Amicus Curiae Brief — Dura Pharmaceuticals, Inc. v. Broudo

MOTION FILED

FEB 4 - 2004 Ss

No. 03-932

IN THE

Supreme Court of the Cited States

DURA PHARMACEUTICALS. INC.. ef al..

Petitioners.

Vv.

MICHAEL BROUDO. ef al..

Respondents.

On Petition for a Writ of Certiorari

to the United States Court of Appeals

for the Ninth Circuit

MOTION FOR LEAVE TO FILE A BRIEF AS

AMICUS CURIAE AND

BRIEF FOR THE SECURITIES INDUSTRY

ASSOCIATION AS AMICUS CURIAE IN

SUPPORT OF PETITIONERS

GEORGE R. KRAMER CARTER G. PHILLIPS*

VICE PRESIDENT AND ACTING RICHARD D. BERNSTEIN

GENERAL COUNSEL JACQUELINE G. COOPER

SECURITIES INDUSTRY SIDLEY AUSTIN BROWN &

ASSOCIATION WoOobD LLP

1425 K Street N.W.. 7th Floor 1501 K Street. N.W.

Washington, D.C. 20005-3500 Washington, D.C. 20005

(202) 216-2000 (202) 736-8000

Counsel for Amicus Curiae

February 4, 2004 * Counsel of Record

ES TS

WILSON-EPES PRINTING Co., INC. — (202) 789-0096 - WASHINGTON, D.C. 20001

IN THE

Supreme Court of the United States

No. 03-932

DURA PHARMACEUTICALS, INC.. ef al..

Petitioners,

Vv.

MICHAEL BROUDO, ef al..

Respondents.

On Petition for a Writ of Certiorari to the

United States Court of Appeals for the Ninth Circuit

MOTION OF THE SECURITIES INDUSTRY

ASSOCIATION FOR LEAVE TO FILE A BRIEF

AS AMICUS CURIAE IN SUPPORT OF PETITIONERS

The Securities Industry Association (“SIA”) hereby

requests, pursuant to Rule 37.2 of the Rules of this Court,

leave to file the accompanying brief as amicus curiae in

support of Petitioners. SIA obtained the consent of the

Petitioners. Petitioners’ letter of consent has been filed with

the Clerk of the Court. Respondents, however, withheld their

consent from the filing of this brief in support of the Petition.

SIA offers this brief because the issues to be decided affect

the interests of the SIA and its members. SIA was established

in 1972 to represent the shared interests of nearly 600

securities firms. SIA member-firms (including investment

banks, broker-dealers, and mutual fund companies) are active

in all U.S. and foreign markets and in all phases of corporate

and public finance. The SIA has previously filed amici briefs

with the Court in cases concerning civil liability under the

federal securities laws. See, e.g.. Howsam vy. Dean Witter

Reynolds, Inc., 537 U.S. 79 (2002); Lampf, Pleva, Lipkind, —

Prupis & Petigrow v. Gilbertson, 501 U.S. 350 (1991);

Rodriguez De Quijas v. Shearson/American Express, Inc.,

490 U.S. 477 (1989); Shearson/American Express Inc. v.

Me Mahon, 482 U.S. 220 (1987).

The question presented by this case — the proper test for .

establishing “loss causation” in securities fraud cases — is an

issue of recurring importance for the securities industry and

investors. It is critically important to the SIA that member

firms not be converted into guarantors that investments will

be successful where no causal connection exists between the

misrepresentation alleged and a security’s decline in price. It

is equally important that a uniform rule of federal law be

applied across the country. The vast majority of SIA

members have nationwide operations, and a patchwork of

rules undermines the Congressional policy favoring national

markets. The SIA therefore has a vital interest in the issue

presented in this case and the SIA’s views can assist the Court

in deciding whether certiorari should be granted.

For the foregoing reasons, SIA’s Motion for Leave to File a

Brief as Amicus Curiae in support of Petitioners should be

granted.

