Opinion ID: 391390
Heading Depth: 1
Heading Rank: 1

Heading: the procedural background leading to this appeal

Text: 5 Fred Zeidman and Steven Youngelson instituted this suit on August 26, 1977 against J. Ray McDermott & Co., Inc. (McDermott), Smith Barney, Harris Upham & Co., Inc. (Smith Barney), and four of McDermott's principal officers. The litigation arises out of a highly publicized tender offer contest for control of Babcock & Wilcox Co. (B&W) that took place in mid-1977 between McDermott (whose investment banker was Smith Barney) and United Technologies Corp. (UTC). During the battle for control of B&W, Zeidman sold (on August 8) 1,000 shares of B&W common stock and Youngelson sold (on August 9) four 100-share call options for B&W common stock; both plaintiffs sold their securities at a price substantially below that eventually offered by McDermott in its final and successful tender offer. 6 Suing on behalf of themselves and other investors who sold B&W stock and options during this period, the plaintiffs alleged in their complaint that the defendants had engaged, during the course of the tender offer contest, in an unlawful scheme to manipulate downward the market price of B&W securities by issuing false and misleading information. According to the plaintiffs, the purpose of this alleged scheme was to frustrate a competing tender offer previously made by UTC, to coerce the B&W Board of Directors into recommending a subsequent McDermott tender offer, and eventually to effect a takeover by McDermott of B&W. 7 Since this appeal involves the denial of class action certification and not the merits of the plaintiffs' claims, we need not examine these allegations in any great detail. However, certain dates and events in the plaintiffs' complaint form the limits of the class that the plaintiffs seek to represent and are therefore relevant at this time. 8 The illegal scheme alleged by the plaintiffs begins on March 30, 1977; the plaintiffs allege that open market purchases begun by McDermott on that date were a tender offer within the meaning of section 14(d) of the Securities Exchange Act of 1934 (the 1934 Act), but that McDermott made no attempt to comply with section 14(d) (i. e., to file a Schedule 13D statement in accordance with section 13(d) of the 1934 Act) at that time. The plaintiffs acknowledge that McDermott did submit a Schedule 13D statement on May 11, 1977, and that McDermott amended that statement on May 16; however, the plaintiffs allege that both the original statement and the amendment were materially false and misleading because they failed to disclose the true purpose of McDermott's substantial open market purchases of B&W stock. On August 9, 1977, Dow Jones reported in a Broad Tape release that McDermott had denied reports that it might make a tender offer for B&W stock. The plaintiffs allege that this release was materially misleading, since McDermott in fact was planning to make a tender offer; the plaintiffs further allege that the release was based on information provided to a Dow Jones reported by McDermott's chief public relations officer, and that McDermott made no attempt to correct the misleading impression created by the release. Three days after this news report on August 12, 1977 McDermott formally announced a tender offer for B&W stock. At this point an open tender offer battle commenced, with McDermott and UTC quickly outbidding each other until McDermott made its successful bid on August 23. 9 On November 25, 1977, the plaintiffs moved to certify their suit as a class action. Their motion requested certification with respect to a class consisting of the plaintiffs and all other persons similarly situated who were between March 29, 1977 and August 14, 1977 beneficial owners of Babcock & Wilcox Company shares or Babcock & Wilcox Company calls and who sold such shares or calls between March 29, 1977 and August 14, 1977 and who sustained losses on such sales by reason of the illegal scheme alleged in the plaintiffs' complaint. This class was subsequently divided by the plaintiffs into two subclasses: first, those investors who sold their B&W stock or calls between March 29 and August 8 (represented by Youngelson); and second, those investors who sold their B&W stock or calls between August 9 and August 11 (represented by Zeidman). The event that divides these two classes is the Dow Jones Broad Tape release of August 9, on which only the Zeidman class is alleged to have relied. 