Hoxworth v. Blinder, Robinson & Co., Inc.

• Court: United States Courts of Appeals. United States Court of Appeals (3rd Circuit)
• Citation: 903 F.2d 186
• Decision Date: 09 May 1990
• Docket Number: Nos. 89-1437,s. 89-1437
• Parties: , Fed. Sec. L. Rep. P 95,229, 16 Fed.R.Serv.3d 774, RICO Bus.Disp.Guide 7474 HOXWORTH, Dan H., Hoxworth, Louise A., on behalf of themselves and all others similarly situated v. BLINDER, ROBINSON & CO., INC., Blinder, Meyer, Appellants in 89-1437. GAVRON, Bradley, on behalf of himself and all others similarly situated v. BLINDER, ROBINSON & CO., INC. and Blinder, Meyer and Cox, John J., Appellants in 89-1438. BROWNSTEIN, Barry, on behalf of himself and all others similarly situated v. BLINDER, ROBINSON & CO., INC. and Blinder, Meyer, Appellants in 89-1439. Appeal of BLINDER INTERNATIONAL ENTERPRISES, INC., Appellants in 89-1440, 89-1441, 89-1442. through 89-1442.

Page 186

903 F.2d 186 58 USLW 2683, Fed. Sec. L. Rep. P 95,229,
16 Fed.R.Serv.3d 774,
RICO Bus.Disp.Guide 7474 HOXWORTH, Dan H., Hoxworth, Louise A., on behalf of
themselves and all others similarly situated
v.
BLINDER, ROBINSON & CO., INC., Blinder, Meyer, Appellants in
89-1437.
GAVRON, Bradley, on behalf of himself and all others similarly situated
v.
BLINDER, ROBINSON & CO., INC. and Blinder, Meyer and Cox,
John J., Appellants in 89-1438.
BROWNSTEIN, Barry, on behalf of himself and all others
similarly situated
v.
BLINDER, ROBINSON & CO., INC. and Blinder, Meyer, Appellants
in 89-1439.
Appeal of BLINDER INTERNATIONAL ENTERPRISES, INC.,
Appellants in 89-1440, 89-1441, 89-1442. Nos. 89-1437 through 89-1442. United States Court of Appeals,
Third Circuit. Argued July 12, 1989.
Decided May 9, 1990.

Page 188

J. Dennis Faucher (argued), Michael R. Lastowski, Ellen Meriwether, Saul, Ewing, Remich & Saul, Philadelphia, Pa., Marvin A. Miller, Patrick E. Cafferty, Chertow & Miller, Chicago,Ill., Stephen A. Whinston, Stephen D. Ramos, Berger & Montague, P.C., Philadelphia, Pa., Michael

Page 189

J. Freed, Kenneth A. Wexler, Much Shelist Freed Denenberg Ament & Eiger, P.C., Chicago, Ill., Don R. Lolli, Beckett & Steinkamp, Kansas City, Mo., Stuart H. Savett, Kohn, Savett, Klein & Graf, Philadelphia, Pa., David B. Zlotnick, David B. Zlotnick & Associates, Bala Cynwyd, Pa., Donald B. Lewis, Philadelphia, Pa., for appellees.

James D. Crawford (argued), Gregg V. Fallick, Schnader, Harrison, Segal & Lewis, Philadelphia, Pa., for appellants in Nos. 89-1440, 89-1441, 89-1442.

James D. Crawford (argued), Sherry A. Swirsky, Gregg Vance Fallick, Daniel Cantu-Hertzler, Elizabeth F. Warner, Schnader, Harrison, Segl & Lewis, Philadelphia, Pa., for appellants in Nos. 89-1437, 89-1438, 89-1439.

Jane L. Dalton, Amy E. Wilkinson, Duane, Morris & Heckscher, Philadelphia, Pa., for amicus curiae Lillian Blinder.

Before HIGGINBOTHAM, BECKER and NYGAARD, Circuit Judges.

OPINION OF THE COURT

BECKER, Circuit Judge.

This is an appeal from an extremely broad preliminary injunction designed to protect a potential future damages remedy in a class action alleging securities fraud and civil RICO violations. Plaintiffs are a class of investors allegedly defrauded by defendants in connection with plaintiffs' purchases and sales of various penny stocks. Defendant Blinder, Robinson & Co. ("Blinder, Robinson") is the securities dealer through which plaintiffs purchased and sold their stock, and defendant Meyer Blinder is the President of both Blinder, Robinson and Blinder International Enterprises, Inc. ("Blinder International"), the corporate parent of Blinder, Robinson. The preliminary injunction ordered Meyer Blinder to repatriate some $11 million dollars transferred abroad during the course of this litigation, over $4 million of which belongs to Blinder International, which is not a party in the litigation. Moreover, it prohibits defendants, inter alia, from transferring any funds outside the ordinary course of business and from transferring any funds outside the country without prior approval by the district court.

Defendants raise a host of claims on appeal. Most fundamentally, they argue that a district court lacks the power to protect a potential future damages remedy by a preliminary injunction encumbering assets, even assuming that the usual criteria for obtaining a preliminary injunction are met. Although we agree that such a remedy must be be reserved for extraordinary circumstances, we reject defendants' argument that such relief can never be appropriate.

