United States District Court, Central District of Illinois
July 22, 1991
ERIC MARGOLIS AND DOROTHY KAS, PLAINTIFFS,
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.
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.
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
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
. . 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
(See Class Action Complaint in Kas v. Caterpillar, Case No.
90-1238 and in Margolis v. Caterpillar, Case No. 90-1242 at ¶
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.
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
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 a
series of alleged misstatements or omissions extending over a
period in excess of five months, this Court believes that a
determination on the individual issues of reliance raised by
these claims would probably subsume any common questions.
Moreover, in order to determine the appropriate state common
law fraud doctrine the governed claims asserted by a nationwide
class of purchasers, the Court would be required to assess
whether there was a material conflict between the Illinois
standards for common law fraud and the standards employed by
each of the states in which the Plaintiffs reside. See,
Phillips Petroleum Company v. Shutts, 472 U.S. 797, 818, 105
S.Ct. 2965, 2977-78, 86 L.Ed.2d 628 (1985). If the Court were
to find that there existed a material conflict between the
competing common law fraud standards, it would then be
necessary to determine what connection the forum state had with
the claims asserted and whether there was a state interest in
those claims that was of such significance that the application
of Illinois law to the claims of non-residents would not be
arbitrary or unfair. See, Phillips, 472 U.S. at 816-817, 105
S.Ct. at 2976-77. The choice of law analysis which would be
required for the adjudication of the common law fraud claims of
a nationwide class of stock purchasers would subsume any common
issues raised by these claims.
Therefore, because common issues would not predominate over
the questions concerning individual reliance, choice of law and
competing state interests, class certification of the
Plaintiffs' common law claims is inappropriate. See, Katz, 117
F.R.D. at 412.
B. The Length of the Class Period
The Plaintiffs in both cases are attempting to assert a class
action for the period between January 19, 1990 and June 26,
1990. Caterpillar asserts that the class period can start no
earlier than March of 1990 because the Complaint does not
allege any false and misleading misstatements or omissions
before that time period. (See, transcript of oral argument held
on April 2, 1991 at pp. 76-82).
This Court rejects Caterpillar's arguments. In ¶ 28 of both
the Margolis and the Kas Complaint, the allegations state that
on January 19, 1990 Caterpillar made misstatements of fact. A
ruling by this Court regarding whether these alleged
statements, in addition to other statements in the Complaint,
were misleading (based upon all the allegations in the
Complaint), would in effect be a ruling on the merits of a
motion to dismiss for failure to state a claim. As this Court
discussed at oral argument, this Court does not believe would
be proper to do so at this time.
C. Mrs. Kas's Adequacy as a Class Representative
Caterpillar asserts that because Mrs. Kas does know much
about the details of the litigation that she is an inadequate
class representative. This Court rejects this argument because
the Plaintiffs need not know all of the ins and outs of a case
to be an adequate class representative. Grossman v. Waste
Management, 100 F.R.D. 781, 790 (N.D.Ill. 1984). Generally,
plaintiffs are adequate class representatives if they are aware
of what the lawsuit is about and are informed of its progress
by counsel. Id. Rather than the Plaintiffs knowledge of the
claim, the critical issue is whether they are committed to the
prosecution of the action. See, Hohmann v. Packard Instrument
Company, 399 F.2d 711, 714 (7th Cir. 1968).
In this case, Mrs. Kas is aware of what the lawsuit is about
and is informed of its progress through her counsel. Under
these circumstances she should be entitled to rely on her
attorneys. Although she does not appear to understand all the
intricacies of the case, she does appear to understand the
general nature of the litigation and, based upon her testimony
in her deposition, appears to be committed to the prosecution
of the action. Therefore, the Court finds that Mrs. Kas is an
adequate class representative. (See, oral argument on April 2,
1991 at p. 34).
Caterpillar also asserts that Mrs. Kas is not an adequate
representative because she is unwilling to assume the pro rata
costs of the litigation. (See, transcript of oral argument on
April 2, 1991 at pp. 34-44). This Court rejects this argument.
The American Bar Association's Model Code of Professional
Responsibility is no longer applicable in Illinois. See, Rand
v. Monsanto Company, 926 F.2d 596, 598 (7th Cir. 1991). At
present, the American Bar Association's Model Rules of
Professional Conduct apply in Illinois. See, Id. at 600. As the
Seventh Circuit noted in Rand, Model Rule 1.8(e) allows a
lawyer to pick up the tab for costs if the suit is
unsuccessful. Since the Plaintiffs' attorneys have agreed to
assume the duty to pay the costs and have submitted an
affidavit to that effect, this Court does not believe that it
would be proper to refuse to certify this class for that
D. Kas's Standing to Assert a Rule 10b-5 Claim
Dorothy Kas's Complaint alleges:
Kas sold "put" options on the open market during
the class period and has been damaged
(See Dorothy Kas's Complaint at ¶ 6).
