On Appeal From the United States District Court for the Eastern District of Pennsylvania, D.C. Civil Nos. 88-0285, 88-0286, 88-0307.
Higginbotham, Becker and Nygaard, Circuit Judges.
This is an appeal from an extremely broad preliminary injunction designed to protect a potential future damages remedy in a class action alleging securities fraud and civil RICO violations. Plaintiffs are a class of investors allegedly defrauded by defendants in connection with plaintiffs' purchases and sales of various penny stocks. Defendant Blinder, Robinson & Co. ("Blinder, Robinson") is the securities dealer through which plaintiffs purchased and sold their stock, and defendant Meyer Blinder is the President of both Blinder, Robinson and Blinder International Enterprises, Inc. ("Blinder International"), the corporate parent of Blinder, Robinson. The preliminary injunction ordered Meyer Blinder to repatriate some $11 million dollars transferred abroad during the course of this litigation, over $4 million of which belongs to Blinder International, which is not a party in the litigation. Moreover, it prohibits defendants, inter alia, from transferring any funds outside the ordinary course of business and from transferring any funds outside the country without prior approval by the district court.
Defendants raise a host of claims on appeal. Most fundamentally, they argue that a district court lacks the power to protect a potential future damages remedy by a preliminary injunction encumbering assets, even assuming that the usual criteria for obtaining a preliminary injunction are met. Although we agree that such a remedy must be be reserved for extraordinary circumstances, we reject defendants' argument that such relief can never be appropriate.
Defendants also raise various narrower arguments as to why the injunction must be set aside. Many of these we reject, and some we decline to consider at this juncture. However, we agree with defendants that the injunction suffers at least one fatal defect: the district court made no attempt to ensure that the value of assets encumbered bore some reasonable relationship to the likely amount of plaintiffs' expected recovery. For this reason, we conclude that the preliminary injunction must be set aside.
Defendants also ask us to reverse the district court's order certifying a class of allegedly defrauded investors, especially because the district court did so without any findings or explanation. The class certification order, however, is not itself reviewable before a final merits judgment. Moreover, we conclude that we cannot review the class certification order at this time under the doctrine of pendent appellate jurisdiction, because the preliminary injunction must be vacated regardless of whether or not the class was correctly certified.
Finally, we briefly touch upon two ancillary issues raised in this appeal. We conclude that the district court abused its discretion in waiving the security requirement of Fed.R.Civ.P. 65(c), and we decline to address whether the district court exceeded the scope of its authority to enjoin Blinder International, which is not yet a defendant in this case.
I. FACTS AND PROCEDURAL HISTORY
Defendant Meyer Blinder is the Chairman, Chief Executive Officer, and President of defendant Blinder, Robinson, a Colorado-based securities firm. Blinder, Robinson is a wholly owned subsidiary of Blinder International, which is also incorporated under Colorado law. Blinder International, which was not a party in the district court proceedings, derives an "overwhelming" percentage of its revenues from Blinder, Robinson, App. 633, although Blinder International holds at least eight different affiliates or subsidiaries. Meyer Blinder and his wife Lillian together own about 52% of Blinder International, the remainder of which is held by some 9000 public shareholders. Meyer Blinder is also the President of Blinder International.
Blinder, Robinson specializes in underwriting, brokering and trading "penny stocks," certain low-priced, high risk equity securities for which there is often no well-developed trading market. Blinder, Robinson was the sole underwriter for about thirteen of the securities at issue in this litigation and was the largest market-maker for aftermarket trading in all but one.*fn1 Blinder, Robinson also executes retail trades, usually as a principal (trading directly with its individual customers), but sometimes as an agent (arranging trades between its customers and charging commissions for that service).
Plaintiffs Dan and Louise Hoxworth, Bradley Gavron, and Barry Brownstein all purchased penny stocks from Blinder, Robinson during 1985. Between January and April of 1988, they filed three separate, but substantially similar, actions in the district court claiming securities fraud. Each complaint listed both Meyer Blinder and Blinder, Robinson as defendants, but none listed Blinder International.*fn2 The Hoxworth plaintiffs later moved to amend their complaint pursuant to Fed.R.Civ.P. 15(a) to add Blinder International as a defendant. This motion remained pending when the preliminary injunction was issued.
