc. at 634 F. Supp. 1048
and is also reported in [1985-1986 Transfer Binder]
Fed. Sec. L. Rep. (CCH) 492,880; a copy of the Order
is reproduced at Appendix D to this Petition. The
Opinion of the District Court denying plaintiffs’ mo-
tion to reconsider the Order denying class certifica-
tion is unreported, and appears at Appendix E to this
Petition.
JURISDICTION
The judgment of the Court of Appeals was entered
on September 15, 1987, and the jurisdiction of this
Court is invoked under 28 U.S.C. §1254(1). The Court
of Appeals denied rehearing by Order entered October
21, 1987 (Appendix B); issuance of the mandate of
the Court of Appeals was stayed by Orders entered
November 17 and November 20, 1987 (Appendix C).
STATUTES AND RULES INVOLVED
The statutes and rules involved in the case are
Section 10(b) of the Securities and Exchange Act of
1934, 15 U.S.C. §78j(b) (1982) (‘‘Section 10(b)’’); Se-
curities and Exchange Commission Rule 10b-5, 17
C.F.R. §240.10b-5 (1987) (‘Rule 10b-5’’); Rule 23 of
the Federal Rules of Civil Procedure; and Sections
11 and 12(2) of the Securities Act of 1933, 15 U.S.C.
§§77k, 771(2) (1982).
STATEMENT OF THE CASE
This Petition seeks review of a judgment of the
Court of Appeals for the Eleventh Circuit, reversing
an Order of the United States District Court for the
3
Northern District of Georgia which refused to certify
this action as a class action. For ease of reference in
this Petition, petitioner will be referred to either as
“defendant” or “Bradford”, while respondents will be
referred to as “plaintiffs”. Citations to the Opinions
of the Court of Appeals and the District Court will
be by reference to pages of the Appendix where such
Opinions are reproduced.
The District Court’s Opinion
This case was considered for class certification con-
currently with two similar cases against other broker/
dealers, Sanders v. Robinson Humphrey/American Ex-
press, Inc., et al. and Parker, et al. v. Paine Webber
Group, Inc., which actions were also pending in the
United States District Court for the Northern District
of Georgia. In an Opinion dated March 28, 1986, the
District Court denied class certification in all three
cases. (App. D-1-38). On July 8, 1986, the District
Court denied plaintiffs’ motion for reconsideration but
certified all three cases for interlocutory appeal under
28 U.S.C. §1292. (App. E-1).
Plaintiffs in this action originally alleged that
defendant, a broker/dealer in investment securities,
violated Sections 11 and 12(2) of the Securities Act
of 1938, 15 U.S.C. §§77k, 771(2); Section 10 of the
Securities Exchange Act of 1934, 15 U.S.C. §78j, and
Rule 10b-5 promulgated thereunder, 17 C.F.R.
§240.10b-5; and various common law and statutory
obligations under state law, all in connection with
plaintiffs’ purchases of limited partnership interests
in Petro-Lewis limited partnerships. (App. D-8-9). The
District Court’s jurisdiction was invoked under 15
U.S.C. §77v and 15 U.S.C. §78a, and under principles
of pendent jurisdiction. Prior to considering the issue
4
of class certification, the District Court had dismissed
plaintiffs’ claims against Bradford under Sections 11
and 12(2) of the Securities Act as barred by the ap-
plicable statute of limitations (App. D-8 at n. 4); no
appeal was taken from such dismissal. Plaintiffs seek
to represent a class comprised of all individuals who
made such purchases between January 1, 1981
through February 6, 1984. (App. D-5). The Petro-
Lewis interests were not traded on the open market.
(App. D-28). The first basis on which the District
Court denied class certification was that plaintiffs
were not adequate representatives of the class as re-
quired by Rule 23(aX4). (App. D-14-20). Plaintiffs had
testified that they did not believe that Bradford in-
tended to defraud them, and two of the plaintiffs
expressed reluctance to pursue claims against the
Bradford employees with whom they dealt and to
whom they were closely related (plaintiff Casler’s son
and plaintiff Lindsey’s brother). (App. D-18-20). Based
on this testimony, the District Court concluded as
follows:
The plaintiffs in Kirkpatrick do not believe,
or are unwilling to prosecute, their fraud
claims. For these reasons, the plaintiffs would
not fairly and adequately represent the other
class members.
(App. D-20).
The second ground cited by the District Court for
denying class certification was that common questions
of law and fact do not predominate, as required by
Rule 23(b\3) of the Federal Rules of Civil Procedure.
(App. D-20-38). The District Court specifically found
that the three plaintiffs in this case acknowledged
that they did not read the prospectuses and relied
entirely upon information provided by their brokers.
(App. D-26 at n. 12). This meant that there was no
uniformity of misrepresentations or omissions which
would merit class treatment. The District Court spe-
cifically found that plaintiffs had failed to establish
that the brokers had used a uniform oral ‘‘sales pitch’’
to Petro-Lewis investors. (App. D-25).
The District Court further ruled that common ques-
tions could not predominate because each class mem-
ber would have to show individual reliance. The
District Court ruled that this case primarily involves
alleged misrepresentations rather than omissions, so
there could be no presumption of reliance under A/-
filiated Ute Citizens v. United States, 406 U.S. 128,
92 S. Ct. 1456, 31 L. Ed. 2d 741 (1972). (App. D-
27). Plaintiffs had sought to avoid the issue of reliance
by asserting a fraud-on-the-market theory. The Dis-
trict Court ruled that the Complaint did not state a
cause of action for fraud-on-the-market.
In the current action the plaintiffs do not
allege that the securities would not have been
sold had the misrepresentations not been
present, nor have they shown that the se-
curities were sold on the open market at the
time of the purchases.
(App. D-28).
The District Court did not separately consider class
certification of plaintiffs’ dismissed claims under Sec-
tions 11 and 12(2) of the Securities Act, and also
denied class certification of plaintiffs’ state law claims.
(App. D-34-38).
The Court of Appeals’ Opinion.
While the Court of Appeals affirmed the District
Court’s denial of class certification of the plaintiffs’
state law claims (App. A-12), it held that the District
Court had erroneously analyzed plaintiffs’ fraud-on-
the-market claims (App. A-6-9), and had mischarac-
terized the misrepresentation claim (A-10-12), and so
had incorrectly determined that individual issues pre-
dominated over common issues in connection with
plaintiffs’ claims under Rule 10b-5.
With respect to plaintiffs’ fraud-on-the-market the-
ory, the Court of Appeals stated as follows:
We conclude, however, that where as here,
a complaint alleges that a security not traded
on the open market could not have been is-
sued but for the fraud of the defendants,
class action treatment is not precluded by the
possibility that some purchases, including the
named plaintiffs, might have relied on factors
other than the integrity of the market.
(App. A-8). The Court of Appeals did not challenge
the District Court’s finding that the named plaintiffs
relied entirely upon information furnished by their
brokers.
With respect to the District Court’s conclusion that
the misrepresentation claims were not suited for class
treatment, the Court of Appeals held as follows:
Neither the complaints nor the deposition
testimony relied upon by the District Court
indicate that any oral representations to the
named plaintiffs varied materially from the
misleading information alleged to have been
disseminated generally as a result of the
defendants’ commons schemes ... conse-
quently, the possibility that the named
plaintiffs or other potential class members
may have obtained the allegedly misleading
information via their individual brokers rather
than through widely distributed written in-
formation cannot transform the allegations of
the complaints into claims concerning pri-
marily questions of individual reliance.
(App. A-10). It should be noted that in so ruling, the
Court of Appeals did not dispute the District Court’s
characterization of the evidence as failing to dem-
onstrate an absence of material variation in represen-
tations to class members.
The Court of Appeals also concluded that the Dis-
trict Court erred in failing to consider separately the
appropriateness of class certification of claims under
Sections 11 and 12(2) of the Securities Act, even
though all such claims against Bradford had already
been dismissed. (App. A-12-13).
Finally, the Court of Appeals held that the Court
had applied an erroneous standard in determining that
the named plaintiffs would not be adequate class rep-
resentatives. (App. A-13-17). The Court of Appeals
remanded the issue to the District Court for a further
factual determination to be based upon the standard
articulated by the Court of Appeals. It stated this
standard as follows:
We conclude, however, that in securities
cases such as these, where the class is rep-
resented by competent and zealous counsel,
class certification should not be denied simply
because of a perceived lack of subjective in-
terest on the part of the named plaintiffs
unless their participation is so minimal that
they virtually have abdicated to their
attorneys the conduct of the case.
(App. A-16).
While other issues were dealt with by the District
Court and the Court of Appeals, the foregoing is suf-
ficient to permit this Court to conclude whether the
decision by the Court of Appeals merits review.
REASONS FOR GRANTING THE WRIT
Under Rule 17.1 of the Rules of this Court, grounds
for considering review on Writ of Certiorari include
a decision by the Court of Appeals which is in conflict
with the decisions of another federal Court of Appeals
on the same matters; or which represents such a de-
parture from the accepted and usual course of judicial
proceedings as to call for exercise of this Court’s
power of supervision; or which decides a federal ques-
tion in a way in conflict with applicable decisions of
this Court. The decision of the Court of Appeals meets
all three criteria.
1. The Court of Appeals’ use of the fraud-on-the-market
theory to supply the commonality requirement of Rule
23(b)3) where the securities were neither traded on an
efficient market nor fraudulently issued conflicts with
many opinions of other Courts of Appeal which have
interpreted and applied this theory.
In holding that the fraud-on-the-market theory may
dispense with reliance as an element of recovery in
an action under Rule 10b-5 with respect to securities
not traded on an open market, the Court of Appeals
purported to follow the Fifth Circuit’s holding in Sho-
res v. Sklar, 647 F.2d 462 (5th Cir. 1981) (in banc),
cert. denied, 459 U.S. 1102, 1038 S. Ct. 722, 74 L.
Ed. 2d 949 (1983). Other Circuit Courts’ opinions have
stated that an efficient market is one of the elements
which must be established in order for this theory to
apply. In Basic v. Levinson, 786 F.2d 741 (6th Cir.
1986), cert. granted, 107 S. Ct. 1284 (1987), recently
argued before this Court, the Sixth Circuit Court of
Appeals listed an efficient market as one of five re-
quirements for establishing a presumption of reliance
under a fraud-on-the-market theory, and stated that
a defendant can defeat the presumption by rebutting
any of the five elements. 786 F.2d at 750, n. 6. Lev-
inson assertedly involved an efficient market. Simi-
larly, Blackie v. Barrack, 524 F.2d 891, 906 (9th Cir.
1975), cert. denied, 429 U.S. 816, 97 S. Ct. 57, 50
L. Ed. 2d 75 (1976), held that a defendant could rebut
the presumption of reliance by establishing that “an
insufficient number of traders relied to [distort] the
price.”’ 524 F.2d at 906. See also Vervaecke v. Chiles,
Heider & Co., Inc., 578 F.2d 713 (8th Cir. 1978) (re-
liance a necessary element for recovery in action for
purchase of unregistered municipal bonds); Ross v.
A.H. Robbins, 607 F.2d 545, 553, cert. denied, 446
U.S. 946 (1980) (2d Cir. 1979) (reliance may be pre-
sumed where “the material misrepresentation ef-
fected the price of stock traded on an open market’’);
Penzirer v. Wolf, 663 F.2d 365 (2d Cir. 1981), vacated
as moot sub nom. Price Waterhouse v. Penzirer, 459
U.S. 1027, 103 S. Ct. 434, 74 L. Ed. 2d 594 (1982)
(investor may rely generally on the supposition that
fraud has not affected the market price); Peil v.
Speiser, 806 F.2d 1154 at 1161, n.10 (3d Cir. 1986)
(fraud-on-the-market theory is based on assumption
that ‘there is a nearly perfect market in informa-
10
tion’). Commentators have criticized the extension of
the fraud-on-the-market theory to permit recovery in
the absence of an efficient market. See, e.g., Note,
The Fraud-on-the-Market Theory, 95 Harv. L. Rev.
1143, 1161 (1982).
The Fifth Circuit in Shores applied the fraud-on-
the-market theory to municipal bonds not traded on
the open market where the securities were “fraudu-
lently created’, 647 F.2d at 472. Defendants had in-
duced “‘the Town of Frisco City to create an Industrial
Development Board to finance [a corporation’s] facil-
ity as a scheme to defraud the investing public’, 647
F.2d at 465. The Court ruled that the plaintiff need
_ not show that he read or relied upon the allegedly
fraudulent Offering Circular issued in connection with
these fraudulently created bonds in order to recover
under subsections (1) and (3) of Rule 10b-5, because
[rjather than containing the entire fraud, the
Offering Circular was assertedly only one
step in the course of an elaborate scheme.
647 F.2d at 468. In this situation, the Court reasoned,
it is unnecessary to establish a causal link (reliance)
between the misrepresentations and the plaintiff's
losses.
Whenever the rule 10b-5 issue shifts from
misrepresentation or omission in a document
to fraud on a broader scale, the search for
causation must shift also. The ‘reliance’ that
produces causation in the latter type of case
cannot come from reading a document. It
may arise from . . . a claim from a bond buyer
that he relied on the market to provide se-
ALA She
OR a 1 25K K.
A telat Fi,
a ie rl Aa
1]
curities that were not fraudulently created as
we have here.
647 F.2d at 472. (Emphasis supplied.) In T.J. Raney
& Sons v. Fort Cobb, Okl. Irr. Fuel, 717 F.2d 13830
(10th Cir. 1983), cert. denied, 465 U.S. 1026 (1984)
the Tenth Circuit followed Shores where bonds were
issued in violation of Oklahoma law.
In the case at bar, as distinct from Shores and
Raney, it is not alleged that the securities were
“fraudulently created’’ or illegally issued, or that there
was any fraud other than misrepresentations of in-
formation, the activity proscribed by subsection (2) of
Rule 10b-5. The Eleventh Circuit characterized the
plaintiffs’ allegations as being solely that the
defendant
knowingly or recklessly participated with Pe-
tro-Lewis in disseminating materially mis-
leading information regarding Petro-Lewis’
financial condition and failed to provide other
information that would have made the state-
ments not misleading.
(App. A-3). While the Fifth and Tenth Circuits’ ver-
sion of fraud-on-the-market dispenses with the neces-
sity of an established market where the securities
themselves are fraudulently created, the Eleventh Cir-
cuit’s version of fraud-on-the-market requires neither
element. Every securities fraud case involving mis-
representations or omissions will involve this kind of
“‘fraud-on-the-market’’. The conflict between the Elev-
enth Circuit’s opinion in the case at bar and the Fifth
Circuit’s opinion in Shores v. Sklar is strikingly and
ironically illustrated by the Eleventh Circuit’s inter-
changeable use of the words “issued” and ‘‘mar-
12
keted” in discussing why it believed its opinion was
consistent with Shores:
Under Shores, reliance may be established by
proof that securities not traded on the open
market could not have been issued but for a
fraudulent scheme by the defendants. [Cita-
tions omitted.] Here, consistent with Shores,
plaintiffs alleged that the Petro-Lewis shares,
which were not traded on the open market,
could not have been marketed but for the
defendants’ fraud.
(App. A-6-7; emphasis supplied). Securities which are
fraudulently marketed are not necessarily fraudu-
lently issued. Fraudulent marketing in the 10b-5 con-
text involves fraudulent misrepresentations or
omissions, the activity proscribed by Rule 10b-5(2).
Fraudulent issuance of securities involves fraud apart
from misrepresentations or omissions, and is covered
by subsections (1) and (3), not subsection (2). In effect,
the Eleventh Circuit has extended fraud-on-the-mar-
ket to cover actions for misrepresentation under Rule
10b-5(2). In Finkel v. Docutel/Olivetti Corp., 817 F.2d
356, 363 (5th Cir. 1987) n. 18, the Fifth Circuit ex-
pressly disagreed with the Eleventh Circuit’s position
on this point as first suggested in Lipton v. Docu-
mation, Inc., 734 F.2d 740 (11th Cir. 1984), cert. de-
nied, 469 U.S. 1132, 105 S.Ct. 814 (1985) Lipton
involved securities traded on an established market.
The Eleventh Circuit’s opinion in this case thus
presents this Court with an opportunity to resolve
the conflicts between three distinct and conflicting
versions of the fraud-on-the-market theory as applied
in the various Circuits. While this Court may resolve
13
this conflict by its disposition of Basic v. Levinson,
unless it entirely vitiates fraud-on-the-market as a the-
ory of recovery, it should take the opportunity to
clarify how—if at all—the theory may be applied to
securities not traded on an open market.
misrepresen
conflicts with the holdings of the Fifth Circuit Court
of Appeals and numerous District Court opinions from
other Circuits.
In addition to its ruling on fraud-on-the-market, the
Court of Appeals concluded that the District Court
had improperly found that plaintiffs’ 10b-5(2) oral mis-
representation claims were unsuited for class treat-
ment. The Court of Appeals’ sole basis for reversing
the District Court on this issue was its assertion that
neither the complaint nor the deposition testimony
relied upon by the District Court “indicate that any
oral representations to the named plaintiffs varied
materially from the misleading information alleged to
have been disseminated generally asa result of the
defendants’ common schemes.” (App. A-10). The
Court of Appeals did not question the District Court’s
finding that
the plaintiffs have presented no materials
whatsoever, developed through discovery or
asserted by the individual plaintiffs, indicat-
ing a uniform ‘sales pitch’ by the defendants
to all members of the proposed classes.
