Exchange Commission. The financial statement attached to the
form revealed that certain sales previously recorded as having
been made had not been made; therefore, the amounts of these
sales were deducted and first year sales (for the fiscal year
ending June 30, 1979) ultimately totalled only $3,763,000.00.
The allegedly misleading press release of July 30, 1979, was
also attached as part of the 10-K filing.
On April 2, 1980, AES issued a press release stating that it
had sustained substantial losses due to the fact that some of
its orders had been contingent, that it had been unable to
collect receivables, and that it was seeking debt or equity
On September 5, 1980, the SEC issued an order (Release No.
17126) finding probable cause to believe that AES had
conducted its business in violation of the securities laws,
and accepting an Offer of Settlement from AES. This SEC
release detailed all the activities complained of by the
plaintiffs in this case. After the release, AES shares
declined to approximately $4 per share.
Plaintiff has filed this suit on behalf of the class
pursuant to Section 27 of the Securities Exchange Act of 1934,
15 U.S.C. § 78aa, to enforce liabilities created by Section
10(b) of the Act (15 U.S.C. § 78j) and Rule 10b-5 of the SEC
(17 C.F.R. § 240.10b-5).
Defendants raise two points in opposition to this motion for
class certification.*fn1 First, they argue that there is no
"common question of law or fact" predominating among the class
members, since the plaintiffs are required to prove reliance
as to each and every class member individually. Second,
defendants argue that the closing date for the class should
not be as late as September 5, 1980, when the SEC published
Release No. 17126 and found that there was reason to believe
that AES was substantially in violation of the securities
laws. Rather, defendants argue that the closing date for the
class should be, at the latest, April 2, 1980, when defendants
issued the "corrective" press release that allegedly "cured"
all previous misstatements and omissions. Neither argument has
merit, and we therefore grant the motion and certify the class
as defined above.
We note at the outset that plaintiff has pleaded and
indicates that she will prove reliance as to her own personal
claim. Therefore, were we to hold that reliance is a necessary
element of this action we would still find that this plaintiff
is an adequate class representative. We also note that even if
every single class member had to prove his or her reliance,
that fact would not preclude certification of the class.
"[T]he mere existence of individual questions of reliance is
not sufficient to warrant a ruling that common questions of
law or fact do not predominate." Ramsey v. Arata, 406 F. Supp. 435,
441 (N.D.Texas 1975), disapproved on other grounds, Wood
v. Combustion Engineers, Inc., 643 F.2d 339 (5th Cir. 1981).
See also Rifkin v. Crow, 80 F.R.D. 285, 286 (N.D.Tex. 1978) (on
remand); Sargent v. Genesco, Inc., 75 F.R.D. 79, 85 (M.D.Fla.
1977). Certainly the class action mechanism would still be
preferable for adjudicating common questions regarding
defendants' conduct and any liability that would attach to such
conduct. The reliance and entitlement of individual investors
to any damage award could be referred to a special master. See
In re LTV Securities Litigation, 88 F.R.D. 134, 143 n. 4
We now turn to the question of whether reliance is a
required element of proof for the plaintiff. The extent to
is an element of a 10b-5 action is an issue currently being
debated in the federal courts, especially in the Fifth and
Ninth Circuits. The United States Supreme Court in
Affiliated Ute Citizens of Utah v. United States, 406 U.S. 128,
92 S.Ct. 1456, 31 L.Ed.2d 741 (1972), held that individual
reliance need not be proven where the plaintiff's 10b-5 claim
is based upon fraudulent, material nondisclosure by the
defendants. Upon proof of the materiality of the nondisclosure,
reliance becomes a rebuttable presumption in favor of the
plaintiff. See Rifkin v. Crow, 574 F.2d 256, 263 (5th Cir.
1978). Ute has been interpreted to apply only to non-disclosure
claims; individual reliance has remained an element of 10b-5
claims for active, material misrepresentations. Sargent v.
Genesco, Inc., 75 F.R.D. 79, 84 (M.D.Fla. 1977). See also Simon
v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 482 F.2d 880
(5th Cir. 1973); Issen v. GSC Enterprises, Inc.,
508 F. Supp. 1278 (N.D.111. 1981).
As in so many securities cases, see, e. g., Sargent v.
Genesco, Inc., 75 F.R.D. at 84, the claims of plaintiff
Mottoros are basically hybrid in nature. They are neither
wholly misrepresentations, nor wholly omissions. "[W]hen
confronted with this occurrence, the Court should not construe
the remedies provided by the Securities Exchange Act
technically and restrictively, but flexibly to effectuate its
remedial purpose of achieving a high standard of integrity in
the securities industry." Ibid. Thus, in such cases — and in
many cases where the claim is based solely upon material
misrepresentations — many courts have been examining a new
theory of proof which more accurately reflects the true nature
of transactions in the stock market. This is the "fraud upon
the market" theory, which plaintiff in this case wishes to
utilize in proving her suit.*fn2 To prevail upon this theory,
plaintiff must demonstrate that defendants' misrepresentations
and omissions were part of a common scheme, or a continuing
course of conduct (see Ute, 406 U.S. at 153, 92 S.Ct. at 1472)
to manipulate the value of the stock, and that defendants'
fraudulent activities caused an artificial inflation of the
market value. The plaintiff need not prove individual reliance
upon the particular misrepresentations or omissions of
defendants, but only that the facts misrepresented or omitted
were material, and that plaintiff relied upon the integrity of
the market price of the security which was distorted by the
impact of the particular misstatements or omissions. See In re
LTV Securities Litigation, 88 F.R.D. 134, 142 (N.D.Tex. 1980).
See also Shores v. Sklar, 647 F.2d 462 (5th Cir. 1981);
Rifkin v. Crow, 574 F.2d 256 (5th Cir. 1978); Blackie v.
Barrack, 524 F.2d 891 (9th Cir. 1975), cert. denied,
429 U.S. 816, 97 S.Ct. 57, 50 L.Ed.2d 75 (1976). Reliance is presumed —
and may be rebutted — once plaintiff makes this showing.
Blackie v. Barrack is the first case, and the leading one, to
discuss this theory in depth. As do the cases which follow it,
Blackie analyzes the rationale for the "fraud upon the market
theory" in terms of the causal relationship between the
defendants' misconduct and the plaintiff's injury.
Proof of reliance is adduced to demonstrate the
causal connection between the defendant's
wrongdoing and the plaintiff's loss. We think
causation is adequately established in the
impersonal stock exchange context by proof of
purchase and of the materiality of
misrepresentations, without direct proof of
reliance. Materiality establishes the reliance of
some market trades and hence the inflation in the
stock price — when the purchase is made the
causational chain between defendant's conduct and
plaintiff's loss is sufficiently established to
make out a prima facie case.
A purchaser on the stock exchanges . . . relies
generally on the supposition that the market
price is validly set and that no
unsuspected manipulation has artificially
inflated the price, and thus indirectly on the
truth of the representations underlying the stock
price — whether he is aware of it or not, the
price he pays reflects material misrepresentations.
Requiring direct proof from each purchaser that he
relied on a particular representation would defeat
recovery by those whose reliance was indirect,
despite the fact that the causational chain is
broken only if the purchaser would have purchased
the stock even had he known of the
524 F.2d at 906-07. See also Shores v. Sklar, 647 F.2d at 469;
Schlick v. Penn-Dixie Cement Corp.,