10 In February 1978 the parties submitted memoranda addressing the question of class certification. These memoranda discuss each of the several prerequisites for a class action under Federal Rule of Civil Procedure 23. As explained infra, however, this appeal involves only one of those prerequisites: Rule 23(a)(1)'s requirement that the class be so numerous that joinder of all members is impracticable. Neither the plaintiffs nor the defendants dealt with this particular requirement in any great detail in their memoranda. In order to meet the numerosity requirement of Rule 23(a)(1), the plaintiffs did no more than to allege the numbers of shares that were traded during the time periods involved; in particular, the plaintiffs asserted that almost 6,000,000 B&W shares were sold between March 30 and August 8, 1977, and that approximately 666,000 shares of B&W stock and at least 14,100 shares of B&W underlying calls were sold between August 9 and August 11, 1977. In response, the defendants argued that the important figure was not the total number of shares traded, but was instead the total number of investors who made those trades, since only the latter figure represents the total number of potential plaintiffs. The defendants also argued that certain classes of people who sold shares or calls during this period could not be represented by the named plaintiffs; in particular, the defendants sought to exclude arbitrageurs and other professional or institutional investors, persons who exercised rather than sold their calls, persons who sold calls which were to expire during the alleged class period, and persons whose reliance and investment motives were different from those of the plaintiffs. 11 The district court issued its decision on the class certification question on June 28, 1978. The court found that each prerequisite other than numerosity had been satisfactorily established by the plaintiffs, but that there was insufficient evidence in the record to determine whether the numerosity requirement had been met. 1 While the court did not decide the numerosity issue, however, its opinion did substantially define that issue for the parties by narrowing the classes which the plaintiffs sought to represent. Most importantly, the court held that neither named plaintiff could represent the arbitrage community or any large institutional or professional investor, since such parties' sophistication, access to information and resources differentiated their cases from those of the named plaintiffs. The court also excluded all holders of B&W calls that expired during the class period, for those holders would have had to sell their interests regardless of representations made by McDermott. Similarly, the court held that the plaintiffs could not represent persons who sold B&W calls but simultaneously purchased B&W stock, or who later repurchased B&W calls or stock prior to the conclusion of the tender offer battle, since these transactions were also sufficiently distinct from those engaged by the plaintiffs so as to preclude their incorporation into the class. Finally the court held that the class could not include persons who sold their stock or calls prior to May 11, 1977, since the court had already granted the defendants' motion for summary judgment with respect to the plaintiffs' claims arising out of actions taking place before that date, i. e., out of McDermott's failure to file a Schedule 13D any earlier than it did. 2 12 Having thus reduced the size of the potential classes that the plaintiffs sought to represent, the court considered whether the plaintiffs' evidence was sufficient to meet the numerosity requirement. Although the court had excluded several different groups from the plaintiffs' classes, its decision rested solely on its exclusion of institutional and professional investors. See infra at note 7. Since the plaintiffs' numerosity evidence consisted only of the number of shares that had been traded in each time frame, and since the presumably large group composed of all institutional and professional investors had been excluded from the potential classes, the court held that the plaintiffs had not introduced sufficient evidence of numerosity. 13 While the court refused to find in favor of the plaintiffs on the numerosity issue, however, it did not find to the contrary that numerosity did not exist in this case. Instead, the court seems to have left the issue open. After discussing the numerosity question, the court concluded: 14 Consequently, this aspect of the class certification will remain open until sufficient additional evidence of numerosity is introduced into the record to allow a ruling on this issue. 