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A federal appeals court has refused to certify a class action RICO suit brought by investors in an HBO-related film production company who say they were misled by false promises that actor Michael Douglas would be producing several movies. In Johnston v. HBO Film Management Inc., a unanimous three-judge panel found that the lower court was correct in holding that class treatment was inappropriate because individual issues would overwhelm the case. “Trial of this case would involve essentially countless mini-trials to determine what alleged misrepresentation was made to each individual plaintiff, whether that person relied upon the statement, and the applicability of any defenses,” 3rd Circuit Judge Morton I. Greenberg wrote. “Obviously, establishing proof of each of these elements and defenses would present severe manageability problems for the court,” Greenberg wrote in an opinion joined by 3rd Circuit Chief Judge Edward R. Becker and Judge Carol Los Mansmann. Legally, the decision is significant because it departs from a line of 3rd Circuit cases that have allowed investors to proceed as a class by arguing that their reliance on misrepresentations should be presumed. Greenberg said the decision was not ignoring those precedents, but instead was insisting as it always has that investors must prove that misrepresentations were made uniformly to all investors when asking the courts to presume reliance. In cases where the alleged misrepresentations are omissions — the failure to inform investors or a critical fact — Greenberg found that courts have routinely presumed reliance because it would be nearly impossible for investors to prove such a negative. But in cases where the alleged misrepresentation was a false statement, Greenberg found that investors have the burden of showing that the sales pitch was consistently delivered to every investor. The investors in HBO’s Cinema Plus couldn’t meet that test, Greenberg found, since the testimony showed that brokers sometimes didn’t mention the involvement of Michael Douglas. Instead, Greenberg said, several brokers who sold units of Cinema Plus said they did not use a standardized script or a uniform presentation in selling shares of Cinema Plus and their discussions varied from customer-to-customer depending on the questions and comments of the investor. Cinema Plus is a limited partnership that was formed to finance the production of motion pictures. In the suit, investors claimed that general partners HBO Film Management Inc. and Entertainment Finance Services Inc. made several fraudulent misrepresentations in the marketing of Cinema Plus. Kidder Peabody & Co. Inc. and Smith Barney Inc., which marketed interests in Cinema Plus to the public, were also named as defendants. The suit alleged that the brokers distributed uniform marketing materials to their sales representatives that emphasized Michael Douglas’s participation in the production of films, but failed to disclose that he was not under contract. Investors said they were told they could “more than double their money” or “earn a multiple of their investment” in three years through films produced by Michael Douglas, Michael Phillips, and Aaron Russo.” In fact, Michael Douglas did not produce any films for Cinema Plus, although the limited partnership did finance and market four films. The films were largely unsuccessful financially, however, resulting in a loss for the partnership. The lower court initially dismissed the suit, but the 3rd Circuit revived it in 1997, finding that the facts alleged in the complaint stated a valid claim under RICO. But on remand, U.S. District Judge William L. Standish refused to certify the suit as a class action after finding that individual issues predominated. Now the 3rd Circuit has upheld Standish’s ruling. Greenberg found that the case easily met the four requirements of Rule 23(a) — numerosity, commonality, typicality and adequacy of representation. But turning to the requirements of Rule 23(b), Greenberg found that Standish was correct in finding that the plaintiffs could not show predominance and superiority. Significantly, Greenberg found that Standish did not err when he opted to look beyond the pleadings to determine whether the plaintiffs could prove that the defendants made uniform oral and written misrepresentations. Plaintiffs’ lawyers pointed to the prospectus and argued that because investors are presumed to have read these materials, the defendants made uniform misrepresentations to all putative class members. But Greenberg found that “the evidence of record, however, simply does not support the plaintiffs’ claims.” Instead, Greenberg found that some investors testified that they had not read the prospectus. As a result, the claims hinged on alleged oral misrepresentations that apparently varied from investor to investor, Greenberg said. “As a general rule, an action based substantially on oral rather than written communications is inappropriate for treatment as a class action,” Greenberg wrote. While courts have allowed class actions where the oral misrepresentations were uniformly delivered in a prepared sales pitch, Greenberg found that in the case of Cinema Plus, “we do not know whether or to what extent the representations facilitated the sales of Cinema Plus units.” Greenberg rejected the plaintiffs’ argument that they were victims of omissions since they were never told that Michael Douglas was not under contract. “Their primary claim is that the defendants misrepresented that Michael Douglas would participate in the production of two to four films for Cinema Plus. This claim should not be transformed into an omission simply because the defendants failed to disclose that the allegedly misleading fact was untrue,” Greenberg wrote. “Under an approach of that nature nearly any misrepresentation could become an omission, which … would allow the presumption to swallow the reliance requirement almost completely.” The plaintiffs’ claimed omission, he said, “would have no impact absent the misrepresentation, or in other words, a misrepresentation is necessary to create the specific expectation that the omission does not negate.” Instead, he said, the defendants’ alleged failure to inform investors that Michael Douglas was not under contract to produce movies for Cinema Plus “is meaningless without the representation that Douglas would produce movies.” The plaintiffs were represented by attorneys Anthony P. Picadio and Tybe A. Brett of Picadio McCall Kane & Norton and Thomas W. Henderson, all of Pittsburgh. Attorneys Perry A. Napolitano, Gregory B. Jordan, Roy W. Arnold and Traci S. Rea of Reed Smith’s Pittsburgh office represented HBO Film Management Inc. and Entertainment Finance Services Inc. Attorneys David A. Brownlee, Kenneth M. Argentieri, Michael J. Lynch, David L. McClenahan, Charles M. Tea and Paul E. Del Vecchio of Kirkpatrick & Lockhart in Pittsburgh represented Kidder Peabody & Co. and Smith Barney.

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