Adrian Freeman v. Laventhol & Horwath

is per- is directed to vacate Order 102 and to issue much broader than hearing will be compliance To new Order in with this Order August Order. mitted under hearing is September August According- with the 17 Order. extent that ly, again, petition a forum for the discussion once for a intended as Writ DE- resolution to the asbestos-related Prohibition and Mandamus will be “national NIED, “des- injury litigation” or for the with the of said deni- personal effective date committee”, being it vio- al steering entry by of a the district court of ignation Further, as the Order August our 17 Order. herein directed. lates intended, may not August our 17 Order but hearing clear, any abundantly

have made regarding pend- by Judge

held Lambros class action for

ing “motion” future or follow the strictures

certification must 23(a) or 23. Rule states

Rule “[o]ne may sue or be of a class members

more parties on behalf representative

sued as course, This, require all[.]” FREEMAN, al., Adrian et pending, in each of Judge Lambros Plaintiffs-Appellees, to make class actions appropriately-filed impracticabili- 23(a) findings as to the Rule commonality, typicality, and joinder, ty of HORWATH, al., et LAVENTHOL representation, as well adequacy of Defendants-Appellants. if action is by Order the class to determine (c)(1). Rules

maintainable No. 89-6259. Although August our 17 Order Appeals, Court of United States extraordi mandamus is an recognized that Sixth Circuit. used, sparingly we also remedy to be nary of the record ... that “on the basis noted July 1990. Argued power by the district usurpation court] [of Sept. Decided August 17 Order has occurred[.]” Moreover, recognized that court has “egregious only in proper

mandamus but instances

jurisdictional violations” power”. usurpations of mundane

“more Co., 541 F.2d Falls Corp. v. Millers

Skil Cir.), n. 3 50 L.Ed.2d 97 S.Ct.

U.S. addition, has Supreme Court “ ‘used to is to be stated that mandamus exer a lawful an inferior court to

confine or to com prescribed jurisdiction

cise of it is its authority exercise its when

pel it to ” so.’ Kerr States duty to do v. United Court, 394, 402, 96 S.Ct. U.S.

District (citation L.Ed.2d

omitted). reiterate aforestated.

Nevertheless, time we at this decline to prohibition. a writ of mandamus

However, not com Order 102 does because Order, Judge August 17

ply with

Lambros, guidance, the benefit of cern, Pitt, (argued) Washington, limited

Harvey L. Blum, Cherno, Don (Marc allegations Irwin of securities fraud in violation P. D.C. Harris, Fried, Frank, Shriver Catinello, Exchange Act Securities § D.C.; David S. Jacobson, Washington, (1988), 78(j)(b) 15 U.S.C. Anderson, Buck- Daniel J. Cupps, Sandra J. promulgated Rule thereunder. 10b-5 Pease, Sater, Seymour & Vorys, ley, and (1990). Appellees plead C.F.R. 240.10b-5 Columbus, Ohio; Augenbraun, Barry S. theory fraud on the market Hor- Gkonos, Laventhol & and James S. the reliance element of their 10b-5 action. Pa., brief), on the for wath, Philadelphia, adopted that in Levinson v. & Horwath. appellants Laventhol Basic, Inc., 786 F.2d 741 on vacated other grounds, 485 U.S. Pitt, Washington, (argued) Harvey L. (hereinafter (1988) Levinson). Swann, (Jerre Thomas H. Christo- B. D.C. Atlanta, Ga., Cody, Kilpatrick &

pher, and Appellants partial summary moved for Rose, et brief), appellants Aaron for on or, alternative, in the judgment, for dismis- al. (1) sal, contending presumption that Orlando, Rediker, (argued) Michael J. fraud on the raised Jr., Adams, D. (Richard Richard H. Fla. involving arise in a case does not the is- Vernon, Connor, Jr., Christopher T. and municipal primary bonds in a suance Fla., Adams, Orlando, Smathers, & Pleus (2) market; appellees’ and that claims were brief), appellees. for on the the statute limitations. barred May denied the motion and on district court Little, and Hunton Gregory G. interlocutory 1989 certified its order for Knoxville, Tenn., Dean Williams, Robert pursuant to 28 appeal U.S.C. III, Featherstone, Pope, W. James 3, 1989, granted we On October Va., Williams, Richmond, filed a Hunton & appeal pursuant to the same permission to brief, Ass’n of amicus curiae National for legal on the limited issue of wheth- statute Lawyers. Bond presumption of reliance er a based Craco, Cooper, and E. Louis A. Deborah on the market arises a case City, New York Gallagher, Farr & Willkie municipal involving a new issue of bonds Garcia, and Willkie Farr & T. William primary a D.C., brief, a Washington, filed Gallagher, Institute of amicus curiae American (1) appeal, appellants contend On Accountants. Certified Public theory does not raise a on the market of reliance in a case presumption MILBURN, GUY and Before: tax-exempt municipal bonds newly issued TIMBERS,* Judges. Circuit market; we should primary in a of reliance based recognize TIMBERS, Judge: theory; the fraud created on interlocutory appeal from an This is recog- inclined to if we were even in the Eastern April order entered appellees’ claims presumption, nize such Bertels- Kentucky, William 0. District under that are insufficient man, appellants’ Judge, denying District follow, or, we reverse partial summary judgment, For the reasons motion alternative, appellees’ in the dismiss and remand. of fraud on the issue market.

