Opposition Brief — Winkleman v. Blyth & Co.

LES LOLS EEN OTE IE MIE EL LOO TRENTO RETIN FRI

i IBRARY | " j

Rhhea | OcT 4 1975

Ju the Supreme Court

of the United States

OCTOBER TERM, 1975

No. 75-365

WALTER E. WINKELMAN and PAUL F.

BECKER,

¥ Petitioners,

BLYTH & CO., INC., a Delaware corporation,

Respondent.

ELMER G. ANDERSON and VICTORIA G.

ANDERSON, husband and wife, THELMA SCOTT

WOOD, MAURICE J. SCOTT and MARGARET M.

SCOTT, husband and wife, ABBOTT W.

LAWRENCE and EDITH R. LAWRENCE,

husband and wife,

Petitioners,

Vv.

BLYTH EASTMAN DILLON & CO., (BLYTH

& CO., INC.), a Delaware corporation,

THOMAS MORRIS and JOHN VAN

LANINGHAM,

Respondents.

RESPONDENTS’ BRIEF OPPOSING PETITION FOR A

WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE

NINTH CIRCUIT

LEIGH DeCAMP STEPHENSON

800 Pacific Building

Portland, Oregon 97204

Telephone (503) 226-6151

Attorney for Respondents

STEVENS-NESS LAW PUB. CO.. PORTLAND, ORE. 10-78

EI Se Oe ee Ee, ee ON eT

Statement of the Case

Opinions Below

Reasons for Denying the Petition

ee.

SUBJECT INDEX

Page

Respondents’ Brief Opposing Petition for a Writ

of Certiorari

Both Lower Courts ne Applied the Fed-

eral Doctrine of Equitable Tolling to the Un-

contested Facts

The District Court Correctly Denied Petition-

ers’ Motion for Class Action Treatment ____

The Oregon Statute of Limitations for Fraud

is the Correct Statute of Limitations for Peti-

tioners’ Rule 10b-5 Claims. sis

ao wo be

il

TABLE OF AUTHORITIES

Page

Cases

Bailey v. Glover, (1875) 88 U.S. (21 Wall) 342 7

City of New York v. International Pipe & Ce-

ramics Corp., (2 Cir. 1969) 410 F.2d 295. 10

lass v. Glenn E. Hinton Investments, Inc.,

9 Cir. 1971) 440 F.2d 912

Errion v. Connell, (9 Cir. 1956) 236 F.2d 447. 5

Fratt v. Robinson, (9 Cir. 1953) 203 F.2d 627_5, 11

Hecht v. Harris, Upham & Co., (9 Cir. 1970)

430 F.2d 1202

Hupp v. Gray, (7 Cir. 1974) 500 F.2d 993 -...7, 9

Kauf v. Dreyfus Fund, Inc., (3 Cir. 1970

on F.2d 727, cert. den. (1971) 401 U.S.

Mintz v. Mathers Fund, Inc., (7 Cir. 1972) 463

F.2d 495

Morris v. Burchard, (S.D. N.Y. 1971) 51 F.R.D.

530 10

Sackett v. Beaman, (9 Cir. 1968) 399 F.2d 884 5

Schillner v. H. Vaughan Clarke & Co., (2 Cir.

1943) 134 F.2d 875

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

(5 Cir. 1973) 482 F.2d 880 10

Turner Vv. Lundquist, (9 Cir. 1967) 377 F.2d

44 5, 7,9

United California Bank v. Salik, (9 Cir. 1973)

Pg 1012, cert. den. (1973) 414 USS.

United States v. Diebold, (1962) 369 U.S. 654. 8

White v. Federal Deposit Ins. Corporation, (4 |

Cir, 1941) 122 F.2d 770 8 |

iii

TABLE OF AUTHORITIES (Cont. )

Page

Winkelman v. Blyth & Co., Inc., (D. Or. 1973)

394 F. Supp. 994 2, 3, 4, 5, 12

Winkelman v. Blyth & Co., Inc., (9 Cir. 1975)

518 F.2d 530, reh. den. July 11, 1975 __ 2, 6,9

Wood v. Baker, (1959) 217 Or. 279, 341 P.2d

134 8

Statutes

15 U.S.C. §§ 78a et seq., (Securities Exchange

Act) 11

ORS 12.110 (1) _. | 11

ORS 59.115 (5) 11, 12

Other Authorities

17 C.F.R. 240.10b-5 (S.E.C. Rule 10b-5)

2, 6, 11, 12

Fy Ms Ge POO vii 2, 4, 9, 10

Fed. R. Civ. P. 56 _. 5, 8

Iu the Supreme Court

of the United States

OCTOBER TERM, 1975

No. 75-365

WALTER E. WINKELMAN and PAUL F.