15 The court then went on to discuss each of the remaining requirements of Rule 23. In each instance the court found the requirement to have been met by the plaintiffs, although the court seems to have regarded several of the various class action prerequisites as more serious questions in this case than the numerosity requirement. For example, the court described the defendants' argument on Rule 23(a)(3)'s requirement as their first major challenge to the certification of this class, and described the question raised by Rule 23(b) (3)'s requirement as the most difficult question of this motion. In fact, the court premised its discussion of Rule 23(b)(3) by noting that it had already determined that the requirements of Rule 23(a) have been satisfied; the numerosity requirement, of course, is included in Rule 23(a). Finally, the court concluded its decision as follows: 16 Accordingly, plaintiffs' motion for certification of the class is DENIED without prejudice to reassert at such time as additional evidence of numerosity may be filed into the record. 17 As a result of this decision, the plaintiffs commenced the compilation of certain documentary evidence on numerosity and the preparation of a memorandum specifically addressed to that issue. This additional evidence and memorandum were filed in the district court on July 6, 1978 approximately one week after the court's initial opinion on class certification. The plaintiffs relied for their new analysis on several published sources for stock exchange data, including the Weekly Reconciliation Reports of the New York Stock Exchange and Stock Clearing Corp.; weekly reports of block trades reported in Barron's ; daily reports of individual stock trades prepared by Francis Emory Fitch, Inc.; and the daily reports of the New York Stock Exchange and Pacific Stock Exchange. Based on figures reported in these sources, the plaintiffs made the following estimates: 18 (1) during the Youngleson class period (May 11-August 8, 1977), 3,466 round-lot trades involving under 1,000 shares averaged 272 shares and accounted for 88% of total sale executions; 19 (2) during the three-day Zeidman class period (August 9-11, 1977), 567 round-lot trades involving under 1,000 shares averaged 318 shares and accounted for 80% of total sale executions; and 20 (3) 5 major retail brokerage firms sold many more shares than they purchased during the two class periods. 21 The plaintiffs argued that a sufficiently large number of non-professional and non-institutional investors must have sold B&W securities during the two class periods because of the extremely large number of small trades in those periods, since institutional and professional investors rarely trade in small amounts. The plaintiffs further argued that while the plaintiffs' losses come from the sale of securities, professional and institutional investors would primarily have been purchasing securities during these periods, since the largest percentage of such trading would likely be done by arbitrageurs who purchase stock in anticipation of a tender offer. Such arbitrageurs purchase from shareholders who would rather sell their stock immediately than await the final formal tender offer and incur the concomitant risk that the offer may fall through; the arbitrageurs purchase stock and accept such risks during the early stages of a tender offer, thereby hoping to profit from a tender offer price which is somewhat higher than the market price of the stock in the initial stages of the process. See Rubin, Arbitrage, 32 Bus.Law. 1315 (1977). In support of this argument, the plaintiffs relied on the evidence summarized above which relates to the trading activity of several brokerage firms which they contend deal mostly with non-professional investors; according to the plaintiffs, this evidence indicates that these firms were predominantly on the sell side of the market during the time frame of the plaintiffs' claims. Finally, the plaintiffs submitted figures from a survey of B&W shareholders prepared by B&W and dated April 15, 1977; the survey showed that there were 23,380 individual B&W shareholders holding an average of 149 shares and at least some of whom resided in every state in the nation. 22 On the same day as the plaintiffs submitted this additional evidence in fact, within two hours thereafter the defendants tendered to the named plaintiffs the full amount of their personal claims 3 and moved in the district court for the dismissal of this entire action. The brief memorandum submitted in support of the defendants' motion argued that the action must be dismissed for mootness because of the defendants' tender of the amounts claimed by the named plaintiffs, since no class had yet been certified and since by virtue of the tender no named plaintiff had any remaining claim. Zeidman and Youngelson refused to accept the tender of the amounts claimed by them in this action, but on July 11 the district court dismissed their personal claims with prejudice. The court refused to reconsider the plaintiffs' motion for class certification on the basis of the additional numerosity evidence. 