claims new arises class action from the sale of This I. tax-exempt finance the only those facts and a retirement center. The We shall summarize construction of necessary to an believed alleges prior proceedings violations of various complaint appeal. the issues on understanding of laws. Our con- federal securities state and * cuit, by designation. sitting Timbers of the Unit- William H. The Honorable Appeals Second Cir- for the ed States Court currently is River North Id. at ment. North Riv- in the investors are Appellees un- center retirement operated being (hereinafter Center, Inc. er Retirement It is management. ownership and new der comprise Appellants River). North occupied. fully di- not issue: bond in the

participants consultants, project feasibility rectors, action class Appellees commenced marketing coordinator, manager, project River North purchasers all behalf of Riv- North trustee Appellees indenture agent, bonds on December underwriters, broker- various er, as well as and feder- state allege of various violations attorneys. accountants, and dealers, need we al On securities laws. claims only consider to be three intended River North of Exchange Act 10(b) of the Securities consisting of community § story retirement Rule (1988), and 1934, 78(j)(b) 15 U.S.C. § fi- It was units. residential separate 17 C.F.R. thereunder. promulgated 10b-5 $18,230,000of of sale through the nanced (1990). 240.10b-5 bonds, by the issued tax-exempt They Kentucky. were Florence, alleges that complaint City of the Specifically, dat- Statement Official misrepresented to an pursuant sold Statement Official the to sold feasibility were The bonds 30, the ed June to disclose failed in denominations not 1,500 could investors than more knew consultant into divided (2) appellants issue was knew $5,000. The bond project; support of the $10,500,000with would nursing care totalling site of on term bonds lack short long River; (3) term 10.5%, and of North rate of failure in the an interest result the an interest $7,730,000with could afford totalling residents prospective bonds by a the bond retiring secured They were on fees, based of were rate 13.0%. which bear; personal would and issue, the real on what the mortgage not on first con- agent, with financial together marketing project, the the of property and to failed feasibility revenues. consultant and fees and occupancy sultant initial another association their disclose the from proceeds the used River North complaint al- center. The retirement failed and acquire, construct to the bonds of sale these misstate- of that, a result leges as the on pay interest to project, the equip the of omissions, true value “the and ments their after 28 months first for the the than less substantially Bonds [was] of reserve service debt fund a delivery, to and the by Plaintiffs them paid for mar- and development to fund $1,000,000, not have would the Bonds such that Class issuance fund the to expenses, and keting complete and accurate had marketed been completed project was The the bonds. of the Offi- in fully disclosed information been budget. the and within essentially time cial Statement.” trustee, Bank 1985, indenture July In did plaintiffs named of the one At least in to be N.A., project South, declared pur- before Statement Official read the had been units Only 7 of default. complaint, there- chasing the bonds. De- to River make failed North sold. re- of presumption fore, invoke seeks interest 31, first scheduled cember on the alleging fraud by liance 31, On December to bondholders. payment in acted Class “Plaintiffs It states: reorganization for petition 1986, it filed integrity upon the justifiable Code, Bankruptcy 11 of the Chapter absence in the marketplace, project (1988). The seq. et 11 U.S.C. § Bonds, and issuance procuring the during bank- $6,025,000 for sold was facts all material complete disclosure North River re proceedings. ruptcy in the issuance Defendants by all of these 2-86-00989, Inc., Center, No. Retirement Bonds.” sale 1987). 