BECKER,

+ Petitioners,

BLYTH & CO., INC., a Delaware corporation,

Respondent.

ELMER G. ANDERSON and VICTORIA G.

ANDERSON, husband and wife, THELMA SCOTT

WOOD, MAURICE J. SCOTT and MARGARET M.

SCOTT, husband and wife, ABBOTT W.

LAWRENCE and EDITH R. LAWRENCE,

husband and wife,

~ Petitioners,

BLYTH EASTMAN DILLON & CO., (BLYTH

& CO., INC.), a Delaware co ration,

THOMAS MORRIS and JOHN VAN

LANINGHAM,

Respondents.

RESPONDENTS’ BRIEF OPPOSING PETITION FOR A

WRIT OF CERTIORARI TO THE UNITED STATES

COURT OF APPEALS FOR THE

NINTH CIRCUIT

' APES INR IP

a o o PPT ER. oe - - 7

BRIEF OPPOSING PETITION FOR A

FOR A WRIT OF CERTIORARI

Respondents urge that the petition for writ of cer-

tiorari be denied.

The District Court correctly held' that the Oregon

two-year statute of limitations for fraud actions ap-

plies to private civil damage actions under Rule 10b-

5;2 that, under the federal doctrine of equitable toll-

ing, the two-year period commenced when the plain-

tiffs knew or reasonably should have suspected the al-

leged fraud; and that the adverse factors about their

investinent set forth in a letter to them dated June

12, 1969 started the two-year limitations period, there-

by barring their claims filed three and three years

nine months later.

The Ninth Circuit unanimously affirmed based

on the District Court’s opinion.*

The District Court was also correct in denying

plaintiffs’ motion to have the Winkelman-Becker case

treated as a class action under Fed. R. Civ. P. 23.*

It properly held that a class action would not be a

superior method of adjudication because non-standard

oral misrepresentations formed the basis of the al-

leged fraud, and that common questions of law and

fact would not predominate.

1 Winkelman Vv. Blyth & Co., Inc., (D. Or. 1973) 394 F.

Supp. 994.

217 C.F.R. 240.10b-5.

3 Winkelman V. Blyth & Co., Inc., (9 Cir. 1975) 518 F.2d

530, reh. den. July 11, 1975.

4R. 133. The Order is reproduced at p. A-13 of the Pe-

tition.

ol laa SOLEIL Cs

3

The Ninth Circuit’s affirmance of the District

Court’s Order granting summary judgment against

petitioners made moot the Winkelman-Becker conten-

tions concerning the District Court’s denial of class

treatment.

STATEMENT OF THE CASE

Petitioners separately purchased stock of Aseco,

Inc. (Aseco) from respondent Blyth & Co., Ince.

(Blyth) over a period from June 25, 1968 to March

5, 1969 at prices ranging from $29.50 to $88.00 per

share.® Their complaints recite that they were induced

to make the purchases by reason of respondents’ al-

leged misrepresentations about the financial and oper-

ating condition of Aseco, i.e., that Aseco stock was in-

vestment grade and would rise in price in a short

time, and that Aseco was a viable company with a

good outlook for the future and soon would be a party

to a favorable merger with Whale, Inc. (Whale).°®

On June 12, 1969, Aseco sent to plaintiffs and

other shareholders a letter which set out numerous

adverse factors about Aseco, including inter alia that

the merger with Whale would not be consummated,

the company had lost all of the contracts which pro-

duced 100% of its income during the year ended Feb-

ruary 28, 1969, four of the five plants were idle with

sales of equipment and facilities contemplated, the

company had been unable to locate new business, cur-

5R. 2, 135, 136, 150.

6394 F. Supp. at 995.

. Pex

= a a a its

— —_——— er see PIO EO Oe ett esti =

4

rent operating losses would continue unless new bus-

iness was found, the company was attempting to defer

payment of long-term indebtedness, the book value of

the stock was about $5.00 per share, and there had

been recent changes of management and litigation

filed by former officers and directors.” The disastrous

condition of Aseco was confirmed in subsequent mail-

ings to stockholders in August, 1969.°

Winkelman and Becker filed their complaint on

June 13, 1972 (R. 1). Their motion to have the case

treated as a class action pursuant to Fed. R. Civ. P.

