Zeidman v. J. Ray McDermott & Co., Inc.

Decision Date27 July 1981
Docket NumberNo. 78-2722,78-2722
Citation651 F.2d 1030
PartiesFed. Sec. L. Rep. P 98,265 Fred ZEIDMAN and Steven Youngelson, Plaintiffs-Appellants, v. J. RAY McDERMOTT & CO., INC., et al., Defendants-Appellees. . Unit A
CourtU.S. Court of Appeals — Fifth Circuit

Thomas F. Jordan, New Orleans, La., Lipper, Lowey and Dannenberg and Burton L. Knapp, Richard B. Dannenberg, New York City, Newman, Shook & Newman, Frank G. Newman, Dallas, Tex., for plaintiffs-appellants.

Milling, Benson, Woodward, Hillyer & Pierson, John C. Cristian, W. Richard House, Jr., New Orleans, La., White & Case, Paul J. Bschorr, Richard W. Reinthaler, Patricia Nicely, New York City, for defendants-appellees.

Appeals from the United States District Court for the Eastern District of Louisiana.

Before THORNBERRY, RANDALL and TATE, Circuit Judges.

RANDALL, Circuit Judge:

This appeal is brought by the two named plaintiffs in a suit filed as a class action but never certified as such. The court declined to certify the class because of the absence of sufficient evidence to meet the numerosity requirement of Federal Rule of Civil Procedure 23(a)(1). The plaintiffs submitted additional evidence on numerosity shortly after the court's refusal to certify the class, but on the same day as the plaintiffs submitted this evidence the defendants tendered to the plaintiffs the full amount of their personal claims. The district court did not consider the additional evidence submitted by the plaintiffs; instead, the court dismissed the entire action for mootness on the basis of the defendants' tender in the absence of a certified class.

The plaintiffs first argue that the district court abused its discretion by declining to find Rule 23(a)(1) to have been satisfied with respect to their purported classes (groups consisting of most non-professional and non-institutional investors who sold certain nationally-traded stock and calls within given periods of time) on the basis of evidence before the court at the time of its decision (an estimate of the total number of shares and calls traded during the relevant periods). The plaintiffs then argue that the district court erred by refusing to consider their additional evidence on the question of numerosity; they contend that the action should not have been dismissed for mootness upon the defendants' tender of their personal claims.

Based on our reading of the district court's initial decision, which we find left the plaintiffs' motion for class certification pending before the court, we hold that the district court did not abuse its discretion by declining at that time to certify the class, but we hold that the court did err by dismissing the case and refusing to consider the plaintiffs' additional evidence. We reverse the judgment of the district court dismissing this case and remand the case to the district court for proceedings consistent with this opinion.

I. THE PROCEDURAL BACKGROUND LEADING TO THIS APPEAL

Fred Zeidman and Steven Youngelson instituted this suit on August 26, 1977 against J. Ray McDermott & Co., Inc. (McDermott), Smith Barney, Harris Upham & Co., Inc. (Smith Barney), and four of McDermott's principal officers. The litigation arises out of a highly publicized tender offer contest for control of Babcock & Wilcox Co. (B&W) that took place in mid-1977 between McDermott (whose investment banker was Smith Barney) and United Technologies Corp. (UTC). During the battle for control of B&W, Zeidman sold (on August 8) 1,000 shares of B&W common stock and Youngelson sold (on August 9) four 100-share call options for B&W common stock; both plaintiffs sold their securities at a price substantially below that eventually offered by McDermott in its final and successful tender offer.

Suing on behalf of themselves and other investors who sold B&W stock and options during this period, the plaintiffs alleged in their complaint that the defendants had engaged, during the course of the tender offer contest, in an unlawful scheme to manipulate downward the market price of B&W securities by issuing false and misleading information. According to the plaintiffs, the purpose of this alleged scheme was to frustrate a competing tender offer previously made by UTC, to coerce the B&W Board of Directors into recommending a subsequent McDermott tender offer, and eventually to effect a takeover by McDermott of B&W.

Since this appeal involves the denial of class action certification and not the merits of the plaintiffs' claims, we need not examine these allegations in any great detail. However, certain dates and events in the plaintiffs' complaint form the limits of the class that the plaintiffs seek to represent and are therefore relevant at this time.

