524 F.2d 891

9th Cir.

1975

William BLACKIE et al., Defendants-Appellants, v. Leonard BARRACK et al., Plaintiffs-Appellees. AMPEX CORPORATION, Defendant-Appellant, v. Benjamin L. KUSHNER, Plaintiff-Appellee. William E. ROBERTS and John Buchan, Defendants-Appellants, v. Benjamin L. KUSHNER et al., Plaintiffs-Appellees. TOUCHE ROSS & CO., Defendant-Appellant, v. Leonard BARRACK et al., Plaintiffs-Appellees. William E. ROBERTS et al., Defendants-Appellants, v. Leonard BARRACK et al., Plaintiffs-Appellees.

Nos. 74-2141, 74-2341, 74-2167, 74-2466 and 74-2648.

United States Court of Appeals, Ninth Circuit.

Sept. 25, 1975.

524 F.2d 891 | Fed. Sec. L. Rep. P 95,312

Arthur R. Albrecht (argued), McCutchen, Doyle, Brown & Enersen, San Francisco, Cal., for defendants-appellants in No. 74-2141.

David Berger (argued), Philadelphia, Pa., for plaintiffs-appellees in No. 74-2141.

Theodore P. Lambros (argued), San Francisco, Cal., for defendant-appellant in No. 74-2141.

Stephen V. Bomse (argued), Heller, Ehrman, White & McAuliffe, San Francisco, Cal., for defendants-appellants in No. 74-2341.

Thomas Elke (argued), San Francisco, Cal., for plaintiff-appellee in Nos. 74-2341 and 74-2648.

William W. Godward (argued), Cooley, Godward, Castro, Huddleson & Tatum, San Francisco, Cal., for defendant-appellant in No. 74-2466.

Melvyn I. Weiss (argued), Milberg & Weiss, New York City, for plaintiff-appellee in Nos. 74-2466 and 74-2648.

Thomas A. H. Hartwell (argued), Cooley, Godward, Castro, Huddleson & Tatum, San Francisco, Cal., for plaintiff-appellee in No. 74-2648.

OPINION

Before TUTTLE,^* KOELSCH and BROWNING, Circuit Judges.

KOELSCH, Circuit Judge:

These are appeals from an order conditionally certifying a class in consolidated actions for violation of Section 10(b) of the Securities and Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5 promulgated thereunder, 17 C.F.R. § 240.10(b)-5.

The litigation is a product of the financial troubles of Ampex Corporation. The annual report issued May 2, 1970, for fiscal 1970, reported a profit of $12 million. By January 1972, the company was predicting an estimated $40 million loss for fiscal 1972 (ending April 30, 1972). Two months later the company disclosed the loss would be much larger, in the $80 to $90 million range; finally, in the annual report for fiscal 1972, filed August 3, 1972, the company reported a loss of $90 million, and the company‘s independent auditors withdrew certification of the 1971 financial statements, and declined to certify those for 1972, because of doubts that the loss reported for 1972 was in fact suffered in that year.

Several suits were filed following the 1972 disclosures of Ampex‘s losses. They were consolidated for pre-trial purposes. The named plaintiffs in the various complaints involved in these appeals¹ purchased Ampex securities during the 27 month period between the release of the 1970 and 1972 annual reports, and seek to represent all purchasers of Ampex securities during the period. The corporation, its principal officers during the period,² and the company‘s independent auditor are named as defendants. The gravamen of all the claims is the misrepresentation by reason of annual and interim reports, press releases and SEC filings of the financial condition of Ampex from the date of the 1970 report until the true condition was disclosed by the announcement of losses in August of 1972.

The plaintiffs moved for class certification shortly after filing their complaints in 1972; after extensive briefing and argument the district judge entered an order on April 11, 1974, conditionally certifying as a class all those who purchased Ampex securities during the 27 month period. The defendants filed notices of appeal from the order of certification on May 9 and 10, 1974.³

Additionally, the district judge, in an order entered July 1, 1974, denying a motion made by defendants Roberts and Buchan, and defendants Blackie, et al., for reconsideration of the class certification, permitted those defendants to seek an interlocutory appeal from that order under 28 U.S.C. § 1292(b).⁴

We granted the petition for interlocutory review.⁵ That appeal was designated No. 74-2648, and consolidated with the direct appeals.

In December of 1974, plaintiffs filed a motion to dismiss the various appeals the purportedly direct appeals on the ground that the certification order is not appealable under 28 U.S.C. § 1291, and the § 1292(b) appeal on the ground that it has been prosecuted in a dilatory manner.

The appeals having now been heard and submitted, we face three issues: 1) whether the order certifying the class is a final order appealable under § 1291; 2) whether the interlocutory appeal should be dismissed; and (if any of the appeals are properly before us) 3) whether the district court order certifying the class was proper under the standards set out in Fed.R.Civ.P. 23(a) and (b)(3). To summarize our decision, we hold the certification order non-appealable and dismiss the direct appeals; we deny the motion to dismiss the § 1292(b) certified appeals; and, on the merits, hold that the suit may properly be maintained as a class action.

I. Appealability under § 1291 of an order granting class action status.

The courts of appeals have jurisdiction over appeals of right under 28 U.S.C. § 1291 only from “final decisions” of the district courts. The statutory limitation is the product of a two-fold policy judgment about judicial administration which was written into the first Judiciary Act and adhered to ever since. See Cobbledick v. United States, 309 U.S. 323, 324-325 (1940). The requirement saves judicial time by eliminating review of rulings adverse to an eventually successful litigant. But more importantly, the uniform imposition of finality as a condition of review improves the quality of justice administered by the judicial system. On balance, the rule shortens the time needed for resolution of controversies, saving litigants both time and money; “(requiring finality avoids) the obstruction to just claims that would come from permitting the harassment and cost of a succession of separate appeals from the various rulings to which a litigation may give rise, from its initiation to entry of judgment.” Cobbledick, supra, at 325. In short, the rule is one of the primary bars against Bleak House Judicial administration;⁶ as such, its rationale applies equally to an order certifying a class.

Nevertheless, in some circumstances deferring an appeal practically operates to deny effective review, as the right threatened by an adverse ruling will have been lost in the interim before final disposition of the other aspects of the controversy. The Court therefore has given the § 1291 final decision requirement a “practical rather than a technical construction,” Cohen v. Beneficial Industrial Loan Corp., 337 U.S. 541, 548 (1949), and allowed interlocutory appeal from a “small class (of orders) which finally determine claims of right separable from and collateral to, rights asserted in the action, too important to be denied review and too independent of the cause itself to require that appellate consideration be deferred until the whole case is adjudicated.” Cohen, at 546. See Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 170-172 (1974) (Eisen IV); Note, Class Action Certification Orders: An Argument for the Defendant‘s Right to Appeal, 42 Geo.Wash.L.Rev. 621, 625-628 (1974). Two of the three circuits which have faced the issue have nevertheless held a class certification order non-appealable under Cohen. Thill Securities Corp. v. New York Stock Exchange, 469 F.2d 14 (7th Cir. 1972); Walsh v. City of Detroit, 412 F.2d 226 (6th Cir. 1969). Accord, 9 J. Moore, Federal Practice P 110.13(9), at 184-187 (2d ed. 1970).