4 Instead, the court heard argument on the defendants' motion to dismiss the entire action on August 2, 1978, and entered judgment dismissing the entire action on October 17, 1978.II. A THRESHOLD QUESTION: THE CORRECT CHARACTERIZATION OF THE DISTRICT COURT'S INITIAL OPINION 23 Central to our resolution of the issues raised in this appeal is a proper understanding of the action taken by the district court in its initial opinion on class certification. The defendants characterize that opinion as a denial of the plaintiffs' motion for class certification, and the defendants argue that the issue was thereby concluded at least until such time as the plaintiffs might urge a new motion for class certification. However, the plaintiffs characterize the court's opinion as a narrower decision ruling only on those class action prerequisites other than numerosity; according to the plaintiffs, the motion for class certification thereafter remained pending before the court. 24 The defendants rely for their argument on the label attached to the decision by the district court in its concluding paragraph, in which the court denied the plaintiffs' motion without prejudice to reassert it at such time as additional evidence of numerosity were introduced. It is well settled, however, that an appellate court is not bound by the label a trial court puts on its opinion where underlying facts or the opinion as a whole indicate that a different action was in fact intended. E. g., Williamson v. Tucker, 645 F.2d 404, 412 (5th Cir. 1981); Gallimore v. Missouri Pacific Railway Co., 635 F.2d 1165, 1170 (5th Cir. 1981); Tuley v. Heyd, 482 F.2d 590, 593 (5th Cir. 1973). In this case the court specifically refused to rule on the question of numerosity, and openly invited the plaintiffs to submit additional evidence on this issue: this aspect of the class certification will remain open until sufficient additional evidence of numerosity is introduced into the record to allow a ruling on this issue. (Emphasis added.) Moreover, the court referred to two other prerequisites (23(a)(3) and 23(b)(3)) as more difficult questions in this case, and yet ruled in favor of the plaintiffs on both. Before reaching the requirement of Rule 23(b)(3), the court went so far as to note that all of the requirements of Rule 23(a), which of course includes the numerosity requirement of Rule 23(a)(1), have been satisfied. Fairly read in its entirety, therefore, we think the court's initial opinion on class certification should properly be read as a limited decision leaving the plaintiffs' motion for certification pending before the court. 5 25 This reading of the district court's initial opinion is buttressed by the court's special responsibility to withhold its decision on class certification until an adequate record has been developed. Although the court is directed by Rule 23(c)(1) to determine the class status of the suit (a)s soon as practicable after the commencement of an action brought as a class action, such a decision may not be practicable before the relevant facts have sufficiently been developed in the record. For example, we held in Jones v. Diamond, 519 F.2d 1090, 1099 (5th Cir. 1975), that under the circumstances of that case the district court had abused its discretion by deciding the class certification issue on the basis of the pleadings alone. We explained:In class actions, particularly in the civil rights field, the general rules on burden of proof must not be applied rigidly or blindly. The court too bears a great responsibility to insure the just resolution of the claims presented; it should be loathe to deny the justiciability of class actions without the benefit of the fullest factual background. 26 519 F.2d at 1099. See also Walker v. World Tire Corp., Inc., 563 F.2d 918, 921 (8th Cir. 1977); Guerine v. J. & W. Investment, Inc., 544 F.2d 863 (5th Cir. 1977); Weathers v. Peters Realty Corp., 499 F.2d 1197, 1200 (6th Cir. 1974); Huff v. N.D. Cass Co., 485 F.2d 710, 713 (5th Cir. 1973). 27 In this case the determinative issue (numerosity) rested on published and easily accessible stock exchange data. Although we need not make such a determination, a strong argument could be made that the district court would have abused its discretion had it excluded institutional and professional investors from the plaintiffs' purported classes and then ruled against them on numerosity without giving them an opportunity to submit easily accessible stock exchange data on the size of the excluded groups. Cf. Guerine v. J. & W. Inv., Inc., supra (district court abused its discretion by refusing to hold an evidentiary hearing concerning substantial factual allegations raised by plaintiffs in motion for rehearing after denial of class certification). 