23 was denied on December 21, 1972 because:

“It appears that, in this action, a class action

is not superior to other available methods for fair

and efficient adjudication in that there appear

to be non-standard oral misrepresentations that

form the basis of the alleged fraud, and common

questions of law and fact do not predominate.”

(R. 133).

On March 8, 1973, Anderson and the other peti-

tioners filed their complaint.°®

7Id. at 995-996. The text of the letter is reproduced at

pp. A-22-29 of the Petition.

® 394 F. Supp. at 996.

® The Anderson complaint did not seek class treatment

under Rule 23.

ae ee es Oe Eo

5

OPINIONS BELOW

The District Court granted respondents’ motion

for summary judgment pursuant to Fed. R. Civ. P. 56.

It first found the facts as stated above with respect

to the nature of petitioners’ allegations and the ad-

verse information in the June 12, 1969 letter showing

the “disastrous condition” of Aseco. It then held that

the Oregon two-year limitation period for commenc-

ing fraud actions applied, subject to the proviso that

the period commences either upon actual discovery of

the fraud, or at such time as a reasonably prudent

person, similarly situated, should have discovered the

fraud.'° It then concluded:

“The knowledge had by or imputed to the

plaintiffs [petitioners] from the June 12, 1969

letter to the stockholders compels the conclusion

that a prudent man would have suspected the al-

leged fraud. There is no genuine issue as to this

material fact.” (394 F. Supp. at 996).

Because the earlier complaint was filed three years

'0 394 F. Supp. 996. At the time of that decision, no opin-

ion of the Ninth Circuit had passed on the statute of limita-

tions applicable to Rule 10b-5 actions arising in Oregon. The

Ninth Circuit, however, had consistently held that the local

statute of limitations relating to fraud actions applied to

Rule 10b-5 cases arising in Washington and Caliornia. Fratt

v. Robinson, (9 Cir. 1953) 203 F.2d 627, 634 (Washington) ;

Errion v. Connell, (9 Cir. 1956) 236 F.2d 447, 455 (Wash-

ington) ; Turner v. Lundquist, (9 Cir. 1967) 377 F.2d 44, 46

(California) ; Sackett v. Beaman, (9 Cir. 1968) 399 F.2d

884, 890 (California); Hecht v. Harris, Upham & Co., (9

Cir. 1970) 430 F.2d 1202, 1210 (California); Douglass v.

Glenn E. Hinton Investments, Inc., (9 Cir. 1971) 440 F.2d

912, 915-916 (Washington) ; United California Bank v. Salik,

(9 Cir. 1973) 481 F.2d 1012, 1014-1015 (California).

al i Re ep, : a le eee —

6

after the June 12, 1969 letter, all of petitioners’ claims

were barred.

The Ninth Circuit unanimously affirmed. 518

F.2d at 531.

REASONS FOR DENYING THE PETITION

Both Lower Courts Correctly Applied the Federal Doctrine

of Equitable Tolling to the Uncontested Facts

Petitioners concede that Aseco mailed the June 12,

1969 letter to its stockholders,"' that petitioners were

stockholders when it was sent, '* that the price of

Aseco declined sharply after petitioners’ purchases,"

that an Oregon statute of limitations applies to their

Rule 10b-5 claims,'* and that both lower courts ap-

plied the federal doctrine of equitable tolling in de-

termining when the two-year limitations period for

fraud actions in Oregon commenced to run.'®

Petitioners contend that the lower courts did not

correctly apply the equitable tolling doctrine to the un-

contested facts. They advance three reasons. None

warrants the granting of a writ of certiorari.

First, petitioners contend that the District Court’s

adoption of a “prudent man” standard for imputing

discovery by petitioners was improper. The cases are

'! Petition 6, 7. See R. 162.

12 R. 2, 185-136, 150, 234.

13 Petition 3, 10, 12, 13.

14 Petition 16,

1S Petition 2, 9-18.

