Supplemental Brief — Dura Pharmaceuticals, Inc. v. Broudo

Supreme Coun U s

(9) FILED

JUN 18 2004

No. 03-932 | OFFICE OF THE CLERK

IN THE

Supreme Court of the United States

DURA PHARMACEUTICALS, INC.; CAM L. GARNER;

JAMES W. NEWMAN; CHARLES W. PRETTYMAN; WALTER

F. SPATH; JAMES C. BLAIR; JULIA R. BROWN; JOSEPH C.

COOK, JR.; and MITCHELL R. WOODBURY,

Petitioners,

v

MICHAEL BROUDO; BALDEV S. GILL; LARRY MORGAN

IRA; LEONID SHVARTSMAN, (for G&S partnership);

NEIL SISKIND; ROBERTA SPECK; BRENT VOGT, on behalf

of themselves and all others similarly situated,

Respondents.

On PETITION FOR A Writ OF CERTIORARI TO THE

Unitep STATES Court OF APPEALS FOR THE NINTH CIRCUIT

SUPPLEMENTAL BRIEF FOR PETITIONERS

WILLIAM F. SULLIVAN

Counsel of Record

CHRISTOPHER H. MCGRATH

Tracey L. DeELANGE

PauL, HasTINGs, JANOFSKY

& Wacker LLP

3579 Valley Centre Drive

San Diego, CA 92130

(858) 720-2500

Attorneys for Petitioners

188044 ce

COUNSEL PRESS

(800) 274-3321 + (800) 359-6859

l

STATEMENT PURSUANT TO RULE 29.6

Petitioners’ corporate disclosure statement was set forth

at page / of their reply brief, and there are no amendments to

that statement.

il ul

TABLE OF CONTENTS TABLE OF CITED AUTHORITIES

Page Page

Cases:

Statement Pursuant to Rule 29.6 ............... 1

. Blue Chip Stamps v. Manor Drug Stores, 421 U.S.

1 ol gt ee er il CE 2

Table of Cited Authorities ...................0.. lil In re Commtouch Software Ltd. Sec. Litig., 2002

WL 3147998 (N.D. Cal. July 24, 2002) ........ 5

ee l

In re Electronic Data Systems Corp. Securities and

“ERISA” Litigation, 298 F. Supp.2d 544

(B.D. Tem. Jam. 13, 20046) ... 2... ccc ccc cece 3

In re Enron Corp. Securities, Derivative & “ERISA”

Litigation, 310 F. Supp.2d 819 (S.D. Tex.

EE 3

In re Syntex Corp. Sec. Litig., 95 F.3d 922 (9th Cir.

DPM EUCCEetesacbdccesesceccesceces 5

eee ie cen deeececévcececes 2

Robbins v. Kroger Properties, Inc., 116 F.3d 1441

es eee ccc cccecececceccces 6

Santa Fe Indus., Inc. v. Green, 430 U.S. 462 (1977)

Semerenko v. Cendant Corp., 223 F.3d 165 (3d Cir.

EE EEE EP 6

iv

Cited Authorities

Page

United States v. Bornstein, 423 U.S. 303 (1976) ... 2

United States v. General Motors Corp., 323 U.S. 373

DD Gc wivedecnsvcdoncseucseueeeennteeas l

l

Petitioners do not oppose respondents’ motion for leave

to file a supplemental brief in response to the Solicitor

General’s Brief for the United States as Amicus Curiae so

long as this Response is considered also.

1. This case is about the proper standard for pleading loss

causation. Whether reversal by the Supreme Court results in

a complete dismissal of respondents’ Albuterol Spiros claims

or the filing of an amended (albeit severely limited) complaint

by respondents, there can be no doubt that the determination

of the proper standard for loss causation “is fundamental to

the further conduct of the case” and therefore meets the

standard for review. United States v. General Motors Corp.,

323 U.S. 373, 377 (1945) (granting certiorari to determine

which items of loss would properly be part of damages).

As the Solic:tor General demonstrated, that standard is easily

met here. (SG Brief at 15-18).

If the Court reverses, one of two outcomes will happen.

The most likely is that the district court’s dismissal will be

affirmed. The only other possible outcome is that the

respondents will be required to replead to limit their Albuterol

Spiros claims to the decline after the November 1998

announcement. This will both eliminate all claims for class

members that sold before the November 1998 announcement,

and drastically reduce or negate any alleged damages for all

remaining class members. (See Pet. at 18; Pet. Reply at 8).

Thus, the Court’s ruling will be “fundamental to the further

conduct of the case” on remand whichever course is followed.

