IN RE EQUITY FUNDING CORP. OF AM. SECURITIES LITIGATION
| Decision Date | 25 April 1974 |
| Docket Number | No. 142.,142. |
| Citation | 375 F. Supp. 1378 |
| Parties | In re EQUITY FUNDING CORPORATION OF AMERICA SECURITIES LITIGATION. |
| Court | Judicial Panel on Multidistrict Litigation |
Before ALFED P. MURRAH, Chairman, and JOHN MINOR WISDOM, EDWARD WEINFELD, EDWIN A. ROBSON, WILLIAM H. BECKER, JOSEPH S. LORD, III, and STANLEY A. WEIGEL, Judges of the Panel.
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The Panel having found, upon the basis of the papers submitted and the hearing held, that the actions listed on the attached Schedule A involve common questions of fact and that transfer of these actions to the Central District of California for coordinated or consolidated pretrial proceedings would serve the convenience of the parties and witnesses and would further the just and efficient conduct of the litigation,
It is ordered that all actions on the attached Schedule A pending in districts other than the Central District of California be, and the same hereby are, transferred to the Central District of California and, with the consent of that court, assigned to the Honorable Malcolm M. Lucas for coordinated or consolidated pretrial proceedings, pursuant to 28 U.S.C. § 1407, with the actions pending in that district and listed on Schedule A.
A full opinion and order embodying the above decision will be filed upon final preparation.
OPINION AND ORDERALFRED P. MURRAH, Chairman, delivered the opinion of the Panel, in which EDWIN A. ROBSON, WILLIAM H. BECKER and JOSEPH S. LORD, Judges of the Panel, joined.
This complex multidistrict litigation arises out of the collapse of Equity Funding Corporation of America, a diversified financial services company based in California. In the latter part of March 1973 trading in Equity Funding's securities was halted by the New York Stock Exchange and the Securities and Exchange Commission. Soon thereafter, in an action brought by the SEC in the Central District of California, Equity Funding consented to a decree enjoining the continuation of an alleged scheme to defraud investors. And the company is now in Chapter X bankruptcy in that district.1 Numerous civil actions, involving in some respects the alleged fraud, have been filed in different federal district courts throughout the country. The majority of these actions are pending either in the Central District of California2 or the Southern District of New York.3
Defendant Seidman & Seidman, joined by numerous other parties, has moved to transfer all actions to the Central District of California for coordinated or consolidated pretrial proceedings.4 Practically all of the parties to the litigation favor coordinated or consolidated pretrial proceedings under Section 1407 in some form or to some extent. Some of the parties, however, insist on bifurcation of the litigation and transfer of certain groups of cases to the Southern District of New York where most of the actions comprising those groups are now pending.
The matter has been extensively briefed and twice orally argued. The real issue confronting us is whether all the litigation should be transferred to a single district and assigned to a single judge under Section 1407 or whether the litigation should be bifurcated with two transferee forums. For reasons which we shall articulate, we have decided that the convenience of the parties and witnesses and the just and efficient conduct of the litigation can best be served by transfer of all of the litigation to the Central District of California and, with the consent of that court, assigned to the Honorable Malcolm M. Lucas for coordinated or consolidated pretrial proceedings pursuant to Section 1407.
A classification of the claims asserted in the litigation is essential to an understanding of the considerations which prompt us to transfer all actions to one district and assign them to one judge for Section 1407 treatment.
The primary or underlying fraud claims relate to an alleged scheme by Equity Funding and its subsidiaries to inflate assets and earnings by, among other things, creating and selling to reinsurers bogus life insurance policies in order to present to the investing public an image of a successful, growing and prosperous enterprise. The alleged fraud, facilitated by the use of computers, enabled Equity Funding to overstate its assets and record non-existent assets, which eventually appeared in its financial statements. The defendants in the fraud actions typically include Equity Funding, its officers, directors and subsidiaries, and its accountants and auditors who prepared the financial statements and reports which concealed the alleged fraud.
