On Appeal from the United States District Court for the Eastern District of Pennsylvania. (D.C. Civil No. 88-00285). (D.C. Civil No. 88-00286). (D.C. Civil No. 88-00307).
Defendants challenge the district court's entry of a default judgment, subsequently assessed in the amount of $73 million, for disregarding certain court orders and for failing to appear at trial. Defendants argue that the district court did not have the authority to impose default as a sanction under Fed. R. Civ. P. 55 and that the court abused its discretion in holding that their behavior warranted such a draconian order. Theyáalso challenge the propriety of the court's orders certifying a class action and declining to order the arbitration of the securities fraud claims that are the subject of this dispute.
FACTS AND PROCEDURAL HISTORY
In 1988, three separate class actions were filed in the United States District Court for the Eastern District of Pennsylvania by Dan and Louise Hoxworth, Bradley Gavron, and Barry Brownstein on behalf of investors who claimed to have been defrauded in connection with the purchase and sale of various "penny stocks." *fn1 The three actions, which were subsequently consolidated for purposes of pretrial proceedings, asserted claims against (1) Blinder, Robinson & Co., áInc. (Blinder, Robinson), a Colorado-based securities dealer through which plaintiffs consummated their stock transactions; (2) Meyer Blinder, the Chairman and President of Blinder, Robinson; and (3) John Cox, the Vice President of Blinder, Robinson. Later, plaintiffs amended their complaint to include a fourth defendant, Intercontinental Enterprises, Inc. á("IEI"), Blinder, Robinson's corporate parent. *fn2 Meyer Blinder is the President of IEI and the owner of 52% of its stock. John Cox is an officer and director of the corporation.
The complaint alleged that Blinder, Robinson defrauded the purchasers and sellers of twenty-one equity securities (the "class securities") in violation of federal and state securities laws, the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961-1968 (1988 & Supp. II 1990), and common law fiduciary duty. The complaint also sought to hold Meyer Blinder, John Cox, and IEI jointly and severally liable for these acts as "control persons" under section 15 of the Securities Act of 1933 *fn3 and section 20(a) of the Securities and Exchange Act of 1934. *fn4
The gravamen of the plaintiffs' complaint as later refined focused on Blinder, Robinson's failure to disclose to its customers its excessive markup policy. *fn5 The National Association of Securities Dealers (NASD), a self-regulating organization of securities brokers of which Blinder, Robinson is a member, promulgates guidelines for the maximum markups that a broker may charge to customers with whom it trades as a principal. The guidelines specify a maximum markup of 5% above the security's prevailing market price, a percentage which the plaintiffs claim Blinder, Robinson substantially exceeded on numerous occasions. Although plaintiffsádid not sue directly on a violation of the NASD guidelines, see Newman v. L.F. Rothschild, Unterberg, Towbin, 651 F. Supp. 160, 162-63 (S.D.N.Y. 1986) (violation of the guidelines does not give rise to private right of action), they proceeded on the theory, inter alia, that the failure to disclose non-compliance with the guidelines was a material omission. The first time this case was before us, we approved the district court's conclusion that this omission was material. See Hoxworth v. Blinder, Robinson & Co., 903 F.2d 186, 200 (3d Cir. 1990) (Hoxworth I).
In that first appeal, taken by defendants from the district court's orders grantingáa preliminary injunction to freeze defendants' assets, we held that plaintiffs had shown a strong likelihood of prevailing on the merits but we vacated the injunction because it was "fatally overbroad." Id. at 211. We declined to address the interlocutory issue of the propriety of the class certification at that time, but we noted that there were certain ambiguities in the definition of the class, which we attributed to the absence of fact findings, and we stated that the parties or the district court could address those issues on remand. See id. at 191 & n.7, 201.
On Remand From Hoxworth I
Following the remand to the district court, the Securities Investors Protection Corporation (SIPC) filed a complaint on July 31, 1990 in the United States District Court for the District of Colorado under the Securities Investors Protection Act of 1970, 15 U.S.C. §§ 78aaa-78lll (1988), seeking the liquidation of Blinder, Robinson. As a result, the Hoxworth action was automatically stayed against Blinder, Robinson pursuant to 11 U.S.C. § 362(a) (1988 & Supp. III 1991), but the class action continuedáagainst the remaining three defendants as control persons of the securities firm. On April 5, 1991, plaintiffs filed an amended consolidated complaint, which added IEI as a defendant, revised the claim to focus on the omission of the information as to the excessive markups charged by Blinder, Robinson, and withdrew any claim for relief directly against Blinder, Robinson in light of the liquidation proceeding. On June 20, 1991, defendants answered the complaint, denying all allegations of unlawful practices and raising several affirmative defenses.
Finally, on November 12, 1991, plaintiffs moved, pursuant to Fed. R. Civ. P. 23(d), to add additional class representatives, to modify the definition of the class securities, *fn6 and to authorize notice to individual class members. These modifications did not expand the scope of the class claims, but were designed to respond to the ambiguities which we had noted in Hoxworth I. In particular, plaintiffs continued to define the class to include all persons who had purchased or sold the class securities through Blinder, Robinson between September 1, 1984 and December 31, 1986. Although defendants did not oppose the proposed modifications, which the district court adopted in an order dated December 12, 1991, IEI reasserted its opposition to the district court's original class certification order in responding with regard to class notice.