The Second Circuit, however, has permitted appeal in certain limited circumstances. In Eisen v. Carlisle & Jacquelin, 370 F.2d 119 (2d Cir. 1966), cert. denied, 386 U.S. 1035 (1967) (Eisen I), that court recognized that an order denying class action status effectively sounded the “death knell” of the plaintiff‘s suit. As “no lawyer of competence is going to undertake this complex and costly case to recover $70 for Mr. Eisen,” the individual claim could not be adjudicated, and as a practical matter the class question could never be appealed. The court therefore concluded the order was appealable under Cohen. We have adopted the death knell doctrine. Falk v. Dempsey-Tegeler & Co., Inc., 472 F.2d 142 (9th Cir. 1972); Weingartner v. Union Oil Company of California, 431 F.2d 26 (9th Cir. 1970).

From that springboard the Second Circuit developed a “reverse death knell” doctrine with respect to a defendant and his rights to foreclose an ostensible class suit against him. Influenced by the suggestion that it consider a rule which would “afford equality of treatment as between plaintiffs and defendants” (Korn v. Franchard Corp., 443 F.2d 1301, 1307 (2d Cir. 1971) (Friendly, J., concurring)), a panel of the circuit held in Eisen v. Carlisle & Jacquelin, 479 F.2d 1005, 1007 n. 1 (2d Cir. 1973) (Eisen III), that defendants could appeal an order granting class status under three specified conditions. As explicated in Herbst v. International Telephone and Telegraph Corp., 495 F.2d 1308, 1312 (2d Cir. 1974), such an order is appealable when the class determination is ” ‘fundamental to the further conduct of the case’ ” (i. e., when, were the class determination reversed, the individual claims presented would be too small to continue the suit, thus effectively terminating it the reverse death knell situation);⁷ when the order is ” ‘separable from the merits; ’ ” and when it will result in ” ‘irreparable harm to the defendant in terms of time and money spent in defending a huge class action.’ ” Herbst, at 1312, quoting from Eisen III, at 1007 n. 1. We are asked, the issue being novel in this circuit, to adopt the Second Circuit‘s position.⁸

We decline to do so, because we believe that the Second Circuit‘s rule impermissibly⁹ disregards the conditions placed on appealability by Cohen. The rule of finality is a statutorily imposed restraint on our jurisdiction; as noted, it imposes a legislative judgment that on balance time and money will be saved if appeal is deferred until the conclusion of a suit. We are not free to disregard that judgment; exceptions to uniform application undermine the rule‘s purpose by fostering litigation about whether an order is exceptional and appealable. And with the proliferation of narrow and peculiar exceptions, the more doubtful and difficult it becomes to determine appealability, at district and appellate court levels, increasingly inviting supposedly foreclosed interlocutory litigation.

In this view and while recognizing that it is nevertheless such an exception, we think the Cohen “collateral order” standards should be restrictively construed. The Cohen rule is an effort to prevent the inevitable injustices to litigants which result from application of a prophylactic rule which operates “on balance,” but only in those limited situations where it can be accomplished with a minimum intrusion on the statutory policy. Thus, Cohen requires not only that denial of immediate review result in loss of a right which cannot be sustained by later review, but also that the order appealed from be final and collateral. Thus, even when an injustice may result, immediate review is available only when the appellate court will not be required to duplicate efforts entailed in a later review on the merits, or to review a decision whose tentative nature will render the appellate court‘s decision fruitless later in the lawsuit.

We are clear that a class certification order does not fall within Cohen. The finality condition is not met, as such an order is not a final determination of the propriety of a class. Under Fed.R.Civ.P. 23(c)(1), a class must be certified as soon as practicable after commencement of the action, and is made conditional and subject to alteration, to the creation of sub-classes, Rule 23(c)(4)(B), or indeed to decertification as the suit progresses and newly discovered facts warrant.¹⁰ Nor is the class issue separable from the merits in all cases (including this one). The common questions, typicality, conflicts and adequacy of representation, Fed.R.Civ.P. 23(a), and predominance tests, Fed.R.Civ.P. 23(b)(3), are determinations (unlike, for example, the notice question involved in Eisen IV ) which may require review of the same facts and the same law presented by review of the merits.¹¹

Nor, for that matter, does the order threaten the defendant with any irreparable harm cognizable under Cohen. The defendant does not lose any legal rights or entitlement in the interim between certification and appeal appeal after the litigation fully protects from a judgment for an improper class. See Geo.Wash. Note, supra, at 628-630.

The Second Circuit found the requisite injury in the increased, and generally irrecoverable, costs of defending the class action. With deference, we disagree. The final decision rule itself often increases the time and cost of litigation. Denial of immediate review from orders denying motions to dismiss, Fed.R.Civ.P. 12(b)(6), or for summary judgment, Fed.R.Civ.P. 56, may subject a defendant in particular cases to defense costs equivalent to those incurred in defending a class action. Geo.Wash. Note, supra, at 629-630; Kohn v. Royall, Koegel & Wells, 496 F.2d 1094, 1098-1099 (2d Cir. 1974). Such litigants must bear those costs because of the legislative judgment that a final decision rule will most benefit all litigants, statutorily foreclosing reliance on litigation costs as a justification for departure from the final decision rule.¹²

It strikes us that the Second Circuit rule is the product of three policy considerations, urged on us here as well, which we conclude are insufficient to justify departure from the Cohen gloss on the rule.

The first is that litigation costs will be reduced by allowing appeal and thus avoiding the substantial costs of litigating an improperly certified class. While perhaps true in a particular suit, we suspect that the savings envisioned may well prove illusory. Applied to all class actions, the Second Circuit‘s rule saves time and money only when the appellate court determines the particular class certification order is appealable, when the order would not have been otherwise appealable under the narrower Cohen exception, when the district judge would have refused to certify a § 1292(b) appeal, where the district judge would not later decertify the class, and where, on the merits, the order is reversed. Even then, later developments in the suit may lead to reinstatement of the class. To be balanced against savings is the loss of time and money resulting from appeal in which the order is held non-appealable, or the order is affirmed. Neither we nor (we suggest) the Second Circuit have any way of striking that balance. We can only speculate concerning the various costs, time spans, and percentages which must necessarily be appraised to determine whether the Second Circuit‘s exception could pay its way; it is ultimately a question which is best suited to legislative investigation and judgment.