It is undisputed that the statutory definition of a
"security" includes "any put, call, straddle [or] option. . .
." See, 15 U.S.C. § 78c(a)(10); see also, Blue Chip Stamps v.
Manor Drug Stores, 421 U.S. 723, 751, 95 S.Ct. 1917, 1932-1933,
44 L.Ed.2d 539 rehearing denied, 423 U.S. 884, 96 S.Ct. 157, 46
L.Ed.2d 114 (1975). However, since Kas does not allege that she
exercised an option and actually bought shares of Caterpillar,
Caterpillar asserts that Kas has no standing under § 10(b) or
Rule 10b-5 to sue the issuer of the underlying security for
allegedly misleading statements. Caterpillar claims that, under
these circumstances, there is no fiduciary relationship or
obligation between the issuing corporation and the options
trader. See, Chiarella v. United States, 445 U.S. 222,
228-230, 100 S.Ct. 1108, 1114-1116, 63 L.Ed.2d 348 (1980);
see also, Dirks v. Securities Exchange Commission,
463 U.S. 646, 103 S.Ct. 3255, 77 L.Ed.2d 911 (1983).
Only two circuit courts have addressed the issue regarding
whether option traders have standing to sue. See, Data Controls
North v. Financial Corp. of America, 688 F. Supp. 1047 (D.Md.
1989), aff'd without opinion, 875 F.2d 314 (4th Cir. 1989)
(affirming dismissal of an option trader's claim); Deutschman
v. Beneficial Corp., 841 F.2d 502 (3rd Cir. 1988), cert.
denied, 490 U.S. 1114, 109 S.Ct. 3176, 104 L.Ed.2d 1037 (1989)
(upholding option trader's standing to sue under Rule
10(b)(5)). Within the Seventh Circuit, only one district court
has addressed the option trader issue under Rule 10b-5. See,
Bianco v. Texas Instruments, 627 F. Supp. 154, 158-161 (N.D.Ill.
1985) (dismissing option traders class claim).
The Court in Data Controls found that federal courts
recognized that option traders had a cause of action under the
federal securities laws only in cases where there were claims
of affirmative misrepresentations or insider trading. Data
Controls, 688 F. Supp. at 1049. Because the parties dropped the
insider trading charge based upon a stipulation, and the option
traders could not show one example of an affirmative
misrepresentation on the part of the defendant, the court held
that the option traders did not have standing under the federal
securities laws. Id. at 1049-1050.*fn2
In Deutschman, a well-reasoned opinion, the Third Circuit
held that the purchaser of an option contract had standing to
seek damages under the Securities Exchange Act for affirmative
misrepresentations made by the corporation. Deutschman, 841
F.2d at 505-508. As the Third Circuit noted:
The only standing limitation recognized by the
Supreme Court with respect § 10(b) damage action is
the requirement that the plaintiff be a purchaser
or seller of a security. See, Blue Chip Stamps v.
Manor Drug Stores, 421 U.S. 723, 95 S.Ct. 1917, 44
L.Ed.2d 539 (1975); Birnbaum v. Newport Steel
Corp., 193 F.2d 461 (2nd Cir.), cert. denied,
343 U.S. 956, 72 S.Ct. 1051, 96 L.Ed. 1356 (1952).
When in Manor Drug Stores the Supreme Court adopted
the Birnbaum requirement that a § 10(b) plaintiff
be a purchaser or seller of a security, however, it
expressly recognized that such plaintiffs need not
be in any relationship of privity with the
defendant charged with the misrepresentation. 421
U.S. at 745, 95 S.Ct. at 1930. The underlying
purpose of the 1934 Act was the protection of
actual participants in the securities markets, and
the Birnbaum rule was consistent with that
purpose because it limited "the class of plaintiffs
to those who have at least dealt in the security to
which the prospectus, representation, or omission
relates." Id. at 747, 95 S.Ct. at 1931.
Id. at 506 (emphasis added).
The Third Circuit then explained why the Supreme Court
decisions in Chiarella and Dirks require a fiduciary
relationship or obligation to establish standing. Id. The Third
Those cases dealt not with injury caused by
affirmative misrepresentations which affected the
market price of securities, but with the
analytically distinct problem of trading on
undisclosed information; a theory of recovery
which Deutschman does not plead.