Accordingly, certiorari should be granted to resolve the

important and recurring circuit conflict on loss causation. '

1. Supreme Court precedent is replete with examples of cases

where the Court has accepted review of and decided issues concerning

(Cont'd)

2

2. Respondents’ Supplemental Brief recycles the arguments

previously expressed by them in their Response in Opposition

to Petition for Writ of Certiorari. Again, respondents fail in

their attempt to obfuscate the existence of the acknowledged

conflict among the circuits — a viewpoint that is shared by

no one else. The conflict was erpressly recognized by the

Ninth Circuit in its decision below as well as by other courts,

by petitioners, and by the Securities Industry Association.

It is also now acknowledged in this case by the Solicitor

General and the Securities and Exchange Commission.

That conflict has been thoroughly briefed by petitioners, the

Securities Industry Association as Amicus Curiae, and the

United States as Amicus Curiae. Those arguments need not

be reiterated here. As each of the briefs submitted by these

parties illustrates, and as the Ninth Circuit itself has expressly

(Cont'd)

the appropriate scope or measure of relief available to a plaintuff,

and such review was not impeded where applying the correct legal

standard would not result in dismissal of the action in its entirety.

See, e.g., Norfolk & Western Ry. Co. v. Ayers, 538 U.S. 135 (2003)

(addressed issue of whether asbestosis plaintiff could recover pain

and suffering damages for his fear of developing cancer, availability

of other relief was not in question); United States v. Bornstein, 423

U.S. 303 (1976) (in a False Claims Act case, the issue was how many

forfeitures the government was entitled to and how double damages

were to be calculated; there was no dispute as to the government's

entitlement to the forfeitures and to double damages). Also, as noted

in our prior submission, the Court has granted certiorari to resolve

important Rule 10b-5 issues in other cases involving circuit court

reversals of Rule 12(b)(6) dismissal of complaints. See Santa Fe

Indus., Inc. v. Green, 430 U.S. 462, 469 (1977) (establishing that

Rule 10b-5 does not cover mismanagement or breach of fiduciary

duty); Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 727

(1975) (establishing that private Rule 10b-5 plaintiff must be a

purchaser or seller).

3

acknowledged, the conflict is real, persistent and well-

positioned for resolution by this Court.’

3. Notwithstanding respondents’ assertion that the Solicitor

General has misunderstood and misstated Ninth Circuit law,

respondents nonetheless argue that the Solicitor General

is, in fact, aligned with their position that a decline in

stock price is not necessary to establish loss causation.

This interpretation of the Solicitor General’s position is not

reasonable. The Solicitor General clearly indicates that in

order to establish loss causation, there must be an actual

reductive effect in the price of the stock — whether in the

form of an overall decline in stock price or a decline in price

which is masked by an unrelated increase — that results from

disclosure of the alleged misrepresentation. As the Solicitor

General reasoned,

it cannot be said that an investor in a fraud-on-

the-market case who purchases a security at an

inflated price has suffered any loss at the time of

purchase, much less one caused by the defendant’s

misrepresentation. . . . Measuring the loss in such

a case as of the time of purchase, and not requiring

2. As the Solicitor General correctly pointed out, in their petition

for rehearing en banc, petitioners invited the Ninth Circuit to

reconsider its decision, in light of the inter-circuit conflict as well as

the intra-circuit conflict. (Pet. App. 52a-53a). The Ninth Circuit

denied the petition without comment. As such, the decision here is

the law of the Ninth Circuit on loss causation. Indeed, it already has

been cited as such by district courts. See Jn re Enron Corp. Securities,

Derivative & “ERISA” Litigation, 310 F. Supp.2d 819, 836 (S.D.

Tex. Mar. 29, 2004); Jn re Electronic Data Systems Corp. Securities

and “ERISA” Litigation, 298 F. Supp.2d 544, 560 (E.D. Tex. Jan.

13, 2004).

4

any allegation of a subsequent loss of value

attributable to the fraud, would grant a windfall

to investors. ...

(SG Brief at 11) (emphasis added).

In their attempt to align the Solicitor General's position

with their own, respondents rely solely on the Solicitor

General’s hypothetical example wherein the disclosure of

negative and positive information results in an overall net

increase in stock price and thus a masking of the reduction

in price caused by the negative disclosure. (SG Brief at 13).

This hypothetical is of no matter to this case because here

we do not have even an allegation of a post-disclosure price

reduction masked by other positive information. Instead,

respondents seek to recover losses for the February 25,1 998

decline in stock price, which, by their own admission, is not

causally related to the much later disclosure of the alleged

misrepresentations concerning Albuterol Spiros. Moreover,

the Solicitor General’s hypothetical still requires an allegation

and proof that disclosure of the correct information is what

reduced the price of the stock from what it “would otherwise

have been.” (SG Brief at 13). The Solicitor General clearly

stated its position that the Ninth Circuit's decision here

was incorrect and erroneous. Respondents’ efforts to

mischaracterize the position of the Solicitor General should

be disregarded. Which party will benefit by the legal rule

proposed by the Solicitor General is of no current import.

