Opinion ID: 328888
Heading Depth: 1
Heading Rank: 2

Heading: The Proceedings in the District Court and this Court.

Text: 9 The complaint in this action alleging violations of the Securities Act of 1933 and the Securities Exchange Act of 1934, and also containing allegations which can be read as charging common law fraud, was filed in December 1971 by Howard Bersch, a United States citizen living in New York, who had purchased 600 shares of IOS common distributed as part of the IOB underwriting. 13 Characterizing the three underwritings as the IOS Public Offering, Bersch alleged he was bringing the action individually and on behalf of all persons who purchased stock in each of the offerings, estimated to approximate 100,000. 14 The complaint contained the allegations usual when a plaintiff desires designation of his action as a class action under Fed.R.Civ.P. 23(b)(3). It alleged that the underwriters impliedly represented to the public that IOS was a suitable company for public ownership when, in part as a result of the refusal of other investment houses to participate, they should have known that it was not. It also contained more particularized charges, e. g., that the prospectuses failed to reveal illegal activities by IOS and its officers which had seriously damaged the company, 15 that the books and records of IOS and its subsidiaries and affiliates were in such a chaotic condition that it was impossible to determine from them an accurate picture of IOS's financial position, and that during the months preceding the offering various IOS officials, including Cornfeld, had touted IOS' prospects. It charged that the underwriters in the Drexel Group had failed to use due diligence with regard to their prospectus, and that Andersen had failed to observe generally accepted accounting principles in connection with its audit with the result that the financial statements were false and misleading in various respects unnecessary to detail here. 10 The first clash between the parties arose on a motion by plaintiff for class action determination. The defendants who had been served 16 filed opposing affidavits and memoranda which raised the question of the propriety of the inclusion of foreign purchasers in the class but did not ask that the complaint be dismissed. On June 28, 1972 Judge Frankel ruled in a short memorandum. Recognizing that (t)he submissions on this motion are substantial and interesting, he thought that the incomplete record before him precluded ultimate decision. Any attempt at this was even more undesirable because of the impending change in the Southern District's calendar plan whereby the case would be assigned for all purposes to a single judge, probably not himself. After this prelude, he announced the following conclusions: 11 (1) It is not possible (or desirable) to say now with confidence whether the transactions plaintiff assails are reachable under either or both the 1933 and 1934 Acts. Defendants obviously took pains to structure their activities to avoid the reach of American securities laws. Whether they succeeded is a question that will probably merit extensive discovery. . . . Whatever final decision may be reached on the applicability of the American securities laws, plaintiff has adduced enough to allow the case to proceed for the time being as a class action. 12 (2) Plaintiff has also made a case sufficient for present purposes that there are predominant common questions of law and fact justifying a class action under Rule 23(b)(3). . . . It is feasible to leave for later determination, upon a fuller record, the question whether foreign purchasers will be entitled to invoke the protections and sanctions of American securities laws. For the present at least, all purchasers may be represented as a single class by the evidently energetic, competent and motivated team of counsel for the named plaintiff. 13 (3) Defendants(') . . . question as to whether foreign investors, whatever actual or constructive notice they receive, will be bound in their own courts by an adverse decision in the instant class action (is serious). 14 (4) (In view of) the substantial change in the procedures of this court (each civil case is to be assigned for all purposes to the same judge) basic questions affecting the management of the case (such as) (t)he keystone . . . matter of notice under subdivision (c)(2) of Rule 23 . . . should be, and will be, left for the judge in charge of it. The memorandum concluded: 15 The single question now resolved (and this, too, is of course open for reexamination under Rule 23(c)(1)) is as to the suitability of allowing the case to proceed as a class action. Plaintiff's motion in this respect is granted. The action may be maintained as a class action on behalf of all purchasers of IOS shares in the 'IOS Public Offering,' as detailed in the complaint, of 10,992,000 shares beginning in September 1969. 