These claims are asserted by purchasers of Equity Funding's securities against parties who allegedly possessed material, non-public information concerning Equity Funding and traded in the securities of the corporation without making such information generally available to the investing public. Plaintiffs typically allege that in March 1973 a former Equity Funding employee informed a securities analyst for a research oriented brokerage firm that a massive fraud was being perpetrated at the company; that the analyst conducted his own investigation and passed the information he gathered to certain investors and agents for investors in Equity Funding's securities; and that those in possession of this inside information used it to their advantage until trading in all securities of Equity Funding was suspended. Plaintiffs also necessarily allege the facts of the primary or underlying fraud.
Some of the complaints which contain trading or "tippee" claims name as defendants not only parties which allegedly traded securities when in possession of inside information but also party-defendants to the primary fraud claims.
Some of the complaints contain a single claim for relief based upon allegations of both primary fraud and trading on inside information.
These claims are asserted by purchasers of debentures of Equity Funding and focus upon the financial statements in the separate registration statements and prospectuses disseminated with respect to the public offerings of the debentures. The claims necessarily contain allegations relating to the underlying fraud at Equity Funding.
Claims for rescission and damages are made arising out of Equity Funding's acquisition of Bankers National Life Insurance Company and Liberty Savings & Loan Association. Plaintiffs were stockholders in the corporations at the time of the acquisitions and received Equity Funding stock in exchange for their shares. They allege that the financial statements used by Equity Funding in connection with the acquisitions were false and misleading. But included in plaintiffs' claim for rescission are allegations concerning facts relevant to the primary fraud.
This action involves a contractual dispute between duPont, Glore Forgan and Federated Income and Private Placement Fund concerning the sale of Equity Funding debentures.5 DuPont, Glore Forgan alleges that Federated Income breached its contract to purchase the debentures and misrepresented its willingness to pay for them under all circumstances. Clearly, this action has nothing in common with the other actions and since no purpose would be served by transfer under Section 1407, it should remain in the Southern District of New York.
Independent Investor Protective League has filed two actions in the Southern District of New York against the indenture trustees of the Equity Funding debentures, alleging that the trustee violated its fiduciary duties to protect the rights of the bondholders.6 Plaintiff is opposed to transfer of either of the actions. The complaints on their face, however, raise questions of fact common to the other actions and we find that these parties will to some extent benefit from participation in the coordinated or consolidated pretrial program in California.
Individuals who purchased Equity Funding securities before trading was suspended have filed actions against their brokers and representative agents alleging violations of Section 10(b) of the Securities and Exchange Act of 1934 and Rule 10b-5 promulgated thereunder.7 These actions necessarily involve the primary fraud at Equity Funding and, in order to eliminate the possibility of duplicative discovery and inconvenience to the parties and witnesses, they should be transferred to the Central District of California and placed under the general supervision of the transferee judge.8 If separate treatment is warranted, however, plaintiffs may address these arguments to the transferee judge who may fashion a pretrial program to suit the needs of these plaintiffs and, when appropriate, recommend to the Panel that the actions be remanded to their respective transferor courts for further proceedings.
Pursuant to pretrial orders entered in the Central District of California and the Southern District of New York, a set of unified and consolidated complaints have been filed. Plaintiffs in California have filed a single unified and consolidated complaint containing requests for definition of four separate classes encompassing the primary fraud, trading or tippee, underwriting and rescission claims as described earlier.9 In the Southern District of New York, four separate consolidated class action complaints have been filed.10 The alleged classes as defined in the New York complaints overlap and conflict with the class allegations in the California consolidated complaint.11
The parties favoring bifurcation suggest that the primary fraud...
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In re Equity Funding Corp. of America Securities Litigation
...of California and placed under the general supervision of the transferee judge." In re Equity Funding Corporation of America Securities Litigation, 375 F.Supp. 1378, 1381-82 (Jud.Pan.Mult. Lit.1974), (citations Prior to the consolidation and transfer of the claims to this Court pursuant to ......
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In re Equity Funding Corp. of Amer. Sec. Litigation
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