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1990 U.S. Dist. LEXIS 20867, *; Fed. Sec. L. Rep. (CCH) P94,881
82 of 437 DOCUMENTS
In re ZZZZ BEST SECURITIES LITIGATION
NO. CV 87-3574-RSWL
UNITED STATES DISTRICT COURT FOR THE CENTRAL
DISTRICT OF CALIFORNIA
1990 U.S. Dist. LEXIS 20867; Fed. Sec. L. Rep. (CCH) P94,881

January 8, 1990, Decided

January 8, 1990, FILED

DISPOSITION: [*1] Ladenburg's Motion to Modify the May 25 Order GRANTED and Ladenburg's
Motion to Dismiss Count X of the Complaint against Ladenburg GRANTED WITHOUT PREJUDICE.
CASE SUMMARY:

PROCEDURAL POSTURE: In securities litigation, defendant alleged defrauders filed certain motions in
response to the court's order, which ruled on the defrauders' motions to dismiss the corrected consolidated
complaint of plaintiff defrauded parties.
OVERVIEW: In order to prevail on the California common law claims of negligent misrepresentation,
fraud and deceit, and negligence, the defrauded parties had to prove the element of reliance. At issue was
whether California law allowed the defrauded parties to plead, in place of the traditional element of
reliance, the "fraud-on-the-market" or reliance on the integrity of the market theory. The court determined
that such a theory was not repugnant to California law. The court remained persuaded that its decision was
correct. That the "fraud-on-the-market" theory had not been utilized in California before did not imply that
it was contrary to California law. The court declined to certify the issue for interlocutory appeal. Immediate
appeal would not materially advance the ultimate termination of the litigation since the fraud-on-the-market
theory would be litigated in any event. Whether one of the defrauders was in a position to control the
corporation was a question of fact. Although the defrauded parties were correct that the existence of an
agency relationship was a question of fact, they were incorrect if they implied that an agency relationship
need not have been specifically alleged.
OUTCOME: The court upon reconsideration modified its order insofar as a defrauder's motion to dismiss
the agency count was denied. The court denied all other motions of the defrauders before the court.
CORE TERMS: certify, interlocutory appeal, fraud-on-the-market, immediate appeal, collectively,
reconsider, agency relationship, modify, Securities Act, minute orders, misrepresentation, reconsideration,
termination, materially, deceit, question of fact, join
LexisNexis(R) Headnotes
Torts > Business Torts > Fraud & Misrepresentation > General Overview

