Dennis Greenman Securities Litigation, In re, 85-5690

• Decision Date: 19 October 1987
• Docket Number: No. 85-5690,85-5690
• Parties: Fed. Sec. L. Rep. P 93,500, 9 Fed.R.Serv.3d 415 In re DENNIS GREENMAN SECURITIES LITIGATION. Leon NAMOFF, Sara Johnson, et al., Plaintiffs-Appellees, Dr. Hyman Baer, Bill Behrle Associates, et al., Plaintiffs-Appellants, v. MERRILL LYNCH, PIERCE, FENNER AND SMITH, etc., et al., Defendants-Appellees.
• Court: U.S. Court of Appeals — Eleventh Circuit

Page 1539

829 F.2d 1539

Fed. Sec. L. Rep. P 93,500, 9 Fed.R.Serv.3d 415

In re DENNIS GREENMAN SECURITIES LITIGATION Leon NAMOFF, Sara Johnson, et al., Plaintiffs-Appellees Dr. Hyman Baer, Bill Behrle Associates, et al., Plaintiffs-Appellants, v. MERRILL LYNCH, PIERCE, FENNER AND SMITH, etc., et al Defendants-Appellees.

No. 85-5690.

United States Court of Appeals Eleventh Circuit.

Oct. 19, 1987.

Michael R. Klein, Washington, D.C., for plaintiffs-appellants.

Martin Paul Unger, Carlton R. Asher, Jr., New York City, for Paine Webber, Jackson & Curtis, Inc.

Jeffrey M. Weissman, Miami, Fla., for Sanford, Freida & Neil Hotchner, Hotchco, Inc.

Paul W. Stivers, Phillip S. McKinney, Atlanta, Ga., for Merrill Lynch, Pierce & Fenner.

Lawrence R. Metsch, Miami, Fla., for Dennis and Jayne Greeman.

Robert A. Meister, New York City, for Arthur May and Penny May.

Jeffrey M. Smith, Karen B. Bragman, Atlanta, Ga., for Jonathan Reisman, Baron L. Bartlett and W. Crosby Few.

R. Earl Welbaum, Miami, Fla., for U.S. Fire Ins. Co.

Francis X. Sexton, Jr., Miami, Fla., for Bruce Paine, O. Roy Vass, Robert Punch.

Jerome Murray, New York City, for Vigilante Ins. Co. & Firemen's Fund.

Hugo L. Black, Thomas Tew, Alan G. Greer, James E. Glass, Mark Hicks, Elizabeth K. Clarke, Lynn M. Summers, Miami, Fla., for plaintiffs committee.

Henry Minnerop, Brown and Wood, New York City, for Becker Paribas, Inc.

Aaron Podhurst, Miami, Fla., for A.G. Becker, Inc., n/k/a Becker Paribas, Inc.

Steven A. Werber, Jacksonville, Fla., for H. Preston Demery.

Appeal from the United States District Court for the Southern District of Florida.

Before HILL and JOHNSON, Circuit Judges, and HENLEY ^*, Senior Circuit Judge.

HENLEY, Senior Circuit Judge:

This is an appeal from a final district court judgment certifying a class action and approving a settlement in a complex securities fraud case. The plaintiffs are victims of a fraud perpetrated by Dennis Greenman, a securities seller. The defendants are brokerage firms that employed Greenman while he was conducting the fraud as well as others who might be liable for Greenman's actions. Appellants, some alleged victims of Greenman, contend that the district court erred in certifying the class for settlement purposes pursuant to Fed.R.Civ.P. 23(b)(1). For reasons to be stated, we reverse.

Greenman conducted the fraud over a period of almost four years beginning in mid-1977 as a broker for or associate of three different brokerage firms: Merrill Lynch, Pierce, Fenner & Smith Incorporated (Merrill Lynch), Paine Webber Jackson & Curtis, Inc. (Paine Webber), and Barclay Financial Corp. (Barclay). Greenman represented himself as operating a riskless, highly profitable computer-driven arbitrage system. In actuality, he was investing the funds in high risk options trading and lost substantial sums of money. Greenman also converted funds to his own use. He concealed the fraud by diverting the genuine account statements to false post office box addresses and forwarding fictitious account statements. Investors who sought to withdraw funds from their accounts were paid with other investors' funds in a "Ponzi" type scheme. Over 600 people participated in the scheme either dealing directly with Greenman or investing through other participants. ¹ They invested approximately $86 million, of which they lost over $50 million.

In April of 1981, the Securities and Exchange Commission filed a complaint against Greenman, Barclay, and its principals seeking injunctive relief and the appointment of a receiver. The district court issued an injunction against Greenman and appointed a receiver to collect and distribute the investors' assets under the custody or control of Greenman, Barclay, or A.G. Becker. ² The receiver found that the investors' funds were commingled to the extent that specific ownership could not be traced. In December of 1981, upon motion of the receiver and after a hearing, the district court issued an Order Approving Interim Distribution to Investors, which determined that the receiver should make his first interim distribution on an individual loss basis, and authorized the receiver to distribute up to 20% of each investor's "net principal investment" as defined in the claim. Upon motion of the receiver and after a hearing, the court ordered a second interim distribution of an additional 15% of the net investments of the investors as individuals in May of 1982. The total amount distributed from the receivership fund was $17,280,681.76, which represented a 35% return of net investments to investors with net losses.