(App. D-25). The Court of Appeals simply assumed
that in the absence of proof that there was not a
uniform sales pitch, the plaintiffs’ allegations that
14
there was a uniform sales pitch could be taken as
established for purposes of Rule 23(b\3).
This holding by the Court of Appeals directly con-
flicts with holdings by the Fifth Circuit Court of
Appeals in Simon v. Merrill Lynch, Pierce, Fenner
& Smith, Inc., 482 F.2d 880, 882-883 (1973) and
Grainger v. State Sec. Life Ins. Co., 547 F.2d 303,
307 (1977), cert. denied, 436 U.S. 932 (1978). As
pointed out above in Simon, Rule 23(bX3) permits a
class action only when the court affirmatively finds
that the questions of law or fact common to the mem-
bers of the class predominate over any questions af-
fecting only individual members; thus the party which
seeks class certification has the burden of establishing
such predominance.
Even if plaintiff had established that the al-
leged misrepresentations were primarily writ-
ten, a class action would not be appropriate
unless he could prove the similarity of the
writings. His failure to prove any standard-
ized representations by Merrill Lynch bars a
class action whether it is based on Rule 10b-
5 or the state common law.
482 F.2d at 880. Similarly, in Grainger, the Court of
Appeals stated as follows:
It is possible, although unlikely, that oral mis-
representations can be uniform, e.g., through
use of a standardized sales pitch by all the
company’s salesmen. Plaintiffs in the present
case should be given the opportunity to dem-
onstrate the existence and use of such a de-
vice. If plaintiffs cannot do this, then the
District Court may quite properly refuse to
15
certify a class on the grounds that common
questions of law or fact do not predominate.
547 F.2d 307-308.
By reversing the District Court because of the fail-
ure of the evidence to show that there was material
variation in the oral representations made to class
members, the Eleventh Circuit did not question the
District Court’s finding that plaintiffs had failed to
demonstrate any uniform sales pitch by Bradford. The
Eleventh Circuit’s opinion thus has adopted a test of
commonality under Rule 23(bX3) which is fundamen-
tally and radically different from that followed in the
Fifth Circuit. Numerous district court opinions have
heretofore assumed that class certification must be
denied in an oral misrepresentations case because
there was no basis for a finding that the represen-
tations to different class members would be similar.
See, e.g., Moscarelli v. Stamm, 288 F. Supp. 453,
462-463 (E.D.N.Y. 1968) (while oral statements by
brokers may have been similar with respect to each
class member, they could not have been standardized
in the sense that written prospectuses or other doc-
uments are standardized, and class certification must
be denied); Crasto v. Estate of Kaskel, 63 F.R.D. 18,
23 (S.D.N.Y. 1974) (even though variations in written
materials can be accommodated by subclasses, class
certification must be denied where action was based,
at least in part, on oral misrepresentations); McMerty
v. Burtness, 72 F.R.D. 450, 455 (D. Minn. 1976)
(mixed oral and written misrepresentations required
application of general rule that oral representations
are not suitable for class treatment); In re Scientific
Control Corp. Securities Lit., 71 F.R.D. 491 (S.D.N.Y.
1976) (class treatment denied with respect to claims
16
involving mixed oral and written misrepresentations).
The Eleventh Circuit’s holding literally dispenses with
the necessity of any finding that misrepresentations
to different class members were similar or identical,
and assumes that the requirements of Rule 23(b\3)
are met absent a showing to the contrary.
3. In ruling that the District Court must consider class
certification of claims under Sections 11 and 12(2) of
the Securities Act of 1933, when all of the plaintiffs’
claims under such Sections were time-barred, the Court
of Appeals radically departed from the usual course of
judicial proceedings, and such ruling is in conflict with
opinions of this and other courts.
In the case at bar, plaintiffs’ claims under Sections
11 and 12(2) of the Securities Act of 1933 had been
dismissed by the District Court as barred by the ap-
plicable statute of limitations prior to the District
Court’s ruling on class certification. (App. D-8 at n.
4). Plaintiffs did not seek any appeal from this ruling.
The Court of Appeals, nonetheless, ruled that the
District Court erred in failing to consider class cert-
ification of these claims. (App. A-12-13).
As this Court has repeatedly held, a class repre-
sentative must be part of the class and “‘possess the
same interests and suffer the same injury’ as the
class members. East Texas Motor Freight v. Rodri-
guez, 431 U.S. 395, 403, 97 S. Ct. 1891, 52 L. Ed.
2d 453 (1977). In Vervaecke v. Chiles, Heider & Co.,
Inc., supra, at 719, the Eighth Circuit Court of
Appeals affirmed the District Court’s refusal to cer-
tify an action for class treatment of claims brought
under Section 10(b) of the Securities Exchange Act
of 1934 and Rule 10b-5 where the Court had made
its determination ‘‘on a record which showed that
plaintiff could not recover on his individual claim.”
The Opinion of the Eleventh Circuit in the case at
bar obviously conflicts with both this Court’s holding
in East Texas Motor Freight and with the Eighth
Circuit’s holding in Vervaecke. Coupled with the Court
of Appeals’ ruling as to the appropriate standard for
adequacy of representation under Rule 23(a)\4) (dis-
cussed in the next section), its holding opens grand
new vistas for abuse of the class certification process.
This Court should not countenance such a departure
from the ordinary and usual course of judicial pro-
ceedings.
4. The standard announced by the Court of Appeals for
adequacy of representation under Rule 23(a\4) of the
Federal Rules of Civil Procedure represents such a de-
parture from the usual and ordinary course of judicial
proceedings as to call for the exercise of this Court’s
supervisory powers.
The District Court expressly found, and the Court
of Appeals did not question, that plaintiffs would not
adequately represent the interests of other class mem-
bers because
the plaintiffs in Kirkpatrick do not believe,
or are unwilling to prosecute their fraud
claims.
(App. D-20; emphasis supplied). The Court of Appeals
ruled that the District Court had applied an improper
standard.
Contrary to the district court’s approach to
the issue, adequate class representation gen-
erally does not require that the named
plaintiffs demonstrate to any particular de-
18
gree that individually they will pursue with
vigor the legal claims of the class.
* * *
We conclude, however, that in securities
cases such as these, where the class is rep-
resented by competent and zealous counsel,
class certification should not be denied simply
because of a perceived lack of subjective in-
terest on the part of the named plaintiffs
unless their participation is so minimal that
they virtually have abdicated to their
attorneys the conduct of the case.
(App. A-15-17). It should be recalled that the District
Court supported its finding by quoting from each of
the three plaintiffs’ depositions, in which all three
stated that they did not believe anyone at Bradford
was guilty of fraud; further, the plaintiffs Casler and
Lindsey testified to a reluctance to involve in liti-
gation the Bradford employees (Lindsey’s brother and
Casler’s son) who sold them the securities. The ruling
by the Court of Appeals assumes that an attorney—
rather than his client—ultimately controls the lawsuit.
Regardless of the ethical difficulties inherent in this
view, it flies directly in the face of this Court’s Opin-
ion in Hansberry v. Lee, 311 U.S. 32, 45, 61 S. Ct.
115, 85 L. Ed. 22 (1940):
Such a selection of representatives for pur-
poses of litigation, whose substantial inter-
ests are not necessarily or even probably the
same as those whom they are deemed to rep-
resent, does not afford that protection to ab-
sent parties which due process requires.
19
CONCLUSION
For all of the foregoing reasons, a Writ of
Certiorari should issue to the United States Court of
Appeals for the Eleventh Circuit.
Dated: Nashville, Tennessee
December 7, 1987
AMES DAVIS
Counsel of Record for Petitioner
JOHN C. GRAY ROBERT E. BOSTON
GRAY, GILLILAND & GOLD, P.C. WALLER LANSDEN DORTCH
Richmond 400 Building, Suite 300 & DAVIS
975 Johnson Ferry Road, N.E. 2100 One Commerce Place
Atlanta, Georgia 30342 Nashville, Tennessee 37239
(404) 843-2800 (615) 244-6380
Attorneys for Petitioner
TABLE OF CONTENTS
Opinion of the Court of Appeals for the Eleventh
Circuit (September 15, 1987) ..........ccceeeseeeeees
Order of the Court of Appeals Denying Petition for
Rehearing and Suggestion of Rehearing in banc
I Fee BEE siirisitsernciiecatsonsncscisasessvenes
Orders Staying the Mandate of the Court of Appeals
(November 17 and 20, 1987) ............csseceseeees
Opinion of the District Court for the Northern Dis-
trict of Georgia Denying Plaintiffs’ Motion for
Class Certiciation (March 27, 1986) _..............
Opinion of the District Court Denying Plaintiffs’
Motion for Reconsideration, Granting Plaintiffs’
Motion to Certify the Case for Interlocutory
Ap al Pursuant to 28 U.S.C. §1292(b) (1982)
oe the District Court’s Order Deny-
an Class Certification (July 8, 1986) _...........
Order of the Court of Appeals Granting Plaintiffs
Permission to Appeal Pursuant to 28 U.S.C.
§1292(b) (1982) (August 21, 1986)...
I I gigi cc csviisccacccensudasonsacasinandins
Suzanne KIRKPATRICK; Dorothy D. Casler and Charles H.
Lindsey, on behalf of themselves and all others similarly situated,
Plaintiffs-Appellants,
v.
— J.C. BRADFORD & CO.,
Defendant-Appellee.
Glenn T. SANDERS on behalf of himself and all others similarly
situated, and Leslie D. Sanders,
Plaintiffs-Appellants,
v.
ROBINSON HUMPHREY/ AMERICAN EXPRESS, INC., and
Shearson/ American Express, Inc.,
Defendants-Appellees.
Tommy E. PARKER, as custodian for Kimberly M. PARKER
and James L. Smith, on behalf of themselves and all others
similarly situated,
Plaintiffs-Appellants,
Vv.
PAINE WEBBER GROUP, INC.,
Defendant-Appellee.
Nos. 86-8624 to 86-8626.
United States Court of Appeals,
Eleventh Circuit.
Sept. 15, 1987.
A-2
Appeals from the United States District Court for the
Northern District of Georgia.
Before VANCE and KRAVITCH, Circuit Judges, and
BROWN’, Senior Circuit Judge.
KRAVITCH, Circuit Judge:
Plaintiffs in these companion cases filed certified interlocutory
appeals pursuant to 28 U.S.C. § 1292(b) challenging the district
court’s denial of class certification under Rule 23 of the Federal
Rules of Civil Procedure. The district court denied class certifica-
tion in each case on the alternative grounds that the named
plaintiffs were not adequate class representatives as required by
Fed.R.Civ.P. 23(a)(4) and that individual questions of fact
predominated over common questions of law and fact in con-
travention of Fed.R.Civ.P. 23(b)(3). Concluding that the district
court applied erroneous legal standards, we reverse and remand
for further consideration.
I. BACKGROUND
These are a few of the many cases arising out of the virtual
collapse in 1984 of the Petro-Lewis oil and natural gas invest-
ment funds. From 1970 to 1984, about 180,000 people purchased
more than $3 billion worth of Petro-Lewis securities and limited
partnerships. When the price of oil and gas declined in 1981
and 1982, Petro-Lewis began borrowing funds to pay partner-
ship distributions, to service its debt, and to promote the sale
of additional programs. In February 1984, revealing for the first
time that it was in dire financial straits, Petro- Lewis announced
that it would implement a series of drastic economy measures,
including cutting partnership distributions by as much as 50 per
cent and selling between one quarter and one third of its reserves.
Numerous lawsuits followed.
In In re Petro-Lewis Securities Litigation, [1984-85 Transfer
Binder], Fed.Sec.L.Rep. { 91,899 (D.Colo.1984), the U.S. District
Court for the district of Colorado approved a settlement of eleven
* Honorable John R. Brown, Senior U.S. Circuit Judge for the Fifth Circuit,
sitting by designation.
A-3
consolidated class suits brought under various provisions of the
federal securities laws against the directors and certain corporate
entities of the Petro-Lewis organization. Under the terms of the
settlement, the participating class members agreed to release
the defendants and all Petro-Lewis subsidiaries in return for the
formation of a royalty trust and a settlement fund valued at $23.5
million. The settlement agreement expressly provided that the
plaintiff class members retained the right to file suit against any
nondefendants, including broker-dealers of Petro-Lewis securi-
ties and limited partnerships.
In these cases, plaintiffs allege that the actions of the de-
fendant brokerage firms and individuals in selling and promoting
interests in Petro-Lewis violated sections 11 and 12(2) of the
Securities Act of 1933, 15 U.S.C. §§ 77k, 771(2), section 10 of
the Securities Exchange Act of 1934, 15 U.S.C. § 78j, Rule 10b-5
promulgated thereunder, 17 C.F.R. § 240.10b-5, and various
common law and statutory obligations under state law! Claiming
to represent classes of plaintiffs who, between January 1, 1981
to February 6, 1984, purchased, reinvested in, or otherwise ac-
hip int from the de-
fendant firms, the plaintiffs alleged that the defendants know-
ingly or recklessly participated with Petro-Lewis in disseminating
materially misleading information regarding Petro-Lewis’ fi-
nancial condition and failed to provide other information that
would have made the statements not misleading.
After discovery and hearings, the district court issued an order
and an amended order denying certification of the classes under
Rule 23 of the Federal Rules of Civil Procedure. Although the
court determined that each suit satisfied the class action prereq-
uisites of Fed.R. 23(a)(1), (2), and (3), the court denied certifica-
tion on the ground that the named plaintiffs were not adequate
class representatives as required by Rule 23(a)(4). The basis for
this determination was that the named plaintiffs did not
' Additional claims were asserted in some of the complaints. The district
court’s ruling on these other claims were not challenged on appeal. Accordingly,
the district court's denial of class certification as to those claims will not be
disturbed.
A-+
demonstrate that they would pursue the litigation with suffi-
cient vigor to protect the interests of the class. As an alternative
ground of decision, the court held that individual questions of
law-and fact outweighed common questions and thus that the
actions did not satisfy the standards of Rule 23(b)(3). Concluding
that its ruling was based upon determinations of law as to which
there may be substantial ground for difference of opinion and
that an immediate appeai from the denial of class certification
would materially advance the ultimate determination of the ac-
tions, the court certified its order for an interlocutory appeal
pursuant to 28 U.S.C. § 1292(b). We accepted jurisdiction. See id.
II. RULE 23(b)(3): PREDOMINANCE OF COMMON
OR INDIVIDUAL QUESTIONS
The district court’s conclusion that individual questions
predominate over common questions is based directly on the
court's interpretation of the substance of the plaintiffs’ claims.
Consequently, we will consider first that aspect of the court's
denial of class certification.
In holding that certification was improper under Rule
23(b)(3),? the court concluded that common questions of law
and fact in the 10(b) and 10b-5 claims were dominated by in-
dividual questions of reliance on the part of the particular
* A suit may be maintained as a class action only if the four prerequisites
of Rule 23(a) are satisfied and, in addition, the case satisfies one of the
requirements of Rule 23(b). See Fed.R.Civ.P. 23(b). In this case, there is no
dispute that subsections (1) and (2) of Rule 23(b) do not apply. Rule 23(b)(3)
permits class action treatment if:
(3) the court finds that the questions of law or fact common
to the members of the class predominate over any questions af-
fecting only individual members, and that a class action is superior
to other available methods for the fair and efficient adjudication
of the controversy. The matters pertinent to the findings include:
(A) the interest of members of the class in individually control-
ling the prosecution or defense of separate actions; (B) the extent
and nature of any litigation concerning the controversy already
commenced by or against members of the class: (C) the desirability
or undesirability of concentrating the litigation of the claims in
the particular forum; (D) the difficulties likely to be encountered
in the management of a class action.
A-5
purchasers, statutes of limitations in each state in which there
may be class members, and arbitration agreements in many of
the purchase contracts. The court viewed the state law claims
to be inappropriate for class action treatment because liability
would depend upon the substantive law of the different states.
Finally, the court refused to consider certifying classes limited
to the section Ll and 12(2) claims after concluding that the 10(b)
and state law claims were the dominant claims asserted in the
complaints.
A. Section 10(b) and Rule 10b-5
The complaints allege that the defendants violated section
10(b) and Rule 10b-5 by engaging in two related but different
courses of conduct. First, the complaints contend that the defen-
dants participated with Petro-Lewis in disseminating misleading
prospectuses and in engaging in a standardized promotion by the
individual brokers. Second, the plaintiffs claim that the firms
continued to sell and promote Petro-Lewis shares despite the firms’
awareness or reckless disregard of Petro-Lewis’ severe financial
difficulties. Based on these allegations, the plaintiffs assert three
theories of liability under which common issues of law and fact
necessarily would outweigh individual issues. They first contend
that their claims concern primarily acts of omission and thus that
reliance on the part of individual purchasers should be presum-
ed under the rule of Affiliated Ute Citizens v. United States, 406
USS. 128, 92 S.Ct. 1456, 31 L.Ed.2d 741 (1975). Second, they argue
that the claims fall under the fraud-on-the-market theory adopted
by our predecessor court in Shores v. Sklar, 647 F.2d 462 (5th
Cir. May 1981) (en banc), cert. denied, 459 U.S. 1102, 103 S.Ct.