4, April (Bankr.E.D.Ky. slip op. at 5 filed a appellants On October plan that reorganization ato Pursuant judgment, summary partial joint motion court, the bankruptcy by the confirmed dismissal, alternative, or, in the approximately receive will bondholders new issue plaintiffs’ claims $18,230,000 invest- their $10,000,000 of denied III. market. This motion was April The court court on district A. true, allegations “if that the factual found appellants’ We turn first to contention plaintiffs presump- to a entitle the holding in that our Levinson cannot be upon reliance based tion of traded in extended to securities markets theory as outlined the Sixth agree. that are not efficient. We Levinson.” Reliance is an essential element May 1989 the district court certi- On pleaded a Rule claim that must be 10b-5 interlocutory April 13 order for fied its Basic, proved by plaintiffs. Inc. v. pursuant to 28 U.S.C. appeal (1988)(herein 485 U.S. found that The court “[t]he Basic). requirement The reliance en after on the market’ can ... be regarding ‘fraud sures that there is a causal connection be of law on which there regarded as an issue plain fraud and the tween the defendant’s disagreement....” might substantial injury. tiff’s Under certain circum Id. order granted permission stances, plaintiffs element can to the “only as October dated by raising of re rebuttable theory.” the market See, e.g., (presump liance. at 245-47 id. reliance in tion of arises cases in which appeal followed. This market); a fraud on the there has been States, v. Ute Citizens United Affiliated II. (1972)(presumption 406 U.S. 153-54 in cases reliance arises material appellants’ mo- court treated The district omissions). summary judgment. Sum- tion as one for justify One of the circumstances proper when the evi- mary judgment is ing presumption a of reliance arises when a genuine “that there is no dence establishes plaintiff alleges that a defendant made ma fact and that the any as to material misrepresentations terial or omissions con judgment a as a moving party is entitled to cerning security actively that is traded on 56(c). We of law.” Fed.R.Civ.P. matter market, thereby establishing efficient an light favor- facts in the most consider the Basic, supra, on the market. 485 non-moving party. Matsushita to the able on the U.S. at 247. The fraud market Radio, 475 U.S. v. Zenith Elec. Indus. Co. theory assumption the that the rests on (1986). 587 actively security traded in an price of an court’s denial of review the district We well-developed, and efficient market open, of dis summary judgment under an abuse reflects all the available information about Trans Pinney standard. Dock & cretion company. Speiser, v. the value of a Peil Corp., 838 F.2d v. Penn Central port Co. (3d Cir.1986). Misrep F.2d 1160 806 Cir.), denied, (6th 109 S.Ct. 1472 therefore, resentations, price affect the (1988). 196 rely security. on the the Investors may ... exercise “The trial court security reflection of its as an accurate summary denying in discretion sound therefore, rely indirectly on They, worth. where, although the movant judgment they if misrepresentations, even do such technically may shouldered his bur- have 1161; directly. Id. at rely not on them den, reasonably certain the court is 750; Levinson, supra, 786 F.2d at Blackie Cir.1975), fact; that there is no triable issue Barrack, 907 may ripe portion of an action where (1976). 429 U.S. 816 rt. ce it inter- summary judgment but is adopted In the fraud on Levinson we claim that must be with another twined recognized a rebuttable theory market tried; and in certain other situations.” arising therefrom. presumption of reliance five elements a Moore, Wicker, held that there were Taggart, & Moore’s Fed- We ¶ required allege prove (2d 1988). plaintiff was ed. eral Practice 56.15[8] apply presump- presumption of reliance does not the fraud on market invoke are not in an effi tion of reliance: when securities traded reason, cient market. Id. For that “(1) public the defendants made that distinguished in cases (2) opinion Levinson misrepresentations, misrepre- that the impersonal not involve ... ex material, (3) that “do that sentations were market, change open in the market.” traded on an efficient stock was 751; at see Platsis v. supra, in- also misrepresentations Co., Inc., reasonable, relying investor to E.F. Hutton & duce a (since stock, (W.D.Mich.1986) in misjudge the value in gas traded the stock be- in oil and shelter limited plaintiff vestments market, misrepresentations open it partnerships time the not an “is tween the is time the truth was type encompassed were made and the of market theory”), aff'd, the market revealed.” on F.2d 13 omitted). (citations This 786 F.2d at short, presumption U.S. approved formulation of arising from the fraud Basic, supra, in Supreme Court only “supported com U.S. at n. Basic, probability,” supra, mon sense and here The district court found that applied to efficient 485 U.S. alleged facts sufficient “[pjlaintiffs have markets. requirements of the fraud holding to our Levinson We adhere by the Sixth announced recog- of reliance we disagree. Levinson.” only in that case arises when there nized give proper consider district court failed a has been fraud on efficient market. market element. We ation to the efficient incon hold that its decision was therefore holding in

