OPINION
Plаintiff Dani Siegel brings the within action pursuant to Section 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b))
FACTS
Plaintiff alleges that from July 24, 1969 to August 3, 1970, defendants REC and certain of its officers and directors issued to the public a series of twelve documents containing material misrepresentations as to the financial condition and results of operations of REC.
On August 3, 1970, trading in REC securities was suspended by the American Stock Exchange pending receipt of accurate financial information concerning REC. At present, this suspension is still in effect.
The gravamen of plaintiff’s complaint is that, as a result of defendants’ unlawful activities, the market prices of REC securities became artificially inflated between July 24, 1969 and August 3, 1970. Thus, plaintiff alleges that he and all the class members who bought REC securities in the open market were misled to their damage by the artificially inflated market prices of those securities at the times of their purchases. Plaintiff himself purchased 1,000 shares of REC common stock on January 15, 1970 at the then-prevailing market price of $10,125 per share. At the time of the filing of this action, the bid and ask priсe for REC common stock and warrants in the over-the-counter market was $2-% bid, $4-i/8 asked and $1 bid, $l-% asked, respectively. Therefore, plaintiff seeks to represent those persons who, like himself, purchased securities of REC between July 24, 1969 and August 30, 1970 at prices which were affected by the acts and transactions complained of herein.
Under Fed.R.Civ.P. 23(a), an action may be maintained as a class action if the following requirements are satisfied: (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. Plaintiff seeks to maintain his action under Fed.R.Civ. P. 23(b) (3), which requires, in addition to the four elements cited supra, 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.
1. Class Size
The class plaintiff seeks to represent numbers several thousand, therеby rendering joinder impracticable. Green v. Wolf Corp.,
2. Common Questions of Law or Fact
At this point we come to the heart of defendants’ objections to plаintiff’s motion for class determination, and the basis for their motions for summary judgment. Defendants’ argument centers around the question of reliance. All parties agree that reliance is a necessary element of a private 10b-5 action, but disagree as to its definition. Plaintiff argues that he and the class he seeks to represent relied on the fact that the market price of REC securities had not been artificially inflаted by . the allegedly false statements issued by the defendants. Defendants, on the other hand, strenuously contend that plaintiff personally must have read at least one of the twelve documents issued by them and been induced by the alleged misrepresentations contained therein to purchase REC securities. They point out that plaintiff cannot ascertain specifically which of the twelve documents in question he read and relied on;
In Green, supra, a case with facts similar to those at bar, the Second Circuit Court of Appeals held a class action proper where the complaint alleged that plaintiff and his class “relied on the misstatements and omissions in that none were aware the price of the stock had been inflated to an artificially high level by the misleading information.” Green, supra
Although it is true that opinions in this circuit have given lip service to the idea that reliance is a necessary element of a private 10b-5 claim when misrepresentations, rather than omissions, are involved, the cases actually define reliance in terms of causation, i. e., “whether ‘the misrepresentation is a substantial factor in determining the course of conduct which results in [the recipient’s] loss’ List v. Fashion Park, Inc.,
“the plaintiff is required to prove by a fair preponderance of the evidence that he or she suffered damages as a proximate result of the alleged misleading statements and purchase of stock in reliance to [sic] them. In other words, the plaintiff must show that the misleading statement or omissiоn played a substantial part in bringing about or causing the damage suffered by him or her and that the damage was either a direct result or a reasonably foreseeable result of the misleading statement.” (Emphasis added.) Globus, supra at 1291.
It appears to this Court, therefore, that if plaintiff at trial can sustain the difficult burden of proving defendants issued false statements concerning their financial condition and paid dividends in contravention of their agreements with сreditors, and that these activities caused the market price of REC securities to be inflated, a jury might find it reasonably foreseeable that such inflated prices would induce the public to purchase REC stock, and subsequently to suffer damages when the misrepresentations were uncovered. In any event, whether such two-step reliance satisfies the causation requirement is a common question of law to be resolved by the trial judge. See Dolgow v. Anderson,
As to common questions of fact, “misrepresentations made over a period of time ‘will not preclude a class action, provided they were made pursuant to a common scheme.’ ” Bernfeld, “Class Actions and Federal Securities Laws”, 55 Cornell L.Rev. 78 (1970), quoting Dolgow, supra at 489.
“Like standing dominoes, one misrepresentation in a financial statement can cause subsequent statements to fall into inaccuracy and distortion when considered by themselves or compared with previous statements. Such a possible close causal relationship between the various alleged misrepresentations in . . . [a corporation’s] financial statements leads to the conclusion that members of the class are interested in ‘common questions of law and fact.’ ” Fischer, supra41 F.R.D. at 381 .
Plaintiff herein has alleged a common scheme to artifiсially inflate the price of REC stock. Unlike cases involving oral misrepresentations (see, e. g., Moscarelli v. Stamm,
Rule 23(a) (3) ^does not require that all members of the class be identically situated if there are common questions of law or fact. Defendants point out that the last two documents challenged by plaintiff as containing false statements were issued after he purchased his stock in January of 1970. If it is true that the twelve documents issued by defendants are all part of a common scheme to defraud the public, I think plaintiff’s claims are typical of his class and that he should be allowed to represent those who purchased REC securities after the last two documents were issued (Fischer, supra
If, on the other hand, the trial judge should rule that the reliance element requires those seeking recovery actually to have read the alleged misstatements and to have purchased REC stock as a direct result thereof, or it appears to him that a distinction should be made among those who purchased аt different times, he is free to create subclasses under Rule 23(c) (4). See Green, supra
The Second Circuit, in Green, supra, which involved a situation similar to the one presented in the instant ease (in that only one plaintiff sued on behalf of a large class and argued for the same definition of reliance as the plaintiff herein), explicitly approved the procedure followed in Brennan v. Midwestеrn United Life Insurance Co.,
U. Adequacy of the Representation
One litigant may assert the rights of a class. Green, supra; Eisen v. Carlisle & Jacquelin,
Under the circumstances of this case, it would be sensible and efficient to permit plaintiff to set forth the elaborate proof on the common issues of misstatement, materiality, effect on price and so on that any purchaser of REC securities between July 24, 1969 and August 3, 1970 would need in order to succeed on the merits. No claim has been made that plaintiff’s counsel are anything but qualified, experienced and generally able to conduct this litigation.