722, 74 L.Ed.2d 949 (1983).’ Finally, they argue that the allega-
tions involve a common course of conduct toward all defendants,
and thus that any issues of individual reliance could not
predominate over common questions of facts. See e.g., Kennedy
v. Tallant, 710 F.2d 711 (lth Cir. 1983).
* The Eleventh Circuit, in the en banc decision Bonner vo. City of Prichard,
661 F.2d 1206, 1209 (Lith Cir.1981), adopted as precedent decisions of the
former Fifth Circuit rendered prior to October 1, 1981.
A-6
The district court rejected each of these theories. The court
found the characterization of the claims as involving primarily
omissions to be precluded by the interpretation in Huddleston
vo. Herman & McLean, 640 F.2d 534 (Sth Cir. Unit A March 198),
affd in part and revd in part on other grounds, 459 U.S. 375,
103 S.Ct. 683, 74 L.Ed.2d 548 (1983), and Cavalier Carpets v.
Caylor, 746 F.2d 749 (Lith Cir.1984), of the requirements for an
omissions case under Affiliated Ute. The court rejected the fraud-
on-the-market theory as insufficiently supported by the pleadings
or the evidence proffered by the plaintiffs. Finally, the court re-
fused class action treatment under the course of conduct theory
based on the court’s determination that the plaintiffs’ allegations
involve primarily individualized oral representations rather than
a common scheme by the defendants toward the plaintiff
purchasers.
We agree with the district court that under the precedent of
this circuit the plaintiffs’ complaints cannot be properly
characterized as omissions cases under the standards of Affiliated
Ute. Here, as in Cavalier Carpets, supra, and Huddleston, supra,
the complaints indicate that “[t]he defendants did not stand mute
in the face of a duty to disclose as did the defendants in Affiliated
Ute.” Cavalier Carpet, 746 F.2d at 749 n. 22 (quoting Huddleston,
640 F.2d at 548). Rather, as in those cases, the allegations con-
tend that the defendants “undertook . . . to disclose relevant in-
formation . . . now alleged to contain certain misstatements of
fact and to fail to contain other facts necessary to make the
statements made, in light of the circumstances, not misleading.”
Id. Consequently, the district court properly concluded that the
at most allege mixed claims of misrepresentations and
omissions and thus that Affiliated Ute’s presumption of reliance
does not apply.
We cannot agree, however, with the court's rejection of the
fraud-on-the-market theory as a basis for class action treatment.
In Shores v. Sklar, supra, the former Fifth Circuit sitting en banc
held that, in fraud claims asserted under Rules 10b-5(1) and (3),
the reliance element of Rule 10b-5 may be satisfied by proof that
the plaintiff relied on the integrity of the market rather than on
specific misrepresentations by the defendants. Under Shores,
i
A-7
reliance may be established by proof that securities not traded
on the open market could not have been issued but for a
fraudulent scheme by the defendants. 647 F.2d at 469; cf. Lip-
ton v. Documation, Inc., 734 F.2d 740, 747 (Lith Cir.1984), cert.
denied, 469 U.S. 1132, 105 S.Ct. 814, 83 L.Ed.2d 807 (1985)
(adopting fraud-on-the-market theory in context of securities
traded in open market). Here, consistent with Shores, plaintiffs
alleged that the Petro-Lewis shares, which were not traded on
the open market, could not have been marketed but for the
defendants’ fraud.
In rejecting this claim as improper for class treatment, the
court relied solely on its conclusion that the plaintiffs’ allega-
tions lacked evidentiary support. Despite the court’s assertions
to the contrary, this determination was an inappropriate inquiry
into the merits of the plaintiffs’ claims. Certainly, as the court
noted in its order, a court may look beyond the allegations of
the complaint in determining whether a motion for class cer-
tification should be granted. General Telephone Co. of
Southwest v. Falcon, 457 U.S. 147, 160, 102 S.Ct. 2364, 2372,
72 L.Ed.2d 740 (1982); Love v. Turlington, 733 F.2d 1562, 1564
(Lith Cir.1984). Indeed, it is often necessary for a district court
to consider, for example, a deposition of a named plaintiff to
determine whether Rule 23(a)’s commonality and typicality re-
quirements are met. See, e.g., Falcon, supra; Nelson v. U.S. Steel
Corp., 709 F.2d 675, 679-80 (Lith Cir.1983). Here, however, the
court’s rejection of the fraud-on-the-market theory was based
upon nothing other than the court’s assessment of the plaintiffs’
likelihood of success on the claims. This is an improper basis
for deciding the propriety of a class action. E.g., Eiser: v. Carlisle
& Jacquelin, 417 U.S. 156, 177-78, 94 S.Ct. 2140, 2152-53, 40
L.Ed.2d 732 (1974); Nelson, 709 F.2d at 679.
Nor can the court’s rejection of the fraud-on-the-market
theory be upheld under the rationale that fraud-on-the-market
claims are improper for class treatment where, as here, the
evidence indicates that the named plaintiffs relied on the ad-
vice of their brokers rather than solely on the integrity of the
market. As the defendants note, several district courts have
denied class certification for fraud-on-the-market claims where
A-8
evidence indicates that the named plaintiffs may in fact have
relied on factors other than the market's integrity. These cases,
however, generally have concerned fraud-on-the-market claims
involving securities traded in an open market. See Masri v.
Wakefield, 106 F.R.D. 322, 325 (D.Colo.1984); Seiler v. E.F. Hut-
ton ¢> Co., 102 F.R.D. 880, 890 (D.N.J.1984); McNichols v. Loeb
Rhoades, 97 F.R.D. 331, 334 (N.D.I11.1982). But see Shores v. Sklar,
[current] Fed.Sec.L.Rep. (CCH) { 92,874 (N.D.Ala. July 30, 1986)
(on remand, denying class certification of fraud-on-the-market
claim involving security not openly traded). That version of the
fraud-on-the-market theory focuses on the plaintiffs’ reliance on
the integrity of an open and developed market to set a price ac-
curately reflecting the security's value. See Lipton v. Documa-
tion, 734 F.2d at 743. The issue of reliance on an open market
thus turns on a matter of degree--the price of the security--and
not, as in Shores, the absolute question of whether the security
was worthy of being issued.
Because the Petro-Lewis shares were not traded on the open
market, we need not now consider the appropriateness of class
certification of traditional fraud-on-the-market claims involving
securities that are openly traded. We conclude, however, that
where as here, a complaint alleges that a security not traded on
the open market could not have been issued but for the fraud
of the defendants, class action treatment is not precluded by the
possibility that some purchasers, including the named plaintiffs,
might have relied on factors other than the integrity of the market.
Shores did not hold, as the defendants contend, that recovery
is possible under a fraud-on-the-market claim only when a
claimant proves reliance on the integrity of the market to the
exclusion of all other factors. Rather, Shores was based on the
premise that “(t]he securities laws allow an investor to rely on
the integrity of the market to the extent that the securities it of-
fers to him for purchase are entitled to be in the marketplace.”
647 F.2d at 471. Consequently, where a security could not have
been issued but for a fraudulent scheme, the fact that the in-
vestor may have relied on other factors in deciding to purchase
that security at a particular price does not minimize the essen-
tial fact that the purchaser relied on the market's integrity to
A-9
ensure that the security was worthy of being issued. Indeed, as
the court noted in Shores, under a theory that the defendants’
fraud caused securities to be issued, “it would have availed [the
plaintiff] nothing to have read the [allegedly misleading] Offer-
ing Circular.” Id. at 470-71. A Shores fraud-on-the-market claim
thus is especially suited for class action treatment, as it makes
virtually irrelevant the possibility that the various purchasers may
have relied on different representations regarding the desirabili-
ty of the particular security in question: all have relied on the
integrity of the market in the but-for sense required by Shores.‘
* In remanding to the district court, Shores instructed the court to “recon-
sider the maintainability of this action as a class action as to members of a
properly defined class of Bond purchasers who did not . . . rely [on the alleged-
ly misrepresentative offering circular].” 647 F.2d at 472. This instruction should
not be misconstrued as an indication that the fraud-on-the-market claim would
be available only to those individuals who did not rely on-the circular. The
district court previously had determined that a Rule 10b-5(2) misrepresenta-
tion claim could be brought as a class action on behalf of a class of purchasers
who had relied on the offering circular. The court of appeals recognized that
any member of a class so defined necessarily would satisfy one of the elements
of a 10b-5(2) claim and thus could recover if it were proven on a class-wide
basis that the defendants knowingly made materially misleading statements
in the offering circular and that the purchasers suffered losses as a result. See
647 F.2d at 468 (listing elements of 10b-5(2) misrepresentation claim). The
court realized that, under the facts alleged in that case, these class-wide
10b-5(2) issues would be contained in the proof necessary for recovery under
the 10b-5(1) and (3) fraud-on-the-market theory. See 647 F.2d at 468 (“[T]he
Offering Circular was assertedly only one step in the course of an elaborate
scheme.”). Those purchasers who did not rely could recover, however, only
by meeting the additional burden of proving, under the fraud-on-the-market
theory, that the securities could not have been issued but for the fraud of the
defendants. Thus, the instruction that the district court determine the main-
tainability of a separate class for purchasers who did not rely was based simply
upon the recognition that, as a practical matter, those purchasers would have
a greater factual burden to establish liability than would those who relied
on the offering circular. The instruction did not imply, however, that those
who had relied on the offering circular could not also recover under the fraud-
on-the-market theory. To the extent that the district court on remand reached
a different conclusion, see Shores v. Sklar, [current] Fed.Sec.L.Rep. (CCH)
{ 92,074 (N.D.Ala. July 30, 1986), we reject that court's interpretation of the
en banc decision.
A-10
We conclude for similar reasons that the district court also
improperly found that the plaintiffs’ 1Ob-5(2) misrepresentation
claims were not suited for class treatment. The basis for the
court’s denial of class certification of the misrepresentation
claims was the court’s conclusion that the claims involved
primarily oral representations and thus would present individual
issues of reliance. To arrive at this conclusion, the court focused
on deposition evidence indicating that the named plaintiffs relied
not so much on prospectuses and other written materials as on
the recommendations of their individual brokers. The court fur-
ther found that the plaintiffs had uncovered no evidence to show
that their particular brokers had attended the Petro-Lewis sales
sessions or explicitly followed the standardized sales pitch.
Contrary to the court’s construction of the claims, however,
the complaints alleged that the defendant brokerage firms and
individual officers engaged in a common course of conduct to
misrepresent, by affirmative acts and by omission, the finan-
cial condition of Petro-Lewis. See, e.g., Kennedy v. Tallant, 710
F.2d at 711. Neither the complaints nor the deposition testimony
relied upon by the district court indicate that any oral repre-
sentations to the named plaintiffs varied materially from the
misleading information alleged to have been disseminated
generally as a result of the defendants’ common schemes. See
id.; cf. Simon v. Merrill Lynch, Pierce, Fennner and Smith, Inc.,
482 F.2d 880, 883 (5th Cir.1973) (“If there is any material varia-
tion in the representations made or in the degrees of reliance
thereupon, a fraud case may be unsuited for treatment as a class
action.”). Consequently, the possibility that the named plain-
tiffs or other potential class members may have obtained the
allegedly misleading information via their individual brokers
rather than through widely distributed written information can-
not transform the allegations of the complaints into claims con-
cerning primarily questions of individual reliance. The claims
essentially involve allegations that the defendants “committed
the same unlawful acts in the same method against the entire
class.” Kennedy v. Tallant, 710 F.2d at 717.
As in any 10b-5(2) misrepresentation claim, each potential
class member must prove reliance on some form of the allegedly
A-11
misleading information in order to recover. See, e.g., Shores v.
Sklar, 647 F.2d at 468. In view of the overwhelming number
‘of common factual and legal issues presented by plaintiffs’
misrepresentation claims, however, the mere presence of the fac-
tual issue of individual reliance could not render the claims un-
suitable for class treatment. Here, as in Kennedy v. Tallant, each
of the complaints alleges “a single conspiracy and fraudulent
scheme against a large number of individuals” and thus is “par-
ticularly appropriate for class action.” 710 F.2d at 718. Moreover,
given the numerous and substantial common issues presented
by both the fraud-on-the-market and the misrepresentation
claims, the common questions in these cases cannot legitimate-
ly be considered subordinate to the individual questions
presented by the different state statutes of limitations that may
be applicable or by the arbitration agreements contained in some
of the purchasers’ contracts.’ “Rule 23 does not require that all
the questions of law and fact raised by the dispute be common.”
Cox v. American Cast Iron Pipe Co., 784 F.2d 1546, 1557 (llth
Cir.), cert. denied, _U.S._, 107 S.Ct. 274, 93 L.Ed.2d 250
(1986).
In sum, we conclude that as a result of the district court’s
erroneous analysis of the fraud-on-the-market claims and its
mischaracterization of the misrepresentations claims, the court
incorrectly determined that individual issues predominated over
common issues. Contrary to the court’s conclusions, these claims
involve common issues that clearly overwhelm the individual
issues that may be present. Consequently, “[s]eparate actions
by each of the class members would be repetitive, wasteful, and
an extraordinary burden on the courts.” Kennedy v. Tallant, 710
* The presence of arbitration agreements is relevant for another factor in
determining the suitability of class treatment on the 10b-5 claims. After the
district court's order was issued, the Supreme Court in Shearson /American
Express 0. McMahon, _U.S.—, 107 S.Ct. 2332, 96 L.Ed.2d 185 (1987), upheld
the enforceability of agreements requiring the arbitration of 10b-5 claims.
Those purchasers whose 10b-5 claims are subject to arbitration thus could not
be considered members of the class. In ruling on the motion for class certifica-
tion, the district court did not determine whether the potential class members
not subject to arbitration would be sufficient to satisfy the numerosity require-
ment of Rule 23(a)(2). The court should make this determination on remand.
A-12
F.2d at 718. The district court thus abused its discretion in rul-
ing that the requirements of Rule 23(b)(3) were not satisfied in
this case. See, e.g., Cox v. American Cast Iron Pipe Co., 784
F.2d at 1557-58.
B. State Law Claims
In concluding that the state law claims failed to satisfy the
requirements of Rule 23(b)(3), the district court reasoned that
the differing standards of liability required by the laws of the
various states would render class action treatment un-
manageable. We agree with the district court that the state law
claims would require application of the standards of liability
of the state in which each purchase was transacted.* The district
court thus did not abuse its discretion in denying class certifica-
tion on these claims. See, e.g., Simon v. Merrill Lynch, Pierce,
Fenner and Smith, Inc., 482 F.2d at 883.
C. Section LI and 12(2) Claims
In explaining its denial of class certification of the section 11
and 12(2) claims, the district court stated that it “did not
* Under the Georgia law applicable to these diversity claims, see Klaxon Co.
vo. Stentor Electric Mfg. Co., 313 U.S. 487, 61 S.Ct. 1020, 85 L.Ed. 1477 (1941),
the standard of liability would be determined, as an initial matter, by the
law of the state in which the purchaser acquired the security, not of the state
from which the shares were sold. See Risdon Enterprises, Inc. v. Coleman
Enterprises, Inc., 172 Ga. App. 902, 324 S.E.2d 738, 740 (1984) (explaining
Georgia's lex loci delecti choice of law rule in tort cases); see also Zandman
v. Joseph, 102 F.R.D. 924, 930 (N.D.Ind.1984) (Indiana's lex loci delecti rule
“would require use of the law of the state where each class member suffered
his or her pecuniary loss”). If a particular state does not have a controlling
statute, however, the Georgia choice of law rule requires application of the
common law as construed by the courts of Georgia. See Frank Briscoe, Inc.
v. Georgia Sprinkler Co., Inc., 713 F.2d 1500, 1503 (Lith Cir.1983); Risdon
Enterprises, 324 S.E.2d at 74] (1984). Thus, although the law of Georgia might
eventually be applied on some claims involving purchases made in other states,
that could be determined only after the district court had fully surveyed the
law of the states of purchase. Moreover, even if Georgia law would require
application of its own common law rules to some claims involving purchases
in other states, the law of Georgia could be applied consistent with due pro-
cess only if the particular transaction had some significant relation to Georgia.
Phillips Petroleum Co. o. Shutts, 472 U.S. 797, 105 S.Ct. 2965, 2980, 86 L.Ed. 2d
628 (1985).
Te eee wee
A-13
address” these claims individually because to separate these
claims from the Rule 10b-5 and state law claims would be “un-
duly burdensome” on the court. The court consequently denied
class certification of the Rule ll and 12(2) claims based upon
its conclusion that the 10b-5 and the state law claims did not
meet the requirements of Rule 23(b)(3). In view of our deter-
mination that the court erroneously ruled that 10b-5 claims did
not meet the requirements of Rule 23(b)(3), the court must of
course reconsider its decision regarding the Section Ll and 12(2)
claims.
