Management, Inc., 100 F.R.D. 781 (N.D.Ill. 1984). We also
indicated that we would certify a class on plaintiffs' claims
under § 11 of the Securities Act of 1933, 15 U.S.C. § 77k (1982)
once plaintiffs demonstrated that arrangements had been made for
the payment of the cost of notice to the § 11 class. Id.
Plaintiffs made such a showing, and we certified a § 11 class.
Defendants now urge that they are entitled to summary judgment as
to each of the named plaintiffs, Stanley Grossman, Cathy Chester,
and Kenneth Frohlick. The motions have been briefed extensively,
and each side has filed voluminous evidentiary materials in
support of its positions. We will begin with the § 10(b) claims
and thereafter discuss the § 11 claims.
SECTION 10(b) CLAIMS
Plaintiffs' § 10(b) claims are predicated on their allegation
that defendants Waste Management, Inc. ("Waste Management") and
several of its managing officers misrepresented or withheld
information concerning the company's compliance with
environmental regulations and disputes with regulatory
authorities. Plaintiffs allege that defendants engaged in a
course of conduct designed to deceive the public as to these
matters, beginning with the issuance of Waste Management's 1981
annual report on March 31, 1982. Included in the course of
conduct was an allegedly misleading prospectus issued in
connection with a proposed merger between Waste Management and
Chem-Nuclear, Inc. ("Chem-Nuclear"), a merger that was
consummated in October 1982. In March 1983 the information
allegedly withheld became public, and the price of Waste
Management's stock dropped considerably.
Plaintiffs Stanley Grossman and Kenneth Frohlick both purchased
Waste Management stock after receiving "buy" recommendations from
an investment advisory service in February 1983. They represent
the § 10(b) class. Plaintiff Cathy Chester acquired her Waste
Management stock in connection with the merger with Chem-Nuclear;
she was a Chem-Nuclear shareholder who tendered her stock in
exchange for Waste Management stock. Though Chester has pleaded
claims under § 10(b), we ruled in our February 6 decision that
she was not a proper representative of the § 10(b) class because
she was subject to a unique defense to which the class might not
be subject. However, Chester does represent the § 11 class, which
is made up of those persons who acquired Waste Management stock
in connection with the Chem-Nuclear merger and who sustained
damages as a result thereof. The § 11 claim stems from the
allegedly misleading prospectus issued to Chem-Nuclear
shareholders in connection with the proposed merger.
As we noted in our decision certifying the § 10(b) class, the
primary legal theory upon which plaintiffs base their § 10(b)
claims is that defendants' conduct amounted to a "fraud on the
market" that resulted in the inflation of the price of Waste
Management stock. In the present motions, defendants argue that
we should not accept the fraud on the market theory as providing
a basis for relief under § 10(b) and SEC rule 10b-5, and that in
any event defendants have shown that plaintiffs are not entitled
to the benefit of that theory under the facts of this case. We
will first discuss the general principles that govern our
consideration of defendants' motions and then will address each
named plaintiff's claim separately.
In addition, defendants urge that their disclosures were
adequate, at least in certain respects; they therefore ask that
we find in their favor as to certain of plaintiffs' allegations,
pursuant to Fed.R.Civ.P. 56(d).*fn1 We will address that question
after dealing with the named plaintiffs' claims.
In a typical 10b-5 action in which the plaintiff asserts that
the defendant made misrepresentations, the plaintiff bears the
burden of persuasion as to several factors as prerequisites to
1) that he purchased or sold securities, Blue Chip
Stamps v. Manor Drug Stores, 421 U.S. 723, 95 S.Ct.
1917, 44 L.Ed.2d 539 (1975);
2) that the defendant misrepresented facts either
with an intent to deceive, Ernst & Ernst v.
Hochfelder, 425 U.S. 185, 96 S.Ct. 1375, 47 L.Ed.2d
668 (1976), or with a reckless disregard for the
truth, Sundstrand Corp. v. Sun Chemical Corp.,
553 F.2d 1033, 1043-45 (7th Cir.), cert. denied,
434 U.S. 875, 98 S.Ct. 224, 54 L.Ed.2d 155 (1977);
3) that the defendant's misrepresentations were
material, Sundstrand, 553 F.2d at 1040 (citing TSC
Industries, Inc. v. Northway, Inc., 426 U.S. 438,
440, 96 S.Ct. 2126, 2128, 48 L.Ed.2d 757 (1976));