Moreover, we would suggest that the number of suits in which a rule of appealability would be worthwhile may be relatively small. The standard of review is abuse of discretion. A number of the criteria set out in Rule 23 relate to matters, such as manageability, adequacy of representation, feasibility of joinder, superiority to other available methods of adjudication, and the like, which are much more within the knowledge of the district court in touch with the litigation than in ours; our review is unlikely to add any superior wisdom, or to reverse on those grounds. In those cases which turn on a question of law, the district judge may certify an interlocutory appeal.¹³ The number of cases in which massive litigation costs are threatened, in which a district judge declines to certify an appeal, and which thereafter results in reversal of the class certification, may prove small indeed.

The second consideration is that, because the “death knell” doctrine allows plaintiffs to appeal orders denying class status, parity of treatment requires that defendants be allowed to appeal orders granting such status. We disagree. Precisely the same disparity exists between plaintiffs and defendants with regard to summary judgment or motion to dismiss orders. So long as they are differently situated in a manner relevant to the purposes of the final decision rule, plaintiffs and defendants may be treated differently. Suffice it here to say that they are differently situated with respect to the finality of the class order an order denying in the “death knell” situation effectively terminates the suit and precludes presentation of the merits; an order granting does not end the suit, or preclude presentation of the defense, and is subject to reevaluation as well. See Geo.Wash. Note, supra, at 631-632.

The final consideration relied on by the Second Circuit, see Herbst, supra, at 1313, strenuously urged here, is that a class certification order in a large-class, small-claim class action threatens such ruinous liability that the defendant inevitably must settle even frivolous claims, thereby effectively precluding review of the crucial class certification order unless interlocutory review is allowed. Again, we are unpersuaded. In large part the argument is an attack on the decision reflected in Rule 23 to allow integration of numerous small individual claims into a single powerful unit, rather than to an attack peculiarly germane to the operation of the final decision rule in the class action context. Precisely the same power to coerce a settlement (and defeat review of potentially erroneous previous orders) is wielded by any plaintiff with a substantial claim that fact alone does not generally confer appealability on an order which effectively requires a defense to a large claim. The fairness of the pressure i. e., the sociological merits of the small claims class action is not a question for us to decide. The fact is that Congress, by authorizing and approving Rule 23(b)(3), created a vehicle to put small claimants in an economically feasible litigating posture. In that light, we doubt the propriety of an attendant judicial alteration of the final decision rule which immediately (and uniquely) subjects redress of class plaintiffs’ claims to the delay and cost of an appeal.

We recognize, of course, that it is the class certification order itself which, if erroneous, creates the improper coercive effect. That is a distinction without a difference unless class certification orders have unique effects specially implicating the policy of the final decision rule. It may well be that a higher percentage of class certification orders are erroneous than others which subject a defendant to the coercion of a large potential liability; or that a higher percentage of frivolous claims are presented in class actions than in others; or that the magnitude of the potential liability in class actions is leading to settlement of more frivolous claims and abandonment of more meritorious appeals, than occurs in other litigation. If such is not the case, there is no reason to treat a class certification order differently than any other interlocutory order. If so, an exception may or may not be justified.¹⁴

In either event, however, the argument is again properly addressed to Congress. We have no reliable knowledge,¹⁵ and no good means of acquiring any, about the present nature and number of class action settlements, and of how that experience compares with individual lawsuits of the same type, or pressing claims of similar magnitude. Thus, we have no means of deciding whether the present hue and cry of “blackmail” in fact reflects an abnormally high incidence of unfairly coerced settlements, or is rather the pained outcry of defendants whose previously advantaged litigating position has been undermined, and who must now confront small claimants (who have been given the capacity to exert pressure proportionate to the magnitude of the total injury occasioned by defendant‘s alleged violation of the law) on more equal grounds. Without such knowledge, there is no justification for departure from the “final decision” rule in this context, and we decline to do so.

Consequently, the § 1291 appeals designated Nos. 74-2141, 74-2167, 74-2341 and 74-2466 are dismissed.

II. The § 1292(b) interlocutory appeals.

We deny the motion to dismiss the § 1292(b) appeals.

The prosecution of these appeals has not been a model of diligence. Defendants were granted an extension of the time to transmit the record, and three extensions in the briefing schedule. Some of those delays could have been avoided; while the issues involved are somewhat complex, we note that much of the material in the appellate briefs was presented to the trial court, and that the lawyers did not start from scratch here.

However, the motion to dismiss is addressed to our discretion, and we think dismissal is not mandated in this case. From the somewhat conflicting representations before us it appears that appellees may have agreed to the extensions, although that acquiescence may have been induced by a now disclaimed representation that plaintiffs could continue with discovery while the case was on appeal. Because the record is hazy, because we have granted the extensions, and because the issues have now been briefed and argued and are ripe for decision, we think the preferable course is for us to decide the appeal and provide guidance to the trial court. However, we do note that one purpose of interlocutory appeals is to hasten the conclusion of a lawsuit, that briefing extensions defeat that purpose, and that in appropriate circumstances we can deny unwarranted extensions and dismiss appeals to prevent an interlocutory appeal from being misused as a dilatory tactic.

We turn to the merits of defendants’ Buchan and Roberts, and Blackie, et al., § 1292(b) appeals.

III. Compliance with the Requirements of Fed.R.Civ.P. 23(a) and (b)(3).

A. The court‘s approach to class certification.

As a preliminary matter, we face the contention that the district judge certified the class in an inappropriate manner. Relying on our opinion in In re Hotel Telephone Charges, 500 F.2d 86, 90 (9th Cir. 1974) defendants argue that he improperly engaged in speculation when determining whether a common question exists, and whether conflicts make class representation inadequate, rather than determining, before certifying the class, that the requirements of the Rule were in fact met. We disagree.

From a thorough review of the district judge‘s opinion, we think it apparent that he analyzed the allegations of the complaint¹⁶ and the other material before him (material sufficient to form a reasonable judgment on each requirement), considered the nature and range of proof necessary to establish those allegations, determined as best he was able the future course of the litigation, and then determined that the requirements were met at that time.¹⁷ That is all that is required.

Defendants misconceive the showing required to establish a class under Hotel Telephone Charges. We indicated there that the judge may not conditionally certify an improper class on the basis of a speculative possibility that it may later meet the requirements. 500 F.2d at 90. However, neither the possibility that a plaintiff will be unable to prove his allegations, nor the possibility that the later course of the suit might unforeseeably prove the original decision to certify the class wrong, is a basis for declining to certify a class which apparently satisfies the Rule. The district judge is required by Fed.R.Civ.P. 23(c)(1) to determine “as soon as practicable after the commencement of an action brought as a class action . . . whether it is to be so maintained.” The Court made clear in Eisen IV that that determination does not permit or require a preliminary inquiry into the merits, 417 U.S. at 177-178; thus the district judge is necessarily bound to some degree of speculation by the uncertain state of the record on which he must rule. An extensive evidentiary showing of the sort requested by defendants is not required. So long as he has sufficient material before him to determine the nature of the allegations, and rule on compliance with the Rule‘s requirements, and he bases his ruling on that material, his approach cannot be faulted because plaintiffs’ proof may fail at trial. Of course, whether he applied correct legal principles in making the ruling, and whether the ruling was within the permissible boundaries of the discretion vested in him, is another question, to which we now turn.

