Amicus Curiae Brief — Merrill Lynch, Pierce, Fenner & Smith Inc. v. Dabit

No. 04-1371

IN THE

Suprdme Court of the United States

MERRILL LYNCH, PIERCE, FENNER & SMITH, INC..

Petitioner,

Vv.

SHAD! DaBIT, on behalf of himself and

~ all others similarly situated,

Respondents.

On Petition for a Writ of Certiorari to the

United States Court of Appeals for the Second Circuit

MOTION FOR LEAVE TO FILE A BRIEF AS

AMICI CURIAE AND

BRIEF FOR THE SECURITIES INDUSTRY

ASSOCIATION AND THE BOND MARKET

ASSOCIATION AS AMICI CURIAE

IN SUPPORT OF PETITIONERS

GEORGE R. KRAMER CARTER G. PHILLIPS

SECURITIES INDUSTRY RICHARD D. BERNSTEIN*

ASSOCIATION APRIL E. FEARNLEY

1425 K Street, N.W. SIDLEY AUSTIN BROWN &

Seventh Floor WoOoD LLP

Washington D.C. 20005 1501 K Street, N.W.

(202) 216-2000 Washington, D.C. 20005

(202) 736-8000

MARIJORIE E. GROSS

THE BOND MARKET

SARAH M. STARKWEATHER |) = >

ASSOCIATION Aare ho |

360 Madison Avenue Pr man i

New York, New York 10017

(646) 637-9200 J

Counsel for Amici Curiae

May 16, 2005 * Counsel of Record

ee i ne es TEED

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

,

IN THE

Supreme Court of the United States

No. 04-1371

MERRILL LYNCH, PIERCE, FENNER & SMITH, INC..,

Petitioner,

Vv.

SHAL1 DABIT, on behalf of himself and

all others similarly situated,

Respondents.

On Petition for a Writ of Certiorari to the

United States Court of Appeals for the Second Circuit

MOTION OF THE SECURITIES INDUSTRY

ASSOCIATION AND THE BOND MARKET

ASSOCIATION FOR LEAVE TO FILE A BRIEF

AS AMICI CURIAE IN SUPPORT OF PETITIONERS

The Securities Industry Association (“SIA”) and the Bond

Market Association (“TBMA”) hereby request, pursuant to

Rule 37.2 of the Rules of this Court, leave to file the

accompanying brief as amici curiae in support of Petitioners.

SIA and TBMA obtained the consent of the Petitioners.

SIA and TBMA offer this brief because the issue to be

decided affects the interests of the SIA and TBMA and their

members. The Securities Industry Association brings

together the shared interests of nearly 600 securities firms to

accomplish common goals. SIA's primary mission is to build

and maintain public trust and confidence in the securities

markets. SIA members (including investment banks, broker-

dealers, and mutual fund companies) are active in all U.S. and

2

foreign markets and in all phases of corporate and public

finance. According to the Bureau of Labor Statistics, the U.S.

securities industry employs nearly 800,000 individuals, and

its personnel manage.the accounts of nearly 93-million

investors directly and indirectly through corporate, thrift, and

pension plans. In 2004, the industry generated an estimated

$227.5 billion in domestic revenue and $305 billion in global

revenues.

TBMA was created in 1976 and represents approximately

200 securities firms and banks that underwrite, trade and sell

fixed-income securities in the United States and in

international markets. TBMA members include all primary

dealers in U.S. government securities and all major dealers in

federal agency securities, mortgage-backed and asset-backed

securities, corporate bonds, money market instruments, and

funding instruments such as repurchase and securities lending

agreements. TBMA has worked with Congress, the SEC, the

Federal Reserve Board, the Federal Reserve Bank of New

York, state regulators and self-regulatory organizations to

foster effective, efficient regulation of the markets.

The SIA and/or TBMA have previously filed amici briefs

with the Court in cases affecting civil liability and the federal

securities laws. See, e.g., Dura Pharms., Inc. v. Broudo, 125

S. Ct. 1627 (2005); Howsam v. 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. McMahon, 482

U.S. 220 (1987).