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1990 U.S. Dist. LEXIS 20867, *; Fed. Sec. L. Rep. (CCH) P94,881
[HN1] An inference of reliance will arise as to an entire class if material misrepresentations are found to
have been made to certain class members.
Governments > Courts > Judicial Precedents
[HN2] While the decrees of lower state courts should be attributed some weight, the decision is not
controlling where the highest court of the state has not spoken on the point.
Civil Procedure > Appeals > Appellate Jurisdiction > Interlocutory Orders
[HN3] Interlocutory appeal is appropriate when the issue for appeal is a controlling question of law as to
which there is substantial ground for difference of opinion and where an immediate appeal may materially
advance the ultimate termination of litigation. 28 U.S.C.S. 1292(b).
COUNSEL: For BRUCE DONIGER, plaintiff: William S Lerach, Milberg Weiss Bershad Hynes &
Lerach, San Diego, CA. Arthur N Abbey, Abbey Gardy & Squitieri, New York, NY. George C Zachary,
Rosenfeld Meyer & Susman, Beverly Hills, CA. David J Bershad, PRO HAC VICE, Milberg Weiss
Bershad Hynes & Lerach, New York, NY. Stuart D Wechsler, Wechsler Harwood Halebian & Feffer, New
York, NY. Marc M Seltzer, George A Shohet, Gretchen M Nelson, Louisa J McNulty, Corinblit & Seltzer,
Los Angeles, CA. Edward Labaton, PRO HAC VICE, Goodkind Labaton Rudoff & Sucharow, New York,
NY. Daniel J Mogin, Mogin & Kendrick, San Diego, CA. Kevin M Prongay, Prongay & Borderud, Pacific
Palisades, CA. For PRUNDENTIAL BACHE SECURITIES INC, plaintiff: Keith E Eggleton, Denise M
Amantea, Bruce G Vanyo, Wilson Sonsini Goodrich & Rosati, Palo Alto, CA. Marc M Seltzer, (See above),
George A Shohet, (See above). For P B FINANCE LTD, plaintiff: Keith E Eggleton, (See above), Denise M
Amantea, (See above), Bruce G Vanyo, (See above). Marc M Seltzer, (See above), George A Shohet, [*2]
(See above).
For STEVEN A GREENBERG, defendant: Jack I Samet, Baker & Hostetler, Los Angeles, CA. Jacob W
Heller, New York, NY. For ANAMETRICS ADVISORS INCORPORATION, defendant: Jack I Samet,
(See above). Jacob W Heller, (See above). For ERNST & YOUNG, defendant: William B Campbell, Todd
E Gordinier, Eve T Saltman, Margaret H Gillespie, Orrick Herrington & Sutcliffe, Los Angeles, CA. John
H Kanberg, Orrick Herrington & Sutcliffe, San Francisco, CA. For RANDOLPH PACE, defendant:
Andrew S Gelb, Wolf Rifik & Shapiro, Los Angeles, CA. Hartley T Bernstein, Bernstein & Wasserman,
New York, NY. For EDWARD M KRIVDA, defendant: Michael K Zweig, Sacks Zweig & Burris, Santa
Monica, CA. Edward M Krivda, defendant, Pro se, Newhall, CA. For LANDENBERG THALMANN &
COMPANY INCORPORATION, defendant: Jerome H Craig, Morrison & Foerster, Los Angeles, CA. Gary
Plessman, Eliot F Krieger, AUSA, Office of US Attorney, Civil Div, Los Angeles, CA. Judith Roxanne
Starr, Calvin House, Gutierrez & Preciado, Pasadena, CA. For ROBERT GROSSMAN, defendant: Jerome
H Craig, (See above). Gary Plessman, (See above), Eliot F Krieger, (See above). Judith Roxanne Starr. For
HUGHES HUBBARD & REED, defendant: Thomas Pollack, [*3] Jonathan Henry Steinberg, Irell &
Manella, Los Angeles, CA. For MARK R MOSKOWITZ, defendant: Thomas Pollack, (See above),
Jonathan Henry Steinberg, (See above). For HAL BERMAN, defendant: Don A Proudfoot, Jr, Graham &
James, Los Angeles, CA. Leonard Sharenow, Leonard Sharenow Law Offices, Santa Monica, CA.
For ERNST & WHINNEY, cross-defendant: John E Porter, Paul Hastings Janofsky & Walker, Los Angeles,
CA. William B Campbell, (See above), Todd E Gordinier, (See above), Eve T Saltman, (See above). For
GREENSPAN & COMPANY, cross-defendant: Richard F Oetting, Barton Klugman & Oetting, Los
Angeles, CA. For GEORGE GREENSPAN, cross-defendant: Richard F Oetting, (See above). For
HUGHES HUBBARD & REED, cross-defendant: Sara Datema Lipscomb, Los Angeles, CA. For
FRESHMAN MARANTZ ORLANSKI COPPER & KLEIN, cross-defendant: Mitchell J Albert, Haight
Brown & Bonesteel, Santa Monica, CA. For MARK A KLEIN, cross-defendant: Mitchell J Albert, (See
above).
JUDGES: RONALD S. W. LEW, United States District Judge

