Viatron Computer Systems Corp. Litigation, In re, s. 79-1351

• Citation: 614 F.2d 11
• Decision Date: 22 January 1980
• Docket Number: 79-1452,Nos. 79-1351,s. 79-1351
• Parties: Fed. Sec. L. Rep. P 97,263 In re VIATRON COMPUTER SYSTEMS CORPORATION LITIGATION. Appeal of ARTHUR ANDERSEN & CO.
• Court: U.S. Court of Appeals — First Circuit

Page 11

614 F.2d 11

Fed. Sec. L. Rep. P 97,263

In re VIATRON COMPUTER SYSTEMS CORPORATION LITIGATION Appeal of ARTHUR ANDERSEN & CO.

Nos. 79-1351, 79-1452.

United States Court of Appeals First Circuit.

Argued Nov. 7, 1979.

Decided Jan. 22, 1980.

George H. Lewald, Boston, Mass., with whom Thomas G. Dignan, Jr., William F. McCarthy, Steven T. Hoort, Ropes & Gray, Boston, Mass., Charles W. Boand, and Wilson & McIlvaine, Chicago, Ill., were on brief for appellant.

Jared Specthrie, New York City, with whom Stephen Moulton, Boston, Mass., Jerome M. Congress, Craig L. Tessler, Milberg, Weiss, Bershad & Specthrie, New York City, and Moulton & Looney, Boston, Mass., were on brief, for appellees.

Before COFFIN, Chief Judge, BOWNES, Circuit Judge, CLARKE, Jr., District Judge. ^*

COFFIN, Chief Judge.

This appeal arises from five consolidated class actions brought on behalf of the purchasers of certain securities of Viatron Computer Systems Corp. (Viatron), a Massachusetts corporation, after the filing of a bankruptcy petition by Viatron in 1971. Read together, the complaints allege violations of Section 11 of the Securities Act of 1933, 15 U.S.C. § 77k, and Section 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), in the issuance of documents which were allegedly materially misleading with respect to Viatron's prospects for survival. Among those named as defendants are Viatron's officers and directors, the underwriters of its convertible subordinated debenture and stock offerings, a consulting and engineering firm retained by the underwriters in connection with their due diligence inquiries, and the appellant, Arthur Andersen & Co. (Andersen), an auditing and accounting firm which certified the financial statements in the prospectus.

Following certification of two classes pursuant to Rule 23(b)(3) of the Federal Rules of Civil Procedure, a joint notice of pendency of the class actions was approved by the court and mailed to all transferees of record of the relevant Viatron securities in April of 1974. The notice was also published in the Wall Street Journal. Since the mailed notice approved by the district court was delivered only to transferees of record, it was not sent directly to class members who were beneficial purchasers of Viatron securities, that is, who purchased securities for which the record title was held in the "street names" of nominee brokerage houses, banks and other entities. ¹ Instead, the court order provided that additional copies of the notice could be obtained by the street name nominees for forwarding to beneficial purchasers. At the time that the court approved this notice, appellant Andersen explicitly approved both its form and method of distribution.

Five years later, after extensive discovery consisting of substantial document production as well as over one hundred days of depositions, counsel for the plaintiffs and the underwriter defendants agreed to a proposed settlement, subject to court approval, whereby the underwriters would pay $1,850,000 to be divided by the two main classes in full satisfaction of any liability which the underwriters might have. Counsel for the plaintiffs then applied to the district court for approval of both the settlement and the proposed method of distributing notice of it to the class members.

The method proposed for sending notice of the partial settlement to the class members was similar to that employed in distributing the 1974 notice in that it provided for mailing of individual notice to all transferees of record. It differed, however, in that the individual notices to be mailed to street names who might be nominees for unknown beneficial purchasers included a request that the nominee either forward copies of the notice to the beneficial purchasers or provide plaintiffs' counsel with their names and addresses. Plaintiffs' counsel further proposed that the settling underwriter defendants who held record title as nominees be directed by the court to submit "reasonably available" names and addresses of their beneficial purchaser customers, who could then be provided with individual notice.

On May 4, 1979, the district court held a hearing for the purpose of determining whether it should approve the partial settlement and notice pursuant to Rule 23(e). At this hearing, appellant Andersen objected to the proposed notice and method of distribution. In particular, Andersen claimed that the beneficial purchasers were entitled to individual notice and that the proposed method of notifying them was not the "reasonable effort" required by Rule 23, as interpreted in Eisen v. Carlisle & Jacquelin, 417 U.S. 156, 94 S.Ct. 2140, 40 L.Ed.2d 732 (1974) (Eisen IV ). Andersen also claimed that the contents of the notice were inadequate.

The district court rejected Andersen's arguments and approved the proposed notice of partial settlement. The court did, however, order that the plaintiffs' counsel "shall take such reasonable steps as the court determines are necessary to identify and provide notice to beneficial purchasers and shall periodically report to the court thereon." ² Andersen still regarded the order as unsatisfactory and brought this appeal.

Determining what efforts are required in order to attempt to provide notice to beneficial purchasers of securities held by street name nominees is far from a simple exercise. The only appellate court to attempt to make such a determination found that "reasonable efforts" must be made to send individual notice to such purchasers, See In Re Franklin National Bank Securities Litigation, 574 F.2d 662 (2d Cir. 1978) (Franklin I ), Modified, 599 F.2d 1109 (2d Cir. 1979) (Franklin II ).

In this particular case, however, we need not reach the notice issue. Plaintiffs-appellees argue that Andersen does not have standing to appeal the court order approving the settlement notice and agreement. We find this argument persuasive and dispositive of this appeal. ³

A nonsettling defendant does not ordinarily have standing to object to a court order approving a partial settlement since the nonsettling defendant is generally not affected by the settlement. In Re Beef Industry Antitrust Litigation, 607 F.2d 167 at 171 (5th Cir. 1979); Seiffer v. Topsy's Int'l, Inc., 70 F.R.D. 622, 631 n.11 (D.Kan.1976); 3 Newberg on Class Actions § 5660b at 564-65 (1977). In this case, Andersen seeks to avoid this general rule by limiting its objections to the method of distribution and form of the notice, rather than the actual merits of the settlement. With regard to the notice and its method of distribution, Andersen asserts two reasons in support of its claim that it has standing.

First, Andersen notes that upon completion of this suit, it will be able to raise a res judicata bar to any future proceedings brought against it on the same issues by class members. See Bersch v. Drexel Firestone, Inc., 519 F.2d 974, 996 (2d Cir.), Cert. denied sub nom. Bersch v. Arthur Andersen & Co., 423 U.S. 1018, 96 S.Ct. 453, 46 L.Ed.2d 389 (1975). If the notice to class members is deficient, however, then those members of the class who should have been given notice of the prior suit but were not might avoid the preclusive effect of this suit. See Bogard v. Cook, 586 F.2d 399, 408-09 (5th Cir. 1978). See generally, Note, Collateral Attack on the Binding Effect of Class Action Judgments, 87 Harv.L.Rev. 589 (1974). Thus, Andersen argues, if it is correct in its claim that the notice of partial...