The question presented by this case is whether the

preemption provision of the Securities Litigation Uniform

Standards Act (“SLUSA”’) applies to state-law class actions

by securities holders who claim that they refrained from

selling securities in reliance on a misrepresentation. This

issue is critically important to the SIA and TBMA because

such suits undermine the efforts of Congress to curb

3

vexatious litigation and enact uniform national standards for

securities class actions. The 5iA and TBMA therefore have a

vital interest in the issue presented in this case and the SIA

and TBMA’s views can assist the Court in deciding whether

certiorari should be granted.

For the foregoing reasons, SIA and 1®MA’s Motion for

Leave to File a Brief as Amici Curiae in support of Petitioners

should be granted.

Respectfully submitted,

GEORGE R. KRAMER CARTER G. PHILLIPS

SECURITIES INDUSTRY RICHARD D. BERNSTEIN*

ASSOCIATION APRIL E. FEARNLEY

1425 K Street, N.W. SIDLEY AUSTIN BROWN &

Seventh Floor WOOD LLP

Washington D.C. 20005 1501 K Street, N.W.

(202) 216-2000 Washington, D.C. 20005

(202) 736-8000

MARJORIE E. GROSS

SARAH M. STARKWEATHER

THE BOND MARKET

ASSOCIATION

360 Madison Avenue

New York, New York 10017

(646) 637-9200

Counsel for Amici Curiae

May 16, 2005 * Counsel of Record

TABLE OF CONTENTS

Ce Ca I crcnnncssensensenseccsnnsnsscscnsseneemnss

INTEREST OF THE AMICI CURIAE ..........ccccccceeeeeeeees

SUCRE PUUIDY cxsssssencensmnsemnmnsssannnenssensnsennsessnensssosaete

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

IV.

THIS CASE PRESENTS AN ACKNOWL-

EDGED CONFLICT THAT WILL NOT BE

RESOLVED WITHOUT INTERVENTION BY

Te I crtrennscnersenemensssemnmmemmensnnennen

THE SECOND CIRCUIT'S DECISION IS IN

CONFLICT WITH THE LANGUAGE OF

SLUSA AND THIS COURT'S PRIOR INTER-

PRETATION OF BLUE CHIP STAMPS ..........0000++

CONGRESS COULD NOT HAVE INTENDED

THAT HOLDER CLASS ACTIONS WOULD

HAVE MORE ROBUST REMEDIES THAN

THOSE FOR PURCHASER AND SELLER

See FG CIE ctcsennnssersscsnnssenmemmannsncsncsenensenens

THIS COURT SHOULD GRANT CERTIORARI

TO BLOCK THE SLIPPERY SLOPE INVITED

BY THE SECOND CIRCUIT’S APPROACH ........

Se ee asennnssensenpssencesacassesenennsnsnsseneanemnsomnsenst

(i)

Page

TABLE OF AUTHORITIES

CASES Page

_ Arent v. Distribution Scis., Inc., 975 F.2d 1370

SG Ge ecnnnnsennnnenennesmenntennenen 10

Basic Inc. v. Levinson, 485 U.S. 224 (1988)........... 6

Blue Chip Stamps v. Manor Drug Stores, 421

SE Fe Ge ee ntennartncnsncnmemusenasnnnmennen 5,6, 7,8

Boguslavsky v. Kaplan, 159 F.3d 715 (2d Cir.

BE cxonsncenoneptenssmusumntenseneannsnemniannamemmanenmnnantes 9

Burns v. Prudential Secs., 116 F. Supp. 2d 917

es Sa eee ccrensencncncensnntnenessentnemmmmmnnmeenae 11

Chanoff v. United States Surgical Corp., 857 F.

Supp. 1011 (D. Conn.), aff'd, 31 F.3d 66 (2d

Ss ee crertacsinninentcnptentcnnaitanniinaduatasiannenaainienes 1]

Crocker v. FDIC, 826 F.2d 347 (Sth Cir. 1987) ..... 10

Cyrak v. Lemon, 919 F.2d 320 (Sth Cir. 1990) ....... 9

Dabit v. Merrill Lynch, Pierce, Fenner & Smith,

Inc., 395 F.3d 25 (2d Cir. 2005) ..........cccccseesseeeees 3

Dura Pharms., Inc. vy. Broudo, 125 §S. Ct. 1627

GE iccennnsintnneeensseinauniatienimemmetinmemenn 5.6

Green v. Ameritrade, Inc., 120 F. Supp. 2d 795

(D. Neb. 2000), aff'd on other grounds, 279

ms SOP Ee Ge GREED cccsnssnmssmmnneeemmnmansens 11

Green v. Ameritrade, Inc., 279 F.3d 590 (8th Cir.