Defendants also raise various narrower arguments as to why the injunction must be set aside. Many of these we reject, and some we decline to consider at this juncture. However, we agree with defendants that the injunction suffers at least one fatal defect: the district court made no attempt to ensure that the value of assets encumbered bore some reasonable relationship to the likely amount of plaintiffs' expected recovery. For this reason, we conclude that the preliminary injunction must be set aside.

Defendants also ask us to reverse the district court's order certifying a class of allegedly defrauded investors, especially because the district court did so without any findings or explanation. The class certification order, however, is not itself reviewable before a final merits judgment. Moreover, we conclude that we cannot review the class certification order at this time under the doctrine of pendent appellate jurisdiction, because the preliminary injunction must be vacated regardless of whether or not the class was correctly certified.

Finally, we briefly touch upon two ancillary issues raised in this appeal. We conclude that the district court abused its discretion in waiving the security requirement of Fed.R.Civ.P. 65(c), and we decline to address whether the district court exceeded the scope of its authority to enjoin Blinder International, which is not yet a defendant in this case.

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I. FACTS AND PROCEDURAL HISTORY

A. Background

Defendant Meyer Blinder is the Chairman, Chief Executive Officer, and President of defendant Blinder, Robinson, a Colorado-based securities firm. Blinder, Robinson is a wholly owned subsidiary of Blinder International, which is also incorporated under Colorado law. Blinder International, which was not a party in the district court proceedings, derives an "overwhelming" percentage of its revenues from Blinder, Robinson, App. 633, although Blinder International holds at least eight different affiliates or subsidiaries. Meyer Blinder and his wife Lillian together own about 52% of Blinder International, the remainder of which is held by some 9000 public shareholders. Meyer Blinder is also the President of Blinder International.

Blinder, Robinson specializes in underwriting, brokering and trading "penny stocks," certain low-priced, high risk equity securities for which there is often no well-developed trading market. Blinder, Robinson was the sole underwriter for about thirteen of the securities at issue in this litigation and was the largest market-maker for aftermarket trading in all but one. ¹ Blinder, Robinson also executes retail trades, usually as a principal (trading directly with its individual customers), but sometimes as an agent (arranging trades between its customers and charging commissions for that service).

Plaintiffs Dan and Louise Hoxworth, Bradley Gavron, and Barry Brownstein all purchased penny stocks from Blinder, Robinson during 1985. Between January and April of 1988, they filed three separate, but substantially similar, actions in the district court claiming securities fraud. Each complaint listed both Meyer Blinder and Blinder, Robinson as defendants, but none listed Blinder International. ² The Hoxworth plaintiffs later moved to amend their complaint pursuant to Fed.R.Civ.P. 15(a) to add Blinder International as a defendant. This motion remained pending when the preliminary injunction was issued.

Plaintiffs alleged that Blinder, Robinson had defrauded them in violation of both section 12(2) of the Securities Act of 1933 ("the 1933 Act") ³ and section 10(b) of the Securities Exchange Act of 1934 ("the 1934 Act"). ⁴ They seek to hold Meyer Blinder jointly and severally liable as a "controlling

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person" under section 15 of the 1933 Act ⁵ and section 20(a) of the 1934 Act. ⁶ In addition, plaintiffs pleaded claims under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. Secs. 1961-1968, with the alleged securities law violations serving as predicate offenses. Finally, plaintiffs pleaded pendent claims for violations of various provisions of the Pennsylvania Securities Act, 70 Pa.Stat.Ann. Sec. 1-101 et. seq., and for breach of common law fiduciary duties.

The three actions were consolidated for purposes of pretrial proceedings. Collectively, plaintiffs sought certification, pursuant to Fed.R.Civ.P. 23(b)(3), of a class of plaintiffs defined as all persons who purchased or sold any of roughly eighteen different securities through Blinder, Robinson between September 1, 1984 and December 31, 1986. ⁷ The named plaintiffs themselves collectively lost under $7300 from their trading. On May 19, 1989, without findings or explanation, the district court certified the requested class.

On January 12, 1989, plaintiffs moved for a preliminary injunction freezing Meyer Blinder's assets and prohibiting Blinder, Robinson from making transfers out of the ordinary course of business without notice to them and prior court approval. In May, 1989, the district court conducted a four-day evidentiary hearing on the preliminary injunction motion.

B. The Evidence at the Preliminary Injunction Hearing

At the hearing, plaintiffs presented evidence of two allegedly fraudulent or misleading courses of conduct routinely followed by Blinder, Robinson brokers. The first involved Blinder, Robinson's failure to disclose to its customers its allegedly excessive markups and markdowns. The National Association of Securities Dealers (NASD), a self-regulating organization of which Blinder, Robinson is a member, has promulgated guidelines for the maximum markups and markdowns that a broker-dealer may charge customers with whom it trades as a principal.

Plaintiffs' expert testified that he had analyzed Blinder, Robinson's trading activity in each of two class securities, Telstar Satellite Corp. and Touchstone Software Corp., for selected periods of time within the class period--January 1986 for Telstar Satellite and September 4, 1984 through

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September 6, 1984 for Touchstone Software. The analysis was done by comparing prices customers actually paid for those securities, derived from Blinder, Robinson's stock activity records, against the prevailing market price, derived from Blinder, Robinson's pricing sheets. Based on those comparisons, the expert testified that Blinder, Robinson's markups for those...