4) that the plaintiff relied upon the
misrepresentations, id.; and
5) that the plaintiff's reliance was justifiable in
the sense that plaintiff did not disregard a risk
known to him or so obvious that he must be taken to
have been aware of it, and so great as to make it
highly probable that harm would follow. Id. at 1048
(citing with approval Holdsworth v. Strong,
545 F.2d 687, 693 (10th Cir. 1976) (en banc)); Dupuy v. Dupuy,
551 F.2d 1005, 1017-20 (5th Cir.), cert. denied,
434 U.S. 911, 98 S.Ct. 312, 54 L.Ed.2d 197 (1977).
The courts have also recognized that materiality, reliance, and
the justifiability of the reliance are all elements of the
plaintiff's burden of showing causation. See, e.g., Affiliated
Ute Citizens v. United States, 406 U.S. 128, 154, 92 S.Ct. 1456,
1472, 31 L.Ed.2d 741 (1972) (materiality and reliance are
elements of causation); Bell v. Cameron Meadows Land Co.,
669 F.2d 1278, 1283 (9th Cir. 1982) (reliance is normally shown in
order to demonstrate the causal connection between a defendant's
wrongdoing and a plaintiff's loss); Holdsworth, 545 F.2d at 694
(viewing justifiability of reliance as element of causation). See
generally R. Crane, "An Analysis of Causation under Rule 10b-5,"
9 Sec.Reg.L.J. 99, 101 (1981).
In Affiliated Ute Citizens v. United States, the Court held
that in a 10b-5 case involving primarily a failure to disclose,
"positive proof of reliance is not a prerequisite to recovery."
Affiliated Ute, 406 U.S. at 153, 92 S.Ct. at 1472. In such a case
what must be shown to establish that defendant's conduct was the
cause of plaintiff's purchase is that "the facts withheld [are]
material in the sense that a reasonable investor might have
considered them important in the making of [his] decision." Id.
at 153-54, 92 S.Ct. at 1472-73. The courts have also held, as in
the case of misrepresentations, that if plaintiff's failure to
discover the truth was the result of his own reckless or
conscious disregard of information available to him, his right to
recover is defeated. Sundstrand, 553 F.2d at 1048. However, since
under Affiliated Ute reliance is essentially "presumed" to exist
in an omissions case if the omission is material, the defendant
bears the burden of showing that the plaintiff's non-discovery
was attributable to his own conduct. Id.
In addition, most courts have held that the Affiliated Ute
presumption of reliance may be rebutted in other ways. If, for
example, the defendant can prove that the plaintiff's decision to
buy or sell would have been the same even had he known the truth,
it has rebutted the presumption of reliance. See, e.g., Bell v.
Cameron Meadows Land Co., 669 F.2d at 1283. Some courts have
expressed this in a slightly different way: if defendant can show
plaintiff's decision would not have been affected if defendant
had disclosed the omitted facts, then recovery is barred. See,
e.g., Zobrist v. Coal-X, Inc., 708 F.2d 1511, 1519-20 (10th Cir.
1983); Rifkin v. Crow, 574 F.2d 256, 262 (5th Cir. 1978). For
example, proof that the plaintiff did not read the publication in
which the omissions occurred has been held sufficient to rebut
the presumption of reliance. Zobrist, 708 F.2d at 1519-20; Shores
v. Sklar, 647 F.2d 462, 468 (5th Cir. 1981) (en banc), cert.
denied, 459 U.S. 1102, 103 S.Ct. 722, 74 L.Ed.2d 949 (1983).
Affiliated Ute's presumption of reliance is based on the
practical impossibility of proving reliance in a case where no
allegedly false statements have been made. See Wilson v. Comtech
Telecommunications Corp., 648 F.2d 88, 93 (2d Cir. 1981). See
also Note, The Reliance Requirement in Private Actions Under SEC
Rule 10b-5, 88 Harv.L.Rev. 584, 590 (1975). However, where the
omissions that form the basis for plaintiff's claim are contained
in a particular disclosure (such as a prospectus or offering
circular), it has been held that the plaintiff cannot recover if
he never read or knew of the disclosure, for in such a case the
omissions cannot have been a cause of his purchase of the
security. Wilson, 648 F.2d at 93-94; see R. Crane, supra at 106.
B. Fraud on the Market
Some courts have extended the Affiliated Ute presumption of
reliance to cases in which, unlike Affiliated Ute, there is no
direct contact between the plaintiff and the person making the
alleged misrepresentations or omitting to disclose material
facts. One such situation is the "fraud on the market" theory on
which plaintiffs rely. Under 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), the seminal case concerning fraud on the
market, an open market purchaser of a security for which there is
a developed market may maintain a cause of action by alleging
that he purchased stock the price of which was inflated due to
defendant's fraud. Under this theory, "a plaintiff . . . need not
allege individual reliance but only that the plaintiff relied
upon the integrity of the market price of the security which was
distorted by the impact of the particular misstatements." In re
LTV Securities Litigation, 88 F.R.D. 134, 142 (N.D.Tex. 1980).
The rationale for extending the presumption of reliance to such
a case was explained in Blackie v. Barrack:
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 misrepresentation.
Blackie, 524 F.2d at 907. According to the court in LTV,