28 III. DID THE DISTRICT COURT ABUSE ITS DISCRETION BY REFUSING TO FIND NUMEROSITY ON THE BASIS OF EVIDENCE SUBMITTED TO IT BEFORE ITS INITIAL DECISION OF JUNE 28? 29 The plaintiffs argue that the district court abused its discretion by requiring additional evidence on numerosity; according to the plaintiffs, the court should have found numerosity on the basis of the evidence initially submitted to it. In order to address this contention we must first consider the nature of the question the district court was called upon to decide. A plaintiff who seeks to certify his suit as a class action under Federal Rule of Civil Procedure 23 must establish a number of specific prerequisites, and in each case the burden of proof is on the plaintiff who seeks to thus certify his suit. See 3B J. Moore & J. Kennedy, Moore's Federal Practice P 23.02-2, at 23-96 (1980). The particular requirement at issue here is stated in Rule 23(a) (1): the purported class must be so numerous that joinder of all members is impracticable. In order to satisfy his burden with respect to this prerequisite, a plaintiff must ordinarily demonstrate some evidence or reasonable estimate of the number of purported class members. See J. Moore & J. Kennedy, supra, at P 23.05(3). However, this does not mean that the actual number of class members is the determinative question, for (t)he proper focus (under Rule 23(a)(1)) is not on numbers alone, but on whether joinder of all members is practicable in view of the numerosity of the class and all other relevant factors. Philips v. Joint Legislative Committee, 637 F.2d 1014, 1022 (5th Cir. 1981). See Garcia v. Gloor, 618 F.2d 264, 267 (5th Cir. 1980), cert. denied, --- U.S. ----, 101 S.Ct. 923, 66 L.Ed.2d 842 (1981). Thus, a number of facts other than the actual or estimated number of purported class members may be relevant to the numerosity question; these include, for example, the geographical dispersion of the class, the ease with which class members may be identified, the nature of the action, and the size of each plaintiff's claim. See Garcia v. Gloor, supra, at 267; 7 C. Wright & A. Miller, Federal Practice & Procedure § 1762, at 600-03 (1972). It is not surprising, therefore, that no definitive pattern has emerged under Rule 23(a) (1) in terms of the number of purported class members. Indeed, classes with as few as twenty-five or thirty members have been certified by some courts. See C. Wright & A. Miller, supra, at 597-99. 30 We must emphasize, however, that this issue is as are other questions involved in the decision to certify a class action left to the sound discretion of the district court. Because the certification of a class action has such a great effect on the district court's control of litigation before it, and because certification involves substantial fact questions, we will not reverse a district court's decision on class certification absent an abuse of its discretion. E. g., Walker v. Jim Dandy Co., 638 F.2d 1330, 1334 (5th Cir. 1981). See J. Moore & J. Kennedy, supra, P 23.05(3), at 23-169. 31 The evidence submitted to the district court before its initial decision on class certification consisted only of the number of shares traded during the periods involved in the plaintiffs' two purported classes: the plaintiffs alleged that almost 6,000,000 shares of B&W stock were traded during the time-span of the Youngelson class and that 666,000 shares of B&W stock and at least 14,100 shares of B&W underlying calls were traded during the time-span of the Zeidman class. The plaintiffs' discussion of these figures in their initial memorandum on class certification is brief, but their argument seems to have relied on a common-sense assumption. In particular, the plaintiffs appear to have presumed that any class composed of the sellers of a nationally traded security during a period in which hundreds of thousands or even millions of shares of the security were traded must necessarily be so numerous that joinder of all members is impracticable. This assumption is indeed a reasonable one, since it is difficult to imagine any such class composed of a small number of sellers, and since the class would in all likelihood be geographically dispersed and difficult to identify. As one would expect, therefore, the prerequisite expressed in Rule 23(a)(1) is generally assumed to have been met in class action suits involving nationally traded securities. As one commentator explains: 32 Joinder impracticability (numerosity) is rarely contested in class actions brought on behalf of shareholders or traders in publicly owned corporations. In class actions brought on behalf of securities traders, federal trial courts are quite willing to accept common sense assumptions in order to support a finding of numerosity. 