7 a de PEF 4 7 oi ti as ee LIME CIG ST calf ONY UIST WHEL NEAT

— ws

-~m «cs 5

-

to the contrary. Bailey v. Glover, (1875) 88 U.S. (21

Wall) 342, which is the fountainhead of federal toll-

ing, states that lack of negligence by a plaintiff is a

condition precedent to his right to claim the benefits

of tolling:

“. .. we hold that when there has been no neg-

ligence or laches on the part of a plaintiff in com-

ing to the knowledge of the fraud which is the

foundation of the suit and when the fraud has

been concealed, or is of such character as to con-

ceal itself, the statute does not begin to run until

the fraud is discovered by, or becomes known to

the party suing, or those in privity with him.”

(88 U.S. at 350; emphasis added).

Mere knowledge of a sharp decline in the price of a

stock is sufficient notice where the investor allegedly

bought in reliance upon a broker’s statement that the

price would rise. Hupp v. Gray, (7 Cir. 1974) 500

F.2d 993, 996-997. Awareness of additional facts

showing the company’s inability to generate profits

is also sufficient notice. Turner v. Lundquist, (9 Cir.

1967) 377 F.2d 44, 47-48.

Petitioners are correct that proof of their actual

awareness of facts pointing to fraud would prevent

them from claiming the benefits of tolling. But their

contention that an objective test can never apply

would nullify the statute of limitations, a result re-

jected by Bailey, Hwpp and Turner, supra.

Second, petitioners contend that awareness of facts

pointing to one violation of the securities laws would

not start the limitations period as to other violations.

sbeeerecnenen penn : oi

PERRY ese py or sseence ER PAPER EN QUT ® BIO EONEIS 2 ‘ PES SEE ON TRS TF. I EAS ELE MLO oe Re RAT

8

That proposition misstates the rule in Schillner v. H.

Vaughan Clarke & Co., (2 Cir. 1943) 134 F.2d 875,

878:

“. . . Even if it be assumed that the action

was barred in so far as it was based on a mis-

representation as to dividends, this would not pre-

clude recovery on the ground of some other un-

truth or material omission which reasonable dili-

gence would not have discovered before the crit-

ical date... .” (Emphasis added).

Accord: White v. Federal Deposit Ins. Corporation,

(4 Cir. 1941) 122 F.2d 770, 775; Wood v. Baker,

(1959) 217 Or. 279, 287.

The District Court properly focused on facts

known or knowable by petitioners more than two years

before their complaints were filed, and concluded

that petitioners should have known that respondents’

alleged statements about the worth of their invest-

ment were false. Clearly its conclusion is consistent

with the reasonable diligence rule in Schillner, White

and Wood, supra.

Third, petitioners contend that summary judg-

ment was inappropriate. The thrust of that conten-

tion is to nullify Fed. R. Civ. P. 56. While summary

judgment is not appropriate if conflicting inferences

may be drawn from the evidence before the court,

United States v. Diebold, (1962) 369 U.S. 654, 655,

it is appropriate where the inferences all point to the

unreliability of the statements by respondents which

en ee -

9

induced petitioners to buy the stock. Hupp and Lund-

quist, supra.'®

The District Court Correctly Denied Petitioners’ Motion

for Class Action Treatment

The class action issue is moot because petitioners’

claims are barred by the statute of limitations. A per-

son without standing cannot be a proper representa-

tive of any class. Mintz v. Mathers Fund, Inc., (7 Cir.

1972) 463 F.2d 495; Kauffman v. Dreyfus Fund, Inc.,

(3 Cir. 1970) 434 F.2d 727, 734, cert. den. (1971)

401 U.S. 974. Furthermore, each purported class

member would be barred in his own right by the stat-

ute of limitations.

Nor have petitioners advanced reasons establish-

ing that the District Court abused its discretion in

denying class treatment. Petitioners’ motion was pred-

icated on Fed. R. Civ. P. 28(b) (3). R. 17-37. Two

of the indispensable requirements of that rule are that

common questions of law or fact predominate over

individual questions, and that class treatment be the

superior method of adjudication, after considering the

practical difficulties in managing a class action and

16 Petitioners’ claim that Blyth was a market maker is

contrary to the undisputed record. Morris Affidavit, R. 88.

Moreover, market making is material only in the context of

the statements which induced petitioners to buy the stock.

Winkelman, supra, 518 F.2d at 531. Notice of the unreli-

ability of those statements charged petitioners with the duty

to — about the circumstances making those statements

unre e.

Purr mcrmen comes Tm et anew en Ney AR enema coanindiaa

err

10

other factors. The core of petitioners’ complaint is an

alleged “misleading stream of information” about

Aseco, made in the context of oral discussions between

the investor and his sales representative.'” R. 4, 638.

