Franklin Nat. Bank Securities Litigation, In re

• Citation: 574 F.2d 662
• Decision Date: 03 April 1978
• Docket Number: No. 960,D,960
• Parties: Fed. Sec. L. Rep. P 96,373 In re FRANKLIN NATIONAL BANK SECURITIES LITIGATION. Robert GOLD, on behalf of himself and on behalf of all others similarly situated, Plaintiff-Appellant, and Louis Pergament, Intervenor-Plaintiff-Appellant, v. ERNST & ERNST, Harold V. Gleason, Paul Luftig, Peter R. Shaddick, Michele Sindona, Carlo Bordoni, Howard D. Crosse, Andrew N. Garofalo, Donald H. Emrich, and Robert C. Panepinto, Defendants- Appellees. ocket 76-7616.
• Court: U.S. Court of Appeals — Second Circuit

Page 662

574 F.2d 662

Fed. Sec. L. Rep. P 96,373

In re FRANKLIN NATIONAL BANK SECURITIES LITIGATION.

Robert GOLD, on behalf of himself and on behalf of all

others similarly situated, Plaintiff-Appellant, and Louis Pergament, Intervenor-Plaintiff-Appellant, v. ERNST & ERNST, Harold V. Gleason, Paul Luftig, Peter R.

Shaddick, Michele Sindona, Carlo Bordoni, Howard

D. Crosse, Andrew N. Garofalo, Donald H.

Emrich, and Robert C.

Panepinto,

Defendants-

Appellees.

No. 960, Docket 76-7616.

United States Court of Appeals, Second Circuit.

Argued April 27, 1977.

Reargued Nov. 15, 1977.

Decided April 3, 1978.

Melvyn I. Weiss, New York City, N.Y. (David J. Bershad, Jared Specthrie, Jerome M. Congress, and Milberg, Weiss, Bershad & Specthrie, Liaison Attorneys for Class Action Plaintiffs and Attorneys for plaintiff-appellant Robert Gold, New York City, and Jessel Rothman, Mineola, N.Y., Attorney for intervenor-plaintiff-appellant Louis Pergament, on the brief), for plaintiff-appellant.

Barbara A. Lee, New York City, N.Y. (Justin N. Feldman and Poletti, Freidin, Prashker, Feldman & Gartner, New York City, for defendant-appellee Howard D. Crosse; Davis, Polk & Wardwell, New York City, for defendant-appellee Ernst & Ernst; Dewey, Ballantine, Bushby, Palmer & Wood, New York City, for defendant-appellee Harold V. Gleason; Battle, Fowler, Lidstone, Jaffin, Pierce & Kheel, New York City, for defendant-appellee Paul Luftig; Anderson, Russell, Kill & Olick, P. C., New York City, for defendant-appellee Peter R. Shaddick; Mudge, Rose, Guthrie & Alexander, New York City, for defendant-appellee Michele Sindona; DiFalco, Field & Lomenzo, New York City, for defendant-appellee Carlo Bordoni; and Pirrotti & Imperato, Brooklyn, N Y., for defendant-appellee Robert C. Panepinto, Brooklyn, New York, on the brief), for defendant-appellee Howard D. Crosse.

Robert P. Stein, New York City, N.Y. (Alvin K. Hellerstein, and Stroock & Stroock & Lavan, Richard O. Scribner, Senior Vice-President and Gen. Counsel for Securities Industry Ass'n, Michael D. Udoff, Robert P. Bramnik, Aaron Teitelbaum, Matthew Farley, New York City, Attorneys for Securities Industry Ass'n and Twenty-five Broker-Dealers, as amici curiae, New York, N.Y., on the brief), for amici curiae.

Before MEDINA and OAKES, Circuit Judges, and MISHLER, District Judge. ^*

MEDINA, Circuit Judge:

This class action appeal ¹ was first argued before the present panel of judges of this Court on April 27, 1977. Plaintiff, who purchased 300 shares of common stock of Franklin New York Corporation on the over-the-counter market in New York City on May 9, 1974, seeks a recovery of money damages for an alleged security fraud against the independent accountants and certain former officers, directors, and employees of Franklin New York Corporation and Franklin National Bank. The class is described as "purchasers of common stock, preferred stock or capital notes of Franklin New York Corporation between July 16, 1973 and May 16, 1974."

The record discloses that many purchases had been recorded in "street names." ² This appeal is from orders of Judge Thomas C. Platt, Jr., dated October 27, 1976 and November 30, 1976, In re Franklin National Bank Securities Litigation, 73 F.R.D. 25 (E.D.N.Y.1976), in which he: (1) certified the class as defined by plaintiff; (2) held that the cost of the search of records and the use of computers necessary to the compilation of a list containing the names and addresses of the beneficial owners was part of the plaintiff's burden in maintaining the action (apparently assuming that notice was required to be sent to the beneficial owners where the securities were held in "street names"); and (3) refused to order the brokerage houses and banks to prepare such lists at their own cost and without reimbursement from the class representatives. The upshot was orders requiring plaintiff to pay for giving notices by mail to the "street names" with the direction to forward the notices to the beneficial owners, and to ascertain the names and addresses of the beneficial owners and mail notices to them also. This was deemed to be a proper compliance with the mandate of Federal Rule 23 that individual notice be given to all the members of the class who could be identified with reasonable effort. No brokerage house or bank is a party to this class action.

