Hoxworth v. Blinder, Robinson & Co., Inc.
| Decision Date | 02 December 1992 |
| Docket Number | No. 92-1108,No. 92-1116,Nos. 92-1108,92-1116,92-1108,s. 92-1108 |
| Parties | Fed. Sec. L. Rep. P 97,216, 24 Fed.R.Serv.3d 614, RICO Bus.Disp.Guide 8157 Dan H. HOXWORTH; Louise A. Hoxworth; Bradley Gavron; Barry Brownstein; Richard Donaldson; Mary Donaldson; Andress Kernick; Edward J. Bush, Rose M. Weber; Stanley Bernstein; Dorothy Bernstein; David Reiff; Joel Lieberman; Jane Scheck; Kenneth J. Holtmeyer, on behalf of themselves and all others similarly situated v. BLINDER, ROBINSON & CO., INC.; Meyer Blinder; John Cox; Intercontinental Enterprises, Inc. Bradley GAVRON; Daniel H. Hoxworth; Louise A. Hoxworth; Barry Brownstein; Richard Donaldson; Mary Donaldson; Andress Kernick; Edward J. Bush; Rose M. Weber; Stanley Bernstein; Dorothy Bernstein; David Reiff; Joel Lieberman; Jane Scheck; Kenneth J. Holtmeyer, on behalf of themselves and all others similarly situated v. BLINDER, ROBINSON & CO., INC.; Meyer Blinder; John Cox; Intercontinental Enterprises, Inc. Barry BROWNSTEIN; Don Townsend; Daniel H. Hoxworth; Louise A. Hoxworth; Bradley Gavron; Barry Brownstein; Richard Donaldson; Mary Donaldson; Andress Kernick; Edward J. Bush; Rose M. Weber; Stanley Bernstein; Joel Lieberman; Jane Scheck; Kenneth J. Holtmeyer, on behalf of themselves and all others similarly situated v. BLINDER, ROBINSON & CO., INC.; Meyer Blinder; Intercontinental Enterprises, Inc. Meyer Blinder and Intercontinental Enterprises, Inc., Appellants inJohn Cox, Appellant in |
| Court | U.S. Court of Appeals — Third Circuit |
Stephen J. Mathes (argued), Jan Fink Call, Linda A. Carpenter, David E. Landau, Hoyle, Morris & Kerr, Philadelphia, Pa., for appellants.
Stephen A. Whinston (argued), Berger & Montague, P.C., Marvin A. Miller, J. Dennis Faucher, Ellen Meriwether, Miller Faucher Chertow Cafferty and Wexler, Michael R. Lastowski, Michael F. McCarthy, Saul, Ewing, Remick & Saul, Philadelphia, Pa., for appellees.
Before: SLOVITER, Chief Judge, GREENBERG and GARTH, Circuit Judges.
In 1988, three separate class actions were filed in the United States District Court for the Eastern District of Pennsylvania by Dan and Louise Hoxworth, Bradley Gavron, and Barry Brownstein on behalf of investors who claimed to have been defrauded in connection with the purchase and sale of various "penny stocks." 1 The three actions, which were subsequently consolidated for purposes of pretrial proceedings, asserted claims against (1) Blinder, Robinson & Co., Inc. (Blinder, Robinson), a Colorado-based securities dealer through which plaintiffs consummated their stock transactions; (2) Meyer Blinder, the Chairman and President of Blinder, Robinson; and (3) John Cox, the Vice President of Blinder, Robinson. Later, plaintiffs amended their complaint to include a fourth defendant, Intercontinental Enterprises, Inc. ("IEI"), Blinder, Robinson's corporate parent. 2 Meyer Blinder is the President of IEI and the owner of 52% of its stock. John Cox is an officer and director of the corporation.
The complaint alleged that Blinder, Robinson defrauded the purchasers and sellers of twenty-one equity securities (the "class securities") in violation of federal and state securities laws, the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961-1968 (1988 & Supp. II 1990), and common law fiduciary duty. The complaint also sought to hold Meyer Blinder, John Cox, and IEI jointly and severally liable for these acts as "control persons" under section 15 of the Securities Act of 1933 3 and section 20(a) of the Securities and Exchange Act of 1934. 4
The gravamen of the plaintiffs' complaint as later refined focused on Blinder, Robinson's failure to disclose to its customers its excessive markup policy. 5 The National Association of Securities Dealers (NASD), a self-regulating organization of securities brokers of which Blinder, Robinson is a member, promulgates guidelines for the maximum markups that a broker may charge to customers with whom it trades as a principal. The guidelines specify a maximum markup of 5% above the security's prevailing market price, a percentage which the plaintiffs claim Blinder, Robinson substantially exceeded on numerous In that first appeal, taken by defendants from the district court's orders granting a preliminary injunction to freeze defendants' assets, we held that plaintiffs had shown a strong likelihood of prevailing on the merits but we vacated the injunction because it was "fatally overbroad." Id. at 211. We declined to address the interlocutory issue of the propriety of the class certification at that time, but we noted that there were certain ambiguities in the definition of the class, which we attributed to the absence of fact findings, and we stated that the parties or the district court could address those issues on remand. See id. at 191 & n. 7, 201.