5. Common Questions Predominate over Individual Issues
Once the court has ascertained that common questions of law or fact exist, in order to allow a class action under 23(b) (3) it must be determined that such commоn questions predominate over any individual issues. Defendants make much of the fact that, under their theory of reliance, separate trials for each defendant would be necessary on that issue. But if plaintiff’s theory of reliance is adopted by the trial judge, this troublesome issue will be a common, rather than an individual, question, rendering separate trials unnecessary, Dolgow, supra
statements and their effect on market price predominate over the individual issues of damages and, possibly, reliance.
6. Superiority of Class Action
Rule 23(b) (3) suggests several factors a court might consider in determining whether a class action is superior to other available methods for the fair and efficient adjudication of the controversy. The factor with the most relevance to this case revolves around the difficulties likely to be encountered in the management of a class action. Although defendants cite Morris v. Bur-chard,
“It cannot be denied that the resolution of the class action issue in suits of this type places an onerous burden on the trial court. But if there is to be an error made, let it be in favor and not against thе maintenance of the class action, for it is always subject to modification should later developments during the course of the trial so require.”
I might mention that this Court is mindful of the concern which has lately arisen over the use of the class action device in a 10b-5 suit. Frequently, shareholders of a corporation institute a class action in a 10b-5 claim similar in nature to the “strike suits” which formerly were widely utilized by disgruntled shareholdеrs in derivative actions. And' it is true that in many instances, once a motion for class determination is granted it is more economical for a corporation to settle such a suit before trial rather than to conduct the litigation—regardless of the merits of the plaintiffs’ claims. At this juncture, however, it would appear that plaintiff Siegel’s action has merit, although it is less clear that he, as opposed to other purchasers of REC stock, has a cause of action under Rule 10b-5 because of the uncertainty in this circuit as to what constitutes reliance. Under Fed.R.Civ. P. 23 as it now stands, however, this Court feels that once it “is convinced that there is substantial merit to plaintiff’s claims and that the class action device is the practicable method of vindicating these claims, it will not let procedural difficulties stand in its way.” Dolgow, supra
DEFENDANTS’ MOTIONS FOR SUMMARY JUDGMENT
Defendants’ motions for summаry judgment pursuant to Fed.R.Civ. P. 56 are both grounded on their theory of reliance: i. e., plaintiff actually must have read at Feast one of the challenged documents and must have purchased his REC stock as a direct result of reading the alleged misrepresentations contained therein. Defendant REC argues that since plaintiff is unable to specify which of the twelve documents in question he read and relied on in purchasing his REC stock, he has not stated a claim under Rule 10b-5 and thus cannot represent his class. Defendant Alexander Grant asserts that it had nothing to do with the REC September 30, 1969 six-month financials (Hoffman Affidavit |j 8) plaintiff states he remembers seeing (although he has not specified exactly where), and thus argues that plaintiff has stated no claim as to them. Alexander Grant, however, on July 21, 1969, did certify REC’s financial statements for the year ending March 31, 1969. Peckel Affidavit |f 4.
In light оf the liberal application of Fed.R.Civ.P. 23, it would be untimely for this Court to decide the reliance issue at this stage of the proceedings. As discussed supra, there is substantial authority for the proposition that what constitutes reliance is one of those common questions of law to be determined by the trial judge. Apart from the reliance issue, this case presents issues of fact (e. g., misrepresentation, materiality) which must await trial for determination. Therefore, defendants’ motions for summary judgment are denied.
Therefore, and for the foregoing reasons, plaintiff’s motion for class determination pursuant to Fed.R.Civ.P. 23 is conditionally granted, and defendants’ motions for summary judgment pursuant to Fed.R.Civ.P. 56 are denied. Plaintiff will submit an order on notice defining the class he seeks to represent in accordance with this opinion and proposing means for notice to the class pursuant to Fed.R.Civ.P. 23(c) (2).
. 15 U.S.C. § 78j provides in pertinent part:
“It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange—
“(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative оr deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.”
. 17 C.F.R. § 240.10b-5 provides:
“It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange,
(1) to employ any device, scheme, or artifice to defraud,
(2) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
(3) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person,
in connection with the purchase or sale of any security.”
. Plaintiff’s Answers to Interrogatories 7 (g), Exhibit O, attached to defendant REC’s motion for Summary Judgment:
“Plaintiff does not specifically recall seeing or reviewing any of the specific documents referred to in the answer to Interrogatories 6 or 7; however he does recall seeing Realty’s earnings for the six months ending September 30, 1969, prior to January 15, 1970.”
. If, later, the misrepresentations turn out to be diverse, the trial judge can strike the class action. Kronеnberg v. Hotel Governor Clinton, Inc.,
. If plaintiff can prove his case, his damages would appear to be so small that they would undoubtedly be consumed by attorney’s fees. In Green, supra
“If, as here, the security in connection with which the alleged misrepresentations and violations of 10b-5 have been made is publicly held, a class action may well be the appropriate means for
. But see Oreen, supra
“Compare Harris v. Jones,