# Petition for Writ of Certiorari — J.C. Bradford & Co. v. Kirkpatrick (Nos. 87-932, 87-835, 87-836) > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385019_0510%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition for Writ of Certiorari - **Published:** January 1, 1987 ## Text 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 C- 11 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 D-2 ORDER VINING, District Judge. In these federal securities actions, the plaintiffs have filed mo- tions for class certification, pursuant to Rule 23 of the Federal Rules of Civil Procedure. The court already has considered and ruled on the defendants’ motions to dismiss and numerous discovery and procedural motions. These cases are now ripe for a determination of whether they may proceed as class actions: An understanding of the history of the Petro-Lewis cases is necessary before the court considers the motions for class certification. I. HISTORY OF THE PETRO-LEWIS LITIGATION From 1970 to 1983, Petro-Lewis was the nation’s largest seller of oil and gas income funds. These programs raised money from investors, who became limited partners, and used the proceeds to purchase oil and gas producing properties. Cash distributions to the limited partners, which were paid quarterly, began almost immediately after each partnership was formed and were to con- tinue for 10 to 15 years or more until the wells were depleted. Petro-Lewis, an independent oil and gas producer and manager of petroleum investments for public and private partners, ac- quired oil and gas properties for public limited partnerships, shared ownership of those properties, and managed the limited partnerships as a general partner. Over a 14-year period, Petro- Lewis sold, through securities brokerage firms, in excess of $3 billion worth of partnerships to approximately 180,000 people. As oil and gas prices began to decline in 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. D-3 distributions to limited partners by as much as 50 percent, that the company would have to sell between one quarter and one third of its total reserves to reduce bank debt, and that Petro- Lewis was immediately terminating all sales of partnership programs. Numerous lawsuits against Petro-Lewis followed. In In re Petro-Lewis Securities Litigation [1984-85 Transfer Binder], Fed. Sec. L. Rep. { 91,899 (D. Colo. 1984), the court set forth the history of the Petro-Lewis litigation that lead to these class actions.? In that case, the court consolidated eleven class actions filed between February 9, 1984, and May 9, 1984. The defendants were the Petro-Lewis Corporation, the Petro- Lewis Funds, Petro-Lewis Securities Corporation, and the seven directors of Petro-Lewis Corporation. The amended consolidated class action complaint set forth claims under the Securities Ex- change Act of 1934, as amended, 15 U.S.C. §§ 78a, et seq., and the Securities Act of 1933, as amended, 15 U.S.C. §§ 77a, et seq. The plaintiffs in the original Colorado action sought to repre- sent two classes: (1) a “securities class,” consisting of the pur- chasers of securities, including common stock, warrants, and preferred stock, and (2) a “partnership class,” consisting of per- sons who purchased, reinvested in, or otherwise acquired limited partnership interests in over 100 partnerships formed by Petro- Lewis to purchase oil and natural gas producing properties be- tween August 1975, and February 1984, and in the Petro-Lewis deferred income program formed in 1981. The Petro-Lewis com- plaint alleged that during the relevant times the defendants made, or caused to be made, statements in Petro- Lewis prospec- tuses, periodic shareholder and investor reports, filings with the Securities and Exchange Commission, press releases, investor letters, and other documents, that were_materially false and misleading and that the defendants omitted to disclose certain material facts and adverse information about Petro-Lewis and the partnerships that it managed. Some plaintiffs sought relief in the form of rescission of their purchases of limited partner- ship interests. All plaintiffs sought damages, interest, costs, and disbursements. * The facts set forth in part I are taken from Judge Carrigan’s opinion in the Colorado litigation. D-4 On July 3, 1984, co-lead counsel for the plaintiffs and counsel for the defendants in the Colorado litigation executed an agree- ment in principle to settle all eleven class actions. The settle- ment agreement consisted of two primary components: (1) for- mation of a royalty trust, and (2) creation by the defendants of a settlement fund consisting of cash and non-cash considera- tions valued at $23.5 million. Notices were sent to approximately 180,000 holders of limited partnership interests in 45 limited partnerships, plus approximately 7,000 members of the stockholder class. In addition, 40,000 notices were sent to brokers for forwarding to persons on whose behalf interests were held. According to a public announcement made December 26, 1984, all 45 affected limited partnerships voted, by very substantial margins, in favor of the settlement. The settlement required Petro-Lewis, on behalf of all defendants, to contribute considera- tion of $23.5 million to a settlement fund, which included $10 million in cash plus approximately 720,000 trust units valued at $13.5 million. The class members who participated in the settlement were to sign a release form which provided that all the defendants, and any subsidiary or affiliate of Petro-Lewis, would be released with respect to all claims, demands, and causes of action. The release form, however, was not intended to release any broker- dealer in its capacity as an agent for Petro-Lewis or any of its affiliates in connection with the issuance, purchase, or sale of any of the securities of, or interest in, Petro-Lewis, or any of the limited partnerships of which Petro-Lewis or any subsidiary or affiliate of Petro-Lewis was a general partner. Counsel for all parties agreed that the purpose and intent of the release was solely to protect the defendants in the Colorado action and that it was intended that all the plaintiff class members retain any rights that they might have to proceed against and collect from broker-dealers or other nondefendants who might be liable to them. The court conditionally certified the partnership class and the securities class for purposes of settlement only. The court indicated that there were serious questions of law and fact which 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, [Text truncated at 120,000 characters. The full text is on the page linked above.] --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385019_0510%3A1. Public record. Not legal advice.