Independent of our decision on the 10b-5 claims, however,
we conclude that the court erred in failing to consider separately
the appropriateness of the class action treatment of the section
ll and 12(2) claims. Although there is some overlap between
section 10(b) and sections 1] and 12(2), the provisions “involve
distinct causes of action and wére intended to address different
types of wrongdoing.” Herman & McLean v. Huddleston, 459
U.S. 375, 103 S.Ct. 683, 687, 688, 74 L.Ed.2d 548 (1983). The
failure of the district court to give separate consideration to class
action certification of these distinct claims thus could serve
neither the securities laws’ purpose of protecting investors, see,
e.g., id., 103 S.Ct. at 687, nor Rule 23’s purpose of protecting
the courts from needlessly repetitious litigation, see, e.g., Ken-
nedy v. Tallant, 710 F.2d at 718. By failing to consider these
claims separately, the court abused its discretion.
III. ADEQUATE CLASS REPRESENTATION
Having concluded that the district court’s ruling on the re-
quirements of Rule 23(b)(3) constituted an abuse of the court’s
discretion, we must address the court’s alternative holding that
the named plaintiffs in each of these cases did not satisfy the
adequate representation requirement of Rule 23(a)(4) because
they failed to demonstrate sufficient “vigor” to prosecute a class
suit.
Among the prerequisites to the maintenance of a class action
is the requirement of Rule 23(a)(4) that the class representatives
A-14
“will fairly and adequately protect the interests of the class.”
The purpose of this requirement, as of many other of Rule 23’s
procedural mandates, is to-protect the legal rights of absent class
members. Because all members of the class are bound by the
res judicata effect of the judgment, a principal factor in deter-
mining the appropriateness of class certification is “the forth-
rightness and vigor with which the representative party can be
expected to assert and defend the interests of the members of
the class.” Mersay v. First Republic Corp., 43 F.R.D. 465, 470
(S.D.N.Y.1968); see also Shatzman v. Talley, 91 F.R.D. 270, 273.
(N.D.Ga.1981) (insufficiency of funds to prosecute suit indicates
the “vigor with which the case will be pursued”); Dolgow v.
Anderson, 43 F.R.D. 472, 494 (E.D.N.Y.1968) (court “must be
assured that ‘the representatives [will] put up a real fight’ ”
(quoting J. Chafee, Some Problems in Equity 23] (1950) ), rev'd
on other grounds, 438 F.2d 825 (2d Cir.1971); cf. Falcon, 457
U.S. at 161, 102 S.Ct. at 2372.
The inquiry into whether named plaintiffs will represent the
potential class with sufficient vigor to satisfy the adequacy re-
quirement of Rule 23(a)(4) most often has been described to “in-
volve[{ ] questions of whether plaintiffs’ counsel are qualified,
experienced, and generally able to conduct the proposed litiga-
tion and of whether plaintiffs have interests antagonistic to those
of the rest of the class.” Griffin v. Carlin, 755 F.2d 1516, 1532
(Lith Cir.1985). Even where these two requirements are satisfied,
however, named plaintiffs might not qualify as adequate class
representatives because they do not possess the personal
characteristics and integrity necessary to fulfill the fiduciary role
of class representative. See, e.g., Kline v. Wolf, 702 F.2d 400,
402-03 (2d Cir.1983); Armour v. City of Anniston, 89 F.R.D.
331, 332 (D.C.Ala.1980), aff'd, 654 F.2d 382 (5th Cir. Unit B
Aug. 1981); 7A C. Wright, A. Miller and M. Kane, Federal Prac-
tice and Procedure, Civil 2d § 1766 at pp. 308-10.
For similar reasons, some courts have found, as did the district
court here, that Rule 23(a)(4) was not satisfied where the nam-
ed plaintiffs demonstrated insufficient participation in and
awareness of the litigation. See, e.g., Darvin v. International
Harvester Co., 610 F. Supp. 255, 257 (S.D.N.Y.1985);
A-15
Massengill v. Board of Educ., 88 F.R.D. 181 (N.D.Il.1980). In
following the lead of these cases, however, the district court ap-
pears to have applied a standard that does not vindicate the
policies and purposes of Rule 23. Contrary to the district court’s
approach to the issue, adequate class representation generally
does not require that the named plaintiffs demonstrate to any
particular degree that individually they will pursue with vigor
the legal claims of the class. Although the interests of the plaintiff
class certainly would be better served if the named plaintiffs
fully participate in the litigation, see, e.g., In re Goldchip Fun-
ding Co., 61 F.R.D. 592, 594-95 (M.D.Pa.1974), the economics
of the class action suit often are such that counsel have a greater
financial incentive for obtaining a successful resolution of a class
suit than do the individual class members. See Deposit Guaranty
Nat. Bank v. Roper, 445 U.S. 326, 338-39, 100 S.Ct. 1166, 1174,
63 L.Ed.2d 427 (1980) (plurality opinion). It is not surprising,
then, that the subjective desire to vigorously prosecute a class
action, which the district court here found missing in the nam-
ed plaintiffs, quite often is supplied more by counsel than by
the class members themselves. Obviously this creates a poten-
tial for abuse. See id. at 339, 100 S.Ct. at 1174. Yet the financial
incentives offered by the class suit serve both the public interests
in the private enforcement of various regulatory schemes, par-
ticularly those governing the securities markets, and the private
interests of the class members in obtaining redress of legal
grievances that might not feasibly be remedied “within the
framework of a multiplicity of small individual suits for
damages.” Id.
As the district court aptly noted, a potential class is entitled
to “more than blind reliance upon even competent counsel by
uninterested and inexperienced representatives.” In re Goldchip
Funding Co., 61 F.R.D. at 594. For where the named plaintiffs
“have abdicated their role in the case beyond that of furnishing
their names as plaintiffs,” the attorneys, in essence, are the class
representative. Helfand v. Cenco, 80 F.R.D. 1, 7-8 (N.D.II1.1977).
Several district courts thus have properly denied class certifica-
tion where the class representatives had so little knowledge of
and involvement in the class action that they would be unable
A-16
or unwilling to protect the interests of the class against the
possibly competing interests of the attorneys. See, e.g. Efros v.
Nationwide Corp., 98 F.R.D. 703, 707 (S.D.Ohio 1983); Hel-
fand v. Cenco, supra; see also 7A Wright, Miller & Kane at §
1766 pp. 310-11 (the “inquiry into the knowledge of the represen-
tative is to ensure that the party is not simply lending his name
to a suit controlled entirely by the class attorney.”)
In concluding that the named plaintiffs in these cases do not
satisfy the adequate representation requirement of Rule 23(a)(4),
the district court noted that neither this court nor the Supreme
Court has set forth standards for determining the adequacy of
class representatives.” Because the issue of adequate class
representation arises in a wide variety of contexts, it would be
inappropriate for us to establish a standard for general applica-
tion. We conclude, however, that in securities cases such as these,
where the class is represented by competent and zealous counsel,
class certification should not be denied simply because of a
perceived lack of subjective interest on the part of the named
plaintiffs unless their participation is so minimal that they vir-
tually have abdicated to their attorneys the conduct of the case.
To require less would permit attorneys essentially to serve as class
’ In support of its conclusion that the named plaintiffs in these cases are in-
adequate class representatives, the court cited Rothenberg o. Security Manage-
ment Co., Inc., 667 F.2d 958 (Lith Cir. 1982). Rothenberg upheld the dismissal
of a Rule 23.1 derivative shareholders’ action where the named plaintiff had
been found not to be an adequate representative of the other shareholders.
In making this determination, the district court and the panel on appeal relied
on factors similar to those relied upon by the district court here. Rothenberg,
however, is not entirely apposite to the determination of adequacy of a class
representative under Rule 23(a)(4). A derivative suit poses inherent conflicts
between those minority shareholders who are bringing the suit and the ma-
jority shareholders whose administration is being challenged either directly
or indirectly. See 7C C. Wright, A. Miller & M. Kane, Federal Practice and
Procedure § 1833 at pp. 137-39. In contrast, a class suit by definition serves
to benefit the members of the class. Consequently, a different degree of par-
ticipation might well be required of a named plaintiff in a Rule 23.1 derivative
than of a named plaintiff in a Rule 23 class action. The case before us does
not involve a Rule 23.1 certification, and we express no opinion as to what
the standard for such cases should be.
A-17
representatives; to require more could well prevent the vindica-
tion of the legal rights of the absent class members under the |
guise of protecting those rights.
Although we conclude that the district court applied an er-
roneous standard in determining that the named plaintiffs would
not be adequate class representatives, it would be inappropriate
for us to make an independent application of the correct stan-
dard in this case. In contrast to the more strictly legal questions
presented by the district court’s characterization of the plain-
tiffs’ claims in its rulings on the Rule 23(b)(3), the adequacy
of class representation is primarily a factual issue that is best
left for determination by the district court. Consequently, we
remand the Rule 23(a)(4) issue for the district court to apply
the standard we have set forth above.
IV. CONCLUSION
For the foregoing reasons, the order of the district court is
REVERSED IN PART, AFFIRMED IN PART, and REMAND-
ED with instructions.
B-1
UNITED STATES COURT OF APPEALS
El h Circuit
56 Forsyth Street, N.W.
Atlanta, Georgia 30303
October 21, 1987
Miguel J. Cortez In Replying Give Number
Clerk Of Case and Names Of Parties
MEMORANDUM TO COUNSEL OR PARTIES LISTED
BELOW:
NOS. 86-8624, 86-8625 & 86-8626
SUZANNE KIRKPATRICK, et al. v. J.C. BRADFORD &
Co.
(Nos. C85-1891A, C85-172A & C85-1586A)
The enclosed order has been entered on petition(s) for rehearing.
See Rule 41, Federal Rules of Appellate Procedure, and Eleventh
Circuit Rule 41-1 for information regarding issuance and stay of
mandate.
Sincerely,
MIGUEL J. CORTEZ, Clerk
By: /s/ Pam Holloway
Deputy Clerk
Encl.
Brenda M. Nelson - Robert E. Boston
Kenneth A. Jacobsen Lloyd S. Clareman
Richard D. Greenfield Harvey D. Myerson
Richard M. Kirby Bradley C. Twedt
Robert E. Zimet Timothy J. Carey
Glenn Delk Peter J. Anderson
J
Ames Davis Mack Young
B-2
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
No. 86-8624
SUZANNE KIRKPATRICK;
DOROTHY D. CASLER and
CHARLES H. LINDSEY, on
behalf of themselves and
all others similarly situated,
Plaintiffs-Appellants,
versus
J.C. BRADFORD & CO.,
Defendant-Appellee.
No. 86-8625
GLENN T. SANDERS on behalf
of himself and all others
similarly situated, and
LESLIE D. SANDERS,
Plaintiffs-Appellants,
versus
ROBINSON HUMPHREY/AMERICAN
EXPRESS, INC., and SHEARSON/AMERICAN
EXPRESS, INC.,
Defendants-Appellees.
B-3
NO. 86-8626
TOMMY E. PARKER, as custodian
for KIMBERLY M. PARKER and JAMES L.
SMITH, on behalf of themselves and
all others similarly situated,
Plaintiffs-Appellants,
versus
PAINE WEBBER GROUP, INC.,
Defendant-Appellee.
Appeals from the United States District Court for the
Northern District of Georgia
ON PETITION(S) FOR REHEARING AND SUGGESTION(S)
OF REHEARING IN BANC
(Opinion September 15, ll Cir., 1987, _. F.2d ___).
(October 21, 1987)
Before VANCE and KRAVITCH, Circuit Judges, and BROWN’,
Senior Circuit Judge.
PER CURIAM:
(x) The Petition(s) for Rehearing are DENIED and no member
of this panel nor other Judge in regular active service on the
Court having requested that the Court be polled on rehearing
in banc (Rule 35, Federal Rules of Appellate Procedure; Eleventh
Circuit Rule 35-5), the Suggestion(s) of Rehearing In Banc are
DENIED. \
( ) The Petition(s) for Rehearing are DENIED and the Court
having been polled at the request of one of the members of the
Court and a majority of the Circuit Judges who are in regular
active service not having voted in favor of it (Rule 35, Federal
B-4
Rules of Appellate Procedure; Eleventh Circuit Rule 35-5), the
Suggestion(s) of Rehearing In Banc are also DENIED.
( ) Amember of the Court in active service having requested
a poll on the reconsideration of this cause in banc, and a ma-
jority of the judges in active service not having voted in favor
of it, Rehearing In Banc is DENIED.
ENTERED FOR THE COURT:
/s/ Phyllis Kravitch
United States Circuit Judge
* Honorable John R. Brown, Senior U.S. Circuit Judge for
the Fifth Circuit, sitting by designation.
~~
C-l
UNITED STATES COURT OF APPEALS
Eleventh Circuit
56 Forsyth Street, N.W.
Atlanta, Georgia 30303
Miguel J. Cortez In Replying Give Number
Clerk Of Case And Names Of Parties
November 17, 1987
TO: ALL COUNSEL LISTED BELOW:
No. 86-8624, 86-8625 & 86-8626
KIRKPATRICK, et al. v. BRADFORD, et al.
MANDATE STAYED TO AND INCLUDING November 23,
1987.
The court has this day granted a stay of the mandate to the date
shown above. If during the period of the stay there is filed in
this court a notice from the Clerk of the Supreme Court that
the party who has obtained the stay has filed a petition for writ
of certiorari in the Supreme Court, the stay shall continue un-
til final disposition by the Supreme Court. Upon the filing of
a copy of an order of the Supreme Court denying the petition
for writ of certiorari, the mandate shall issue forthwith. See
Fed.R.App.P. 41.
The Clerk of the Supreme Court has requested the clerks of the
federal courts of appeal to retain the record on appeal until the
Supreme Court requests that it be transmitted. Parties will be
advised when this occurs. Accordingly, please refrain from
routinely requesting transmittal of the record. See Supreme
Court Rule 19.1.
A copy of this court’s opinion (or Rule 36-1 decision), the judg-
ment, and any order on rehearing should be attached as an ap-
pendix to any petition for writ of certiorari (or jurisdictional
statement) filed. See Supreme Court Rules 21(k), 15(j).
C-2
( ) This court has also directed recall of the mandate. By copy
of this letter the clerk of the district court is requested
to return the opinion and judgment previously issued as
mandate.
Sincerely,
MIGUEL J. CORTEZ, Clerk
By: /s/ Pam Holloway
Deputy Clerk
Glenn Delk
Kenneth A. Jacobsen
Richard D. Greenfield
Ames Davis
Robert E. Boston
Lloyd S. Clareman
Harvey D. Myerson
Bradley C. Twedt
Timothy J. Carey
Peter J. Anderson
Mack Young
Brenda M. Nelson
Richard M. Kirby
Robert E. Zimet
MDT-2
7/87
C-3
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
No. 86-8624
SUZANNE KIRKPATRICK;
DOROTHY D. CASLER and
CHARLES H. LINDSEY, on
behalf of themselves and
all others similarly situated,
Plaintiffs-Appellants,
versus
J.C. BRADFORD & CO.,
Defendant-Appellee.
No. 86-8625
GLENN T. SANDERS on behalf
of himself and all others
similarly situated, and
LESLIE D. SANDERS,
Plaintiffs-Appellants,
versus
ROBINSON HUMPHREY/AMERICAN
EXPRESS, INC., and SHEARSON/AMERICAN
EXPRESS, INC.,
Defendants-Appellees.
No. 86-8626
TOMMY E. PARKER, as custodian
for KIMBERLY M. PARKER and JAMES L.
SMITH, on behalf of themselves and
all others similarly situated,
Plaintiffs-Appellants,
versus
PAINE WEBBER GROUP, INC.,
Defendant-Appellee,
FILED
U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
NOV 17
MIGUEL J. CORTEZ, CLERK
Appeal from the United States District Court for the
Northern District of Georgia
ORDER:
( ) The motion of Appellees, J.C. BRADFORD & CO., et
al. for (xx) stay ( ) recall and stay of the issuance of the
mandate pending petition for writ of certiorari is
DENIED.
(x) The motion of Appellees, J.C. BRADFORD & CO., et al.
for (xx) stay ( _) recall and stay of the issuance of the man-
date pending petition for writ of certiorari is GRANTED
to and including Nov. 23rd 1987, the stay to continue in
force until the final disposition of the case by the Supreme
Court, provided that within the period above mention-
ed there shall be filed wtih the Clerk of this Court the
C-5
certificate of the Clerk of the Supreme Court that the cer-
tiorari petition has been filed. The Clerk shall issue the
mandate upon the filing of a copy of an order of the
Supreme Court-denying the writ, or upon expiration of
the stay granted herein, unless the above mentioned cer-
tificate shall be filed with the Clerk of this Court within
that time.
The motion of
for a further stay of the issuance of the mandate is
GRANTED to and including , under
the same conditions as set forth in the preceding
paragraph.
IT IS ORDERED that the motion of
for a further stay of the issuance of the mandate is
DENIED.
/s/ Phyllis Kravitch
UNITED STATES CIRCUIT JUDGE
C- 6
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
NO. 86-8624
SUZANNE KIRKPATRICK;
DorotTHy D. CASLER and
CHARLES H. LINDSEY, on
behalf of themselves and
all others similarly situated,
Plaintiffs-A ppellants,
versus
J.C. BRADFORD & Co.,
Defendant-A ppellee.