Plaintiffs alleged that Blinder, Robinson had defrauded them in violation of both section 12(2) of the Securities Act of 1933 ("the 1933 Act")*fn3 and section 10(b) of the Securities Exchange Act of 1934 ("the 1934 Act").*fn4 They seek to hold Meyer Blinder jointly and severally liable as a "controlling person" under section 15 of the 1933 Act*fn5 and section 20(a) of the 1934 Act.*fn6 In addition, plaintiffs pleaded claims under the Racketeer Influenced and Corrupt Organizations Act (RICO), 18 U.S.C. §§ 1961-1968, with the alleged securities law violations serving as predicate offenses. Finally, plaintiffs pleaded pendent claims for violations of various provisions of the Pennsylvania Securities Act, 70 Pa.Cons.Stat.Ann. § 1-101 et. seq., and for breach of common law fiduciary duties.
The three actions were consolidated for purposes of pretrial proceedings. Collectively, plaintiffs sought certification, pursuant to Fed.R.Civ.P. 23(b)(3), of a class of plaintiffs defined as all persons who purchased or sold any of roughly eighteen different securities through Blinder, Robinson between September 1, 1984 and December 31, 1986.*fn7 The named plaintiffs themselves collectively lost under $7300 from their trading. On May 19, 1989, without findings or explanation, the district court certified the requested class.
On January 12, 1989, plaintiffs moved for a preliminary injunction freezing Meyer Blinder's assets and prohibiting Blinder, Robinson from making transfers out of the ordinary course of business without notice to them and prior court approval. In May, 1989, the district court conducted a four-day evidentiary hearing on the preliminary injunction motion.
B. The Evidence at the Preliminary Injunction Hearing
At the hearing, plaintiffs presented evidence of two allegedly fraudulent or misleading courses of conduct routinely followed by Blinder, Robinson brokers. The first involved Blinder, Robinson's failure to disclose to its customers its allegedly excessive markups and markdowns. The National Association of Securities Dealers (NASD), a self-regulating organization of which Blinder, Robinson is a member, has promulgated guidelines for the maximum markups and markdowns that a broker-dealer may charge customers with whom it trades as a principal.
Plaintiffs' expert testified that he had analyzed Blinder, Robinson's trading activity in each of two class securities, Telstar Satellite Corp. and Touchstone Software Corp., for selected periods of time within the class period -- January 1986 for Telstar Satellite and September 4, 1984 through September 6, 1984 for Touchstone Software. The analysis was done by comparing prices customers actually paid for those securities, derived from Blinder, Robinson's stock activity records, against the prevailing market price, derived from Blinder, Robinson's pricing sheets. Based on those comparisons, the expert testified that Blinder, Robinson's markups for those securities during those periods substantially exceeded what was permitted under the NASD guidelines. Plaintiffs' expert testified further that because Blinder, Robinson dominated the market of the securities he had analyzed during the intervals of his analysis, a more appropriate calculation would have employed a lower baseline -- and therefore resulted in significantly higher markups -- than the one plaintiffs actually employed.*fn8 The expert testified that the time frames and sample sizes of his analysis were large enough to be statistically significant, that he had selected these securities and time frames randomly, and that an analysis of other class securities during other intervals within the class period would probably have yielded a similar conclusion about excessive markups.
Defendants' expert testified that plaintiffs had misread Blinder, Robinson's pricing sheets in determining the prevailing market prices and that Blinder, Robinson did not dominate the markets of the analyzed securities during the analyzed periods. In cross-examining plaintiffs' expert, defendants also questioned the randomness of plaintiffs' selection of securities and time frames to analyze.
Blinder, Robinson's second course of conduct involved allegedly misleading statements made to its clients about the firm's "research department." Blinder, Robinson brokers were trained to solicit new business in a carefully scripted sequence of three consecutive phone calls made to prospective customers. Blinder, Robinson distributed to its brokers a reference manual which contained, among other things, a suggested outline of the three-call sequence. During the second call, brokers were instructed to state that "[our] research department is always preparing reports on a number of stocks." App. 2408. In fact, however, the research department consisted of only one individual, who assembled information only about companies whose securities Blinder, Robinson had underwritten.
Plaintiffs also introduced undisputed evidence chronicling transfers of large sums of money from New York to Hong Kong by Meyer Blinder and Blinder International during the course of this litigation. In March and April of 1989, barely two months after plaintiffs had moved for a preliminary injunction to encumber defendants' assets, Meyer Blinder transferred some $6.6 million dollars from New York to Hong Kong, where he bought 90 day certificates of deposit with the Hong Kong branch of Chase Manhattan Bank, and with the Hong Kong Bank and Shanghai Banking Corporation. During roughly the same period, Blinder International transferred about $4.4 million from New York to the Hong Kong branch of Chase Manhattan.