Respectfully submitted,

GEORGE R. KRAMER CARTER G. PHILLIPS* -

VICE PRESIDENT AND ACTING RICHARD D. BERNSTEIN

GENERAL COUNSEL JACQUELINE G. COOPER

SECURITIES INDUSTRY SIDLEY AUSTIN BROWN &

ASSOCIATION WOobD LLP

1425 K Street N.W., 7th Floor 1501 K Street, N.W.

Washington, D.C. 20005-3500 Washington, D.C. 20005

(202) 216-2000 (202) 736-8000

Counsel for Amicus Curiae

February 4, 2004 * Counsel of Record

TABLE OF CONTENTS

Page

TABLE arene ii

INTEREST OF THE AMICUS CURIAE ..0.........00c0000c0000. l

SIT TT teceeneniencntnanasnnsasocsenetenqunetnesees 2

REASONS FOR GRANTING THE PETITION............. 2

-l. THIS CASE PRESENTS AN ACKNOWL-

EDGED, ESTABLISHED, AND LONGSTAND-

ING CIRCUIT SPLIT THAT WILL NOT BE

RESOLVED WITHOUT INTERVENTION BY

in oi crriertereissishaticinsinantbeatncenneunasnateoennensenenennes 2

ll. THE CIRCUIT SPLIT NEEDS TO BE

RESOLVED BECAUSE IT PRESENTS A

FREQUENTLY-LITIGATED ISSUE THAT

SIGNIFICANTLY AFFECTS THE SECURI-

TIES INDUSTRY AND INVESTORS................... 5

Te cc 8

(i)

il

TABLE OF AUTHORITIES

CASES Page

Abbey vy. Control Data Corp. (In re Control Data

Corp. Sec. Litig.), 933 F.2d 616 (8th Cir.

SUID cxcsnninzcansienmniniiniemeummansiaibiinaiiinenianiemiaiie 3

Bastian v. Petren Res. Corp., 892 F.2d 680 (7th

aa eal nisteestnscnnncrnanasnasinniiesitiasmiaiintuncitienaicuibiainin 2,3, 7,8

Blue Chip Stamps v. Manor Drug Stores, 421

ee Pe ee rniciterericrinrionscnnennisniusiteninneninnitntaiananin 6,7

Central Bank of Denver, N.A. v. First Interstate

Bank of Denver, N.A., 511 U.S. 164 (1994) ........ 7

Emergent Capital Inv. Mgmt., LLC v. Stonepath

Group, Inc., 343 F.3d 189 (2d Cir. 2003)............ 2,3

First Interstate Bank of Nev., N.A. v. Chapman &

Cutler, 837 F.2d 775 (7th Cir. 1988)... 3

Gebhardt vy. ConAgra Foods, Inc., 335 F.3d 824

eT 3

In re Initial Pub. Offering Sec. Litig., No. 21 MC

92 (SAS), 2003 WL 23096875 (S.D.N.Y. Dec.

Fiais Gee ciccacerainnammnieeieneneiinenedinienntans 4

Robbins v. Koger Props., Inc., 116 F.3d 1441

ee ee icinsncenctenmnennnniiiatiniininibatieiaiainies 3.4.6

Rousseff v. EF. Hutton Co., 843 F.2d 1326 (11th

aes See ncnnereseteicnentinninirenitemannncnssiantniannaaniaitddans 2

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

aT Oi incinecnenstnescacneennnarenseniesiesiatennanimmneanininieusintaicis 6

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

SE: aE criereterrnsenctccnsnsnmemninnstinndinapiennsmaabibantiniiaen 3

SCHOLARLY AUTHORITY

David S. Escoffery, Note, A Winning Approach to

Loss Causation Under Rule 10b-5 in Light of

the Private Securities Litigation Reform Act of

1995 (“PSLRA”), 68 Fordham L. Rev. 1781

ili

TABLE OF AUTHORITIES — continued

OTHER AUTHORITY Page

Cornerstone Research, Securities Class Action

Case Filings - 2002: A Year in Review (2003),

available at http://securities.stanford.edu/

clearinghouse research 2002 YIR/2002_yir.

INTEREST OF THE AMICUS CURIAE'

The Securities Industry Association (“SIA”), established in

1972 through the merger of the Association of Stock

Exchange Firms and the Investment Banker’s Association,

brings together the shared interests of nearly 600 securities

firms to accomplish common goals. SIA member-firms

(including investment banks, broker-dealers, and mutual fund

companies) are active in all U.S. and foreign markets and in

all phases of corporate and public finance. According to the

Bureau of Labor Statistics, the U.S. securities industry

employs more than 800,000 individuals. Industry personnel

manage the accounts of nearly 93-million investors directly

and indirectly through corporate, thrift, and pension plans. In

2002, the industry generated $222 billion in domestic revenue

and $304 billion in global revenues. (More information about

SIA is available on its home page: www.sia.com).