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1990 U.S. Dist. LEXIS 20867, *; Fed. Sec. L. Rep. (CCH) P94,881
OPINION BY: RONALD S. W. LEW
OPINION
ORDER
Several defendants in the ZZZZ Best Securities litigation have filed certain motions in response to the
Court's Order of May 25, 1989 (the "May 25 Order") [*4] which ruled on said defendants' motions to
dismiss plaintiffs' Corrected Consolidated Complaint (the "Complaint").
Defendants Hughes Hubbard & Reed and Mark R. Moskowitz (collectively "HH&R") have filed a motion
for reconsideration of that portion of the May 25 Order (specifically, Section I-F) which denies HH&R's
Motion to Dismiss Counts V (negligent representation), VI (fraud and deceit), and XI (negligence) of the
Complaint. In the alternative, HH&R moves the Court to certify Section I-F of the May 25 Order for
interlocutory appeal pursuant to 28 U.S.C. 1292(b). In addition, HH&R moves the Court to certify
Section I-D of the May 25 Order for interlocutory appeal pursuant to 28 U.S.C. 1292(b). In Section I-D
the Court denied HH&R's Motion to Dismiss plaintiffs' Section 11 and Section 12(2) (of the 1933
Securities Act) claims against HH&R as the "controlling persons" of the ZZZZ Best Corporation.
Defendant Ernst & Whinney ("E&W") moves the Court to reconsider those portions of the May 25 Order
which deny E&W's Motion to Dismiss Counts V and XI of the Complaint. In the alternative, E&W moves
the Court to certify said portions of the May 25 Order for interlocutory appeal pursuant [*5] to 28 U.S.C.
1292(b).
Defendants Rauscher, Pierce, Refsnes, Inc.; UN Financial Corp. (formerly Underwood Neuhaus & Co.,
Inc.); Baer & Company Inc.; Cantor Fitzgerald & Co. Inc.; Engler-Budd & Company, Inc.; Evans & Co.,
Inc.; Rosenkrantz Lyon & Ross, Inc.; Steinberg & Lyman and Whale Securities Corp. (collectively, the
"Non-Managing Underwriters") move the Court to reconsider those portions of the May 25 Order which
deny the Non-Managing Underwriters' Motion to Dismiss Counts V and VI of the Complaint. In the
alternative, the Non-Managing Underwriters' move the Court to certify said portions of the May 25 Order
for interlocutory appeal pursuant to 28 U.S.C. 1292(b).
Defendants Freshman, Marantz, Orlanski, Cooper & Klein and Mark A. Klein (collectively "Freshman")
join in HH&R's motions as well as in E&W's motions, and move the Court to reconsider or, in the
alternative, certify for immediate appeal those portions of the May 25 Order which deny Freshman's
Motion to Dismiss Counts V, VI, and XI of the Complaint.
Defendants Steven A. Greenberg and Anametrics Advisors, Inc. (collectively "Greenberg") join in E&W's
motion as it relates to Count V and move the Court to reconsider [*6] those portions of the May 25 Order
which deny dismissal of Counts V and VI with respect to Greenberg. In the alternative, Greenberg also
moves the Court to certify such issues for immediate appeal.
Defendant Ladenburg, Thalmann & Co. Inc. ("Ladenburg") moves the Court to modify the May 25 Order
insofar as said Order denies Ladenburg's Motion to Dismiss Count X (agency) of the Complaint.
Ladenburg moves the Court pursuant to Fed. R. Civ. P. 60. All other defendants move the Court pursuant to
Local Rules 7.13 and 7.16.
Plaintiffs filed a single opposition against the collective motions of the defendants, and HH&R, E&W, and
Ladenburg filed replies. Oral argument on the motions was originally scheduled for hearing on August 14,
1989 but was removed from the Court's law and motion calendar for disposition based on the papers
pursuant to Fed. R. Civ. P. 78.
Now, having read and considered the papers filed both in support of and in opposition to the motions, the
Court hereby issues the following:

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1990 U.S. Dist. LEXIS 20867, *; Fed. Sec. L. Rep. (CCH) P94,881
Ladenburg's Motion to Modify the May 25 Order is GRANTED and Ladenburg's Motion to Dismiss Count
X of the Complaint against Ladenburg is accordingly GRANTED WITHOUT PREJUDICE. Plaintiffs
[*7] shall have thirty (30) days in which to file an amended complaint pursuant to this Order.
All other defendants' motions now before the Court in this matter are hereby DENIED.
COUNTS V, VI, AND XI
In order to prevail in the California common law claims of negligent misrepresentation, fraud and deceit,
and negligence, a plaintiff must prove the element of reliance. At issue now and in the May 25 Order is
whether California law allows a plaintiff to plead, in place of the traditional element of reliance, the "fraudon-the-market" or "reliance on the integrity of the market" theory long accepted in federal securities law.
Although at the time the May 25 Order was filed no California court had ever applied the "fraud-on-themarket" theory, this Court, after careful consideration, determined that such a theory was not repugnant to
California law. In making this determination the Court relied significantly on Vasquez v. Superior Court, 4
Cal. 3d 800, 94 Cal. Rptr. 796, 484 P.2d 964 (1971), in which the California Supreme Court held that
[HN1] an inference of reliance will arise as to an entire class if material misrepresentations are found to
have been made to certain class members.
Defendants' reliance [*8] on two unpublished minute orders issued by the Honorable Barnet M.
Cooperman of the Superior Court of Los Angeles and their suggestion that these orders place the May 25
Order in a new light are in error. In the minute orders Judge Cooperman noted that the "fraud-on-themarket" theory is unknown in California jurisprudence and dismissed without prejudice claims which
depended on that theory. With all due respect to Judge Cooperman, however, this Court is not bound by his
authority. [HN2] "While the decrees of 'lower state courts' should be 'attributed some weight . . . the
decision [is] not controlling . . .' where the highest court of the state has not spoken on the point."
Commissioner of Internal Revenue v. Estate of Bosch, 387 U.S. 456, 465, 18 L. Ed. 2d 886, 87 S. Ct. 1776
(1967) (citing King v. Order of Travelers, 333 U.S. 153, 160-61, 92 L. Ed. 608, 68 S. Ct. 488 (1948)).
Furthermore, with respect to California law, these unpublished orders should not even be cited. See
California Rules of Court 977(a).
The Court is aware that it is dealing with a delicate and relatively untrammeled area of California law.
However, that the "fraud-on-the-market" theory has not been directly utilized in California to date does not
imply that it is [*9] contrary to California law. The Court remains persuaded that its decision in the May 25
Order accords with the spirit of the California Supreme Court as expressed in Vasquez.
The Court also declines to certify this issue for interlocutory appeal. [HN3] Interlocutory appeal is
appropriate when the issue for appeal is a controlling question of law as to which there is substantial
ground for difference of opinion and where an immediate appeal may materially advance the ultimate
termination of litigation. 28 U.S.C. 1292(b). In the instant case the Court is not convinced that immediate
appeal will materially advance the ultimate termination of the ZZZZ Best litigation since the fraud-on-themarket theory will be litigated in any event under the federal claims.
CONTROL PERSON LIABILITY
HH&R argues that it is outside the ambit of the 1933 Securities Act to hold corporate counsel liable as
"controlling persons" pursuant to Sections 11 and 12(2) of that Act. HH&R also argues that plaintiffs failed
to adequately plead such liability in Paragraph 51 of the Complaint. The Court, however, remains
persuaded that whether HH&R was in a position to control the ZZZZ Best Corporation is a question
[*10] of fact. Furthermore, plaintiffs pleading suffices to withstand a motion for dismissal: the allegations
specifically set forth in Paragraph 51 are clarified and supported by the facts expounded throughout the
entire Complaint.
LADENBURG MOTION

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1990 U.S. Dist. LEXIS 20867, *; Fed. Sec. L. Rep. (CCH) P94,881
Plaintiffs failed to name Ladenburg as a defendant in Count X (see Paragraph 47 of the Complaint), which
alleges an agency relationship between various defendants (the "Underwriter Defendants") and ZZZZ
Best. Although plaintiffs are correct that the existence of an agency relationship is a question of fact
(Opposition, p. 21), plaintiffs are incorrect if they imply that an agency relationship need not be specifically
alleged. As a result, the Court upon reconsideration modifies the May 25 Order insofar as Ladenburg's
Motion to Dismiss Count X against Ladenburg was denied.
IT IS SO ORDERED.
DATED: 1-8-90
RONALD S. W. LEW
United States District Judge