It appeared on the first oral argument that what seemed to be a similar case, Sanders v. Levy, was sub judice before this Court, sitting en banc, and that no decision had yet been forthcoming. So we decided to hold the appeal in abeyance until the opinion or opinions in the Sanders case were filed. The majority and dissenting opinions in Sanders were filed on June 22, 1977. (Sanders v. Levy, 558 F.2d 636 (2d Cir. 1977) (en banc ).) Also, since the oral argument on April 27, 1977, opinions were filed in related cases, involving "street names" or other so-called "absentee" owners, by the Third and Fifth Circuits in In re Nissan Motor Corporation Antitrust Litigation, 552 F.2d 1088 (5th Cir. 1977), and In Re: Penn Central Securities Litigation, 560 F.2d 1138 (3d Cir. 1977). Accordingly, we asked the parties to file supplemental briefs, and we set the case down for a second oral argument on November 15, 1977. The Supreme Court has granted certiorari in Sanders sub nom. Oppenheimer Fund, Inc. v. Sanders, 434 U.S. 919, 98 S.Ct. 391, 54 L.Ed.2d 275 (1977).

The net result is that we vacate the stay and the orders appealed from, agree with the trial judge's certification of the class as defined by plaintiff, and otherwise remand the case. We retain jurisdiction, as we did in Eisen II, 391 F.2d at page 570. ³

As the scope of this opinion covers a wide field of complex and interlocking legal issues, all arising out of the use of "street names" in the context of a securities fraud class action governed by Federal Rule 23, as revised in 1966, we have thought it more conducive to clarity and the elimination of much of the confusion in the existing case law on the subject to avoid preliminaries and to proceed at once with our disposition of these legal issues. Thus, we have divided this opinion into three sections: Part One, relating to our formulation of the principles governing The Basic Issues; Part Two, an Intermediate Summary and Commentary ; and Part Three, a brief historical sketch of how the "street names" practice expanded to help meet the so-called "paperwork crisis" in the securities industry, during the years 1967-1970 and a statement of suggested procedures to be followed according to the discretion of the trial judge in the management of the case.

PART ONE.

The Basic Issues.

A.

The District Court Had No Jurisdiction to Enter a Judgment Requiring the Brokerage Houses to Defray the Expense of Compiling a List of the Names and Addresses of the Beneficial Owners as None of the Brokerage Houses is a Party to This Action.

It is difficult to imagine a principle of jurisprudence more fundamental than that requiring that no judgment be rendered against any person without giving that person notice of the claim made against him and an opportunity to be heard. And yet, when it comes to saving cash outlay by class representatives and putting this burden on the brokerage houses, judge after judge has apparently felt no hesitancy in making such orders, despite the fact that the brokerage houses were not parties to the class actions.

The briefs before us contain numerous references to the fact that in Jahre v. Joseph M. Rait, Proflex Limited and Pelorex Corp., No. 74 Civ. 805 (E.D.N.Y. May 19, 1976), a class action, Judge Jack B. Weinstein, of the Eastern District, made an ex parte order in which he

ORDERED, that any bank, brokerage firm or other nominee which purchased the common stock of Pelorex Corp. for the account of others (beneficial owners) shall immediately transmit to each beneficial owner a copy of the Stipulation of Settlement, Notice to class members and Proof of Claim and request reimbursement for mailing costs, or supply the names and addresses of such beneficial owners to Defendants' counsel, without cost.

We do not know what representations were made to Judge Weinstein before he signed that order. But the twelve brokerage houses involved started a special proceeding in which they sought to have the order vacated on the ground that none of them was a party to the class action and that the court had no jurisdiction to make the order. The record on file in the office of the Clerk of the District Court for the Eastern District of New York discloses the following summary of petitioners' argument:

The brokerage firms were not on notice, had no opportunity to be heard, were not parties, and hence not subject to the court's jurisdiction.

Judge Weinstein vacated the order without comment on October 15, 1976.

In connection with the huge class actions in In Re: Penn Central Securities Litigation, 416 F.Supp. 907 (E.D.Pa.1976), Judge Joseph H. Lord of the Eastern District of Pennsylvania on August 22, 1975 made similar ex parte orders directing fourteen named brokerage houses, none of which was a party to any of the class actions, to ascertain the names and addresses of the beneficial owners of stock held in "street names" and to mail the class action notices to them. In these orders it was provided that the brokerage houses would be reimbursed for "reasonable postage expenses incurred in connection with (the) mailing." In contrast to what occurred in Jahre v. Rait, these brokerage houses went ahead and performed the necessary research, and they produced a list, apparently containing the names and addresses of the beneficial owners whose purchases had been recorded in "street names." They also mailed the class notices to the persons and corporations on this list. When they sought reimbursement for the $24,106.03 they had spent doing what they had been ordered to do, Judge Lord denied their application, and even refused...