Plaintiffs further introduced essentially uncontradicted evidence regarding Blinder, Robinson's sagging financial fortunes. During 1988, Blinder, Robinson's net worth fell from about $24.0 million to about $9.2 million, and its unsegregated cash fell from over $16 million to under $4 million. Blinder, Robinson has been forced to close 27 of its 85 branch offices, while its sales force has shrunk from about 1800 brokers to about 500. One of defendants' own witnesses testified that this contraction was due to the considerable adverse publicity Blinder, Robinson has received, and continues to receive, in the national media regarding its sales and marketing practices. Moreover, Blinder, Robinson currently faces various administrative proceedings in about 24 different jurisdictions.
Defendants presented evidence regarding Meyer Blinder's and Blinder International's extensive business dealings in Hong Kong. Blinder International owns several affiliates located in Hong Kong, and Meyer Blinder testified at his deposition that he does business in Hong Kong and "always [looks] for more [business] opportunities" there. App. 771.
C. The District Court's Findings
On the basis of this evidence, the district court found that plaintiffs were likely to prevail on the merits of their various securities claims. The district court found that Blinder, Robinson's markups and markdowns were excessive,*fn9 that information about such markups and markdowns was material, and that Blinder, Robinson intentionally withheld that information from its customers. Moreover, the district court found that Blinder, Robinson intentionally mislead its customers about the scope of its research department and that its misleading statements in this regard were material. Thus, the district court concluded that plaintiffs were likely to succeed on their cause of action against Blinder, Robinson under rule 10b-5.
Moreover, because the district court held that section 12(2) applies to aftermarket trading, it concluded that plaintiffs were likely to succeed in all their claims under section 12(2), not just those involving purchases in which Blinder, Robinson was underwriting a primary distribution. Because the court found that Meyer Blinder had actual knowledge of the conduct complained about, it concluded that plaintiffs were likely to succeed in their claims against Blinder himself under section 15 of the 1933 Act and section 20(a) of the 1934 Act. Additionally, the district court found that because defendants had invested funds taken from plaintiffs in enterprises engaged in interstate or foreign commerce, plaintiffs were likely to succeed on the merits of their RICO claims under 18 U.S.C. § 1962(a) and -(d).
The district court next concluded that plaintiffs were likely to suffer irreparable injury absent a preliminary injunction designed to ensure that their potential future judgment would be satisfied. The court determined that in light of Blinder, Robinson's significant financial and legal difficulties, that firm was unlikely to have sufficient assets to satisfy plaintiffs' potential future judgment against it. As for Meyer Blinder, the court found that at his deposition he had failed to identify the certificates of deposit he had purchased in Hong Kong and failed to offer a plausible business explanation for his asset transfers. Based on those findings, the district court concluded that Blinder was attempting to put his assets beyond the reach of the court, which threatened the irreparable injury of making plaintiffs' likely future judgment against him unenforceable.
The district court also found that defendants would not be harmed by an injunction designed to protect plaintiffs' potential future judgment and that the public interest would be well served by such an injunction. Therefore, the district court granted plaintiffs a preliminary injunction encumbering defendants' assets, which was far broader in scope than the one plaintiffs had requested.
D. The District Court's Order
Paragraph 1 of the order enjoined defendants, as well as "all those persons with whom they act in concert," from "transferring funds and/or liquid assets outside of this country" without prior notice to plaintiffs and court approval.*fn10 Paragraph 2 ordered Meyer Blinder to repatriate all funds he had transferred overseas, "individually or jointly with Lillian Blinder," since January 1, 1989; to deposit those funds into a bank within the Eastern District of Pennsylvania; and to disburse those funds only after having given notice to plaintiffs and obtained court approval. Paragraph 3 ordered Meyer Blinder to cause Blinder International to repatriate all funds it had transferred overseas since January 1, 1989, and imposed the same restrictions on those funds as the restrictions imposed in paragraph 2. Paragraph 4 enjoined Meyer Blinder from liquidating, encumbering or transferring his interest in Blinder International without prior notice to plaintiffs and court approval, and paragraph 5 prevented Blinder International from liquidating, encumbering or transferring its interest in Blinder, Robinson without prior notice to plaintiffs and court approval. Paragraph 6 prohibited "[defendants] and all those acting in concert with them" from transferring assets outside the ordinary course of business and required all transfers within the ordinary course of business exceeding $250,000 to be reported to the plaintiffs. Paragraph 7 required Meyer Blinder to file an updated financial statement with the plaintiffs every 30 days, and paragraph 8 waived the usual requirement, see Fed.R.Civ.P. 65(c), that plaintiffs obtaining a preliminary injunction post a security bond.*fn11
Defendants appeal both the grant of the preliminary injunction and the class certification. In addition, Blinder International appeals the preliminary injunction insofar as it encumbers its assets.*fn12