B. The merits of class certification.

Defendants question this suit‘s compliance with each of the various requirements of Rule 23(a) and (b)(3)¹⁸ except numerosity (understandably, as it appears that the class period of 27 months will encompass the purchasers involved in about 120,000 transactions involving some 21,000,000 shares). However, all of defendants’ contentions can be resolved by addressing 3 underlying questions: 1) whether a common question of law or fact unites the class; 2) whether direct individual proof of subjective reliance by each class member is necessary to establish 10b-5 liability in this situation; and 3) whether proof of liability or damages will create conflicts among class members and with named plaintiffs sufficient to make representation inadequate? We turn to the first issue.

1. Common questions of law or fact.

The class certified runs from the date Ampex issued its 1970 annual report until the company released its 1972 report 27 months later. Plaintiffs’ complaint alleges that the price of the company‘s stock was artificially inflated because:

“the annual reports of Ampex for fiscal years 1970 and 1971, various interim reports, press releases and other documents (a) overstated earnings, (b) overstated the value of inventories and other assets, (c) buried expense items and other costs incurred for research and development in inventory, (d) misrepresented the companies’ current ratio, (e) failed to establish adequate reserves for receivables, (f) failed to write off certain assets, (g) failed to account for the proposed discontinuation of certain product lines, (h) misrepresented Ampex‘s prospects for future earnings.”

The plaintiffs estimate that there are some 45 documents issued during the period containing the financial reporting complained of, including two annual reports, six quarterly reports, and various press releases and SEC filings.

Because the alleged misrepresentations are contained in a number of different documents, each pertaining to a different period of Ampex‘s operation, the defendants argue that purchasers throughout the class period do not present common issues of law or fact. They reason that proof of 10b-5 liability will require inspection of the underlying set of facts to determine the falsity of the impression given by any particular accounting item presented; that the underlying facts fluctuate as the business operates (i. e., inventory is bought and sold, accounts are paid off and created); thus, proof of the actionability of a current accounting representation or omission will apply only to those who purchased while a financial report was current; from which they conclude no common question is presented and a class is improper.

We disagree. The overwhelming weight of authority holds that repeated misrepresentations of the sort alleged here satisfy the “common question” requirement. Confronted with a class of purchasers allegedly defrauded over a period of time by similar misrepresentations, courts have taken the common sense approach that the class is united by a common interest in determining whether a defendant‘s course of conduct is in its broad outlines actionable, which is not defeated by slight differences in class members’ positions, and that the issue may profitably be tried in one suit. See Green v. Wolf Corporation, 406 F.2d 291, 298 (2d Cir. 1968); Esplin v. Hirschi, 402 F.2d 94 (10th Cir. 1968); Harris v. Palm Springs Alpine Estates, 329 F.2d 909 (9th Cir. 1964); U. S. Financial Securities Litigation, 64 F.R.D. 443 (S.D.Cal.1974); Aboudi v. Daroff, 65 F.R.D. 388 (S.D.N.Y.1974); Werfel v. Kramarsky, 61 F.R.D. 674 (S.D.N.Y.1974); In re Memorex Security Cases, 61 F.R.D. 88 (N.D.Cal.1973); Siegel v. Realty Equities Corporation of New York, 54 F.R.D. 420 (S.D.N.Y.1972); Herbst v. Able, 47 F.R.D. 11 (S.D.N.Y.1969); Dolgow v. Anderson, 43 F.R.D. 472 (E.D.N.Y.1968); Siegel v. Chicken Delight, Inc., 271 F.Supp. 722 (N.D.Cal.1967); Fischer v. Kletz, 41 F.R.D. 377, 381 (S.D.N.Y.1966); Kronenberg v. Hotel Governor Clinton, Inc., 41 F.R.D. 42 (S.D.N.Y.1966). As we stated in Harris, supra:

“Appellees assert that the various investors made payments on the securities at different times and stand in different positions . . . (S)ince the complaint alleges a common course of conduct over the entire period directed against all investors, generally relied upon, and violating common statutory provisions, it sufficiently appears that the questions common to all investors will be relatively substantial.” 329 F.2d at 914.

Those views are consistent with the views of the Advisory Committee on the Rule: “(A) fraud perpetrated on numerous persons by the use of similar misrepresentations may be an appealing situation for a class action . . . ” Advisory Committee on Rule 23, Proposed Amendments to the Rules of Civil Procedure, 39 F.R.D. 69, 103 (1966). The availability of the class action to redress such frauds has been consistently upheld, see In re Caesars Palace Securities Litigation, 360 F.Supp. 366, 395-96 (S.D.N.Y.1973), in large part because of the substantial role that the deterrent effect of class actions plays in accomplishing the objectives of the securities laws. See III Loss, Securities Regulation 1819 (2d ed. 1961) (“the ultimate effectiveness of (the security anti-fraud laws) may depend on the applicability of the class action device“).

While the nature of the interrelationship and the degree of similarity which must obtain between different representations in order to come within the outer boundaries of the “common course of conduct” test is somewhat unclear,¹⁹ the test is more than satisfied when a series of financial reports uniformly misrepresent a particular item in the financial statement. In that situation, the misrepresentations are “interrelated, interdependent, and cumulative; ” “(l)ike standing dominoes . . . one misrepresentation . . . cause(s) subsequent statements to fall into inaccuracy and distortion when considered by themselves or compared with previous misstatements.” Fischer v. Kletz, supra, at 381.

Precisely such a situation is alleged here in at least three respects the failure to create adequate reserves for uncollectible accounts receivable and for contractually guaranteed royalty payments, and the overstatement of inventory. The 1972 Annual Report shows writedowns of $31.9 million as provision for royalty guarantees, $11.8 million for uncollectible accounts receivable, and $15 million for inventory. Plaintiffs allege that the writedowns had roots tracing back to the beginning of the class period, an allegation somewhat borne out by the auditors’ withdrawal of certification of the 1971 report because of uncertainty that the huge losses reported in 1972 were the product of 1972 business operations, and not attributable to earlier years. Plaintiffs contend that the company‘s financial reports throughout the period uniformly and fraudulently failed to establish reserves in amounts adequate to satisfy accepted accounting principles, injuring all purchasers of the consequently inflated stock.