33 5 J. Newberg, Class Actions § 8812, at 836 (1977). 34 Indeed, a number of courts have found the numerosity requirement to have been met with respect to a purported class of purchasers or sellers of nationally traded securities on the basis of evidence similar to that initially offered by the plaintiffs in this case. See Greene v. Emersons, Ltd., 86 F.R.D. 47, 53 (S.D.N.Y.1980) (1.3 million outstanding shares held by 1,271 shareholders); Greenspan v. Brassler, 78 F.R.D. 130, 132 n.4 (S.D.N.Y.1978) (964,000 shares traded during time period at issue); Trattner v. American Fletcher Mortgage Investors, 74 F.R.D. 352, 356 (S.D.Ind.1976) (stock traded on New York Stock Exchange); Brady v. Lac, Inc., 72 F.R.D. 22, 27 (S.D.N.Y.1976) (1.3 million outstanding shares); In re Penn Central Securities Litigation, 62 F.R.D. 181, 188 (E.D.Pa.1974) (1.5 million outstanding shares, viewed in light of the geographical dispersion of the shareholders); Hawk Industries, Inc. v. Bausch & Lomb, Inc., 59 F.R.D. 619, 623 (S.D.N.Y.1973) (574 transactions on New York Stock Exchange during period at issue); Price v. Skolnik, 54 F.R.D. 261, 264 (S.D.N.Y.1971) (3 million outstanding shares, 1,100 shareholders, and 17 market-makers listed in the pink sheet); Berland v. Mack, 48 F.R.D. 121, 127 (S.D.N.Y.1969) (4.5 million shares traded during period at issue, 16,000 shareholders, large number of certificates delivered to transfer agents); Jacobs v. Paul Hardeman, Inc., 42 F.R.D. 595, 598 (S.D.N.Y.1967) (7,000 outstanding debentures). 6 35 Although the evidence initially submitted by the plaintiffs would ordinarily seem adequate to meet the numerosity requirement in a securities case, two factors distinguish this case from the more common cases such as those cited above. In the first place, the plaintiffs do not seek to represent all investors who purchased B&W securities during the periods at issue; the district court excluded from the plaintiffs' purported classes the undeniably significant group composed of the arbitrage community and other large institutional or professional investors, and the plaintiffs do not contest this exclusion on appeal. What the district court had to decide, therefore, was whether the remaining class composed only of non-institutional and non-professional investors met the numerosity requirement. 7 36 In the second place, the district court did not find that the numerosity requirement had not been met by the plaintiffs, but instead left the question open pending submission of additional evidence. As we found in Part II of this opinion, the district court's initial decision on class certification found the record inadequate to make any determination with regard to numerosity until evidence on the size of the excluded groups were introduced, and then properly gave the plaintiffs an opportunity to submit such evidence. 37 Viewed in this light, we cannot say that the district court's initial decision on class certification was an abuse of its discretion. Where an admittedly large and potentially dominant group is excluded from a plaintiff's purported class, it is obviously difficult to estimate the numerosity of the plaintiff's class absent some evidence of the size either of the excluded group or of the remaining class. Thus, some courts have indeed refused to find numerosity on the basis of evidence similar to that initially introduced by the plaintiffs, in situations where as here the plaintiffs have introduced no evidence as to the size of a particular subclass of securities buyers or sellers which they seek to represent. See Petersen v. Federated Development Company, 387 F.Supp. 355, 360-61 (S.D.N.Y.1974) (while 200,000 shares had not been tendered and purchased in the course of a given tender offer, plaintiff who had not tendered could not represent those whose tender was refused, and was not entitled to class certification absent evidence of the number of shareholders who, like the plaintiff, had not tendered their shares); Cannon v. Texas Gulf Sulphur Co., 53 F.R.D. 216, 219 (S.D.N.Y.1971) (although 500,000 shares traded in period at issue, market behavior suggested that the great majority of trades were not based on allegedly misleading information; therefore plaintiff was not entitled to class certification absent evidence of the number which claimed to have relied on such information). We conclude therefore that the district court did not abuse its discretion by holding the numerosity issue open pending submission of additional evidence on the role of professional and institutional investors in the market for B&W securities. 38