The illegal scheme alleged by the plaintiffs begins on March 30, 1977; the plaintiffs allege that open market purchases begun by McDermott on that date were a tender offer within the meaning of section 14(d) of the Securities Exchange Act of 1934 (the 1934 Act), but that McDermott made no attempt to comply with section 14(d) (i. e., to file a Schedule 13D statement in accordance with section 13(d) of the 1934 Act) at that time. The plaintiffs acknowledge that McDermott did submit a Schedule 13D statement on May 11, 1977, and that McDermott amended that statement on May 16; however, the plaintiffs allege that both the original statement and the amendment were materially false and misleading because they failed to disclose the true purpose of McDermott's substantial open market purchases of B&W stock. On August 9, 1977, Dow Jones reported in a Broad Tape release that McDermott had denied reports that it might make a tender offer for B&W stock. The plaintiffs allege that this release was materially misleading, since McDermott in fact was planning to make a tender offer; the plaintiffs further allege that the release was based on information provided to a Dow Jones reported by McDermott's chief public relations officer, and that McDermott made no attempt to correct the misleading impression created by the release. Three days after this news report on August 12, 1977 McDermott formally announced a tender offer for B&W stock. At this point an open tender offer battle commenced, with McDermott and UTC quickly outbidding each other until McDermott made its successful bid on August 23.

On November 25, 1977, the plaintiffs moved to certify their suit as a class action. Their motion requested certification with respect to a class consisting of the plaintiffs and all other persons similarly situated "who were between March 29, 1977 and August 14, 1977 beneficial owners of Babcock & Wilcox Company shares or Babcock & Wilcox Company calls and who sold such shares or calls between March 29, 1977 and August 14, 1977" and who sustained losses on such sales by reason of the illegal scheme alleged in the plaintiffs' complaint. This class was subsequently divided by the plaintiffs into two subclasses: first, those investors who sold their B&W stock or calls between March 29 and August 8 (represented by Youngelson); and second, those investors who sold their B&W stock or calls between August 9 and August 11 (represented by Zeidman). The event that divides these two classes is the Dow Jones Broad Tape release of August 9, on which only the Zeidman class is alleged to have relied.

In February 1978 the parties submitted memoranda addressing the question of class certification. These memoranda discuss each of the several prerequisites for a class action under Federal Rule of Civil Procedure 23. As explained infra, however, this appeal involves only one of those prerequisites: Rule 23(a)(1)'s requirement that the class be "so numerous that joinder of all members is impracticable." Neither the plaintiffs nor the defendants dealt with this particular requirement in any great detail in their memoranda. In order to meet the numerosity requirement of Rule 23(a)(1), the plaintiffs did no more than to allege the numbers of shares that were traded during the time periods involved; in particular, the plaintiffs asserted that almost 6,000,000 B&W shares were sold between March 30 and August 8, 1977, and that approximately 666,000 shares of B&W stock and at least 14,100 "shares of B&W underlying calls" were sold between August 9 and August 11, 1977. In response, the defendants argued that the important figure was not the total number of shares traded, but was instead the total number of investors who made those trades, since only the latter figure represents the total number of potential plaintiffs. The defendants also argued that certain classes of people who sold shares or calls during this period could not be represented by the named plaintiffs; in particular, the defendants sought to exclude arbitrageurs and other professional or institutional investors, persons who exercised rather than sold their calls, persons who sold calls which were to expire during the alleged class period, and persons whose "reliance and investment motives were different" from those of the plaintiffs.

The district court issued its decision on the class certification question on June 28, 1978. The court found that each prerequisite other than numerosity had been satisfactorily established by the plaintiffs, but that there was insufficient evidence in the record to determine whether the numerosity requirement had been met. 1 While the court did not decide the numerosity issue, however, its opinion did substantially define that issue for the parties by narrowing the classes which the plaintiffs sought to represent. Most importantly, the court held that neither named plaintiff could represent "the arbitrage community or any large institutional or professional investor," since such parties' "sophistication, access to information and resources" differentiated their cases from those of the named plaintiffs. The court also excluded all holders of B&W calls that expired during the class period, for those holders would have had to...

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