No. 86-8625
GLENN T. SANDERS on behalf
of himself and all others
similarly situated, and
LESLIE D. SANDERS,
Plaintiffs-A ppellants,
versus
ROBINSON HUMPHREY/AMERICAN EXPRESS, INC., and
SHEARSON/AMERICAN EXPRESS, INC.,
Defendants-A ppellees.
Filed
Nov 17 1987
No. 86-8626
Tommy E. PARKER, as custodian
for KIMBERLY M. PARKER and JAMES L. SMITH,
on behalf of themselves and
all others similarly situated,
Plaintiffs-A ppellants,
versus
PAINE WEBBER GROUP, INC.,
Defendant-A ppellee.
Appeal from the United States District Court for
the
Northern District of Georgia
ORDER:
( ) The motion of Appellees, J.C. BRADFORD & Co., et al.
(X)
for (XX) stay ( ) recall and stay of the issuance of
the mandate pending petition for writ of certiorari is
DENIED.
The motion of Appellees, J.C. BRADFORD & Co., et al.
for (XX) stay ( ) recall and stay of the issuance of
the mandate pending petition for writ of certiorari is
GRANTED to and including Nov. 23rd 1987, the stay
to continue in force until the final disposition of the
case by the Supreme Court, provided that within the
period above mentioned there shall be filed with the
Clerk of this Court the certificate of the Clerk of the
Supreme Court that the certiorari petition has been
filed. The Clerk shall issue the mandate upon the filing
of a copy of an order of the Supreme Court denying
the writ, or upon expiration of the stay granted herein,
C- 8
unless the above mentioned certificate shall be filed
with the Clerk of this Court within that time.
( ) The motion of for a further
stay of the issuance of the mandate is GRANTED to
and including , under the same condi-
tions as set forth in the preceding paragraph.
( ) IT IS ORDERED that the motion of
for a further stay of the issuance of the mandate is
DENIED. ~
PHYLLIS KRAVITCH
UNITED STATES CIRCUIT JUDGE
C- 9
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
No. 86-8624
SUZANNE KIRKPATRICK;
Dorotuy D. CASLER and
CHARLES H. LINDSEY, on
behalf of themselves and
all others similarly situated,
Plaintiffs-A ppellants,
versus
J.C. BRADFORD & Co.,
Defendant-A ppellee.
ooo
No. 86-8625
GLENN T. SANDERS on behalf
of himself and all others
similarly situated, and
LESLIE D. SANDERS,
Plaintiffs-A ppellants,
versus
ROBINSON HUMPHREY/AMERICAN EXPRESS, INC., and
SHEARSON/AMERICAN EXPRESS, INC.,
Defendants-A ppellees.
Filed
Nov 20 1987
“ C- 10
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
No. 86-8626
Tommy E. PARKER, as custodian
for KIMBERLY M. PARKER and JAMES L. SMITH,
on behalf of themselves and
all others similarly situated,
Plaintiffs-A ppellants,
versus
PAINE WEBBER GROUP, INC.,
Defendant-A ppellee.
Appeal from the United States District Court for
the
Northern District of Georgia
ORDER:
( ) The motion of for ( )stay( )
recall and stay of the issuance of the mandate pending
petition for writ of certiorari is DENIED.
( ) The motion of for ( ) stay ( )
recall and stay of the issuance of the mandate pending
petition for writ of certiorari is GRANTED to and
including , the stay to continue in force
until the final disposition of the case by the Supreme
Court, provided that within the period above men-
tioned there shall be filed with the Clerk of this Court
the certificate of the Clerk of the Supreme Court that
the certiorari petition has been filed. The Clerk shall
issue the mandate upon the filing of a copy of an
order of the Supreme Court denying the writ, or upon
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expiration of the stay granted herein, unless the above
mentioned certificate shall be filed with the Clerk of
this Court within that time.
(X) The motion of Appellee, J.C. Braprorp & Co., for a
further stay of the issuance of the mandate is
GRANTED to and including December 7, 1987, under
the same conditions as set forth in the preceding par-
agraph.
( ) IT IS ORDERED that the motion of Appellee, J.C.
BRADFORD & Co. for a further stay of the issuance
of the mandate is DENIED.
PHYLLIS KRAVITCH
UNITED STATES CIRCUIT JUDGE
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF GEORGIA
ATLANTA DIVISION
GLENN T. SANDERS, on behalf of himself and
all others similarly situated,
Plaintiffs,
vs.
ROBINSON eee ga EXPRESS, INC.,
et ai.,
Defendants.
CIVIL ACTION No. C 85-172 A
TOMMY E. PARKER, as custodian for KIMBERLY M.
PARKER, and JAMES L. SMITH, on behalf of themselves
and others similarly situated,
Plaintiffs,
vs.
PAINE WEBBER GROUP, INC.,
Defendant.
CIVIL ACTION No. C 85-1586 A
SUZANNE KIRKPATRICK, DOROTHY D. CASLER,
and CHARLES H. LINDSEY,
Plaintiffs,
vs.
J.C. BRADFORD & CO.,
Defendants.
CIVIL ACTION No. C 85-1891 A
March 27, 1986
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ORDER
VINING, District Judge.
In these federal securities actions, the plaintiffs have filed mo-
tions for class certification, pursuant to Rule 23 of the Federal
Rules of Civil Procedure. The court already has considered and
ruled on the defendants’ motions to dismiss and numerous
discovery and procedural motions. These cases are now ripe for
a determination of whether they may proceed as class actions:
An understanding of the history of the Petro-Lewis cases is
necessary before the court considers the motions for class
certification.
I. HISTORY OF THE PETRO-LEWIS LITIGATION
From 1970 to 1983, Petro-Lewis was the nation’s largest seller
of oil and gas income funds. These programs raised money from
investors, who became limited partners, and used the proceeds
to purchase oil and gas producing properties. Cash distributions
to the limited partners, which were paid quarterly, began almost
immediately after each partnership was formed and were to con-
tinue for 10 to 15 years or more until the wells were depleted.
Petro-Lewis, an independent oil and gas producer and manager
of petroleum investments for public and private partners, ac-
quired oil and gas properties for public limited partnerships,
shared ownership of those properties, and managed the limited
partnerships as a general partner. Over a 14-year period, Petro-
Lewis sold, through securities brokerage firms, in excess of $3
billion worth of partnerships to approximately 180,000 people.
As oil and gas prices began to decline in 198] and 1982, Petro-
Lewis was forced to borrow funds to pay partnership distribu-
tions, service the debt it was incurring, and promote the sale
of additional programs. In February 1984 Petro-Lewis revealed
that it would sustain a substantial loss, that it was cutting
' On October 28, 1985, this court held that a companion case, Chandler v.
Drexel Burnham Lambert, Inc., C85-1585A (N.D. Ga. 1985), should be sent
to arbitration. The plaintiff has appealed that decision to the Eleventh Cir-
cuit Court of Appeals.
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distributions to limited partners by as much as 50 percent, that
the company would have to sell between one quarter and one
third of its total reserves to reduce bank debt, and that Petro-
Lewis was immediately terminating all sales of partnership
programs. Numerous lawsuits against Petro-Lewis followed.
In In re Petro-Lewis Securities Litigation [1984-85 Transfer
Binder], Fed. Sec. L. Rep. { 91,899 (D. Colo. 1984), the court
set forth the history of the Petro-Lewis litigation that lead to
these class actions.? In that case, the court consolidated eleven
class actions filed between February 9, 1984, and May 9, 1984.
The defendants were the Petro-Lewis Corporation, the Petro-
Lewis Funds, Petro-Lewis Securities Corporation, and the seven
directors of Petro-Lewis Corporation. The amended consolidated
class action complaint set forth claims under the Securities Ex-
change Act of 1934, as amended, 15 U.S.C. §§ 78a, et seq., and
the Securities Act of 1933, as amended, 15 U.S.C. §§ 77a, et seq.
The plaintiffs in the original Colorado action sought to repre-
sent two classes: (1) a “securities class,” consisting of the pur-
chasers of securities, including common stock, warrants, and
preferred stock, and (2) a “partnership class,” consisting of per-
sons who purchased, reinvested in, or otherwise acquired limited
partnership interests in over 100 partnerships formed by Petro-
Lewis to purchase oil and natural gas producing properties be-
tween August 1975, and February 1984, and in the Petro-Lewis
deferred income program formed in 1981. The Petro-Lewis com-
plaint alleged that during the relevant times the defendants
made, or caused to be made, statements in Petro- Lewis prospec-
tuses, periodic shareholder and investor reports, filings with the
Securities and Exchange Commission, press releases, investor
letters, and other documents, that were_materially false and
misleading and that the defendants omitted to disclose certain
material facts and adverse information about Petro-Lewis and
the partnerships that it managed. Some plaintiffs sought relief
in the form of rescission of their purchases of limited partner-
ship interests. All plaintiffs sought damages, interest, costs, and
disbursements.
* The facts set forth in part I are taken from Judge Carrigan’s opinion in the
Colorado litigation.
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On July 3, 1984, co-lead counsel for the plaintiffs and counsel
for the defendants in the Colorado litigation executed an agree-
ment in principle to settle all eleven class actions. The settle-
ment agreement consisted of two primary components: (1) for-
mation of a royalty trust, and (2) creation by the defendants
of a settlement fund consisting of cash and non-cash considera-
tions valued at $23.5 million. Notices were sent to approximately
180,000 holders of limited partnership interests in 45 limited
partnerships, plus approximately 7,000 members of the
stockholder class. In addition, 40,000 notices were sent to brokers
for forwarding to persons on whose behalf interests were held.
According to a public announcement made December 26, 1984,
all 45 affected limited partnerships voted, by very substantial
margins, in favor of the settlement. The settlement required
Petro-Lewis, on behalf of all defendants, to contribute considera-
tion of $23.5 million to a settlement fund, which included $10
million in cash plus approximately 720,000 trust units valued
at $13.5 million.
The class members who participated in the settlement were
to sign a release form which provided that all the defendants,
and any subsidiary or affiliate of Petro-Lewis, would be released
with respect to all claims, demands, and causes of action. The
release form, however, was not intended to release any broker-
dealer in its capacity as an agent for Petro-Lewis or any of its
affiliates in connection with the issuance, purchase, or sale of
any of the securities of, or interest in, Petro-Lewis, or any of
the limited partnerships of which Petro-Lewis or any subsidiary
or affiliate of Petro-Lewis was a general partner. Counsel for
all parties agreed that the purpose and intent of the release was
solely to protect the defendants in the Colorado action and that
it was intended that all the plaintiff class members retain any
rights that they might have to proceed against and collect from
broker-dealers or other nondefendants who might be liable to
them.
The court conditionally certified the partnership class and
the securities class for purposes of settlement only. The court
indicated that there were serious questions of law and fact which
D-5
placed the outcome of the class actions, if tried rather than set-
tled, in substantial doubt. One such question was:
In view of the substantial number of distinct part-
nerships and the variations in facts relevant to, and
potential conflicts among, the claims of those part-
nerships, there is doubt whether this action could be
certified under Fed. R. Civ. P. 23 (except conditionally, —
for settlement purposes) and, if certified, whether the
partnership class would have to be splintered into
numerous subclasses.
{ 91,889 at 90,470.
After carefully examining the proof of claim and release forms
and the notices to be sent out, the court approved the proposed
settlement as fair, reasonable, and adequate for all members of
the plaintiff classes.
Il. THE INSTANT LITIGATION
The plaintiffs seek to represent individuals who purchased,
reinvested in, or acquired from the defendants limited partner-
ship interests in Petro- Lewis income programs from January 1,
1981, to February 6, 1984. The amended complaints in these
three proposed class actions are divided into three parts. The
plaintiffs spend 30 pages setting forth the alleged wrongdoings
by Petro-Lewis. For example, the amended complaint alleges
that statements made in the Petro-Lewis prospectuses from 1981
to 1984 were false and misleading because they did not disclose
the risks inherent in purchasing Petro-Lewis partnership inter-
ests. Amended Complaint { 22.’ Petro-Lewis also allegedly failed
to disclose excessive leveraging of all partnerships, made
unsecured loans to partnerships to inflate distributions to limited
partners and to attract new sales, made false and misleading
financial statements, annual and periodic reports, press releases
* References to paragraphs in this part of the order refer to the Sanders v.
Robinson-Humphrey amended complaint, although the other two amended
complaints are substantially similar.
D-6
and newsletters, and failed to disclose that substantial tax
benefits expected to be received by limited partnership investors
were likely to be disallowed. Id. at {4 22-23. Petro-Lewis also
allegedly failed to inform the investing public of the risks in-
volved in the Petro- Lewis method of operation, including com-
petition in the industry by less risky investment programs and
the severe difficulty of obtaining debt servicing. Id. at { 23.
A Wall Street Journal article on April 5, 1983, reported that
Petro-Lewis was “facing an apparent cash squeeze that might
lead to nasty surprises for holders.” The article stated that Petro-
Lewis had “ ‘leveraged’ or invested in a larger value of oil pro-
perties than the original cash put up.” Jd. at { 24. Petro-Lewis
issued a press release denying substantially all of the statements
made in the Wall Street Journal article and allegedly maintained
artificially high distribution to the partnerships to attract new
partnership sales. Jd. Finally, on February 6, 1984, Petro-Lewis
allegedly revealed the following: that it had severe losses, that
it was cutting its distribution by 50 percent, that it was reduc-
ing the price at which Petro-Lewis agreed to repurchase part-
nership interests, that it was drastically reducing its work force,
and that it was immediately terminating all sales of partner-
ship programs. Id. at {{ 35-36. At the time Petro-Lewis made
these revelations, reserves bought by many partnerships were
worth only 1/3 to 1/2 what the partnerships paid for them. Jd.
at 7 36.
In the second part of the complaints, the plaintiffs set forth
the defendants’ alleged roles in the sales scheme. According to
the complaints, Petro-Lewis partnership interests were marketed
by selected members of the National Association of Securities
Dealers, including the defendants in this action, pursuant to
selling agreements with Petro-Lewis securities corporation, a
wholly owned subsidiary of Petro-Lewis. Each brokerage house
allegedly received sales commissions of up to seven percent on
each partnership interest sold, plus a special sales incentive pay-
ment of 1-1/2 percent when the brokerage house’s sales in a
program exceeded $400,000. Id. at { 38. Sales of the Petro-Lewis
partnership interests allegedly were a significant source of
D.7
revenue and profit to the defendants. Id. at { 40. The plaintiffs
contend that the defendants trained and instructed their account
representatives in standard techniques to promote, solicit, sell,
and induce customers to purchase Petro-Lewis partnership in-
terests. During the class period, the defendants allegedly pro-
vided to the plaintiffs and the proposed classes the prospectuses,
financial statements, annual and periodic reports, press releases,
and other statements described in part I of the complaints. In
addition, the plaintiffs assert that the defendants made numerous
uniform statements of fact and verbal assurances to the plain-
tiffs and the members of the proposed classes to the effect that
Petro-Lewis’ public statements were worthy of the plaintiffs’ trust
and belief, that Petro-Lewis was operating soundly, and that
Petro-Lewis partnerships were good investments from which
high long-term yields could be expected at minimal risk. Id. at
q 41.
The defendants allegedly knew or recklessly disregarded in-
formation available to them which disclosed or would have
disclosed the financial problems of Petro-Lewis and its partner-
ships as described in part I of the complaints. Id. at { 43. Even
though the defendants allegedly knew or should have known
these facts, they continued to market and sell Petro-Lewis part-
nership interests to the plaintiffs and members of the proposed
classes during the class period without disclosing any of the facts
asserted in part I of the complaints. The plaintiffs assert that
the defendants characterized the Petro-Lewis partnership in-
terests as relatively low risk investments when they were clear-
ly known to be high risk investments and that the defendants
unifox nly dissuaded and discouraged customers, including the
plaintiffs and the members of the proposed classes, from sell-
ing or liquidating their interests in the Petro-Lewis partnership
programs. Id. at { 44. The plaintiffs allege that the defendants
knew or recklessly disregarded facts contributing to Petro-Lewis’
financial problems, the vulnerability of Petro-Lewis’ partner-
ship programs caused by the pattern of excessive leveraging in-
stituted by Petro-Lewis management, and the high degree of
risk involved in any investment in the Petro-Lewis partnership
D-8
programs. Id. at { 45. The plaintiffs and their proposed classes
allege that as a result of the foregoing, they were damaged. Id.
at { 46.
Part III of the amended complaints sets forth the seven counts
that form the basis of this lawsuit. Count I, brought pursuant
to section 1] of the Securities Act of 1933, 15 U.S.C. § 77k, alleges
that the defendants issued, caused to be issued, participated in
the issuance of, or aided and abetted the issuance of materially
false and misleading statements to the investing public that ap-
peared in publicly disseminated materials relating to Petro-Lewis
and its partnership programs during the class period, including
the registration statements and the prospectuses that
misrepresented and failed to disclose the facts set forth in part
I of the complaints. Jd. at ¢ 53. Count II, brought pursuant to
section 12(2) of the Securities Act, 15 U.S.C. § 771(2), alleges that
the defendants made untrue statements of material fact or omit-
ted to state material facts in the prospectuses, newsletters,
releases, and instruction booklets. The defendants also allegedly
used the means and instruments of transportation or com-
munication in interstate commerce or the mails to perform these
violations of section 12(2). Id. at { 58.* Count ITI, brought pur-
suant to section 15 of the Securities Act, 15 U.S.C. § 770, the
“controlling person” liability provision for sections ll and 12,
alleges that the named defendants directly or indirectly con-
trolled the activities of the brokerage houses as underwriters of
the Petro-Lewis partnership interests and programs and were
responsible for the content of the Petro-Lewis registration state-
ment and prospectuses during the class period, or directly or
* In all three class action cases, the defendants filed motions to dismiss, con-
tending that section 13 of the Securities Act, 15 U.S.C. § 77m, the statute of
limitations for sections ll and 12(2), barred these counts. In Sanders v.