sistent with our Levinson. B. mindful that the securities We are question turn next to the We a intended “to establish acts not were primary newly a market for issued whether insurance.” List v. scheme investors’ tax-exempt municipal is an efficient Park, Inc., 340 Fashion preceding It from market. follows (2d Cir.), 382 U.S. 811 market analysis that the fraud on the theo mind, presume re that in we “will With ry not a of reliance does raise only logical it is to do so.” liance when primary if a market in the instant case Sells, 599 v. Deloitte Haskins & Reingold newly tax-exempt municipal issued bonds is (S.D.N.Y.1984). F.Supp. agree appellants’ efficient. not We with ap be on the market cannot law, contention, as a matter it is not. logically to that are not plied securities ex We did not have occasion An inefficient in efficient markets. traded qualities define the that charac plicitly to market, definition, incorporate by does not in an efficient market terize price into all the available information not in that since that was at issue case. security. Lipton a v. about the value of following general observe the defini We Inc., Documation, 734 F.2d tions: 469 U.S. open any- “—An is one in which market (1985); F.Supp. at Reingold, supra, 599 one, large per- at a number of least Investors, therefore, pre cannot be sons, buy can or sell. rely reasonably integrity sumed —A market is which has price security developed that is one a of the market a activity relatively high level of and fre- in such a v. Van traded market. Stinson trading quency, and for which informa- Valley Corp., F.Supp. Dev. volume) (3d (E.D.Pa.1989), (e.g., widely tion aff'd, price 897 F.2d 524 Cir. I). secondary a 1990) (hereinafter principally The ratio available. It is Stinson outstanding in It supporting the fraud on the market securities. nale usually, necessarily, newly but not has continui- of issued primarily securities is set (the ty liquidity ability by offeror, a to absorb underwriter and the trading Lipton, supra, reasonable amount of rela- 746; Bexar, tively price changes). supra, 130 F.R.D. at small 607. We agree with those courts that have held that rapid- —An efficient market is one which primary newly a market for issued bonds is ly price. in reflects new information Bexar, supra, efficient. 130 F.R.D. at in are cumulative the sense These terms 607; I, supra, F.Supp. Stinson at 137. developed market will almost al- that a open And an efficient ways be an one. We pri- hold in the instant case that a invariably market will almost be devel- mary newly market for issued oped one.” bonds as a matter of law is not efficient. Appellants were judgment entitled to aas Bloom, Cammer appellees’ matter of law on 10b-5 claim to (D.N.J.1989) (quoting Bromberg n. 17 it is the extent based on the fraud on the Lowenfels, Fraud and Commodi Securities We conclude that the dis- (Aug.1988)). ties Fraud 8.6 The court trict court its discretion in denying abused identified five that would Cammer factors appellants’ partial summary motion for proving security useful in that a judgment claims of fraud on market, justifying traded in an efficient issue market new because it is certain application market theo of the fraud on the appellees cannot the elements volume; (2) ry: large weekly trading of the fraud on the market as set significant the existence of a number of forth in Levinson. reports by analysts; (3) exist securities arbitrageurs in ence of market makers and hold fraud on the market security; eligibility com as articulated us Levinson Statement; pany Registration to file an S-3 apply does not to cases (5) history of immediate movement of primary newly market for tax-ex- issued unexpected the stock caused cor empt municipal bonds.

porate events or financial releases. Cam IV.

