harm to the corporation. That will be plaintiffs' burden at trial.
This court recognizes the expansion of securities fraud remedies under Rule 10b-5, since the Diamond decision. Freeman, 584 F.2d at 195. However, these remedies do not recognize a cause of action for a derivative plaintiff. The state is not precluded from regulation in this area. See Securities Exchange Act of 1934, § 28, 15 U.S.C. § 78bb. Defendants argue that the possibility of double liability weighs against the creation of such a cause of action. See Freeman 584 F.2d at 195. But see Diamond, 301 N.Y.2d at 86, 248 N.E.2d at 715. However, the court recognizes the possibility of two distinct harms here, one to the corporation and one to the shareholders. See Bateman Eichler, Hill Richards v. Berner, 472 U.S. 299, 105 S. Ct. 2622, 2630, 86 L. Ed. 2d 215 (1985). In any event that question need not be resolved at the motion to dismiss stage. The court finds that a derivative cause of action against corporate officers for trading on the basis of insider information does state a claim for which a derivative plaintiff may attempt to show damages.
C. Rule 23.1 Requirements
As a final note the court notes that Individual Defendants have moved to dismiss the Complaint for procedural defects under Fed. R. Civ. P. 23.1. The purpose of this rule is to ensure that a derivative claim has basis in fact, and is not a strike suit. Surowitz v. Hilton Hotels Corp., 383 U.S. 363, 15 L. Ed. 2d 807, 86 S. Ct. 845 (1966). The Surowitz court held that mere non-compliance with the verification requirement is not grounds for dismissal, "where plaintiff has diligently investigated the possible charges prior to filing the Complaint." Weisfeld v. Spartans Industries, Inc., 58 F.R.D. 570, 577, (S.D.N.Y. 1972). The Seventh Circuit has found the verification requirement to be met where plaintiff's counsel attests to the truth of certain facts in the complaint and attests to information and belief to other elements of the complaint. Hirshfield v. Briskin, 447 F.2d 694 (7th Cir. 1971). In regard to the required allegation of noncollusion, this court sees no hint of collusion on the record. In light of the above, the court will not dismiss Count V of the Complaint, but will require derivative plaintiff to file an affidavit verifying the Complaint and serve it upon Defendants within ten (10) days of this order. Markowitz v. Brody, 90 F.R.D. 542, 549-550 n.2 (S.D.N.Y. 1981); Weisfeld, 58 F.R.D. at 578.
III. Pendent Common Law Claims
Defendants have moved for dismissal of Count II and Count III of the Complaint arguing that these counts are not appropriate for the exercise of pendent jurisdiction, Fed. R. Civ. P. 12(b)(1). Count II alleges common law fraud and deceit and Count III alleges negligent misrepresentation. Defendants' attack on these counts consist of arguments that the counts are not properly maintainable as class actions under Fed. R. Civ. P. 23. For the reasons stated below the court finds that class certification and the exercise of pendent jurisdiction in regard to Count II and Count III are appropriate. Therefore, Defendants' motion to dismiss Count II and Count III is denied.
Pendent jurisdiction is a discretionary doctrine which requires the court to consider "judicial economy, convenience, and fairness." Shaffer v. Board of School Directors, 730 F.2d 910, 911 (3d Cir. 1984) quoting United Mine Workers v. Gibbs, 383 U.S. 715, 726, 16 L. Ed. 2d 218, 86 S. Ct. 1130 (1966). The operative test to apply to pendent jurisdiction questions is whether the state claims are derived "from a common nucleus of fact" as the federal claims. Gibbs, 383 U.S. at 725. In the case at bar the resolution of the class certification motion pertaining to the common law counts is determinative of the pendent jurisdiction question. Rule 23(a) and (b) establish five criteria to be applied to class certification questions. Rule 23(a)
establishes four prerequisites to a class action, which will be referred to as (1) numerosity, (2) commonality, (3) typicality, and (4) adequate representation. Rule 23(b)
adds an additional requirement. The 23(b) requirement applicable in the case at bar is 23(b)(3) which requires that classwide questions of fact or law predominate over individual questions and that a class action be superior to other methods for adjudication of the controversy.
