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MARGOLIS v. CATERPILLAR

July 22, 1991

ERIC MARGOLIS AND DOROTHY KAS, PLAINTIFFS,
v.
CATERPILLAR, INC., G.A. SCHAEFER, D.V. FITES, L.A. KUCHAN, AND J.W. KENNING, DEFENDANTS.



The opinion of the court was delivered by: Mihm, Chief Judge.

ORDER

Before the Court are Motions by the Plaintiffs Kas and Margolis to certify a class action (# 26 in Case No. 90-1238 and # 20 in Case No. 90-1242). The Court grants Margolis's Motion to Certify a Class (# 26 in Case No. 90-1238). Kas's Motion to Certify a Class (# 20 in Case No. 90-1242) is granted in part and denied in part.

JURISDICTION

The Plaintiffs have brought this action pursuant to § 10(b) of the Securities Exchange Act of 1934 (15 U.S.C. § 78j(b)), Rule 10b-5 promulgated thereunder (17 C.F.R. § 240.10b-5), and § 20 of the Securities Exchange Act of 1934 (15 U.S.C. § 78t) and state law. This Court has jurisdiction of this action pursuant to § 27 of the Exchange Act (15 U.S.C. § 78aa). The Court has jurisdiction over the state fraud and deceit claims based on this Court's pendant jurisdiction.

BACKGROUND

The actions brought by Margolis and Kas are shareholder class actions brought on behalf of all persons, other than the Defendants, who purchased or otherwise acquired the common stock of Caterpillar during the class period when Caterpillar's stock allegedly lost $11 in two days (20% of its market value) for an allegedly aggregate market loss of over $1 billion upon the disclosure of news that the Plaintiffs assert the Defendants should have released earlier. Margolis has brought a class action for the period between January 19, 1990 and June 26, 1990. Kas has brought a class action for the same period.

  The Plaintiffs allege that Caterpillar disclosed the
following information and that the disclosure of said
information caused the decline in the value of the Caterpillar
stock:

   . . that its plant renovation program had not
  been proceeding on schedule, thereby increasing
  costs over and above the expected benefits
  associated with the program; that its
  reorganization was also causing the company to
  experience costly inefficiencies and, contributing
  to more than half of the expected decrease in
  Cat's 1990 profits, that its Brazilian earnings,
  which had previously generated an undisclosed 20%
  of Cat's profits, was experiencing a dramatic
  decline due to a significant slow down in the
  Brazilian economy.

(See Class Action Complaint in Kas v. Caterpillar, Case No. 90-1238 and in Margolis v. Caterpillar, Case No. 90-1242 at ¶ 1).

The Plaintiffs allege that, during the class period, the Defendants issued a series of false public statements in Caterpillar's press releases, its interviews, its filings with the Securities and Exchange Commission, and in its annual and quarterly reports to the shareholders. The statements were allegedly regarding Caterpillar's finances, business projects, operations, renovation, restructuring, cost savings programs, and overseas operations, including its Brazilian operations, and the contributions to earnings of these operations. The Plaintiffs assert that these statements were materially false and misleading for failing to disclose material adverse facts. The Plaintiffs contend that the failure to disclose these facts artificially inflated the market price of Caterpillar's common stock throughout the class period until Caterpillar finally made the announcements regarding the problems at Caterpillar.

DISCUSSION

Plaintiffs who seek to certify a claim for class treatment must satisfy the requirements of Federal Rule of Civil Procedure 23(a) and one of the subsections of Rule 23(b). Rule 23(a) provides:

  One or more members of a class may sue or be sued
  as representative parties on behalf of all only if
  (1) the class is so numerous that joinder of all
  members is impracticable, (2) there are questions
  of law or fact common to the class, (3) the claims
  or defenses of the representative parties are
  typical of the claims or defenses of the class,
  and (4) the representative parties will fairly and
  adequately protect the interests of the class.

In addition to satisfying the requirements of Rule 23(a), the Plaintiffs in this action must satisfy the requirements of Rule 23(b)(3). Rule 23(b)(3) requires the Court to find:

  That the questions of law or fact common to the
  members of the class predominate over any
  questions affecting only individual members, and
  that a class action is superior to other available
  methods for the fair and efficient adjudication of
  the controversy. . . .

The burden is on the Plaintiffs to demonstrate that each of the requirements of Rule 23 have been satisfied. See, Valentino v. Howlett, 528 F.2d 975, 978 (7th Cir. 1976).

In this case, Caterpillar generally does not oppose the certification of a class by Margolis. However, Caterpillar does assert that the common law claims of fraud should not be certified as to either Margolis or Kas. Further, Caterpillar asserts that the length of the class period should be shortened in both cases.

Regarding Mrs. Kas, who did not sell stock during the class period, but only sold options, Caterpillar argues that she does not have standing to represent a class of shareholders. Further, Caterpillar contends that her lack of knowledge and her refusal to assume the pro rata costs of the litigation make Kas an unfit class representative. Finally, Caterpillar contends that Mrs. Kas cannot prove that she relied on the integrity of the market in making her investment decision; therefore, Caterpillar asserts that there is a unique defense which it can assert against Mrs. Kas which would make her an unfit representative for the class.

A. Common Law Claims

Caterpillar asserts that, with regard to the common law claims, the questions of law and fact common to the members of the proposed classes do not predominate over any questions affecting only individual members and that a class action is not superior to other available methods for the fair and efficient adjudication of these claims under Rule 23(b)(3). This Court agrees. (See record of the oral argument and ruling on the certification of the common law claims at pp. 68-78 of the transcript of the hearing held on April 2, 1991).

In deciding whether common issues predominate, the Court considers the substantive elements of the Plaintiffs' cause of action, the proof necessary for the various elements, and the manageability of the trial on these issues. Liability for common law fraud in Illinois requires a showing by each Plaintiff of reasonable and individual reliance upon alleged misrepresentation. West v. Western Casualty and Surety Company, 846 F.2d 387, 393 (7th Cir. 1988); Good v. Zenith Electronics Corp., 751 F. Supp. 1320, 1323 (N.D.Ill. 1990); Katz v. Comdisco, Inc., 117 F.R.D. 403, 412 (N.D.Ill. 1987). Illinois law also precludes reliance upon allegedly misleading statements that were made after an investor has purchased stock in order to support a common law fraud claim. Good, 751 F. Supp. 1323; Coe v. Circle Express, No. 89-C-884, 1990 WL 37260, 1990 U.S. Dist. Lexis 2322 (N.D.Ill., March 5, 1990). Because the Plaintiffs, common law claims in this action are based upon ...


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