In this aspect, plaintiffs allege a source of inflation common to every purchaser. The creation of a reserve is of course simply an adjustment made to the balance sheet and income statement to provide a more realistic view of the business and its operations. Failure in any particular period to recognize that a portion of the accounts receivable generated in that period are uncollectible, and to create or adjust a reserve, will have the effect of inflating the balance sheet assets and surplus, and overstating the income for the period; likewise failure to recognize accrued liabilities for royalty payments will inflate surplus by understating liabilities, and will overstate income. Naturally, any inflation in the stock price due to inadequate reserves will persist until the reserves become adequate or until the losses are in fact written off.

Defendants nevertheless contend that a class is improper because each purchaser must depend on proof of a different set of accounting facts to establish the inadequacy of the reserves at the time he bought. Defendants misconceive the requirement for a class action; all that is required is a common issue of law or fact. Even were we to assume that the reserves were at some points during the period adequate, the class members still would be united by a common interest in the application to their unique situation of the accounting and legal principles requiring adequate reserves i. e., by a common question of law.²⁰ Here, however, in light of the progressive deterioration of Ampex‘s financial position and the magnitude of the losses at the end of the period, even the fact that reserves were in reality inadequate throughout much if not all of the period may not be in serious dispute; rather, the question will be whether the inadequacy was in some sense culpable because the contingencies which proved them inadequate were foreseen or foreseeable.

The alleged inventory overvaluation likewise presents common issues. Defendants again contend it does not because the valuation of any particular period‘s closing inventory involves a process of physical estimation based on that inventory‘s characteristics, and that overstatement of one period‘s closing inventory, while overstating that period‘s income, will have an opposite effect on the next period‘s income by overstating opening inventory, deflating rather than inflating stock price. While true in the abstract, appellants’ position disregards the real substance of the plaintiffs’ complaint which is again highlighted by the 1972 Report. In explaining the $15 million writedown, the company stated: “Inventories of stereo tapes more than six months old and more than one year old were written down 50% and 100% respectively . . . No significant writedowns of this nature were made in the prior year.”

Plaintiffs thus are complaining of the balance sheet effect of inventory overvaluation. They are alleging that by failing throughout the class period to recognize and account for inventory obsolescence each time the inventory was valued, the company consistently inflated the value at which it carried inventory on the balance sheet.²¹ In effect, plaintiffs are complaining of a consistent disregard of the accounting principle that inventory be valued at “lower of cost or market.” Again, common questions of law and facts are presented.

The class members also share an interest in establishing the standard of care required of the various defendants under the White v. Abrams, 495 F.2d 724 (9th Cir. 1974), flexible duty standard. The flexible duty of any defendant, while depending on his particular relationship to Ampex and to the financial reporting involved, will be owed identically to all market purchasers, who are for practical purposes identically situated. The culpability of each defendant‘s conduct is to be measured against the statutorily imposed duty not to manipulate the market. Differences in sophistication, etc., among purchasers have no bearing in the impersonal market fraud context, because dissemination of false information necessarily translates through market mechanisms into price inflation which harms each purchaser identically. See U. S. Financial Securities Litigation, supra, at 451-452.

Moreover, because of the relative similarity of the various documents involved, the duty owed by a defendant with respect to such documents will probably be uniform or nearly so, further uniting the positions of all class purchasers.

2. Predominance and reliance.

Defendants contend that any common questions which may exist do not predominate over individual questions of reliance and damages.

The amount of damages is invariably an individual question and does not defeat class action treatment. E. g., U. S. Financial Securities Litigation, supra, at 448 n. 5, and cases there cited. Moreover, in this situation we are confident that should the class prevail the amount of price inflation during the period can be charted and the process of computing individual damages will be virtually a mechanical task. See n. 24 infra.

Individual questions of reliance are likewise not an impediment subjective reliance is not a distinct element of proof of 10b-5 claims of the type involved in this case.

The class members’ substantive claims either are, or can be, cast in omission or non-disclosure terms the company‘s financial reporting failed to disclose the need for reserves, conditions reflecting on the value of the inventory, or other facts necessary to make the reported figures not misleading. The Court has recognized that under such circumstances

“involving primarily a failure to disclose, positive proof of reliance is not a prerequisite to recovery. All that is necessary is that the facts withheld be material in the sense that a reasonable investor might have considered them important in the making of this decision. This obligation to disclose and this withholding of a material fact establish the requisite element of causation in fact.” (citations omitted)

Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128, 153-154 (1972). See U. S. Financial Securities Litigation, supra, at 451; Caesars Palace Securities Litigation, supra, at 399; In re Penn Central Securities Litigation, 347 F.Supp. 1327, 1344 (E.D.Penn.1972).

Moreover, proof of subjective reliance on particular misrepresentations is unnecessary to establish a 10b-5 claim for a deception inflating the price of stock traded in the open market. See Herbst v. I. T. T., supra, at 1315-1316; Chris-Craft Industries, Inc. v. Piper Aircraft Corp., 480 F.2d 341, 373-374 (2d Cir. 1973); Tucker v. Arthur Andersen & Co., 67 F.R.D. 468, at 480 (S.D.N.Y.1975); U. S. Financial Securities Litigation, supra, at 449-451; Werfel v. Kramarsky, supra, at 681; In re Memorex Security Cases, supra, at 100-101; Siegel v. Realty Equities Corporation of New York, supra, at 424-425; Herbst v. Able, supra, at 20. Proof of reliance is adduced to demonstrate the causal connection between the defendant‘s wrongdoing and the plaintiff‘s loss. We think causation is adequately established in the impersonal stock exchange context by proof of purchase and of the materiality of misrepresentations, without direct proof of reliance. Materiality circumstantially establishes the reliance of some market traders and hence the inflation in the stock price when the purchase is made the causational chain between defendant‘s conduct and plaintiff‘s loss is sufficiently established to make out a prima facie case. See In re Memorex Security Cases, supra, at 101; Note, The Reliance Requirement in Private Actions Under SEC Rule 10b-5, 88 Harv.L.Rev. 584, 593 (1975).

Defendants argue that proof of causation solely by proof of materiality is inconsistent with the requirement of the traditional fraud action that a plaintiff prove directly both that the reasonable man would have acted on the misrepresentation (materiality), and that he himself acted on it, in order to establish the defendant‘s responsibility for his loss, which justifies the compensatory recovery.

We disagree. The 10b-5 action remains compensatory; it is not predicated solely on a showing of economic damage (loss causation). We merely recognize that individual “transactional causation” can in these circumstances be inferred from the materiality of the misrepresentation, see Tucker v. Arthur Andersen & Co., supra, at 480; Schlick v. Penn-Dixie Cement Corp., 507 F.2d 374, 381-382 (2d Cir. 1974), and shift to defendant the burden of disproving a prima facie case of causation. Defendants may do so in at least 2 ways: 1) by disproving materiality or by proving that, despite materiality, an insufficient number of traders relied to inflate the price; and 2) by proving that an individual plaintiff purchased despite knowledge of the falsity of a representation, or that he would have, had he known of it.²²

That the prima facie case each class member must establish differs from the traditional fraud action, and may, unlike the fraud action, be established by common proof, is irrelevant; although derived from it, the 10b-5 action is not coterminous with a common law fraud action. As we recently recognized in White v. Abrams, the fraud action must be and has been flexibly adopted to the overriding purpose of enforcing the Federal securities laws. 495 F.2d at 731. See Affiliated Ute, supra, at 151; Superintendent of Insurance v. Bankers Life & Casualty Co., 404 U.S. 6, 12 (1971); Mills v. Electric Auto-Lite Co., 396 U.S. 375 (1970); SEC v. Capital Gains Research Bureau, 375 U.S. 180, 186, 195 (1963).