Although a class certification question does not pertain to the merits of a cause of action, but only the requirements of Rule 23, Glictronix Corp. v. American Telephone and Telegraph Co., 603 F. Supp. 552, 584 (D.N.J. 1984), here the court must look far enough to determine if the cause of action survives a motion to dismiss. Defendants basically make a two-pronged attack on the suitability of the common law claims being brought as a class action. Firstly, Defendants argue that common law fraud and misrepresentation require proof of individual reliance. Therefore under Rule 23(b)(3) the court should find that individual fact inquiries into reliance predominate over common classwide questions and deem the class action unmanageable and inappropriate. Secondly, Defendants argue applicable conflicts of law rules require that the law of each plaintiffs' state be applied to plaintiffs' claims. Consequently, this court would have to apply numerous state law fraud doctrines, a task which would be unmanageable and inappropriate. Defendants' arguments will be discussed in order.
B. Questions of Actual Reliance
In analyzing class actions under Rule 10b-5, several federal jurisdictions have found that the presence of individual questions of reliance (or actual reliance) do not preclude a finding that common questions of law and fact predominate. Eisenberg v. Gagnon, 766 F.2d 770, 786 (3d Cir. 1985); Green v. Wolf Corp., 406 F.2d 291, 301 (2d Cir. 1968), cert. denied, 395 U.S. 977, 23 L. Ed. 2d 766, 89 S. Ct. 2131 (1969).
An exception to the reliance argument exists under Rule 10b-5. A rebuttable presumption of reliance arises when a defendant "'fails to disclose material facts which it has a duty to disclose' or misrepresents itself in 'prepared or disseminated' documents." Sharp v. Coopers & Lybrand, 70 F.R.D. 544, 546 (E.D. Pa. 1976) (citations omitted) aff'd 649 F.2d 175 (1981), cert. denied, 455 U.S. 938, 71 L. Ed. 2d 648, 102 S. Ct. 1427 (1982); see also Affiliated Ute Citizens v. United States, 406 U.S. 128, 31 L. Ed. 2d 741, 92 S. Ct. 1456 (1972). Where such a presumption does not arise, separate hearings can be held to determine reliance questions, and the action could proceed as a class action. Sharp, 70 F.R.D. at 547. However in analyzing pendent common law claims for securities fraud, there is a sharp split in authority on whether questions of individual reliance make individual questions predominate. There does not appear to be any common law exceptions to the requirement of individual reliance (analogous to the judicially created Rule 10b-5 exceptions). B.F. Hirsch v. Enright Refining Co., Inc., 751 F.2d 628, 631 (3d Cir. 1984) (applying New Jersey law); see also Tober v. Charnita, 58 F.R.D. 74, 84 (M.D. Pa. 1973). Some courts have dismissed class actions brought under common law fraud theories because of the "actual reliance" requirement. Rosenberg v. Digilog Inc., Fed. Sec. L. Rep. (CCH) P 92,274 at 91,895 (E.D. Pa. 1985). The Rosenberg court allowed class certification for the Rule 10b-5 claim. Id. Some courts have found that the fact that reliance varies with the knowledge and circumstances of the individual investor makes class certification inappropriate for common law fraud claims. In re Consumers Power Co. Securities Litigation, 105 F.R.D. 583, 609 (E.D. MI 1985). These courts have not found the possibility of separate trials on reliance questions to be a viable strategy to maintaining these types of class actions. Tober, 58 F.R.D. at 84. But see Ridings v. Canadian Imperial Bank, 94 F.R.D. 147, 151 (N.D. Ill. 1982) ("If necessary, the court may order separate hearings on the individual questions of reliance after determination of the common questions of law and fact."); In re Fiddler's Wood Bondholders Litigation, No. 83-2340 (E.D. Pa. 1984) (Tr. 19) ("On that aspect, it is my intention to see if we can devise a procedure, perhaps the use of questionnaires, whatever, and for a period of time we will attempt to deal with the common law claims along with the federal securities claim . . ."); Caleb & Co. v. E.I. DuPont de Nemours & Co., Fed. Sec. L. Rep. (CCH) P 92,739 at 93,594 (S.D.N.Y. 1986) ("Consideration of the individual issues can later be decided through a separate trial or through the use of a special master.") (citations omitted); see also Dekro v. Stern Bros. & Co., 540 F. Supp. 406, 418 (W.D. Mo. 1982) ("Nevertheless, this court believes in those instances where reliance is genuinely disputed, the parties and the court should be able to fashion a workable arrangement for trying the issue without destroying the efficacy of class proceedings on other issues.") (citations omitted).