Subsequent to the SEC's disclosure of the fraud, numerous suits were filed on behalf of investors. Among the suits, a complaint was filed on behalf of all people and entities who lost investments. The class action complaint named as defendants: Greenman, Paine Webber, Barclay, A.G. Becker, Inc., and various officers of Paine Webber and Barclay. The plaintiffs alleged violations of the Security Exchange Acts of 1933 and 1934, the Investment Company Act of 1940, the R.I.C.O. Act, various Florida statutes, the rules of the New York Stock Exchange and the National Association of Securities Dealers. In addition, plaintiffs alleged common law causes of action of fraudulent misrepresentation, concealment, nondisclosure, breach of fiduciary duty, conversion, and negligence. As relief, the plaintiffs sought their lost investments, the three-fold damage award provided for in the R.I.C.O. Act, punitive damages, interest, costs, and attorney fees.

After receiving advice from counsel and conducting hearings, the district court consolidated and stayed the individual suits and certified a class action pursuant to Fed.R.Civ.P. 23(b)(1). See In re Dennis Greenman Securities Litigation, 94 F.R.D. 273, 279 (S.D.Fla.1982). The district court ruled that the general class action prerequisites of Rule 23(a) were satisfied because of the large number of investors and the similarity of their claims. Id. at 276. In reaching its decision to certify the class pursuant to Rule 23(b)(1), the district court reasoned that the case's unique facts made the possibility of individual actions, as would be allowed under Rule 23(b)(3), undesirable. The district court observed that: (1) all investors were involved in the same fraud scheme and shared causes of action, id. at 277; (2) individual actions may cause both defendants and plaintiffs to develop inconsistent claims and defenses, id.; (3) class members' interests would best be protected by insuring that the receivership fund was used and distributed equitably, id. at 278; and (4) individual actions would result in huge attorney fees and burden the judicial system. Id.

After a year and a half of discovery, the parties began to seek a settlement. At the request of the plaintiffs and certain defendants, the district court participated in the settlement process pursuant to Fed.R.Civ.P. 16. The parties reached an agreement. Adherence to the agreement was conditioned upon the district court certifying a class action pursuant to Rule 23(b)(1). The district court certified a class for settlement purposes pursuant to Rule 23(b)(1) and approved the settlement. See In re Dennis Greenman Securities Litigation, 622 F.Supp. 1430, 1433 (S.D.Fla.1985).

In certifying the class, the district court again emphasized the special circumstances of the case. The court reasoned that the cohesion among the plaintiffs' claims caused each plaintiff's ability to recover to be intertwined with that of other plaintiffs. Id. at 1445. Specifically, the court expressed concern that plaintiffs, who brought their actions first, might bankrupt potential sources of recovery and, thereby, preclude recovery for those plaintiffs who brought later actions. Id. at 1447. In addition, the district court feared that individual actions would cause the defendants to face incompatible standards of conduct or create for them inconsistent adjudications. Id. at 1445. The court also noted that Rule 23(b)(1) certification would aid in equitably distributing the receivership fund. Id. at 1447. The court further recited several negative consequences that would result if the class was not certified pursuant to Rule 23(b)(1). Individual defendants would lose the ability to set off, against their investors' claims, the money they paid through the receivership fund to those who invested at other brokerage firms. Id. Individual actions would also create both burdens for the court and the prospect of enormous attorneys' fees. Id. at 1450. The court also expressed concern that by not certifying the class pursuant to Rule 23(b)(1), most plaintiffs would be deprived of the settlement they desire. Id. at 1447.

A group of plaintiffs, named the Baer plaintiffs, brought this appeal challenging the district court's class certification under Rule 23(b)(1). Appellants contend that the class should have been certified pursuant to Rule 23(b)(3) to allow class members to opt out.

Initially, we observe that appellants have not waived their right to object to the Rule 23(b)(1) certification by failing to appeal the district court's initial class certification decision. Orders certifying a class ordinarily are not appealable as final orders pursuant to 28 U.S.C. Sec. 1291. Williams v. City of New Orleans, 565 F.2d 874, 874-75 (5th Cir.1978); Link v. Mercedes-Benz of North America, Inc., 550 F.2d 860, 862 (3d Cir.), cert. denied, 431 U.S. 933, 97 S.Ct. 2641, 53 L.Ed.2d 250 (1977); Hellerstein v. Mr. Steak, Inc., 531 F.2d 470, 472 (10th Cir.), cert. denied, 429 U.S. 823, 97 S.Ct. 75, 5 L.Ed.2d 85 (1976); Bennett v. Behring Corp., 525 F.2d 1202, 1202 (5th Cir.), cert. denied, 425 U.S. 975, 96 S.Ct. 2175, 48 L.Ed.2d 798 (1976); Blackie v. Barrack, 524 F.2d 891, 900 (9th Cir.1975), cert. denied, 429 U.S. 816, 97 S.Ct. 57, 50 L.Ed.2d 75 (1976). Such orders may become the subjects of interlocutory appeal. Indeed, to the extent that they...