This Court agrees with the reasoning of the Third Circuit in
Deutschman. In Chiarella, the Supreme Court required a showing
of a fiduciary relationship between a defendant and the injured
party in an insider trading case because the duty to disclose
arises from a relationship of trust and confidence between
parties to a transaction. Chiarella, 445 U.S. at 230, 100 S.Ct.
at 1115-1116. The Chiarella court did not state that there was
a need for a showing of a fiduciary relationship where there
were affirmative misrepresentations. As noted by the Third
Circuit in the above quotation, the only standing limitation
recognized by the Supreme Court in 10(b) damage actions is the
requirement that the plaintiff be a purchaser
or seller of a security. Deutschman, 841 F.2d at 506. It is
undisputed in this case that Kas was a purchaser of a security
by her purchase of an option.
This Court concludes, with all due respect to Judge Grady, a
distinguished jurist, that the holding in Bianco is incorrect.
In Bianco, the district court held that there must be a
fiduciary relationship between the issuing corporation and the
options trader in order for the options trader to have standing
even where there were affirmative misrepresentations. Bianco,
627 F. Supp. at 158-161. In fact, the court stated:
We do not agree that the distinction between
affirmative misrepresentation and non-disclosure
calls for a different rule as to the standing of
option traders to sue under § 10(b). Instead, we
read Chiarella and its progeny as indicating that
there must be some relationship, or some connection
between the plaintiffs and the 10(b) defendant.
Id. at 161.
This Court believes that there is a clear distinction between
omissions and affirmative misrepresentations. As the Supreme
Court stated in Chiarella:
That the relationship between a corporate insider
and the stockholders of his corporation gives rise
to a disclosure obligation is not a novel twist of
the law. At common law, misrepresentation made for
the purpose of inducing reliance upon the false
statement is fraudulent. But one who fails to
disclose material information prior to the
consummation of a transaction commits fraud only
when he is under a duty to do so. And the duty to
disclose arises when one party has information
"that the other [party] is entitled to know because
of a fiduciary or other similar relation of trust
and confidence between them." (Footnote omitted).
Chiarella, 445 U.S. at 227-228, 100 S.Ct. at 1114 (emphasis
Where affirmative misrepresentations are alleged, this Court
can find no basis in the case law or in the statutory law for
the premise that shareholders are to be protected more than
option holders. In addition, this Court believes that extending
a private cause of action to option holders where there are
affirmative misrepresentations furthers the purposes behind
Rule 10b-5. See, Note, Private Causes of Action for Option
Investors Under SEC Rule 10b-5: A Policy, Doctrinal, and
Economic Analysis, 100 Harvard Law Review, 1959, 1964-1966
However, Caterpillar contends that, although Kas has alleged
that Caterpillar made statements which were affirmative
misrepresentations, the underlying facts alleged by Kas do not
support her claim that there were affirmative
misrepresentations. Again, this Court believes that Caterpillar
is asking this Court to now rule on the merits of Kas's
allegations in her Complaint. Such a ruling at this time would
not be appropriate.
Thus, this Court concludes that Kas can represent a class of
option holders for alleged affirmative misrepresentations by
the Defendants. However, since Kas's claim as an option holder
is not typical of a stock purchaser's claim, this Court finds
that Kas can only represent a class of option holders, not
stockholders. (See, transcript of hearing held April 22, 1991
at pp. 11-34, 53-54).
E. Kas's Reliance on the Integrity of the Market
Caterpillar next asserts that Mrs. Kas is not a proper class
representative because she did not rely upon the integrity of
the market in making her investment decision; consequently, she
would be an inadequate or improper representative of a class on
a 10(b)(5) claim (which is a fraud on the market-type claim).
(See, transcript of hearing on April 2, 1991 at pp. 44-53,
55-68; see also, transcript of continued hearing regarding
class certification held on May 30, 1991).
At the April hearing on class certification, it became clear
that Mrs. Kas relied on her husband Irving Kas with respect to
her decision to invest in put options on the common stock of
Caterpillar. This Court believes that Mrs. Kas is entitled to
rely on her husband's advice as an investment advisor as long
as her husband relied on the integrity of the market. See,
generally, Grossman v. Waste Management, Inc.,
589 F. Supp. 395, 403-406 (N.D.Ill. 1984) (an investor's reliance on
an analyst's recommendation does not totally divorce the
investor's decision to purchase from basic reliance on the
integrity of the market price of the stock); see also, In re
Data Access Systems Securities Litigation, 103 F.R.D. 130, 139
(N.N.J. 1984). However, this Court determined that it was
unclear from the record whether Mr. Kas had relied on the
market, because the Plaintiff's attorneys had directed Mr. Kas
not to answer a number of questions which were directly related
to his reliance on the market. This Court allowed the
Defendants to retake Mr. Kas's deposition at Plaintiff's
expense so that Caterpillar would have the opportunity to rebut
the presumption of reliance on the market by asking Mr. Kas
more questions on this issue.