II. CAN A DISTRICT COURT ISSUE A PRELIMINARY INJUNCTION TO PROTECT A DAMAGES REMEDY?
Appellants' threshold argument posits that a district court is simply without the power to issue a preliminary injunction in order to protect a potential future damages remedy, even if the usual requirements for obtaining preliminary equitable relief have been met.*fn13 In their submission, a federal court is powerless to protect a potential future damages remedy against a recalcitrant defendant with highly liquid assets, no matter how wrongful its conduct, how bad the injury it caused, or how brazen its attempt to evade judgment by secreting assets. Appellants argue that this baldly stated view is compelled by De Beers Consolidated Mines v. United States, 325 U.S. 212, 89 L. Ed. 1566, 65 S. Ct. 1130 (1945). The Fifth Circuit agrees. See In re Fredeman Litigation, 843 F.2d 821 (5th Cir. 1988), which held that an injunction was inappropriate to protect a potential future damages remedy under RICO even assuming "that the defendants are scoundrels who will try to escape judgment." Id. at 826. The First Circuit disagrees. See Teradyne, Inc. v. Mostek Corp., 797 F.2d 43, 53 (1st Cir. 1986) ("[A] preliminary injunction can be granted when it is necessary to protect the damages remedy . . . ."). This court has never squarely addressed the question. For the reasons that follow, we conclude that De Beers should not be read as broadly as appellants suggest.*fn14
Appellants highlight language from De Beers that, considered in isolation, might seem to support their position:
To sustain the [preliminary injunction] would create a precedent of sweeping effect. This suit . . . is not to be distinguished from any other suit in equity. What applies to it applies to all such. Every suitor who resorts to chancery for any sort of relief by injunction may, on a mere statement of belief that the defendant can easily make away with or transport his money or goods, impose an injunction on him, indefinite in duration, disabling him to use so much of his funds or property as the court deems necessary for security or compliance with its possible decree. And, if so, it is difficult to see why a plaintiff in any action for a personal judgment in tort or contract may not, also, apply to the chancellor for a so-called injunction sequestering his opponent's assets pending recovery and satisfaction of a judgment in such a law action. No relief of this character has been thought justified in the long history of equity jurisprudence.
De Beers, however, must be understood in its context. It involved a suit by the government to enjoin future antitrust violations by De Beers. The government sought no damages for past violations, for the applicable statutes gave the district courts no authority to award such relief. See id. at 219-20. Thus the government did not seek, nor could it have sought, a preliminary injunction to protect any potential future damages remedy to which it might become entitled. Instead, it argued that unless the court preserved a source of funds against which it could later threaten a contempt sanction, the government would have no practical means of enforcing whatever injunction might be granted. Given this background, the narrowness of the Court's holding becomes apparent. The preliminary injunction was inappropriate not because the plaintiff was seeking money damages, as appellants here contend; to the contrary, the injunction was inappropriate precisely because the plaintiff could not recover any money damages. Thus the Court's comment that the preliminary injunction "[dealt] with a matter wholly outside the issues in the suit." Id. at 220.
The De Beers Court expressly distinguished cases in which "an interlocutory injunction was granted with respect to a fund or property which could have been the subject of the provisions of any final decree in the cause." Id. (citing Deckert v. Independence Shares Corp., 311 U.S. 282, 85 L. Ed. 189, 61 S. Ct. 229 (1940)). Legally as well as economically, money is fungible -- if a debtor with $100,000 cash in its general coffers owes $10,000 to someone, there is no meaningful distinction among which of those dollars is actually paid to satisfy the debt. Thus, when a plaintiff seeks money damages and the funds encumbered by the preliminary injunction are worth no more than the amount reasonably in controversy, the injunction does involve "a fund or property which could [be] the ...