The question presented by this case — the proper test for

establishing “loss causation” in securities fraud cases — is an

issue of recurring importance for the securities industry and

investors. It is critically important to the SIA that member

firms not be converted into guarantors that investments will

be successful where no causal connection exists between the

misrepresentation alleged and a security's decline in price. It

is equally important that a uniform rule of federal law be

applied across the country. The vast majority of SIA

members have nationwide operations, and a patchwork of

rules undermines the Congressional policy favoring national

markets. The SIA therefore has a vital interest in the issue

presented in this case and the SIA’s views can assist the Court

in deciding whether certiorari should be granted.

‘Pursuant to this Court’s Rule 37.6, amicus Securities Industry

Association states that no counsel for any party authored this brief in

whole or in part, and no person or entity made a monetary contribution to

the preparation or submission of the brief.

2

INTRODUCTION

Compelling reasons warrant granting certiorari. The

petition presents an acknowledged conflict between a

growing number of circuits. The conflict concerns a central

issue — loss causation — that is contested in the vast majority

of securities cases. There are hundreds of filed securities

cases in the pipeline in which loss causation is a critical issue.

Only a decision by this Court will resolve this recurring and

important issue.

REASONS FOR GRANTING THE PETITION

I. THIS CASE PRESENTS AN ACKNOWLEDGED,

ESTABLISHED, AND LONGSTANDING CIRCUIT

SPLIT THAT WILL NOT BE RESOLVED

WITHOUT INTERVENTION BY THIS COURT.

The Ninth Circuit’s decision below acknowledges, extends,

and perpetuates a longstanding conflict among the circuits on

the proper test for establishing the “loss causation” element of

a claim under Rule 10b-5 of the Securities Exchange Act of

1934. “Loss causation” is “the causal link between the

alleged misconduct and the economic harm_ ultimately

suffered by the plaintiff.” Emergent Capital Inv. Mgmt, LLC

v. Stonepath Group, Inc., 343 F.3d 189, 197 (2d Cir. 2003).

“Loss causation” is the securities law equivalent to the

common law tort rule of proximate cause. /d. (“We have

often compared loss causation to the tort law concept of

proximate cause”); Bastian v. Petren Res. Corp., 892 F.2d

680. 683 (7th Cir. 1990) (“|W hat securities lawyers call ‘loss

causation’ is the standard common law fraud rule”.) “The

proximate cause [or loss causation] element of the claim

prevents section 10(b) and Rule 10b-5 from becoming a

system of investor insurance.” Rousseff v. E.F. Hutton Co.,

843 F.2d 1326, 1329 (11th Cir. 1988).

3

Under the Ninth Circuit’s decision, a plaintiff in a securities

fraud case satisfies the “loss causation” element of a claim

under Rule 10b-5 merely by pleading and proving that the

company’s share price was inflated when the plaintiff

purchased shares. See Pet. App. 9a (“[L]oss causation does

not require pleading a stock price drop following a corrective

disclosure or otherwise. It merely requires pleading that the

price at the time of purchase was overstated and sufficient

identification of the cause.”). The Eighth Circuit also follows

this approach. Abbey v. Control Data Corp. (In re Control

Data Corp. Sec. Litig.), 933 F.2d 616, 619-20 (8th Cir. 1991);

Gebhardt v. ConAgra Foods, Inc., 335 F.3d 824, 831 (8th

Cir. 2003).

In the Second, Third, Seventh, and Eleventh Circuits, by

contrast, the plaintiff must allege and prove that the

company’s share price declined when the allegedly concealed

information was disclosed, and any damages are limited to

that decline. Emergent Capital, 343 F.3d at 198-99;

Semerenko v. Cendant Corp., 223 F.3d 165, 184-85 (3d Cir.

2000); Bastian, 892 F.2d at 684-85; First Interstate Bank of

Nev., N.A. v. Chapman & Cutler, 837 F.2d 775, 779-80 (7th

Cir. 1988); and Robbins v. Koger Props., Inc., 116 F.3d 1441,

1447-49 (11th Cir. 1997).

An illustration will demonstrate the vastly different

outcomes under the conflicting approaches. Suppose plaintiff

P buys $200 of stock in defendant D. As time passes, the

value of P’s investment declines to $20. After this decline, D

announces the restatement of an accounting item. After this

announcement, the value of P’s shares remains at $20. P

brings a lawsuit under Rule 1(b-5. In the Second, Third,

Seventh, and Eleventh Circuits, the no-decline case is

dismissed on a Rule 12(b)(6) motion? In contrast, in the

Ninth and Eighth Circuits, P’s lawyers bring a class action

’ Of course, in every circuit, loss causation properly may be alleged in

the classic situation when the announcement causes a share price decline.