Robinson-Humphrey, the court dismissed the plaintiffs’ claims for their 198)
purchases. See Order filed Sept. ll, 1985. In Kirkpatrick o. J. C. Bradford,
the court dismissed Counts I and II since the claims were barred by the statute
of limitations. The court allowed the plaintiffs’ attorneys to communicate with
potential class members in an attempt to find plaintiffs not barred by the
statute of limitations. See Order filed Sept. 11, 1985. In Parker v. Paine Webber,
(Footnote continued)
D-9
indirectly induced the acts alleged in Counts I and II. Jd. at
{ 64.* Count IV alleges a cause of action under sections 10 and
20 of the Securities Exchange Act of 1934, 15 U.S.C. § 78j and
§ 78t, and Rule 10b-5, 17 C.F.R. § 240.10b-5.*
In addition to the federal securities claims, the plaintiffs allege
common law fraud and deceit (Count V), negligence and
negligent misrepresentation (Count VI), and fraudulent con-
cealment and breach of fiduciary duty (Count VII). The amend-
ed complaint in Parker v. Paine Webber also alleges a cause of
action under the Racketeer Influenced and Corrupt Organaza-
tions Act (RICO), 18 U.S.C. § 1962(c).
Each of the complaints demand judgment against the deten-
dants for compensatory damages, the costs and disbursements
of the action, including reasonable attorneys’ fees, and punitive
and exemplary damages in the amount of $10 million. In addi-
tion, the plaintiffs requested that this court determine that these
complaints may proceed as class actions under Rule 23 of the
Federal Rules of Civil Procedure.
the court dismissed Counts I and II. See Order filed Sept. Ll, 1985. The plain-
tiffs amended their complaint, and the court denied the defendant’s motion
to dismiss Counts I and II of the amended complaint. See Order filed Feb.
14, 1986. ;
* A claim against a controlling person is governed by the same limitations period
that applies to the Securities Act claim against the controlled person. This
court held that section 13, therefore, also applied to the plaintiffs’ section 15
claim. See Herm v. Stafford, 663 F.2d 669, 679 (6th Cir. 1981). As a result,
Count III in Kirkpatrick was dismissed. See Order filed Sept. Ll, 1985. The
amended complaint in Perker v. Paine Webber did not allege a cause of ac-
tion under section 15.
* The cause of action under section 20 was dismissed in Kirkpatrick v. J. C.
Bradford and not alleged in the amended complaint in Parker v. Paine Webber.
The defendants, in their motions to dismiss this count, alleged that the plain-
tiffs failed to plead fraud with sufficient particularity to satisfy Rule 9(b) of
the Federal Rules of Civil Procedure. The court declined to dismiss on this
ground. See Orders filed Sept. 1, 1985.
D-10
The parties have engaged in extensive preliminary discovery
on the class certification question. The court held an eviden-
tiary hearing on Febraury 27, 1986, and the parties submitted
briefs before and after the hearing.
Ill. FRAMEWORK OF ANALYSIS
A party that seeks to invoke Rule 23 has the burden of prov-
ing that all of the prerequisites to utilizing the class action pro-
cedure have been satisfied. Zeidman v. J. Ray McDermott &
Co., 651 F.2d 1030, 1038 (5th Cir. 1981).’ The burden of satis-
fying the requirements of Rule 23 falls on the party who seeks
to maintain a class action. Amswiss International Corp. v.
Heublein, Inc., 69 F.R.D. 663, 665 (N.D. Ga. 1975). Questions
concerning class certification are left to the sound discretion of
the trial court. Freeman v. Motor Convoy, Inc., 700 F.2d 1339,
1347 (th Cir. 1983).
The question of class certification is a procedural one, distinct
from thé merits of the action. Garcia v. Gloor, 618 F.2d 264,
267 (5th Cir. 1980), cert. denied, 449 U.S. 1113, 101 S.Ct. 923,
66 L.Ed.2d 842 (1981). The court may not inquire into the merits
of this case because the Supreme Court has held that “nothing
in either the language or history of Rule 23 . . . gives a court
any authority to conduct a preliminary inquiry into the merits
of a suit in order to determine whether it may be maintained
as a class action.” Eisen v. Carlisle & Jacquelin, 417 U.S. 156,
177, 94 S. Ct. 2140, 2152, 40 L.Ed.2d 732 (1974). “[T]he ques-
tion is not whether the plaintiff or plaintiffs have stated a cause
of action or will prevail on the merits, but rather whether the
requirements of Rule 23 are met.” Jd. at 178, 94 S. Ct. at 2153.*
’ In Bonner ov. City of Prichard, 66) F.2d 1206, 1209 (Lith Cir. 1981)(en banc),
the Eleventh Circuit adopted the law of the Fifth Circuit prior to October
1, 1981, as binding precedent.
* After citing Eisen, however, Professor Arthur Miller points out that “there
is no way the judge can make the .. . findings required by Rule 23 without
(Footnote continued)
D.11
The court must make seven affirmative findings before this
case may be certified as a class action. First, the plaintiffs must
establish two prerequisites not expressly stated in Rule 23 that
have been developed by the courts. Then, the plaintiffs must
demonstrate that they have met the requirements of Rule 23(a).
Finally, the plaintiffs must prove that these cases fall within one
of the three categories of class actions in Rule 23(b).
Although not specifically mentioned in Rule 23, the first essen-
tial prerequisite of a class action is that there must be a class.
7 C. Wright & A. Miller, Federal Practice and Procedure: Civil
§ 1760 at 579 (1972). The class actton complaints allege that these
actions were brought on behalf of individuals who purchased,
reinvested in, or acquired limited partnership interests in Petro-
Lewis income programs from January 1, 1981, to February 6,
1984. These individuals form the class. Once a court determines
that a class exists, it then must ascertain whether the named
representatives are members of the class they purport to repre-
sent. Id. at § 1761, at 584; see East Texas Motor Freight v.
Rodriguez, 431 U.S. 395, 403, 97 S. Ct. 1891, 1896, 52 L.Ed2d
453 (1976)(holding that “a class representative must be part of
the class and ‘possess the same interest and suffer the same
at least a preliminary exploration of the merits. This will not be to ascertain
who is going to win and who is going to lose, but simply to develop some feel
for the contours of the case.” A. Miller, An Overview of Federal Class Actions:
Past, Present and Future, 15 (Federal Judicial Center 2 ed. 1977). The Eleventh
Circuit agrees with Miller:
While it is true that a trial court may not properly reach the
merits of a claim when determining whether class certification
is warranted, Miller v. Mackey International, Inc., 452 F.2d 424,
428 (5th Cir. 1971), this principle should not be talismanically
invoked to artifically limit a trial court’s examination of the fac-
tors necessary to a reasoned determination of whether a plaintiff
has met her burden of establishing each of the Rule 23 class ac-
tion requirements. Love ov. Turlington, 733 F.2d 1562, 1564 (11th
Cir. 1984).
D-12
injury’ as the class members”). Because the plaintiffs clearly pur-
chased their limited partnership interests within the class period,
they are clearly members of the class.
Having satisfied the two implied prerequisites for a class ac-
tion, the plaintiffs have the burden of making a positive show-
ing that they fulfill all the requirements of Rule 23(a) and that
the action falls within one of the categories of Rule 23(b). See
Amswiss International Corp. v. Heublein, Inc., 69 F.R.D. 663,
665-66 (N.D. Ga. 1975). The court now turns to Rule 23.
IV. RULE 23(a)
A class action “may only be certified if the trial court is
satisfied, after a rigorous analysis, that the prerequisites of Rule
23(a) have been satisfied.” General Telephone Co. of the
Southwest v. Falcon, 457 U.S. 147, 161, 102 S. Ct. 2364, 2372,
72 L.Ed.2d 740 (1982). Rule 23(a) provides:
Prerequisites to a Class Action. One or more
members of a class may sue or be sued as represen-
tative parties on behalf of all only if (1) the class is
so numerous that joinder of all members is imprac-
ticable, (2) there are questions of law or fact common
to the class, (3) the claims or defenses of the represen-
tative parties are typical of the claims or defenses of
the class, and (4) the representative parties will fair-
ly and adequately protect the interests of the class.
‘e court addresses each of these subdivisions in turn.
A. Rule 23(a)(1): Numerosity
Numerosity is not in dispute in this case. Joinder of all class
members clearly would be impracticable. A plaintiff need not
specify an exact number of class members, but must show only
that joinder is impracticable through “some evidence or
reasonable estimate of the number of purported class members.”
See Zeidman v. J. Ray McDermott & Co., 651 F.2d 1030, 1038
D-13
(5th Cir. 1981). The plaintiffs in Kirkpatrick and Sanders have
offered evidence showing that there are approximately 8,000 in-
dividuals who are potential class members. None of the de-
fendants contends that the plaintiffs have not met the numerosity
requirement.
B. Rule 23(a)(2): Commonality
To satisfy Rule 23(a)(2) the plaintiff must establish the ex-
istence of questions of law or fact common to the class. This
provision does not require that all class members share the ex-
act same legal claims. Johnson v. American Credit Co. of
Georgia, 581 F.2d 526, 532 (5th Cir. 1978). The commonality
requirement is satisfied where the questions of law or fact link-
ing the class members are substantially related to the resolu-
tion of the litigation even though the individuals are not iden-
tically situated. See Kleiner v. First National Bank of Atlanta,
97 F.R.D. 683, 691 (N.D. Ga. 1983). The court notes that because
Rule 23(a)(2) requires “questions of law or fact,” more than one
issue of law or fact must be common to the members of the class.
The plaintiffs list numerous questions of law or fact that clear-
ly satisfy this requirement: (1) whether the prospectuses and
other sales literature distributed by the defendants to the plain-
tiffs and the class contain material misrepresentations of fact
or omit material facts concerning the safety and investment
worth of the Petro-Lewis partnerships; (2) whether, during the
class period, the defendants concealed material information
about the precarious financial condition of Petro-Lewis and its
partnerships; (3) whether the defendants concealed the truth
about the historical performance of the Petro-Lewis partner-
ships; (4) whether the defendants misrepresented the future
business prospects of Petro- Lewis and its partnerships programs;
and (5) whether the defendants violated the federal securities
laws and the common law in connection with their sales of
limited partnership interests in the Petro-Lewis programs dur-
ing the class period.
In most cases, neither the parties nor the courts spend much
time discussing the commonality requirement. In general, courts
D-14
that have focused on Rule 23(a)(2) have given it a permissive
application so that common questions have been found to exist
in a wide range of contexts. 7 C. Wright & A. Miller, Federal
Practice and Procedure: Civil § 1763 at 604 (1972).°
C. Rule 23(a)(3): Typicality
Rule 23(a)(3) insists that the class representatives have typical
claims or defenses.” A representative's claim is typical of the class
if it arises from the same event, practice, or course of conduct
that gives rise to the claims of the absent class members and
if the individual claims are based on the same legal or remedial
theory. Davis v. Northside Realty Associates, Inc., 95 F.R.D. 39,
43 (N.D. Ga. 1982); see Gonzales v. Cassidy, 474 F.2d 67, 71
n.7 (5th Cir. 1973)(holding that representative was “typical of
the class within the meaning of Rule 23(a)(3) because he did
not have interests which conflicted with those of the class, . . .”).
The Supreme Court has held that typicality is met when a “class
representative [is] part of the class and ‘possess[es] the same in-
terests and suffers] the same injury’ as the class members.” East
Texas Motor Freight System, Inc. v. Rodriguez, 43] U.S. 395,
403, 97 S. Ct. 1891, 1896, 52 L.Ed.2d 453 (1976).
* It is important to distinguish between Rule 23(a)(2) and Rule 23(b)(3). Rule
23(b)(3) provides that common questions must predominate to have a class
action under Rule 23(b)(3). This requirement is discussed more fully in part V.
" Professor Arthur Miller is skeptical] about the usefulness of this requirement:
But in the case of subdivisiew (a)(3), there does not seem to be
any functuc” it performs that is not accomplished by some other
portion of the Rule.... But if the plaintiffs are class members
(an implied requirement), and there are common questions (Rule
23(a)(2)), and the class is adequately represented (Rule 23(a)(4)),
it is very, very difficult to identify anything that is added by
“typicality.” The other prerequisites wil] ensure “typicality” among
the class members’ claims or defenses.
A. Miller, An Overview of Federal Class Actions: Past, Present and Future,
26 (Federal Judicial Center 2 ed. 1977) (emphasis in original).
D-15
The degree of investment experience or sophistication of the
class representatives is irrelevant. Kennedy v. Tallant, 710 F.2d
711, 717 (Lith Cir. 1983). The complaints allege that the defen-
dant committed the same unlawful acts by the same method
against an entire class. All members of the class, therefore, may
have similar claims. Thus, the plaintiffs have met the typicality
requirement. See id. Even though class members purchased dif-
ferent Petro-Lewis limited partnership interests, the plaintiffs
allege that the defendants engaged in a uniformly fraudulent
course of conduct, disseminated virtually identical false prospec-
tuses, financial statements, and other financial information, and
failed to disclose material information regarding the operations
of Petro-Lewis to purchasers during the class period. When
plaintiffs have alleged such a common course of conduct, courts
consistently have found no bar to class certification even though
members of a class may have purchased different types of
securities or interests, or purchased similar securities at different
times.
When weighing the prerequisites of Rule 23, the Eleventh Cir-
: cuit has held that “subsection (a)(3) primarily directs the district
court to focus on whether named representatives’ claims have
the same essential characteristics as the claims of the class at
large. Moreover, “the typicality requirement may be satisfied
even if there are factual distinctions between the claims of the
named plaintiffs and those of other class members.” Appleyard
v. Wallace, 754 F.2d 955, 958 (Lith Cir. 1985)(citations omit-
ted). The court clearly finds that the plaintiffs’ claims are typical
of the classes they seek to represent. “[T]he typicality require-
ment is not so rigid as to comprehend only similar fact situa-
tions ... it would be a better test of typicality to consider
whether the types of facts or evidence were typical of the class.”
Walker v. Jim Dandy Co., 638 F.2d 1330, 1336 (Sth Cir. 1981).
D. Rule 23(a)(4): Adequacy of Representation
Rule 23(a)(4) is the most important prerequisite in Rule 23(a).
See A. Miller, An Overview of Federal Class Actions: Past, Pre-
sent and Future, 27 (Federal Judicial Center 2 ed. 1977). This
provision requires a showing that the class representative will
D-16
fairly and adequately protect the interests of the class. By far
it is the most heavily litigated of the prerequisites. Jd. at 28.
Professor Miller states:
The class or representative action represents an ex-
ception to the principle of an individual right to a day
in court. The justification for permitting it is that con-
siderations of efficiency and economy and good prac-
tice permit issuing an order or rendering a judgment
that binds everyone in a defined group who was pro-
perly represented before the court and therefore has
had a day in court vicariously. It is Rule 23(a)(4) that
ensures the quality of that representation and the in-
tegrity of the system. Unless there has been fair and
adequate representation, due process has not been
satisfied and any attempt at binding the absentee is
improper. Id.
See Hansberry v. Lee, 311 U.S. 32, 44-46, 61 S. Ct. 115, 119-20,
85 L.Ed. 22 (1940)(discussing due process under Rule 23(a)(4)).
Courts traditionally hold that to satisfy Rule 23(a)(4) the
plaintiff must meet two tests. First, the plaintiffs attorney must
be qualified, experienced, and generally able to conduct the pro-
posed litigation. Gonzales v. Cassidy, 474 F.2d 67, 73 n.10 (5th
Cir. 1973); Schatzman v. Talley, 91 F.R.D. 270, 273 (N.D. Ga.
1981). Based on the plaintiffs’ attorneys’ performance in these
cases thus far, as seen through the discovery, briefs, and mo-
tions, and the hearing before the court, the court has no reason
to question the competency of the plaintiffs’ attorneys. They have
demonstrated a clear understanding of the issues in these cases
and the competence and ability to conduct sophisticated
securities litigation.
The second requirement under Rule 23(a)(4) is that the plain-
tiffs must not have interests antagonistic to those of the class.
Gonzales, 474 F.2d at 73 n.10; Schatzman, 91 F.R.D. at 373.
Courts interpreting this prerequisite have held that “the primary
criterion is the forthrightness and the vigor with which the
representative party can be expected to assert and defend the
D-17
interests of the members of the class.” See Schatzman, 91 F.R.D.
at 273. The named plaintiffs have failed to impress the court
that they will vigorously prosecute these class actions. The
representatives are not sufficiently interested in the outcome of
these actions to protect adequately the rights of the potential
class members. The plaintiffs’ failure in this respect is fatal to
their motions for class certification.