Here, we eliminate the requirement that plaintiffs prove reliance directly in this context because the requirement imposes an unreasonable and irrelevant evidentiary burden. A purchaser on the stock exchanges may be either unaware of a specific false representation, or may not directly rely on it; he may purchase because of a favorable price trend, price earnings ratio, or some other factor. Nevertheless, he relies generally on the supposition that the market price is validly set and that no unsuspected manipulation has artificially inflated the price, and thus indirectly on the truth of the representations underlying the stock price whether he is aware of it or not, the price he pays reflects material misrepresentations. Requiring direct proof from each purchaser that he relied on a particular representation when purchasing would defeat recovery by those whose reliance was indirect, despite the fact that the causational chain is broken only if the purchaser would have purchased the stock even had he known of the misrepresentation. We decline to leave such open market purchasers unprotected. The statute and rule are designed to foster an expectation that securities markets are free from fraud an expectation on which purchasers should be able to rely.

Thus, in this context we think proof of reliance means at most a requirement that plaintiff prove directly that he would have acted differently had he known the true facts. That is a requirement of proof of a speculative negative (I would not have bought had I known) precisely parallel to that held unnecessary in Affiliated Ute and Mills (I would not have sold had I known). We reject it here for the same reasons. Direct proof would inevitably be somewhat pro-forma, and impose a difficult evidentiary burden, because addressed to a speculative possibility in an area where motivations are complex and difficult to determine. That difficulty threatens to defeat valid claims implicit in Affiliated Ute is a rejection of the burden because it leads to underinclusive recoveries and thereby threatens the enforcement of the securities laws. See Harv. Note, supra, at 590-91. Here, the requirement is redundant the same causal nexus can be adequately established indirectly, by proof of materiality coupled with the common sense that a stock purchaser does not ordinarily seek to purchase a loss in the form of artificially inflated stock.²³ Under those circumstances we think it appropriate to eliminate the burden.

Defendants contend that elimination of individual proof of subjective reliance alters and abridges their substantive rights in violation of the Rules Enabling Act, 28 U.S.C. § 2072. The obvious answer is that the standards of proof of causation we have set out apply to all fraud on the market cases, individual as well as class actions. No interpretation of Rule 23 is involved, and the Rules Enabling Act limitation is not implicated.²⁴

C. Conflicts.

Defendants’ final major argument is that conflicts among class members preclude class certification. They contend that the interests of class members in proving damages from price inflation (and hence the existence and materiality of misrepresentations subsumed in proving inflation) irreconcilably conflict, because some class members will desire to maximize the inflation existing on a given date while others will desire to minimize it. For example, they posit that a purchaser early in the class period who later sells will desire to maximize the deflation due to an intervening corrective disclosure in order to maximize his out of pocket damages, but in so doing will conflict with his purchaser, who is interested in maximizing the inflation in the price he pays. We agree that class members might at some point during this litigation have differing interests. We altogether disagree, for a spate of reasons, that such potential conflicts afford a valid reason at this time for refusing to certify the class.

Defendants’ position depends entirely on adoption of the out of pocket loss measure of damages, rather than a rescissory measure. Under the out of pocket standard each purchaser recovers the difference between the inflated price paid and the value received, plus interest on the difference. If the stock is resold at an inflated price, the purchaser-seller‘s damages, limited by § 28(a) of the Act, 15 U.S.C. § 78bb(a) to “actual damages,” must be diminished by the inflation he recovers from his purchaser. Thus, he is interested in proving that some intervening event, such as a corrective release, had diminished the inflation persisting in the stock price when he sold.²⁵