4

and hire an expert who opines on how much of the price P

paid was “inflated” because of the undisclosed accounting

issue. In these circuits, the no-decline case likely results in

discovery, summary judgment motions, often settlement, and

sometimes trial. Across the mass of securities cases, the

difference between the two conflicting approaches affects

hundreds of millions of dollars in damage awards,

settlements, attorneys’ fees, and costs imposed on the federal

judicial system.

As the 1997-2003 dates of the cited cases on both sides of

this conflict demonstrate, see supra, at 3, the circuit courts

have found nothing in the Private Securities Litigation

Reform Act of 1995 (or any subsequent legislation) that

resolves this conflict. Only a decision by this Court will

resolve the doctrinal divide.

This conflict has been expressly acknowledged by the

circuits for at least six years. The Eleventh Circuit

acknowledged the conflict in 1997 in Robbins. 116 F.3d at

1448 (noting that the Eighth and Ninth Circuits have held that

“plaintiffs establish loss causation if they have shown that the

price on the date of purchase was inflated because of the

misrepresentation,” but holding that “we refuse to do so

here”) (internal quotation marks omitted). And in the

decision below, the Ninth Circuit expressly acknowledged

that its holding conflicts with decisions of the Third and

Eleventh Circuits. Pet. App. 9a n.4 (“By contrast, other

circuits are less favorable to plaintiffs and do require

demonstration of a corrective disclosure followed by a stock

price drop to be alleged in the complaint.”) (citing Semerenko

and Robbins). See also In re Initial Pub. Offering Sec. Litig.,

No. 21 MC 92 (SAS), 2003 WL 23096875, at *2 (S.D.N.Y.

Dec. 31, 2003) (“The Courts of Appeals are deeply divided on

this question. The Eighth and Ninth circuits have recently

reaffirmed their holding that allegations of artificial inflation,

alone, are sufficient. The Third and the Eleventh circuits

have held otherwise.”) (footnotes omitted); David S.

5

Escoffery, Note, A Winning Approach to Loss Causation

Under Rule 10b-5 in Light of the Private Securities Litigation

Reform Act of 1995 (“PSLRA”), 68 Fordham L. Rev. 1781,

1797-1809 (2000) (discussing the circuit conflict).

The Ninth Circuit’s decision perpetuates this acknowledged

conflict. In addition, the recent vintage of the court of

appeals’ decisions perpetuating the conflict demonstrates that

only action by this Court will resolve the conflict over “loss

causation” in securities fraud cases.

Il. THE CIRCUIT SPLIT NEEDS TO BE RESOLVED

BECAUSE IT PRESENTS A FREQUENTLY-—

LITIGATED ISSUE THAT SIGNIFICANTLY

AFFECTS THE SECURITIES INDUSTRY AND

INVESTORS.

The Court should resolve the circuit conflict because the

proper standard for loss causation is a recurring and

frequently-litigated issue in securities fraud cases. Securities

lawsuits are proliferating as a result of the broad stock market

declines between early 2000 and March 2003. See, e.g.,

Cornerstone Research, Securities Class Action Case Filings —

2002: A Year in Review 2 (2003), available at http://

securities.stanford.edu/clearinghouse_research/2002_YIR/

2002 yir.pdf (reporting that the 224 securities class action

suits filed in 2002 was “31 percent greater than the number of

cases filed in 2001 [171] and the second highest of any year

since the passing of the Private Securities Litigation Reform

Act of 1995”) (brackets in original); id. at 17 (noting that 85

percent of the cases filed in 2002 involved Rule 10b-5

claims). Accordingly, there are many securities cases in the

federal court pipeline that are affected by this conflict. This

Court should resolve the conflict before numerous cases in

the pipeline are decided incorrectly and judicial resources are

wasted.

The lack of a uniform rule on loss causation is intolerable.

As matters now stand, litigants in different circuits are subject

6

to different legal standards with respect to this outcome

determinative issue. Indeed, the Ninth Circuit’s expansion of

the conflict is particularly significant because it means that

the circuits in which the largest number of securities fraud

cases are filed now have conflicting rules. See id. at 14 (the

top circuits in number of filings have been the Second, Third,

Ninth and Eleventh Circuits). The inconsistent legal

standards in those circuits result in diametrically opposed

outcomes for indistinguishable cases. It is therefore

important that the Court resolve the conflict before many

more cases are wrongly decided, resulting in_ either

inappropriate liability imposed on defendants or no redress

for legitimate victims.

