## Facts

- Dennis Greenman operated a Ponzi-type securities fraud for nearly four years beginning in 1977 while associated with multiple brokerage firms.
- Greenman falsely claimed to run a “riskless” arbitrage system but instead engaged in high-risk options trading, misappropriated investor funds, and concealed losses through diverted and fictitious account statements.
- More than 600 investors invested about $86 million and lost over $50 million.
- The SEC sued in 1981; the district court enjoined Greenman and appointed a receiver to marshal and distribute assets connected to the scheme.
- Because investor funds were commingled and tracing was not feasible, the court ordered interim receiver distributions based on each investor’s net principal investment, totaling about $17.28 million (roughly 35% of net losses for eligible investors).
- Investors also filed numerous private suits against Greenman, brokerage firms, and related parties under federal and state securities laws, seeking compensatory and punitive damages.
- The district court consolidated and stayed the private actions, certified a settlement class covering all investors with losses, and approved a global settlement.
- The settlement class was certified under Rule 23(b)(1), making it mandatory and binding on absent class members without opt-out rights.
- A subgroup of investors appealed, arguing the case sought primarily money damages and should have been certified, if at all, under Rule 23(b)(3) to allow opt outs.

## Issues

1. Whether a securities-fraud action seeking primarily money damages may be certified as a mandatory class under Rule 23(b)(1), thereby eliminating opt-out rights.
2. Whether a receivership and the risk of inconsistent outcomes justified certification under Rule 23(b)(1)(A) (incompatible standards of conduct) or Rule 23(b)(1)(B) (limited fund).

## Decision

- The Eleventh Circuit reversed the judgment certifying the Rule 23(b)(1) class and approving the settlement.
- The court held that the case was improperly treated as a mandatory (b)(1) class because the claims were primarily for compensatory damages.
- The court rejected the asserted “limited fund” justification because the record lacked specific findings that available assets were truly limited in the Rule 23(b)(1)(B) sense.
- The court rejected the “incompatible standards” justification because separate damages suits might yield differing results, but not the kind of incompatible standards of conduct contemplated by Rule 23(b)(1)(A).
- The case was remanded for further proceedings consistent with the opinion.

## Legal Principles

- Rule 23(b)(1) certification is generally inappropriate for class actions that primarily seek money damages; such cases ordinarily proceed under Rule 23(b)(3), which provides notice and opt-out protections.
- A receivership or the existence of substantial aggregate losses does not, without specific factual findings, establish a Rule 23(b)(1)(B) limited fund warranting mandatory treatment.
- The risk that separate damages actions may produce different liability determinations or damages awards does not, standing alone, constitute “incompatible standards of conduct” under Rule 23(b)(1)(A).
- Binding absent class members to a damages settlement without opt-out rights requires a valid Rule 23 basis; absent that, mandatory certification raises serious procedural fairness concerns.

## Conclusion

The Eleventh Circuit set aside a mandatory settlement class in a securities-fraud damages case, holding that Rule 23(b)(1) could not be used to eliminate opt-out rights absent a properly supported limited-fund or incompatible-standards showing, and indicating that damages claims generally require Rule 23(b)(3) treatment.


In re Dennis Greenman Sec. Litig., 829 F.2d 1539 (11th Cir. 1987)