Under the "reliance on the market" theory, a plaintiff's
reliance on the integrity of the market is presumed. See, Basic
v. Levinson, 485 U.S. 224, 108 S.Ct. 978, 99 L.Ed.2d 194
(1988); Alexander v. Centrafarm Group, 124 F.R.D. 178, 184, n.
5 (N.D.Ill. 1988). This presumption has been accepted in nearly
every circuit which has considered the proposition. Basic, 485
U.S. at 247, n. 25, 108 S.Ct. at 991, n. 25.
In this case, Mr. Kas testified in his deposition that he
read analyst reports, that he sees quite a few news services,
and that he reads the Wall Street Journal. Further, although
Mr. Kas's testimony was not unequivocal, it did appear from his
testimony that he relied on the fact that the price of
Caterpillar stock accurately reflected the true value of the
Caterpillar asserts that Mr. Kas's testimony was inconsistent
and that he did not clearly rely on the market. Although, as
stated above, Mr. Kas's testimony was not unequivocal, his
testimony does tend to show some reliance, and, further,
Caterpillar has failed to rebut the presumption of reliance on
the market. The Court ordered the parties to retake the
deposition of Mr. Kas so that Caterpillar would have an
opportunity to ask Mr. Kas the questions that the Plaintiff had
earlier ordered Mr. Kas not to answer regarding reliance on the
integrity of the market. However, only a few of Caterpillar's
questions at Mr. Kas's supplemental deposition were directed
toward the issue of reliance on the integrity of the market.
Thus, this Court concludes that Caterpillar has failed to rebut
the presumption of reliance on the market, and Kas has
presented sufficient evidence of reliance on the market to be
entitled to rely on the presumption.
This Court further finds that interests of sellers of put
options and buyers of call options on Caterpillar common stock
during the class period are consistent enough for purposes of
the adequacy of a seller of put options to represent both the
class of buyers of call options and sellers of put options.
Further, the Court does not believe that certifying a class of
persons consisting of sellers of put options and buyers of call
options will create an unreasonable burden in terms of
manageability of a class.
The classes in these cases are sufficiently numerous to
satisfy Rule 23(a)(1) as thousands of people hold Caterpillar
stock and options. The commonality requirement of Rule 23(a)(2)
is met with regard to the federal claims as there are questions
of law and fact that are common to the classes.
Rule 23(a)(3) also requires that the class representatives
establish that their claims are typical of the claims or
defenses of the class. To met the typicality requirement, the
Plaintiffs' claims must have the same essential characteristics
as the class at large. De La Fuente v. Stokely Van Camp,
713 F.2d 225, 232 (7th Cir. 1983). Where it is predictable that a
major focus of the litigation will be on an arguable defense
unique to the named plaintiff or a small sub-class, then the
named plaintiff is not a proper class representative. Koos v.
First National Bank, 496 F.2d 1162, 1164 (7th Cir. 1974).
Except where otherwise stated in this opinion, this Court finds
that the Plaintiffs' claims are typical of the class claims.
The adequacy requirement of Rule 23(a)(4) consists of two
components: (1) the absence of a potential conflict between the
named plaintiffs and the absent class members; and (2) that the
parties' attorneys be qualified, experienced, and generally
able to conduct the proposed litigation. Barkman v.
Wabash 674 F. Supp. 623, 633 (N.D.Ill. 1987). This Court finds
that there are no significant potential conflicts between the
class representatives and class members and that it is clear
that the Plaintiff's attorneys are qualified and experienced.
Finally, this Court concludes that the class questions of
fact and law predominate over questions affecting individual
claims on the federal claims in this case.
Therefore, based on the foregoing, Eric Margolis is certified
to represent a class of those persons who purchased Caterpillar
common stock between January 19, 1990 and June 26, 1990. The
class shall be for the claims of misrepresentations and
omissions in violation of § 10(b) and for claims under § 20(a)
of the Securities Exchange Act of 1934.
Dorothy Kas is certified to represent a class of those person
who purchased call options or sold put options on Caterpillar
common stock between January 19, 1990 and June 26, 1990. The
class shall be for claims of affirmative misrepresentations in
violation of § 10(b) and for claims under ¶ 20(a) of the
Securities Exchange Act of 1934.