The sole question here is whether this Court should grant

certiorari, which the Solicitor General has urged it to do.

4. Respondents appear to posit that upon amending their

complaint, they can assert claims based on the November 3,

1998 Albuterol Spiros announcement by Dura and subsequent

5

share price decline on behalf of the putative class. In fact,

respondents cannot now attempt to expand their class to

include purchasers of Dura stock beyond February 25, 1998

through the November 3, 1998 announcement. Such an

expansion would be time-barred. See /n re Syntex Corp. Sec.

Litig., 95 F.3d 922, 935-36 (9th Cir. 1996) (extension of class

period denied where time-barred and would not relate back

because two groups would not have identity of interests and

claimants bought stock at different values and after different

disclosures and statements were made by defendants); /n re

Commtouch Software Ltd. Sec. Litig., 2002 WL 3147998

(N.D. Cal. July 24, 2002) (following Syntex and rejecting

attempt to expand class period where statute of limitations

had lapsed). Consequently, respondents are in fact limited to

attempting to fashion ailegations on behalf of the previously

defined putative class. Further, the leave to amend afforded

respondents by the Ninth Circuit’s Order on the issue of

scienter does not empower them to assert claims concerning

the November 3, 1998 announcement on behalf of even

this class, nor did respondents ever seek such relief.

(Pet. App. 15a-16a). Nowhere did the Ninth Circuit afford

leave to amend with respect to the November 1998 share

price decline or any other novel or previously unraised

causation theories.

Moreover, petitioners are unaware of any authority

supporting respondents’ novel construction of a securities

class action with an identified class period asserting a

damages claim associated with a share price decline which

occurred nine months after the conclusion of that class period.

Such a construct is inconsistent with the basic principles

courts consistently apply in securities class actions where it

is the behavior of the share price or investment during or

immediately at the end of the class period that is relevant to

6

demonstrate economic loss. See, e.g., Robbins v. Kroger

Properties, Inc., 116 F.3d 1441, 1448 (11th Cir. 1997)

(“Plaintiffs offered no evidence of a connection between

Deloitte’s misrepresentation and the decline in price of KPI

stock throughout the class period or following the October

1990 dividend cut [at the end of the class period].”);

Semerenko v. Cendant Corp., 223 F.3d 165, 185-86 (3d Cir.

2000) (holding that plaintiffs’ actual economic loss had been

sufficiently alleged where share price decline occurred at

conclusion of class period).

Respondents’ counsel are among the most sophisticated

practitioners in this field among the plaintiffs’ bar. They were

aware of all of the Albuterol Spiros developments, the

November 3, 1998 announcement and movements in Dura’s

share price up until February 1999 when they filed their first

complaint. It is not accidental that they consciously elected

to define their Class Period as ending on February 25, 1998

with its more substantial associated price decline. They had

the opportunity to amend this Class Period and these very

allegations as late as September 23, 2000, prior to the district

court’s dismissal of the action, and elected not to do so.

5. Respondents argue that because establishing loss

causation can be factually complicated and “potentially

messy,” it is not something to be resolved as a matter of law

at the pleading stage. (Resp. Supp. Brief at 6). As the cases

discussed in the Petition and the supporting briefs make clear,

the required element of loss causation is a rule of law that

applies equally at both the pleading and proof stages — a

proposition which respondents do not dispute. But this

argument is inapplicable to this case. Respondents never

alleged (in either simple or complicated fashion) any decline

in share price (actual or masked) from the information about

Albuterol Spiros announced on November 3, 1998.

7

This case presents the loss causation issue plainly and

cleanly. The decline in value for which respondents seek to

recover occurred on February 25, 1998, the day after the class

period ended, when the price of Dura’s stock dropped 47%.

Respondents do not allege, however, that the 47% drop was

caused by Dura’s announcement regarding Albuterol Spiros,

because it was not until nine months later in November 1998

that Dura and the public learned that the FDA did not approve

Albuterol Spiros. The facts of this case are neither complex

nor messy. Indeed, when the district court applied the proper

standard for loss causation, it granted petitioner’s Rule

12(b)(6) motion and dismissed respondents’ complaint and

its Albuterol Spiros-based allegations with prejudice.

This Court should grant the petition for certiorari.

Respectfully submitted,

WILLIAM F. SULLIVAN

Counsel of Record

CHRISTOPHER H. MCGRATH

Tracey L. DELANGE

Paui, Hastincs, JANOFSKY

& WALKER LLP

3579 Valley Centre Drive

San Diego, CA 92130

(858) 720-2500

Attorneys for Petitioners