US SUPREME COURT DECISIONS

Petitioner, a stockholder in Hilton Hotels Corporation, brought this action on behalf of herself and other stockholders charging the corporation's officers and directors with fraud. The 60-odd-page complaint was signed by petitioner's counsel in compliance with Rule 11 of the Federal Rules of Civil Procedure. Pursuant to Rule 23(b), the complaint was verified by petitioner, who stated that some of the allegations were true and that, "on information and belief," she thought the others were true. In an oral examination by respondents' counsel, petitioner, an immigrant with practically no formal education and limited knowledge of the English language, showed that she did not understand the complaint, and that, in signing the verification, she relied on her son-in-law's explanation of the facts. Respondents then moved to dismiss the complaint on the ground that it was a sham, and that petitioner was not a proper party plaintiff. Petitioner's counsel filed two affidavits, one by himself and the other by petitioner's son-in-law, an investment advisor, demonstrating that extensive investigation had preceded the filing of the complaint. Despite the affidavits, the District Court dismissed the suit with prejudice on the ground that petitioner's affidavit was false and a sham. The Court of Appeals affirmed, although noting that "many of the material allegations of the complaint are obviously true, and cannot be refuted."

Held:

1. While Rule 23(b) was adopted and has served to discourage "strike suits" based on worthless claims, it was not written to bar derivative suits which have played an important part in protecting stockholders from management frauds. P. 383 U. S. 371.

2. The record here discloses that this is not a strike suit, but a suit by a small stockholder who, to protect her investment, acted in good faith on the basis of advice by her counsel and financial advisor son-in-law. Pp. 383 U. S. 371-372.

3. The purpose of the Federal Rules is to administer justice through fair trials, and Rule 23 cannot be construed as compelling chanrobles.com-red

Page 383 U. S. 364

dismissal of cases like this, where the record shows grave fraud charges based on reasonable beliefs growing out of careful investigation. P. 383 U. S. 373.

342 F.2d 596 reversed and remanded.