Neither petitioners nor the other investors they

sought to represent could escape having to testify

about the statements made to them about Aseco. Oth-

erwise the trier would have no basis to determine

whether the material facts alleged by petitioners were

misstated or omitted. Nor would the trier have any

basis to decide if petitioners did or did not rely or

otherwise suffer harm as a result of the alleged

wrongs. The District Court properly concluded that

common questions would not predominate and that

the practical difficulties of trying each claim fore-

closed a finding of superiority. R. 133. Accord: Mor-

ris Vv. Burchard, (S.D. N.Y. 1971) 51 F.R.D. 530,

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

(5 Cir. 1973) 482 F.2d 880, 882-883.

Rule 23 contemplates that the trial judge, who is

best able to assess the practical difficulties of trying

a class action, has broad discretion in determining

the appropriateness of class treatment. On review, his

decision is entitled to the greatest respect. City of

New York v. International Pipe & Ceramics Corp.,

(2 Cir. 1969) 410 F.2d 295, 298. In the case at bar,

the District Court fully and fairly canvassed the

factual aspects and concluded that class treatment

would not be appropriate. Petitioners’ contentions that

'7 There was no prospectus or other writing received by

petitioners prior to their purchases.

11

certain aspects of the alleged wrongs might involve

similar proof, e.g., Blyth’s purported self-interest in

selling the stock or its relationship with activities of

another broker-dealer, do not override the trial

judge’s determination that disposition of the claims

as a whole would preclude commonality and superior-

ity.

The Oregon Statute of Limitations for Fraud Actions is the

Correct Statute of Limitations for Petitioners’

Rule 10b-5 Claims

Petitioners’ final contention is that the three-year

limitation period of the Oregon blue sky statute (ORS

59.115(5)) should have been applied, rather than

the two-year fraud statute (ORS 12.110(1)). They

concede that an appropriate Oregon statute must be

used. '®

Since 1953 (Fratt, supra) the Ninth Circuit has

stated its preference for the local fraud statute. It

bases its preference on the grounds that securities

fraud actions are closely akin to common law fraud

actions and that state legislatures have incorporated

tolling until “discovery.” ORS 12.110(1) incorporates

tolling:

“, . . the limitation shall be deemed to com-

mence only from the discovery of the fraud or

deceit.”

ORS 59.115(5) does not:

“(5) No action or suit may be commenced

'® The Securities Exchange Act of 1934, 15 U.S.C. §§ 78a

et seq., does not prescribe a limitations period for federal

civil damage actions.

a a me FEMA TAY NESE ARLENE 5 TS

12

under this section more than three years after

the sale.’’'®

The Ninth Circuit’s consistent reaffirmation of

its preference*° gives certainty of application to all

Rule 10b-5 actions arising in states within that Cir-

cuit.

Petitioners’ laborious citation of cases from other

Circuits does not establish any “conflict” which re-

quires resolution by this Court. Congress has left to

the lower courts the task of deciding which state stat-

ute of limitations is most appropriate for actions aris-

ing in that state. The fact that decisions from other

states and Circuits adopt a statute other than the

fraud statute merely reflects the court’s assessment

of the proper statute for that state, based on the

choices prescribed by the legislature of that state.

Thus, uniformity of results and certainty of applica-

tion do prevail; petitioners have not shown other-

wise.?'

While the foregoing disposes of petitioners’ con-

tention that the pendency of the Winkelman-Becker

class allegations from June 13, 1969 to December 21,

1969 tolled the limitations period as to Anderson et

'9 Petitioners’ claims are barred under ORS 59.115 (5).

Winkelman, supra, 394 F. Supp. at 996. Petitioners do not

challenge that holding in this appeal.

20 See Fn. 10, supra.

21 Petitioners do not contend that the statute of another

state applies in the case at bar. Even if that were the case,

the District Court could resolve the question under familiar

conflicts of laws rules.

13

al., that tolling cannot help the latter. They are

charged with three years from the June 12, 1969

letter to the filing of the Winkelman-Becker com-

plaint, and an additional two and one-half months

from the denial of the Winkelman-Becker class mo-

tion (December 21, 1969) to the filing of their com-

plaint (March 8, 1973).

CONCLUSION

Respondents pray that the petition be denied.

Respectfully submitted,

LEIGH D. STEPHENSON

Attorney for Respondents