The court notes that while each of the reasons given below
is not determinative, the “totality of the circumstances” indicates
that the plaintiffs have failed to satisfy Rule 23(a)(4).
First, in the hearing the court stated: It concerns me
deeply today that as far as I know none of the named
plaintiffs showed up for this hearing and in fact when
a subpoena was issued for them they resisted. I did
not require them to appear simply because I thought
if they were interested in the litigation they ought not
to have to be subpoenaed to appear. Transcript of
hearing, Feb. 27, 1986, at 114-15.
The plaintiffs contend that the defendants subpoenaed the plain-
tiffs merely to harass them. At the hearing, the court was not
concerned with the potential for harassment, but rather with
the plaintiffs’ reluctance to vigorously prosecute these class ac-
tions. The plaintiffs’ failure to show up for the hearings indicates
a lack of interest.
Second, the plaintiffs cannot act as representatives for the state
and common law claims because these claims vary from state
to state. In addition, different state statutes of limitation govern
the section 10(b) claims. These differences are discussed more
fully in part V, sections C and D.
In Sanders, Glenn Sanders stated that he had little or no in-
volvement in preparing the complaint, which was investigated
and drafted exclusively by his attorneys. Deposition of Glenn
Sanders, pp. 85-86, 92-93. Sanders also was uncertain whether
to proceed with this action if the class was not certified. Id. at
D-18
p. 114. Sanders did not know the identity of the individual defen-
dants named in the complaint. Jd. at pp. 94-96.
Leslie Sanders, the other named plaintiff in the Sanders case,
indicated that she did not want to be involved in this case and
did not agree to become one of the named plaintiffs until counsel
for the plaintiffs called her one month before her deposition.
Deposition of Leslie Sanders, pp. 49-52. Ms. Sanders did not
contribute to the complaint or the amended complaint, and she
never saw the amended complaint until a couple of days before
the deposition. Jd. at p. 50. In addition, Ms. Sanders did not
know the name of one of the firms that was representing her.
Id. at p. 3. Furthermore, Ms. Sanders stated that her claim does
not concern her initial decision to purchase securities, as the
complaint alleges, but that in 1983 Robinson-Humphrey pur-
portedly told her not to sell her securities. Jd. at pp. 43, 54. Ms.
Sanders also did not know the identity of the individual defen-
dants. Jd. at pp. 55-56. Chip Traynor, the broker who alleged-
ly fraudulently sold securities to Ms. Sanders, still acts as a broker
for her and almost all her family. Deposition of Chip Traynor,
p. 232. If the Sanders truly felt that their broker defrauded them,
presumably he would no longer be their broker.
In Kirkpatrick, plaintiff Charles Lindsey purchased limited
partnership interests through his brother, a broker for J.C. Brad-
ford. In deposition, Lindsey stated:
Q. Is it your belief that they [the defendants] tried
to defraud the investing public, or do you think they’re
just guilty of mismanagement, or do you have --
A. I don’t know. I don’t think you can say that
somebody was really planning to defraud me. Petro-
Lewis was a reputable firm and was on the New York
Stock Exchange and what have you. Petro-Lewis is
not a fly-by-night. I mean, they were a pretty
reputable firm. I don’t think Bradford’s people kept
up with it. That’s pure and simple what happened.
Q. You think they were negligent?
A. Absolutely, positively... .
Deposition of Charles Lindsey, pp. 60-61. Lindsey was careful
to point out that the allegations of paragraph 5 of the complaint
—to the effect that he purchased pursuant to a prospectus —
were in error. While insisting that he would let the chips fall
where they might against his brother, Lindsey admitted that
his family would be upset if he sued his brother. Jd. at p. 57.
Similarly, plaintiff Suzanne Kirkpatrick still has an account
with the person from whom she purchased her partnership in-
terests in Petro-Lewis, although he no longer works for J. C.
Bradford. Deposition of Suzanne J. Kirkpatrick, p. 6. In her
deposition, Kirkpatrick stated:
Q. .. .Is it your belief or your contention that Brad-
ford was trying to defraud you or was trying to sell
you something they knew or should have known was
no good?
A. No, sir, but I think they should have done their
homework before they made the sales.
Q. You think they were negligent in failing to find this
out?
A. Yes.
Id. at p. 69.
) The other named plaintiff in Kirkpatrick, Dorothy Casler,
: purchased her interests in Petro- Lewis from her son. In deposi-
tion, she testified:
Q. Have you sued your son over his selling you this
Petro-Lewis?
A. No.
ld
D-20
Q. Well, you sued Bradford and I was wondering if
you sued him since he’s the one that put you into it?
A. No.
Q. Is there any reason why you haven’t?
A. Because I think he —in his mind he thought it was
the best thing that I could do.
Deposition of Dorothy Casler, p. 8. In addition, Casler’s son did
not disclose to her the risks which, as the complaint alleges, were
disclosed in the prospectus concerning a possible decline in the
price of oil and the fact that Petro-Lewis was borrowing money
to make the property acquisitions. Jd. at pp. 48-49. In fact,
Casler says she thought there were virtually no risks involved
because her son knew that she could not take risks. Jd. at p.
38. Casler expressed shock at the possibility that her claim might
give rise to a lawsuit against her son. Jd. at p. 42.
In summary, the court finds that the plaintiffs in their deposi-
tion testimony in Sanders and Kirkpatrick demonstrate a lack
of interest in the vigorous prosecution of this lawsuit. Glenn and
Leslie Sanders are not involved or knowledgeable enough to ef-
fectively prosecute a class action. See Schatzinan v. Talley, 91
F.R.D. 270, 273 (N.D. Ga. 1981). The plaintiffs in Kirkpatrick
do not believe, or are unwilling to prosecute, their fraud claims.
For these reasons, the plaintiffs would not fairly and adequate-
ly represent the other class members. See Rothenberg v. Security
Management Co., 667 F.2d 958, 962-63 (llth Cir. 1982).
V. RULE 23(b)
If the four prerequisites of Rule 23(a) are satisfied, a suit may
be maintained as a class action only if it falls within one of the
three categories set forth in Rule 23(b). See George v. United
Federal Savings and Loan Association, 63 F.R.D. 631, 636 (N.D.
Ga. 1974). Even assuming that the plaintiffs satisfy Rule 23(a)(4),
the court holds that they cannot satisfy Rule 23(b).
D.21
Rule 23(b) prescribes the various types of class actions that
are permitted under the Federal Rules. It provides:
(b) Class Actions Maintainable. An action may be
maintained as a class action if the prerequisites of sub-
division (a) are satisfied, and in addition:
(1) the prosecution of separate actions by or against
individual members of the class would create a risk of
(A) inconsistent or varying adjudications with
respect to individual members of the class which
would establish incompatible standards of conduct for
the party opposing the class, or
(B) adjudications with respect to individual
members of the class which would as a practical mat-
ter be dispositive of the interests of the other members
not parties to the adjudications or substantially im-
pair or impede their ability to protect their interests; or
(2) the party opposing the class has acted or refus-
ed to act on grounds generally applicable to the class,
thereby making appropriate final injunctive relief or
corresponding declaratory relief with respect to the
class as a whole; or
(3) the court finds that the questions of law or fact
common to the members of the class predominate over
any questions affecting only individual members, and
that a class action is superior to other available
methods for the fair and efficient adjudication of the
controversy. The matters pertinent to the findings in-
clude: (A) the interest of members of the class in in-
dividually controlling the prosecution or defense of
separate actions; (B) the extent and nature of any
litigation concerning the controversy already com-
menced by or against members of the class; (C) the
desirability or undesirability of concentrating the
litigation of the claims in the particular forum; (D)
the difficulties likely to be encountered in the manage-
ment of a class action.
At the outset, the court notes that the parties do not rely on
or discuss Rule 23(b)(1) or (b)(2). Because the plaintiffs do not
D-22
allege that these subdivisions apply, " the court turns to sub-
division (5)(3).
Rule 23(b)(3) sets out two prerequisites that the plaintiffs must
satisfy to maintain a class action under this subdivision: (1) ques-
tions of law or fact common to the members of the class must
predominate over any questions affecting only individual
members; and (2) the class action must be superior to other
available methods for the fair and efficient adjudication of the
controversy. A plaintiff must satisfy Rule 23(b)(3) to have a class
action that involves securities fraud.
The court holds that because common questions of law and
fact do not predominate, the plaintiffs cannot satisfy Rule
23(b)(3). The court arrives at this conclusion for four reasons.
First, and most importantly, the alleged statements upon which
the plaintiffs relied in purchasing Petro-Lewis securities were
primarily oral rather than written and misrepresentations rather
than omissions. The court, therefore, cannot imply the element
of reliance central to the issue of this case. “(T]he most signifi-
cant problem facing the [class] representatives under subdivi-
sion (b)(3) is to demonstrate that the representations made to
and the reliance by each of the class members is not so divergent
that common questions do not predominate.” 7A C. Wright & ‘
A. Miller, Federal Practice and Procedure: Civil, § 1781 at 90
(1972). The plaintiffs have failed to overcome this problem.
Second, many of the potential class members have signed ar-
bitration agreements that oblige them to arbitrate their
grievances. Third, the statute of limitations for section 10(b)
varies from state to state, and in some states it is unknown. Last,
because the purchasers of Petro-Lewis limited partnerships are from
most of the 50 states, this court would be forced to apply the state
and common law from each state in which a potential class member
resides. The court addresses each of these problems in turn.
“ The plaintiffs may not rely on Rule 23(b)(2) because this subdivision only
applies to injunctive or declaratory relief. “The subdivision does not extend
to cases in which the appropriate final relief relates exclusively or predominate-
ly to money damages.” Rule 23, Notes of Advisory Committee. The plaintiffs
seek money damages.
ll
D.23
- A, Oral Representations and Reliance
The principal claims asserted by the plaintiffs are based upon
alleged violations of section 10(b) and Rule 10b-5 of the Securities
Exchange Act of 1934. To support a claim under section 10(b)
and Rule 10b-5 the plaintiff must establish the following
elements: (1) that a misstatement or omission has been made,
(2) that the misstatement or omission pertains to material facts,
(3) that the misstatement or omission was made with scienter,
(4) that the plaintiff relied upon the misstatement or omission,
and (5) that the misstatement or omission was the proximate
cause of the injury to the plaintiff. Huddleston v. Herman &
MacLean, 640 F.2d 534 (5th Cir. 1981)(en banc), modified on
other grounds, 650 F.2d 815 (1981), affd in part and rev’ in
part on other grounds, 459 U.S. 375, 103 S. Ct. 683, 74 L.Ed.2d
548 (1983). Each of these elements of a section 10(b) and Rule
10b-5 cause of action must be proven for the plaintiff to prevail.
Although a determination of class action generally does not
permit investigation into the merits of a case, it is necessary in
this situation in order to determine whether the common ques-
tions of law or fact predominate over individual questions of
law or fact concerning the section 10(b) and Rule 10b-5 claims.
The key factor in determining whether class action is appropriate
is the matter of reliance. If it is determined that reliance is com-
mon to all members of the class, the class action will stand. If,
however, reliance is found to be an individual element whereby
each plaintiff must prove reliance upon misstatements and omis-
sions, the class action status will not be available.
The element of reliance and its effect upon class certifica-
tion have been handled by the courts in several different fashions.
Reliance m~ be implied where the plaintiff alleges a course
of fraudulent conduct common to all members of the class where
misrepresentations or omissions upon which the fraud is based
are uniform throughout the class. In re Home Stake Production
Co. Securities Litigation, 76 F.R.D. 351 (N.D. Okla. 1977). It
may be implied where the course of fraudulent conduct is
perpetrated by way of oral representations where information
material to the decision to purchase has been omitted.
D-24
Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128,
92 S. Ct. 1456, 31 L.Ed.2d 741 (1972); Kennedy v. Tallant, 710
F.2d 71] (llth Cir. 1983); Shores v. Sklar, 647 F.2d 462 (5th Cir.
1981)(en banc), cert. denied, 459 U.S. 1102, 103 S Ct. 722, 74
L.Ed.2d 949 (1983). Finally, reliance may be implied under the
“Fraud on the Market” theory. Lipton v. Documation, Inc., 734
F.2d 740 (Lith Cir. 1984).
In an attempt to refute the requirement of reliance, the plain-
tiffs allege the following: (1) that the defendants have perpetrated
a course of fraudulent conduct upon all members of the pro-
posed classes by use of a uniform sales pitch in marketing Petro-
Lewis securities, (2) that this is not a case of oral misrepresen-
tations and omissions but one of written misrepresentations and
omissions found in the prospectuses and other written materials
issued by Petro-Lewis, and (3) that the defendants have
perpetrated a “Fraud on the Market” with regard to Petro-Lewis
securities.
The court finds that none of these allegations falls within the
bounds required for implying the element of reliance necessary
to justify class certification in a section 10(b) and Rule 10b-5
action.
The plaintiffs state that the defendants followed a fraudulent
course of conduct in making sales of Petro-Lewis securities to
the potential class members and rely upon Kennedy and Home
Stake to support these allegations. A distinction must be made,
however, between these two cases and the instant case. First,
the suits in Home Stake and Kennedy were brought against the
company issuing the securities involved rather than against the
broker selling the securities. Second, the securities in Home Stake
and Kennedy were sold by salesmen employed by the company
issuing the securities rather than by brokerage firms promoting
sales between the issuer and the purchaser as in the instant case.
In circumstances such as those in Home Stake and Kennedy,
the issuer has direct control over what information is
disseminated to the purchasers as well as control over the means
by which the information is transferred. In Home Stake, for in-
stance, the issuer had a sales force promoting sales by use of
a “black book,” which was the central selling tool in each
D-25
presentation. The plaintiffs in the instant cases allege that a
uniform sales program was used in presentations to prospective
buyers who are potential class members. However, all the briefs,
as well as information in the complaint, presented by the plain-
tiffs in support of a class action status assert facts pertinent on-
ly to the sales pitch by Petro-Lewis to each of the individual
brokerage houses. Granted, the defendants could have used the
sales materials presented by Petro-Lewis (and in the case of plain-
tiff Parker, did by way of a joint seminar presented by Petro-
Lewis and Paine Webber). However, the plaintiffs have presented
no materials whatsoever, developed through discovery or asserted
by the individual plaintiffs, indicating a uniform presentation
or “sales pitch” by the defendants to all the members of the pro-
posed classes. Had the plaintiffs shown evidence of the uniform.
sales pitch by each of the defendants to the members of the pro-
posed classes, then a fraudulent course of conduct by the defen-
dants might be at issue and class action status might be war-
ranted. The sales suggestions presented by Petro-Lewis to the
defendant brokerage firms provide no guarantee that the
brokerage firms would use the sales materials provided. The
plaintiffs have failed to show that the materials provided were
in fact used on a uniform basis or used at all by the defendants.
The alleged common course of conduct was conduct between
Petro-Lewis and the defendants rather than the defendants and
the plaintiffs and cannot form the basis for dispensing with the
reliance required in a section 10(b) and Rule 10b-5 action. Hence,
the uniform scheme required to assume the element of reliance
has not been alleged.
The plaintiffs contend that the defendants misrepresented and
omitted certain facts from presentations made in sales of the
Petro-Lewis securities and rely upon the prospectuses as the
uniform sales tool used in the misrepresentations and omissions.
The named plaintiffs acknowledge that they either did not read
the prospectuses and relied entirely upon the information pro-
vided by their brokers,” or state that they read or looked through
2 In Sanders v. Robinson-Humphrey, both plaintiffs stated that they did not
read the prospectus and in fact relied totally upon oral representations by their
(Footnote continued)
D-26
the prospectuses, but could not recall any specifics and also relied
upon representations made by their brokers in deciding to pur-
chase the Petro-Lewis partnership interests.” The plaintiffs assert
that beoause the prospectuses were used in the sales of the
securities, the misrepresentations and omissions presented in
them provide a uniform presentation upon which common
reliance can be based, and class certification need not depend
upon whether the plaintiffs actually read the prospectuses. Ken-
nedy v. Tallant, 710 F.2d 711 (lth Cir. 1983); Affiliate Ute
Citizens of Utah v. United States, 406 U.S. 128, 92 S. Ct. 1456,
31 L.Ed.2d 741; Shores v. Sklar, 647 F.2d 462 (Sth Cir. 1981)(en
banc), cert. denied, 459 U.S. 1102, 103 S. Ct. 722, 74 L.Ed.2d
949 (1983); Sharp v. Coopers & Lybrand, 70 F.R.D. 544 (E.D.
Pa. 1976). If misrepresentations are both oral and written and
the plaintiffs relied upon the oral representations of their brokers,
there is no standardized communication by the defendants and
no basis for the assumption of reliance. Simon v. Merrill Lynch,
brokers. See Deposition of Glenn Sanders, pp. 28-32, 35-36, 42, 46-49, 51-56;
deposition of Leslie Sanders, pp. 19-29, 24-26, 31-32, 46. In Kirkpatrick o.
J.C. Bradford, plaintiff Suzanne Kirkpatrick did not read a prospectus until
after she made her purchase, deposition of Suzanne Kirkpatrick, p. 38, and
relied totally upon J.C. Bradford's remarks concerning the Petro-Lewis invest-
ment. Jd. at pp. 71-72. Plaintiff Dorothy Casler relied totally on her son, a
broker for J.C. Bradford, in making her decision to purchase. Deposition of
Dorothy Casler, pp. 35-36. As to plaintiff Charles Lindsey, Mr. Lindsey in-
vested through his brother and relied totally upon what his brother told him.