On August 1, 1991, the district court, in an effort to move the case towards trial, entered a schedulingáorder fixing a discovery deadline of November 15, 1991 and a trial date of February 3, 1992. The order directed defendants to file a pretrial memorandum no later than January 20, 1992.
On September 17, 1991, the defendants' counsel, James D. Crawford of the law firm of Schnader, Harrison, Segal & Lewis, moved to withdraw from the case because of a fee dispute. Defendants did not object to this withdrawal, provided that the court would stay action on all pending matters for sixty days to permit them to obtain substitute counsel. Plaintiffs, on the other hand, objected to the request on the ground of prejudice, noting that the case had been pending for more than three years. Nonetheless, the district court granted Crawford's motion to withdraw on October 18, 1991. It did not, however, alter its previous scheduling order and it directed the defendants to "obtain substitute counsel whose appearance shall be entered forthwith." App. at 308.
Meanwhile, plaintiffs sought to complete discovery, but defendants were not cooperative. On September 25, 1991, plaintiffs served a deposition subpoena on IEI concerning the corporation's financial operations and its relationship with its subsidiaries, including Blinder, Robinson. IEI failed to designate any of its officers or directors to testify on its behalf and it did not produce the documents identified in the subpoena. On October 28, 1991, the day before the deposition was scheduled, IEI's in-house counsel, Kalmon Glovin, telephoned the court requesting a postponement, which the court denied.
When Meyer Blinder and Glovin appeared the next morning, they designated Stephen Kohn, one of IEI's directors, pursuant to Fed. R. Civ. P. 30(b)(6) to testify in response to the subpoena. However, Kohn stated that he had no knowledge of any of the events referred to in the notice of deposition and that the only person with such knowledge had been fired from IEI four days earlier. Counsel for the plaintiffs suggested that Blinder, as President of the company, would have knowledge of the relevant information, but Blinder refused to be deposed on Fifth Amendment grounds. *fn7 In addition, Glovin was also unable to specify when he would be able to produce the requested documents. On November 14, 1991, plaintiffs moved to compel discovery against IEI and Meyer Blinder under Fed. R. Civ. P. 37(d) for failure to produce documents or to respondáadequately to their deposition subpoena. Only the corporation responded, opposing the plaintiffs' motion in a document signed by Glovin. IEI stated that it could not comply with the discovery requests because it was preoccupied with its obligation to produce documents in connection with the SIPC bankruptcy proceeding in Colorado, and that the only person able to respond to the plaintiffs' requests was Meyer Blinder himself, who continued to assert his Fifth Amendment privilege. IEI also requested that any further discovery be postponed until defendants were able to secure new counsel. The district court denied IEI's request and on November 26, 1991 ordered IEI to produce the necessary documents at its own expense within five days and to identify an IEI official to testify at the deposition within ten days.
None of the three defendants complied with the court's order to file a pretrial memorandum by January 20, 1992. On January 24, 1992, Meyer Blinder filed a pro se motion for a continuance, which the district court denied on January 30, 1992. When IEI failed to comply with the court's November 26, 1991 order requiring production of documents and witness identification, *fn8 plaintiffs moved on January 29, 1992 for a default judgment against IEI and Meyer Blinder pursuant to Fed. R. Civ. P. 37(b)(2)(C). They also served a request for admissions on the defendants, to which only Cox responded.
The motion for a default remained pending when the trial was scheduled to begin on February 3, 1992. On that morning, Steven Mathes, of Hoyle, Morris & Kerr, stated that he would be willing to enter an appearance on behalf of the defendants if a postponement were granted. Prior to ruling on thisárequest, and in response to counsel's statement that "Blinder is . . . on trial in Colorado in bankruptcy court," App. at 512, the district court telephoned the Colorado bankruptcy court to determine if Meyer Blinder was occupied in that proceeding at that time. After ascertaining that Blinder "had not been attending all of the sessions," App. at 519, the court refused Mathes's request for a postponement and proceeded to enter a default in favor of plaintiffs.
On the same day, the defendants were personally served with notice of the default and of a hearing scheduled for February 7, 1992 to determine damages. The defendants did not attend that hearing. Plaintiffs presented the testimony of their expert, John T. Christensen, who calculated Blinder, Robinson's excessive markups for the twenty-one class securities. Christensen posited a markup of ten percent (twice that of the NASD guidelines) as excessive. He compared the amount paid by class members for each security to the price Blinder, Robinson paid for the stock on the same day or one day earlier. He then determined the extent to which the difference between these two figures exceeded ten percent, totaled the excessive sums foráall of the securities, and then tripled the sum as provided in 18 U.S.C. § 1964 (1988 & Supp. II 1990). On the basis of this evidence, the district court determined that plaintiffs proved treble damages in the amount of $73,319,824.45, and it entered a default judgment jointly and severally against IEI, Meyer Blinder, and John Cox for that amount. *fn9 Plaintiffs' counsel was also granted attorneys fees of $2,350,117.45 and costs of $258,364.62. Each of the defendants filed timely notices of appeal. *fn10 We have jurisdiction under 28 U.S.C. § 1291 (1988).