17 16 On December 27, 1972, the Drexel Group entered into a consent order with plaintiff Bersch, in which it was agreed that plaintiff would initially limit his discovery to the issues that Judge Ryan considered to have been left open by Judge Frankel, 18 at the completion of which the defendants might make jurisdictional and class action motions within sixty days. After plaintiff had had extensive discovery, particularly directed at the extent of the activities of the defendants within the United States, the defendants, in the fall of 1973, moved to dismiss the complaint for lack of subject matter jurisdiction and, in some cases, lack of jurisdiction over the person; several of the motions also requested that Judge Frankel's class action determination be either vacated or modified to exclude foreign purchasers. While these motions were pending before Judge Carter, to whom the case had been assigned, the members of the Drexel Group, on June 8, 1974, entered into a stipulation of settlement. As against the original claim of some $110,000,000, plus interest from September, 1969, this provided for a payment of $700,000. The settlement was conditioned upon the entry of a final judgment approving it as regards the settling defendants; reserving all rights of plaintiff against non-settling defendants; and providing that the settling defendants should receive out of any recovery against the non-settling defendants the amount of any liability arising from cross-claims and their expenses in defending against these and in assisting in the prosecution of this action. It was conditioned also on the dismissal with prejudice and on the merits of any other action brought in any court arising out of any of the events described in the complaint. The settling defendants might withdraw from the settlement if members of the plaintiff class holding more than 300,000 IOS shares should opt out. On December 4, 1974, Judge Carter entered an order setting a hearing on the proposed settlement for March 21, 1975. The settling defendants were to mail notices of the hearing in a form annexed to the order 19 to each purchaser from them, were to request each underwriter or dealer known to have participated in any of the three underwritings to mail similar notice to purchasers from them and furnish an adequate number of copies and postage, and to cause notice to be published in The New York Times, the Paris Herald Tribune, the Montreal Gazette, and the Toronto Globe and Mail. The notice included an indication that plaintiff's counsel intended to apply for a fee in the amount of $200,000 and reimbursement of expenses then in the amount of some $10,000. 17 The district court had been kept advised of the progress toward settlement and there had been conferences concerning the relation between the settlement and the ruling on the pending motions to dismiss. Pursuant to an agreement on procedure at a conference on July 15, 1974, the parties were notified by telephone on July 29 that the court had concluded it had subject matter jurisdiction and was preparing an opinion to that effect. At a further conference on July 31, the non-settling defendants requested that the court in its opinion certify the issue of subject matter jurisdiction for an interlocutory appeal under 28 U.S.C. § 1292(b). 18 The district court rendered its opinion on November 26, 1974. The first question it addressed was whether the 1969 IOS Public Offering fairly could be viewed as one, two, or three distinct offerings. Depending upon whether one focused on the purposes of the offering and the interaction of its prime movers, upon the character of the offerings themselves, or upon the structure of the selling arrangement and the identity and locus of the purchasers, each of these views was considered at least arguable. The court concluded that the three offerings were sufficiently integrated that they should be considered as one for the purpose of determining subject matter jurisdiction. It then found subject matter jurisdiction because of three factors: 19 (1) The amount of activity in the United States, almost entirely in connection with the Drexel offering, by the underwriters, their counsel and accountants (Price Waterhouse & Co.), and IOS. 20 (2) Sales to Americans, estimated at 386 individuals, even though the defendants appear to have made an attempt to prevent any sales to Americans and none occurred through the Drexel Group or Crang offerings. 21 (3) Generally adverse effects upon the American securities markets from the collapse in the price of the IOS shares offered. 22 The court rejected contentions of Crang and Smith Barney & Co. that they were exempt from liability under the 1934 Act by virtue of § 30(b). 20 Turning to in personam jurisdiction it sustained the contention of Crang that it was not subject to the jurisdiction of the district court but rejected that of IOS. 21 It likewise rejected contentions of IOS and Cornfeld with respect to the method of services of process, as well as of undue delay in effecting service. 22 It also denied an application of IOS for a stay of proceedings against it on the ground that comity required any claims to be determined in the New Brunswick liquidation. The court certified its ruling with respect to subject matter jurisdiction for an interlocutory appeal under 28 U.S.C. § 1292(b) and affixed a Rule 54(b) certificate to its order dismissing against Crang for lack of jurisdiction over the person. However, it declined to grant a § 1292(b) certificate with respect to its various unfavorable rulings as to IOS and Cornfeld which we have just described. 23 On December 17 Andersen and Cornfeld moved this court to stay the mailing and publication of the notice of the proposed settlement on the ground that the district court had no subject matter jurisdiction and that publicizing of the settlement would stir up litigation against them. We granted a stay on December 19 pending consideration of the motions for leave to appeal under § 1292(b) by Andersen, IOS and Cornfeld, which were being held by the clerk to await opposing papers, and if such motions were granted, for such further period as should then be provided. Subsequently we granted the motions for leave to appeal under § 1292(b), consolidated the three appeals, set an expedited schedule, and extended the stay pending argument of the appeals and such further period, if any, as might then be determined. 23 Later we also consolidated plaintiff's appeal from the order dismissing the complaint against Crang for want of jurisdiction over the person. 24