Moreover, the Court should take this case to review the

conflict because the class action plaintiffs’ bar has shown that

it is not likely to seek certiorari when it loses on loss

causation so long as one or more circuits favors its position.

In Robbins, the Eleventh Circuit reversed an $81 million class

action judgment for the plaintiff class and acknowledged a

conflict with the Ninth Circuit, 116 F.3d at 1446, 1448.

Nonetheless, the nation’s leading plaintiffs’ class-action law

firm did not seek certiorari in Robbins. Rather, as long as the

plaintiffs’ bar can forum shop because some circuit has

favorable loss causation rules (and the plaintiffs’ bar can

bring new, nationwide class actions in a district court within

the circuit), the plaintiffs’ bar has every incentive to leave the

conflict festering.

The interlocutory posture of this case does not render it an

inappropriate vehicle for resolving- this important circuit

conflict. This Court has granted certiorari to resolve

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

court reversals of Rule 12(b)(6) dismissals of complaints.

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

7

private Rule 10b-5 plaintiff must be a purchaser or seller).

The proper standard for loss causation is a pure question of

law that can be fully addressed at the Rule 12(b)(6) stage.

Indeed, in this case, the district court used the proper standard

and granted petitioner’s Rule 12(b)(6) motion. Pet. App. 40a.

Amicus believes that it is particularly important for this

Court to grant review to establish a loss causation rule that

results in the dismissal of cases where there is no injury at the

Rule 12(b)(6) motion to dismiss stage. This Court has

recognized that “litigation under Rule 10b-5 presents a danger

of vexatiousness different in degree and in kind from that

which accompanies litigation in general.” Blue Chip Stamps,

421 U.S. at 739. As a result, defendants “expend large sums

even for pretrial defense and the negotiation of settlements”

when cases without merit are not dismissed at an

appropriately early stage. Central Bank of Denver, N.A. v.

First Interstate Bank of Denver, N.A., 511 U.S. 164, 189

(1994). This Court has noted that the “ripple effects” of such

“uncertainty and excessive litigation” under Rule 10b-5 can

include increased “litigation and settlement costs,” which may

be passed on to companies and their investors, and which can

make professionals reluctant to work with newer and smaller

companies. /d.°

The real-world effects of the unresolved conflict on loss

causation extend beyond the impact on particular litigants.

Amicus believes the standard set by the Ninth Circuit will

impose liability when no damage has been caused by the

defendants. This gives securities issuers, investment firms,

and professionals a strong disincentive to undertake or

* The absence of a private civil remedy under the federal securities laws

in cases where the plaintiff has suffered no injury does not affect federal

and state administrative and criminal remedies that are otherwise available

against wrongdoers even when there is no financial loss. See Bastian, 892

F.2d at 685 (“Defrauder: are a bad lot and should be punished, but Rule

10b-5 does not make them insurers against national economic

calamities.”).

|

8

participate in securities transactidns beneficial to our market

economy. The resulting suppression of a robust securities

market is harmful to the entire economy and is in nobedy’s

interest. See Bastian, 892 F.2d at 685 (“No social purpose

would be served by encouraging everyone who suffers an

investment loss because of an unanticipated change in market

conditions to pick through offering memoranda with a fine-

tooth comb in the hope of uncovering a misrepresentation.”).

At present, the loss causation standard is set on a circuit-by-

circuit basis and different courts have set opposing rules. The

resulting lack of uniformity causes inconsistent outcomes for

litigants and uncertainty for participants in the securities

markets. The Court should resolve the issue presented in this

case now in order to set a clear rule and avoid the undesirable

economic effects fostered by the acknowledged circuit split.

CONCLUSION

For the foregoing reasons, the petition for writ of certiorari

should be granted.

Respectfully submitted,

GEORGE R. KRAMER CARTER G. PHILLIPS*

VICE PRESIDENT AND ACTING RICHARD D. BERNSTEIN

GENERAL COUNSEL JACQUELINE G. COOPER

SECURITIES INDUSTRY SIDLEY AUSTIN BROWN &

ASSOCIATION WoOobD LLP

1425 K Street N.W., 7th Floor 1501 K Street, N.W.

Washington, D.C. 20005-3500 Washington, D.C. 20005

(202) 216-2000 (202) 736-8000

Counsel for Amicus Curiae

February 4, 2004 * Counsel of Record

ES