occasions. Although plaintiffs did not sue directly on a violation of the NASD guidelines, see Newman v. L.F. Rothschild, Unterberg, Towbin, 651 F.Supp. 160, 162-63 (S.D.N.Y.1986) (violation of the guidelines does not give rise to private right of action), they proceeded on the theory, inter alia, that the failure to disclose non-compliance with the guidelines was a material omission. The first time this case was before us, we approved the district court's conclusion that this omission was material. See Hoxworth v. Blinder, Robinson & Co., 903 F.2d 186, 200 (3d Cir.1990) (Hoxworth I )
Following the remand to the district court, the Securities Investors Protection Corporation (SIPC) filed a complaint on July 31, 1990 in the United States District Court for the District of Colorado under the Securities Investors Protection Act of 1970, 15 U.S.C. §§ 78aaa-78lll (1988), seeking the liquidation of Blinder, Robinson. As a result, the Hoxworth action was automatically stayed against Blinder, Robinson pursuant to 11 U.S.C. § 362(a) (1988 & Supp. III 1991), but the class action continued against the remaining three defendants as control persons of the securities firm. On April 5, 1991, plaintiffs filed an amended consolidated complaint, which added IEI as a defendant, revised the claim to focus on the omission of the information as to the excessive markups charged by Blinder, Robinson, and withdrew any claim for relief directly against Blinder, Robinson in light of the liquidation proceeding. On June 20, 1991, defendants answered the complaint, denying all allegations of unlawful practices and raising several affirmative defenses.
Finally, on November 12, 1991, plaintiffs moved, pursuant to Fed.R.Civ.P. 23(d), to add additional class representatives, to modify the definition of the class securities, 6 and to authorize notice to individual class members. These modifications did not expand the scope of the class claims, but were designed to respond to the ambiguities which we had noted in Hoxworth I. In particular, plaintiffs continued to define the class to include all persons who had purchased or sold the class securities through Blinder, Robinson between September 1, 1984 and December 31, 1986. Although defendants did not oppose the proposed modifications, which the district court adopted in an order dated December 12, 1991, IEI reasserted its opposition to the district court's original class certification order in responding with regard to class notice.
On August 1, 1991, the district court, in an effort to move the case towards trial, entered a scheduling order fixing a discovery deadline of November 15, 1991 and a trial date of February 3, 1992. The order directed defendants to file a pretrial memorandum no later than January 20, 1992.
On September 17, 1991, the defendants' counsel, James D. Crawford of the law Meanwhile, plaintiffs sought to complete discovery, but defendants were not cooperative. On September 25, 1991, plaintiffs served a deposition subpoena on IEI concerning the corporation's financial operations and its relationship with its subsidiaries, including Blinder, Robinson. IEI failed to designate any of its officers or directors to testify on its behalf and it did not produce the documents identified in the subpoena. On October 28, 1991, the day before the deposition was scheduled, IEI's in-house counsel, Kalmon Glovin, telephoned the court requesting a postponement, which the court denied.
firm of Schnader, Harrison, Segal & Lewis, moved to withdraw from the case because of a fee dispute. Defendants did not object to this withdrawal, provided that the court would stay action on all pending matters for sixty days to permit them to obtain substitute counsel. Plaintiffs, on the other hand, objected to the request on the ground of prejudice, noting that the case had been pending for more than three years. Nonetheless, the district court granted Crawford's motion to withdraw on October 18, 1991. It did not, however, alter its previous scheduling order and it directed the defendants to "obtain substitute counsel whose appearance shall be entered forthwith." App. at 308.
When Meyer Blinder and Glovin appeared the next morning, they designated Stephen Kohn, one of IEI's directors, pursuant to Fed.R.Civ.P. 30(b)(6) to testify in response to the subpoena. However, Kohn stated...
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