mer, supra, F.Supp. 711 at 1286-87. criteria, Considering appears Appellants reject presump- us these it invite to secondary that securities traded in national tion of reliance on a “fraud created based alternative, theory. markets such the Ex- In if New York Stock the market” the change, recognize pre- as was the case in are are inclined to such a we application sumption, appellants well suited for of the fraud on invite us to hold that theory. high appellees’ the market The level of trad- claims are insufficient to invoke ing activity presumption. ensures that information from that We decline that invita- many necessary sources is disseminated into the mar- tion because it is not to the de- ketplace consequently appeal. and is reflected in termination of the issue on this price. reasoning. upon proceed only explain the market to premise This is the We the fraud on which the market recognized presump Some courts have rests. newly tion of reliance in cases contrast, By primary See, market v. Bank newly e.g., for issued securities. Ross (11th “is not South, N.A., issued bonds efficient 729 Cir. 885 F.2d denied, developed any 1989) under definition of 110 (en banc), these S.Ct. cert. Co., County (1990), terms.” In re Bexar Health Ins. 858 Fa- 1924 Potomac Abell v. Corp. 130 cility Litig., Dev. Sec. F.R.D. vacated on F.2d 1121 (E.D.Pa.1990). (1989); 607 The North River 3236 grounds, other 109 S.Ct. T.J. bonds, example, Cobb, Sons, for were not traded active- Raney Inc. v. Fort Okla. Auth., ly impersonal in an market. This decreases 717 F.2d Irrigation 1333 Fuel (10th probability price Cir.1983), the that their could be 465 U.S. 1026 (1984); reasonably Sklar, relied on as an accurate reflec- 647 F.2d 470 Shores v. fact, (5th Cir.1981) (en banc), tion of their true value. In the 459 court, grant panel of prior this of a order Bexar, supra, 130 F.R.D. (1983); U.S. 1102 our review limits to permission Corp., ing Dev. Valley 610; v. Van Stinson at the market fraud on (herein- application (E.D.Pa.1989) to F.Supp. tax-exempt munici of new issue re- to a II). presumption of The after Stinson an As in market. primary on a in a pal rests in these cases recognized liance appeal is the in this Court “[t]his case created fraud earlier as the theory, known by certified question specific theory, inves- to the limited theory. Under market to leave integ- which the court and rely on district to the presumed are not tors under they by are our court granted price, appeal rather was market rity of Corp., 1292(b).” Keene integrity of Herron rely on U.S.C. presumed to Cir.1985) (per cu i.e., offered securities itself, F.2d market Ross, supra, 885 riam). genuine. are market at F.2d Shores, supra, 647 729; at F.2d between connection causal 470-71. V. plaintiff’s and the fraud the defendant’s To summarize: alleging and established is not injury the market We hold the market affected the fraud proving that in Levinson us articulated theory as es- is connection rather, causal price; to a give rise does proving that alleging tablished involving newa in a case at marketed been not have could securities primary in a municipal bonds tax-exempt Ross, supra, 885 fraud. any price absent appellants hold that further We at 647 F.2d Shores, supra, 731; at as a matter judgment entitled were Abell, supra, 469-71; also see grant summa- Failure issue. on this law patently worth- was itself (enterprise abuse issue was judgment on ry F.2d at supra, less); Raney, T.J. decision, we reaching our discretion. applicable under validly (bonds issued appropriate necessary nor it neither find F.R.D. at Bexar, supra, 130 law); state claims appellees’ sufficiency of consider worthless); patently (enterprise itself theory. created under at 366 II, supra, Stinson (same). is reversed court district The order proceedings is remanded the case sufficiency opinion on no express opinion. consistent a fraud created claims created The fraud Jr., Judge, GUY, B. RALPH from distinct separate and is part. dissenting concurring part theory, and on the market ratio- entirely different by an supported quarrel with no absolutely I have 130 F.R.D. Bexar, supra, See, e.g., nale. “fraud on conclusion court's market’ created (“[t]he ‘fraud 607 this applicable theory is market” economic on neither the[ ] relies have parties doctrine However, I think case. the fraud [underlying certified, principles judge has asked, district support a rebuttable I doctrine] be- for resolution. question different in the new issues us is whether question before lieve market”). created recognize a “fraud will circuit join with I not market” issue is created The theory1 recognized such have courts district court this time. us at before proceed- further case for remand in and decision ruling on our explicitly based necessary facts can ings so that us given The mandate Levinson. banc); (en 459 Cir.1981) (5th N.A., South, 462 See, e.g., v. Bank Ross 1. (1983); 74 L.Ed.2d banc); Raney S.Ct. Cir.1989) (en T.J. U.S. (11th 723 Sons, Corp., Cobb, Valley Irrigation Dev. Van Oklahoma v. Stinson v. Fort Inc. Cir.1983); (3d Cir. aff’d, F.2d 524 (E.D.Pa.1989), Authority, F.2d 1330 Fuel S.Ct. 1990) (table). U.S. Sklar, (1984); v. Shores L.Ed.2d 687 a “fraud developed to determine whether appli- theory would be

created the market” here.

cable MOODY, Plaintiff-Appellee,

Duane

PEPSI-COLA METROPOLITAN COMPANY, INC.,

BOTTLING

Defendant-Appellant. 89-1917, 89-2078.

Nos. Appeals,

United States Court

Sixth Circuit.

Argued July 1990. Sept.

Decided Rehearing En Banc

Rehearing and Nov.

Denied

Case Details

Case Name: Adrian Freeman v. Laventhol & Horwath

Court Name: Court of Appeals for the Sixth Circuit

Date Published: Sep 17, 1990

Citation: 915 F.2d 193

Docket Number: 89-6259

Court Abbreviation: 6th Cir.