While out of pocket loss is the ordinary standard in a 10b-5 suit, Foster v. Financial Technology, Inc., 517 F.2d 1068, at 1071 (9th Cir. 1975); Janigan v. Taylor, 344 F.2d 781, 786 (1st Cir. 1965); Estate Counseling Service, Inc. v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 303 F.2d 527 (10th Cir. 1962); Abrahamson v. Fleschner, 392 F.Supp. 740, at 746 (S.D.N.Y.1975); see Sigafus v. Porter, 179 U.S. 116, 123 (1900); Smith v. Bolles, 132 U.S. 125 (1889); Note, The Measure of Damages in Rule 10b-5 Cases Involving Actively Traded Securities, 26 Stan.L.Rev. 371, 383-384 (1974); 3 A. Bromberg, Securities Law, Fraud Rule 10b-5, § 9.1, at 226-227 (1974), it is within the discretion of the district judge in appropriate circumstances to apply a rescissory measure, Chasins v. Smith, Barney & Co., 438 F.2d 1167, 1173 (2d Cir. 1970); Abrahamson v. Fleschner, supra, at 746; see Stanford Note, supra, at 374-376; A. Bromberg, supra, at 226, or to allow consequential damages. Foster, supra, at 1071; Zeller v. Bogue Elec. Mfg. Co., 476 F.2d 795, 802-803 (2d Cir. 1973)Rule 23(c)(4), to deal with latent conflicts which may surface as the suit progresses. Green v. Wolf Corporation, supra, at 299; Tucker v. Arthur Andersen & Co., supra, at 482; Handwerger v. Ginsberg, CCH Fed.Sec.L.Rep. P 94,934, at 97,241 (S.D.N.Y.1975); Caesars Palace Securities Litigation, supra, at 398; Sol S. Turnoff v. N. V. Nederlandsche Combinatie Voor Chemische Industrie, 51 F.R.D. 227, 233 (E.D.Pa.1970). As a result, courts have generally declined to consider conflicts, particularly as they regard damages, sufficient to defeat class action status at the outset unless the conflict is apparent, imminent, and on an issue at the very heart of the suit. See Hawk Industries, Inc. v. Bausch & Lomb, Inc., 59 F.R.D. 619 (S.D.N.Y.1973); Siegel v. Realty Equities Corporation of New York, supra, at 426. Here, the conflict, if any, is peripheral, and substantially outweighed by the class members’ common interests. Even assuming arguendo that the out of pocket standard applies, the class is proper. Every class member shares an overriding common interest in establishing the existence and materiality of misrepresentations. The major portion of the inflation alleged is attributed to causes which allegedly persisted throughout the class period. It will be in the interest of each class member to maximize the inflation from those causes at every point in the class period, both to demonstrate the sine qua non liability and to maximize his own potential damages the more the stock is inflated, the more every class member stands to recover. Moreover, because the major portion of the inflation is attributed to causes persisting throughout the period, interim corrective disclosures (of which there appear to have been only two or three) do not necessarily bring predisclosure purchasers into conflict with post-disclosure purchasers. Because both share an interest in maximizing overall inflation, the latter purchaser will no doubt strive to show a substantial market effect from disclosure of the lesser (or partial) causes of inflation to maximize the inflation attributable to more serious causes persisting when he bought a showing which will increase the recovery of the earlier purchaser. In that light, any conflicting interests in tracing fluctuations in inflation during the class period are secondary, and do not bar class litigation to advance predominantly common interests. Courts faced with the same situation have repeatedly, either explicitly or implicitly, rejected defendants’ position, for the potential conflict is present in most prolonged classes involving a series of misrepresentations. See Green v. Wolf Corporation, supra; Tucker v. Arthur Andersen & Co., at 475-476 and 476 n. 14, and cases there cited, and at 97,936; Aboudi v. Daroff, supra, at 391-392; U. S. Financial Securities Litigation, supra, at 452; In re Memorex Security Cases, supra; Caesars Palace Securities Litigation, supra; Siegel v. Realty Equities Corporation of New York, supra, at 426; Dolgow v. Anderson, supra; Fischer v. Kletz, supra, at 381-383; Kronenberg, supra. In support of that conclusion, we note that Rule 23 makes no mention of conflicts. The Rule‘s requirements are that the representative‘s claims be “typical” and that the class be “fairly and adequately” represented claims need not be coextensive. Caesars Palace Securities Litigation, supra, at 397. Those requirements are in part constitutionally dictated, as due process requires, in order to give collateral res judicata effect to a judgment against class members, that their interests have been adequately represented in the class action. Hansberry v. Lee, 311 U.S. 32, 61 S.Ct. 115, 85 L.Ed. 22 (1940). Hansberry does not, however, as defendants seem to assume, dictate that any divergence of interest among class members violates due process (thereby necessarily requiring an identity of interests to satisfy Rule 23‘s adequacy or representation and typicality requirements). Neither the Rule‘s requirements nor those of due process are so inflexible. The due process touchstone of adequacy and fairness of representation (see In re Four Seasons Securities Laws Litigation, 502 F.2d 834, 842 (10th Cir. 1974); Eisen IV, at 177) must be judged in light of the seriousness and extent of conflicts involved compared to the importance of issues uniting the class; the alternatives to class representation available;26 the procedures available to limit and prevent unfairness; and any other facts bearing on the fairness with which the absent class member is represented. Hansberry is not controlling here in Hansberry there was nothing to satisfy due process. Not only were the members of the purported class of property owners diametrically opposed on the central issue the validity of racial covenants restricting their property but the state class action procedure provided absent class members no notice. Here, on the other hand, under the notice and opt-out procedure of Rule 23(b)(3) and 23(c)(2), an absent class member may evaluate his position in the class and decide for himself whether to avail himself of the representation offered. See, e. g., Four Seasons Securities Laws Litigation, supra, at 842-844; Herbst v. Able, supra, at 15. The potential conflicts are at most peripheral. And the district judge will retain constant supervision, through his powers under Rule 23(d) and (e), and through his ability to decertify or create sub-classes, to assure fairness of representation. See Dolgow v. Anderson, supra, at 496. Finally, and unlike numerous cases in which even one representative has been held adequate to represent a prolonged class, the class members here will be represented by numerous named representatives, with substantial personal stakes, who purchased throughout the class period, and who thus will probably represent whatever conflicting interests there are in the development of plaintiffs’ trial strategies. In light of those various factors, we agree with the district judge that the class representatives are typical and will adequately and fairly represent the class.27 Affirmed.

Notes

Named plaintiffs in these appeals are Barrack, Kushner, and various other individuals whose suits have been consolidated. Some represent only themselves, but most represent a class of some sort. For instance, the Barrack complaint was filed on behalf of a class of all those who purchased Ampex securities during the 27 month period; the Kushner complaint on behalf of those who purchased during a 15 month period. The order of the district court from which these appeals are taken consolidated the various individual and class suits for all purposes and certified a single class as described in the text.

The individual defendants are William E. Roberts, Ampex‘s chief executive officer during most of the period, and John Buchan, Ampex‘s president during most of the period. Several other directors and officers were also named as defendants.

The “direct” appeals are: 74-2141 (Blackie, et al., Ampex Corporation); 74-2167 (Roberts and Buchan); 74-2341 (Ampex Corporation); and 74-2466 (Touche Ross & Co.).

The judge also certified for interlocutory appeal the question of whether the class could include those who had purchased Ampex‘s 5 1/2% Convertible Subordinated Debentures. That issue is not before us.

The petition for interlocutory review was granted on August 8, 1974, but on the condition that “no part of the record is to be transmitted to this court and no briefs are to be filed until the court decides the motions to dismiss the related appeals (Nos. 74-2141, 74-2167, 74-2341, 74-2466).” The court on December 12, 1974, ordered the motions to dismiss to be heard with the appeals.

“In the presence of the Dickensian trial of Jarndyce v. Jarndyce, still ‘perennially hopeless‘, it is even more important today that ‘the correction of a particular decision at the cost of a generalized harm to the judicial administration’ . . . should not be countenanced.” .

Of course, if reversal of the class certification would not terminate the suit, the order is not appealable under Herbst. See .

We have not yet faced the issue. See , where we heard a § 1292(b) appeal.

The Eisen III-Herbst rule was effectively questioned by the Supreme Court in Eisen IV. The Court there cited Herbst as an example of the Second Circuit‘s then current view that an order granting class action status was appealable under § 1291. . The Court did not, however, approve the rule, but rather meticulously applied the Cohen criteria to the notice and cost of notice order before it, and then explicitly noted: “We of course had no occasion in (Eisen I) to determine whether an order granting class action status would be appealable, nor do we mean to imply an answer to that question today.” .

The conditional nature of the order likewise distinguishes it from the notice and cost of notice order held appealable in Eisen IV. The Eisen IV order “involved nothing less than the termination of the class action” because Eisen would not pay for the notice. .

While the Herbst rule requires that the order be “separable from the merits,” we fail to see how most certification orders could ever be appealable under it. As the Second Circuit recognized in Kohn, supra, it is difficult to separate the “common question” and “predominance” inquiries from the merits. See .

See . In Eisen IV the Court allowed appeal from the order requiring defendants to pay 90% of the cost of notice. While the Court relied on the potential high cost of notice, it did so only because the order decided a “settled and elusive” question of legal right (how costs should be allocated) which could not be effectively reviewed after the notice had been given and the money spent. The Court did not hold that the expense of litigation, or the increased costs of defense, was a sufficient right to confer appealability. See .