In instances where class certification of pendent state claims went unchallenged, many courts have certified the class of investors for both the federal securities law and common law claims. Eisenberg, 776 F.2d at 774, 786; Harmsen v. Smith, 693 F.2d 932, 937 (9th Cir. 1982), cert. denied, 464 U.S. 822, 104 S. Ct. 89, 78 L. Ed. 2d 97 (1983); Weinberger v. Jackson, 102 F.R.D. 839, 841, 846 (N.D. Cal. 1984); Ridings 94 F.R.D. at 149 & n.2.
Plaintiffs have cited to the court three cases which certified a class on pendent securities fraud claims after explicit consideration of the predominance issue as it pertains to common law fraud claims. The earliest of the cases involved a securities fraud action arising out of the sale of tax exempt bonds issued by Colorado water districts. Dekro, 540 F. Supp. at 409. Defendant allegedly underwrote and resold the bonds without disclosing material facts concerning a development corporation within one of the districts. The development corporation subsequently went bankrupt and the water districts defaulted on their obligations. Id. Plaintiff investors filed a class action under common law and federal securities laws.
On a class action decertification motion, defendants argued that questions of individual reliance and conflicts of laws made the common law claim unsuitable for class action treatment. 540 F. Supp. at 418. The court rejected this argument on the issue of individual reliance. The court found after considering the overlapping nature of the proofs under federal and state claims that judicial economy, the best interests of the parties, fairness, and convenience, indicated that all claims should be heard in one action. Id. A similar position was taken in the case of Fiddler's Wood, at Tr. 19, 20.
In the recent case of Finkel v. O'Brien, the court certified a class action on pendent federal securities claims. No. 85-2539 slip op. at 20-21 (D.N.J. May 23, 1986). In discussing the typicality requirement the court found questions of individual reliance did not render plaintiffs' claims atypical.
Because these acts by defendants, if true would have affected all the class members as well as the named plaintiffs and because defendants are not alleged to have taken any actions that are unique to the named plaintiffs, I find that the typicality requirement is met.
In the case at bar the relevant facts underlying the claims of fraud and negligent misrepresentation consist entirely of reports and news releases issued by ORFA from September, 1983, to January, 1986. Specifically, these reports included ORFA's Form 10-K (fiscal year 1984), Complaint at paras. 25-29; ORFA's 1984 Annual Report, Complaint at paras. 30-35; ORFA's Form 10-Q's (second and third quarter 1985), Complaint at paras. 37, 38; ORFA's Form 8-K (dated December 3, 1985), Complaint at para. 39; and a series of four news releases issued in 1985 and 1986, Complaint at para. 40. These same releases are the gravamen of all of the Plaintiffs' counts for relief including those under Rule 10b-5 and common law.
The elements of fraud under New Jersey law
are (1) material misrepresentation of fact, (2) knowledge of falsity by person making the representation, (3) intent that the misrepresentation be relied on, and (4) reliance in the misrepresentation. B.F. Hircsh, 751 F.2d at 628; Enright v. Lubow, 202 N.J. Super. 58, 493 A.2d 1288 (App. Div. 1985). In considering the type of proofs Plaintiffs will attempt to make based on the above described ORFA releases, it is clear that common issues of fact and law will predominate over individual issues. The Complaint is devoid of any allegations of personal contact or personalized representations to any of the shareholders. Shareholders will attempt to make out their claims on the basis of the alleged deception and falsity of the reports, filed forms, and news releases of ORFA.
The court finds that the questions of actual reliance do not render class treatment of the pendent claims unworkable. There is a limited factual basis for the claims of fraud and misrepresentation in this case. The core elements of the tort of fraud: material misrepresentation, knowledge of falsity, and intent, must be argued on the basis of the identical facts for all the members of the class. Considering the total lack of personal contact between the defendants and class members, the actual reliance argument will not be amenable to significant variation among class members. This court simply does not see actual reliance as an issue requiring such a level of individualized attention that class certification is inappropriate.
It should be noted that varying issues of reliance exist in practically all securities class actions. Even if plaintiff Finkel relied on her stockbroker's advice, that reliance would not be sufficient to defeat class action certification. Indeed, it is typical, rather than atypical, for shareholders to rely on various sources of information including stockbrokers in making investment decisions.