Deposition of Charles Lindsey p. 8.
* In Parker c. Paine Webber, both plaintiffs state that they looked at the pro-
spectus. However, James Smith did not review the prospectus until after his
first purchase of Petro-Lewis securities, deposition of James S. Smith, pp.
193-94, and when he finally did review the prospectus, was unable to point
to specifics in the prospectus. When asked which portions of the prospectus
were false and misleading, Mr. Smith stated, “I'm not able to do that, because
it was an overall impression I got after talking to my broker, after this (in-
dicating), it was may overall impression of the investment rather than the
specifics from this document.” Jd. at p. 234. When Mr. Parker was questioned
about reading the prospectus he stated, “I reviewed the prospectus. To be frank,
you know, I was more interested in the pamphlet they had with all the pretty
pictures in it.” Deposition of Tommy E. Parker, p. 123. Smith later stated that
in making his decision to purchase he relied on what Petro-Lewis and his broker
said at the seminar which Mr. Parker attended. Jd. at p. 39.
D-27
Pierce, Fenner & Smith, Inc., 482 F.2d 880 (Sth Cir. 1973). The
distinction here is that the cases relied upon by the plaintiffs
were omissions cases whereas the instant cases primarily involve
misrepresentations. The allegations stated in the complaints are
almost entirely allegations of misrepresentations of material in-
formation presented in the prospectuses rather than the omis-
sion of material facts in the sale of Petro-Lewis securities. Where
the misrepresentations and omissions are oral, precluding the
uniformity of sales, rather than written, the court may infer
reliance by the plaintiff in a section 10(b) and Rule 10b-5 ac-
tion only where the defendant fails to disclose information
material to the sale of the security. Where failure to disclose
is material, the case is an omissions case. Affiliated Ute, supra;
Huddleston vo. Herman & MacLean, 640 F.2d 534 (5th Cir. 1981)
(en banc modified on other grounds, 650 F.2d 815 (1981), affd
in part and revd in part on other grounds, 459 U.S. 375, 103
S. Ct. 683, 74 L.Ed.2d 548 (1983)); Simon, supra; Shores v. Sklar,
647 F.2d 462 (5th Cir. 1981). “Where a 10b-5 action alleges defen-
dant made positive misrepresentations of material information,
proof of reliance by the plaintiff upon misrepresentations is re-
quired. Upon an absence of proof on the issue, plaintiff loses.
On the other hand, where a plaintiff alleges deception by defen-
dant’s nondisclosure of material information, the Ute presump-
tion obviates the need for plaintiff to prove actual reliance on
the omitted information.” Rifkin v. Crow, 574 F.2d 256, 262
(5th Cir. 1978) (footnote omitted).
This court has determined that the instant case is primarily
one of a “misstatement or failure to state the facts necessary to
make those statements made not misleading.” Huddleston, 640
F.2d at 548. Because this case is one of misrepresentation, it is
necessary that each class member prove his individual reliance
upon the material misrepresentations made to him. Certifica-
tion as a class action, therefore, is highly inappropriate. Cavalier
Carpets, Inc. v. Caylor, 746 F.2d 749 (lth Cir. 1984); Hud-
dleston, supra.
The plaintiffs’ final attempt to procure a basis for the assump-
tion of reliance is based upon the Fraud on the Market theory.
D-28
If the Fraud on the Market theory is accepted by the court, the
element of reliance in a section 10(b) and Rule 10b-5 action is
assumed because the reliance is based upon the integrity of the
open market and sales of the security on the open market. Lip-
ton vo. Documation, Inc., 734 F.2d 740 (Lith Cir. 1984). This
court has recognized the Fraud on the Market theory in Shores
and Lipton, but has applied the theory only to securities trad-
ed on the open market. Although Shores involved the sales of
new issue bonds, the bonds were traded on the secondary market
after the original issue was released. Additionally, the plaintiff
in Shores alleged that, but for the fraud, the bonds would not
have been offered at all. Proof that they would have been issued
at a higher or lower price would not have been sufficient for
the plaintiff to recover.
The case at bar does not fall under the realm of the Fraud
on the Market theory of Shores or Lipton. In the current action
the plaintiffs do not allege that the securities would not have
been sold had the misrepresentations not been present, nor have
they shown that the securities were sold on the open market at
the time of the purchases. The securities in fact were limited
partnerships where liquidity was spelled out in the prospectus
as being nonexistent except for the ability of Petro-Lewis to
repurchase the interest. Petro-Lewis additionally set the price,
the number of sales that were to be made, and also looked at
the ability of each purchaser to withstand any losses that might
result from a purchase of this nature. Hence these securities were
not traded on the open market where such factors would not
be present. In an open market the issuer would have no contact
whatsoever with the purchaser, the issuer would not set the price
for sale of the securities, and the issuer would not provide for
repurchase of the security in the event the purchaser desired to
sell. Moreover, in an open market, in order to sell, the purchaser
only would have to set a price for sale of the security and have
a broker place the order. These characteristics of an open market
are not present in this cause of action. The plaintiffs, therefore,
cannot rely upon the Fraud on the Market theory to provide
the necessary reliance element of section 10(b) and Rule 10b-5
of the 1934 Act.
D-29
The court finds that the plaintiffs have not met the reliance
requirement of section 10(b) and Rule 10b-5 of the Securities
Exchange Act of 1934 and, therefore, cannot meet the
predominance requirement of Rule 23(b)(3). This is an oral
misrepresentation case and because the reliance requirement
cannot be implied, each member of the class would be required
to prove his reliance upon the misrepresentations and omissions
in the purchase of Petro-Lewis securities.
B. Arbitration
In addition to the requirement of predominance of common
issues over individual issues, Rule 23(b)(3) requires that the class
action be “superior to other available methods for the fair and
efficient adjudication of the controversy.” At issue in both of these
contexts is the right of the defendants to enforce arbitration
agreements with members of the proposed classes. Each defen-
dant has available the arbitration forum with some members
of the proposed classes.”
As to all state claims where defendants have executed an ar-
bitration agreement with purchasers of Petro-Lewis securities
who fall into the proposed classes, it has been determined that
the “Arbitration Act requires district courts to compel arbitra-
tion of pendent arbitrable claims where one of the parties files _
a motion to compel, even where the result would be the possi-
ble inefficient maintenance of separate proceedings in different
forums.” Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 105
S. Ct. 1238, 1241, 84 L.Ed.2d 158 (1985). Should any of the
defendants move to arbitrate any of the class members’ claims
where a valid arbitration agreement is in existence, the court
“ Each of the defendants has alleged the existence of arbitration agreements
with some members of the proposed classes. Although defendants Paine Webber
and }.C. Bradford and Ca have not indicated the numbers that could be poten-
tially involved in arbitration, Robinson- Humphrey has stated that those class
members that could reach arbitration are between 50 and 70 percent of the
total number of potential class members in the Sanders v. Robinson-Humphrey
action.
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would be required to compel arbitration and stay the current
proceedings until such time as the arbitration is completed with
regard to the state issues involved therein. See Harris v. Shear-
son Hayden Stone, Inc., 82 A.D.2d 87, 441 N.Y.S.2d 70 (1981),
aff'd, 56 N.Y.2d 62, 450 N.Y.S.2d 482, 435 N.E. 2d 1097 (1982);
Vernon v. Drexel Burnham & Co., 52 Cal.App. 3d 706, 125 Cal.
Rptr. 147 (1975). Such a situation would be untenable, par-
ticularly in Sanders, where upwards of 70 percent of the pro-
posed class members have executed arbitration agreements.
The plaintiffs assert that, because the Securities Act of 1933
is part of the litigation, arbitration of the federal claims is not
enforceable. The 1933 Act claims are not subject to arbitration.
Wilko v. Swan, 346 U.S. 427, 74S. Ct. 182, 98 L.Ed. 168 (1953).
However, the 1933 Act claims do not comprise the major issues
in these cases. The plaintiffs contend that the claims under sec-
tion 10(b) and Rule 10b-5 of the Securities Exchange Act of 1934
are also not subject to arbitration pursuant to the Eleventh Cir-
cuit ruling in Gorman v. Merrill Lynch, Pierce, Fenner & Smith,
Inc., 780 F.2d 1032 (11th Cir. 1985). That case, however, is now
en banc and no longer binding upon this court. This court is
of the opinion, as stated in Raiford v. Merrill Lynch, Pierce,
Fenner & Smith, Inc., Civil Action No. C83-685A (N.D. Ga.
May 16, 1985), and Chandler v. Drexel Burnham Lambert, Inc.,
633 F.Supp. 760 (N.D. Ga. 1985), that the 1934 Act claims are
subject to the Arbitration Act and to arbitration agreements ex-
ecuted by the defendants and potential class members and must
be sent, along with any state claims, to arbitration upon mo-
tion by the defendants. This opinion is supported by a number
of recent Supreme Court cases including Byrd, Moses H. Cone
Memorial Hospital v. Mercury Construction Corp., 460 U.S. 1,
103 S.Ct. 927, 74 L.Ed.2d 765 (1983), and Mitsubishi Motors
Corp. v. Soler Chrysler-Plymouth, Inc., 5 is Fs
Ct. 3346, 87 L.Ed.2d 444 (1985). The Supreme Court has
established a strong tendency to favor use of the arbitration
forum in the context of federal statutory claims. Indeed, in Mit-
subishi the Court stated:
We find no warrant in the Arbitration Act for implying
in every contract within its ken a presumption against
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arbitration of statutory claims. . . . Nor is there any
reason to depart from the federal policy favoring ar-
bitration where a party bound by an arbitration agree-
ment raises claims founded on statutory rights. Mit-
subishi, 105 S. Ct. at 3355.
This policy favoring the arbitration agreement is based upon
the “ ‘preeminent concern . . . to enforce private agreements in-
to which parties had enteréd, a concern which ‘requires that
we rigorously enforce agreements to arbitrate.’ ” Id. at 3356,
citing Dean Witter Reynolds v. Byrd, 470 U.S. 213, 105 S. Ct.
1238, 1243, 84 L.Ed.2d 158 (1985).
In conjunction with the strong tendency of the courts to favor
enforcement of arbitration agreements is the express provision
in 28 U.S.C. § 2072 of the enabling act of the Federal Rules of
Civil Procedure whereby Congress stated that the “rules shall
not abridge, enlarge, or modify any substantive right . . . ” Rule
23 is a procedural device provided by Congress to allow the court
discretion in applying class action status to plaintiffs and those
other class members similarly situated. The right to arbitration
is contractual and therefore substantive. Congress did not in-
tend that procedural class action certification be used to abrogate
the contractual rights employed in the execution of the arbitra-
tion agreements by the defendants and some members of the
proposed classes. To allow class certification where such arbitra-
tion agreements exist would not only be unduly burdensome and
inefficient should defendants move to compel arbitration but
would also violate the requirement of Rule 23(b)(3) that the class
action be “superior to other available methods for the fair and
efficient adjudication of the controversy.” Fed. R. Civ. P. 23(b)(3).
C. Rule 10b-5 Statute of Limitations
Although the moment at which a section 10(b) action accrues
and the statute of limitations begins to run is a matter of federal
law, the time period itself is taken from state law. Kennedy v.
Tallant, 710 F.2d 711, 716 (11th Cir. 1983). Under Phillips Petro-
leum Co. v. Shutts, __. U.S. ___, 105 S. Ct. 2965, 2980, 86
L.Ed.2d 628 (1985), this court “may not take a transaction with
little or no relationship to [Georgia] and apply [Georgia law]
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in order to satisfy the procedural requirement that there be a
‘common question of law. ” If the court certifies these class ac-
tions, it must apply the state statute of limitations for every state
in which a class member resides. This court has held that where
“the applicable statute of limitations . . . is dependent on state
law ... [the claims] are inappropriate for treatment as class
actions because they present substantial and predominate [sic]
individual questions.” Elster v. Alexander, 76 F.R.D. 440, 442
(N.D. Ga. 1977), appeal dismissed, 608 F.2d 196 (5th Cir. 1979).
The time period within which a section 10(b) action must
be brought varies from state of state. Courts have applied a one-
year statute of limitations, see, e.g., O’Hara v. Kovens, 625 F.2d
15, 17 (4th Cir. 1980), cert. denied, 449 U.S. 1124, 101 S.Ct. 939,
67 L.Ed.2d 109 (1981) (Maryland); a two-year statute of limita-
tions, see, e.g., Diamond v. Lamotte, 709 F.2d 1419, 1424 (llth
Cir. 1983) (Georgia); Gurley v. Documation, Inc., 674 F.2d 253,
259 (4th Cir. 1982) (Virginia); White v. Sanders, 650 F.2d 627,
633 (5th Cir. 1981) (Alabama); Cook v. Avien, Inc., 573 F.2d
685, 694 (lst Cir. 1978) (Massachusetts); Dupuy v. Dupuy, 551
F.2d 1005, 1024 n.31 (5th Cir.), cert. denied, 434 U.S. 911, 98
S.Ct. 312, 54 L.Ed.2d 197 (1977) (Louisiana); Nortek v. Alex-
ander Grant & Co., 532 F.2d 1013, 1015 (5th Cir. 1976), cert.
denied, 429 U. S. 1042, 97 S.Ct. 742, 50 L.Ed 2d 742 (1977)
(Florida); Dirksen v. Hynes & Howes Insurance Counselors, Inc.,
423 F. Supp. 1290, 1293 & n.4 (S.D. Iowa 1976) (Iowa); a three-
year statute of limitations, see, e.g., Herm v. Stafford, 663 F.2d
669, 677-78 (6th Cir. 1981) (Kentucky); Jablon v. Dean Witter
& Co., 614 F.2d 677, 682 (9th Cir. 1980) (California); Nemkov
v. O’Hare Chicago Corp., 592 F.2d 351, 355 (7th Cir. 1979) (Il-
linois); Hilton vo. Mumaw, 522 F.2d 588, 601 (9th Cir. 1975)
(Washington); Burns v. Ersek, 591 F. Supp. 837, 839 (D. Minn.
1984) (Minnesota); Mid-Carolina Oil, Inc. v. Klippel, 526 F.
Supp. 694, 697 (D. S.C. 1981), aff'd. mem., 673 F.2d 1313 (4th
Cir.), cert. denied, 457 U.S. 1107, 102 S.Ct. 2906, 73 L.Ed.2d
1315 (1982) (South Carolina); Ohio v. Peterson, Lowry, Rall,
Barber & Ross, 472 F. Supp. 402, 405-06 (D. Colo. 1979), aff,
651 F.2d 687 (10th Cir.), cert. denied, 454 U.S 895, 102 S. Ct.
392, 70 L.Ed.2d 209 (1981) (Colorado); a four-year statute of
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limitations, see, e.g., Gaudin v. KDI Corp., 576 F.2d 708, 711-12
(6th Cir. 1978) (Ohio); and six-year statute of limitations, see,
e.g., Roberts v. Magnetic Metals Co., 611 F.2d 450, 452 (3d Cir.
1979) (New Jersey); IDS Progressive Fund, Inc. v. First of
Michigan Corp., 533 F.2d 340, 344 (6th Cir. 1976) (Michigan);
Bartels v. Algonquin Properties Ltd., 471 F. Supp. 1132, 1147,
1149 (D. Vt. 1979) (Vermont). |
In Hawaii, North Dakota, South Dakota, West Virginia, and
Wyoming courts have not yet determined the applicable statute .
of limitations in a section 10(b) case. If this court were to cer-
tify a class, it would have to make that determination if a class
member resided in one of these states." In several states, the
courts have applied different statutes of limitation. For exam-
ple, in Connecticut the statute of limitations may be two years
or three years. Compare Clute v. Davenport Co., 584 F. Supp.
1562, 1577 (D. Conn. 1984) (two years) with Klock v. Lehman
Bros. Kuhn Loeb, Inc., 584 F. Supp. 210, 215-16 (S.D.N.Y. 1984)
(holding Connecticut law has three-year statute of limitations).
Nevada has a three-year limitation period for fraud, a two-year
Blue Sky limitation period for fraud in the sale of securities,
and a catch-all limitation period of four years. See Nev. Rev.
Stat. §§ 11.190, 11.220, 90.200. This court, therefore, would have
to determine which Nevada statute to apply. Finally, in Rhode
Island, a court has indicated that either a six-year general statute
of limitations or a three-year personal injury statute of limita-
tions may apply. See Holmes v. Bateson, 583 F.2d 542, 561-62
(Ist Cir. 1978).
If a class were certified, this court would be the first to deter-
mine the statute of limitations for 10(b) actions in numerous
states. Given that some states never have ruled on the statute
of limitations and other states have applied it with inconsistent
results, individual questions of law clearly predominate. In
* In Sanders the defendants’ attorney indicates that his examination of client
mailing lists taken from the defendants’ business files shows that the defen-
dants sold Petro-Lewis limited partnership interests to clients maintaining ad-
dresses in 32 states, the District of Columbia, and West Germany. Supplemental
Affidavit of Peter J. Anderson, q
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