Of course, if a district judge refuses to certify a § 1292(b) appeal, we are powerless to hear the appeal. See .

See Recommendation of the Board of Bar Governors of the State Bar of California to the House of Delegates of the American Bar Association, at 5-6 (undated), which recommends that “interlocutory appeals from orders granting or denying class action status should be allowed as of right, but only upon a finding by the trial court that the order ‘involves a controlling question of law’ as to which there is ‘substantial ground for difference of opinion’ and ‘that an immediate appeal from the order may materially advance the ultimate termination of the litigation.’ ” (emphasis in original.) As the state bar‘s comments indicate, that is already available under § 1292(b).

One commentator has noted: “The widespread use of the term ‘blackmail’ to describe class actions suggests that the label is being used as a substitute for thought. When a company is told it has to face a $1,000,000 liability it may well decide to settle even if it thinks it has a good defense. This is true of all lawsuits.” H. Friendly, Federal Jurisdiction: A General View 120 (1973).

The district judge properly was not limited to the complaints. At the time of certification he had before himAmpex‘s 1970, 1971 and 1972 annual reports, various 10-K‘s, interim reports, and the like. He also had the benefit of the withdrawal of certification by Touche Ross of the 1971 financial statements, and its refusal to certify the 1972 financial statements. He also had extensive briefing and oral argument on the class issues.

“The court has reviewed each of the requirements for a class action. It has concluded that it can best proceed by conditionally certifying the class as it is defined in the Barrack complaint, that is, one including all who purchased Ampex securities during the twenty-seven month period from the date of the 1970 annual report to the date of the 1972 annual report. This will mean that all common and typical issues can be heard in one proceeding. If it later appears that certain issues are not common or typical, or that certain class members’ interests are in conflict with others, the court can then create subclasses or even decertify the class. The same can be done if it should later appear that the class is unmanageable. Proceeding in this manner is consistent with the Ninth Circuit‘s approach to class actions as it was expressed in . . . . This procedure will permit the case to proceed while at the same time preserving to the defendants their right to move for decertification or for the creation of subclasses.” District Court Opinion at 22-23.

”Rule 23. Class Actions
(a) Prerequisites to a Class Action. One or more members of a class may sue or be sued as representative parties on behalf of all only if (1) the class is so numerous that joinder of all members is impracticable, (2) there are questions of law or fact common to the class, (3) the claims or defenses of the representative parties are typical of the claims or defenses of the class, and (4) the representative parties will fairly and adequately protect the interests of the class.
(b) Class Actions Maintainable. An action may be maintained as a class action if the prerequisites of subdivision (a) are satisfied, and in addition:
. . . .
(3) the court finds that the questions of law or fact common to the members of the class predominate over any questions affecting only individual members, and that a class action is superior to other available methods for the fair and efficient adjudication of the controversy. . . .”

We do not see that Ampex‘s operations, as a “conglomerate” with “seven distinct divisions,” in any way impacts on the “common course of conduct” measurement. The financial reporting is on a consolidated basis for the entire company; that reporting was as much a common course of conduct for the consolidated entity as it would have been for a company which had but one division and one product.

Defendants’ 10(b) and 10b-5 liability for each period will of course be limited to the amount of the inflation in the stock price during that period which is attributable to the particular culpable financial reporting. To provide a hypothetical example: if the reserves are inadequate by $10 million in period one, and period one‘s culpable reporting is solely responsible for a $5 inflation in the stock price, then a period one purchaser‘s damages will be limited by the $5 inflation. If in period two the reserves are again inadequate by $10 million, but the company has had a $5 million profit, the reserves are in an absolute sense more inadequate. If the culpable reporting in period two is responsible for $10 inflation, then the period two purchaser‘s damages will be limited by that $10 inflation. The fact that the $10 million inadequacy in period one is also a part of the $15 million inadequacy in period two does not mean that the period one and period two purchasers are not united by the common question of the ACTIONABILITY of the $10 million inadequacy. If the $10 million inadequacy is not actionable, then the period two purchaser will have to establish that the additional $5 million inadequacy is actionable, but both period one and period two purchasers have a common interest in the $10 million inadequacy. We fail to see how defendants’ point about the deflationary effect of opening inventory overvaluation is relevant. The balance sheet reflects only the closing inventory. The fact that opening inventory is also overstated may indeed deflate the period‘s income, but that deflation will be more than offset by the overvaluation of the closing inventory (which will include the overvalued opening inventory, or its products), and the balance sheet as a whole will be inflated by the overvaluation of the closing inventory. That is the point. Each periodic report is a “domino.”

We skip for the moment the question of whether the 10b-5 scienter requirement, see , will be satisfied by the same proof as to each class member. We think it will, for the same reasons that materiality and duty are uniform. See discussion infra.

The same results could be reached by using the “fraud on the market” theory to include direct reliance on the market price as 10b-5 reliance. See ; Note, 88 Harv.L.Rev. 584. We follow the Affiliated Ute-Mills approach to avoid semantic confusion.

We note that in any event Ampex‘s stock was not traded on an exchange, but rather over the counter. We find the difference irrelevant. Ampex was a large public corporation, with some 21,000,000 shares outstanding. During the period involved some 120,000 transactions were executed. The volume of the over-the-counter trading in Ampex‘s stock was such that it was for all purposes here identical to an exchange. The market was impersonal and reached a large number of investors. The price was determined by a large number of buyers and sellers, and by several market makers, and therefore reflected all the public information available about the company. The same forces that create the “market price” on an exchange were at work. See Harv. Note, supra, at 594 n. 53.

See Harv. Note, supra, at 594-596; Stanford Note, infra, at 380-383.

The rule requires adequate representation. The alternative may be none at all. “The basic concept of commonality, a requirement which is prevalent throughout Rule 23 and is premised upon a fundamental recognition that representatives of a class must have interests which are not in opposition to the members of that class, must be interpreted to best effectuate the primary purposes of the class action device, i. e., to give small investors a reasonable opportunity to vindicate their claims in a manner which will not place an undue burden upon them. It is in this light that we must approach the defendants’ objections to the instant class actions under Rule 23(a)(3).” Caesars Palace Securities Litigation, supra, at 397-398.

We likewise reject the contention that conflicts between debenture holders and shareholders require decertification at this time; see Handswerger v. Ginsberg, supra, at 97, 240-97, 241; Caesars Palace Securities Litigation, supra, at 398-399; Fischer v. Kletz, supra, at 384; or that present shareholders and those purchasers who have sold their shares irreconcilably conflict. See Handswerger, supra, at 97, 240 n. 3; Herbst v. ITT, supra, at 1314; Herbst v. Able, supra, at

Honorable Elbert Parr Tuttle, Senior United States Circuit Judge for the Fifth Circuit, sitting by designation.