TTT tetenanpicibipuatenmenmmmmestneanedammnnnenenee 3

Holmes v. Securities Investor Prot. Corp., 503

Rs See el nrnentsnncennntesenenattntamnntamaniictmenes 7

Kagan v. Edison Bros. Stores, Inc., 907 F.2d 690

EEE, Getta icncunreisencspdensiniannuntivansnnentnitememenen 10

Kircher v. Putnam Funds Trust, 403 F.3d 478

(7th Cir. 2005), rehearing denied (May 2,

a inianariaiahatidiarhiteialtitashiieninrnat i niateiteaticianaitienatiaiaenls 3,4, 12

Levine v. Seilon, Inc., 439 F.2d 328 (2d Cir.

EERE eer es sonar woo eer nT me 1]

Morales v. Transworld Airlines, Inc., 504 U.S.

I cic ceaceea hc aidcienaaaeaiiedaldititlaaiaianiaiiciniiin S

iil

TABLE OF AUTHORITIES -— continued

Page

Pelletier v. Stuart-James Co., 863 F.2d 1550

SI UMEEE, Ci einterintncineehesterniiinidnennbintiateeneeemanntans 9

Rieger v. Drabinsky (In re Livent, Inc. Note-

holders Secs. Litig.), 151 F. Supp. 2d 371

ee 9

Riley v. Merrill Lynch, Pierce, Fenner & Smith,

Inc., 292 F.3d 1334 (11th Cir. 2002) ..............00. 3

United States v. O' Hagan, 521 U.S. 642 (1997)..... 6,7

STATUTES

ee 3,5, 8,9

ar Caneeoe OF WUD scncninesrntiennidennenenintnnnninitaeniinennes 6

LEGISLATIVE HISTORY

143 Cong. Rec. 10477 (daily ed. Oct. 7, 1997),

available at 1997 WL 614735 ........ccccccesseseeeeeeeees 8

OTHER AUTHORITIES

Cornerstone Research, Securities Class Action

Case Filings — 2004: A Year in Reviéw (2005),

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

inghouse_research/2004_ YIR/2004010305.

ee ee eee EE 4

Securities Industry Association, at http://www.

sia.com (last visited May 13, 2005)................0+. I

The Bond Market Association, af http://www.

bondmarkets.com (last visited May 13, 2005)..... 2

INTEREST OF THE AMICI CURIAE'

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

1972 through the merger of the Association of Stock

Exchange Firms and the Investment Bankers’ Association,

represents the shared interests of more than 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 nearly 800,000 individuals. Industry personnel

manage the accounts of nearly 93 million investors directly

and indirectly through corporate, thrift, and pension plans.

(More information about SIA is available at www.sia.com.)

The Bond Market Association (“TBMA”) represents

approximately 200 securities firms and banks that underwrite,

trade and sell fixed-income securities in the United States and

in international markets. TBMA’s members transact business

in a wide variety of public and private fixed-income

securities. Its membership comprises a diverse mix of

securities firms and banks, including large, multi-product

firms and companies with special market niches. It includes

all primary dealers in U.S. government securities, as

recognized by the Federal Reserve Bank of New York, and all

major dealers in federal agency securities, mortgage-backed

and asset-backed securities, corporate bonds, money market

instruments, and funding instruments such as repurchase and

securities lending agreements. From its inception in 1976,

TBMA has worked with its member firms, Congress, the

SEC, the Federal Reserve Board and the Federal Reserve

' Pursuant to this Court’s Rule 37.6, amici SLA and TBMA state that no

counsel for any party authored this brief in whole or in part, and no person

or entity other than amici and their members made a monetary

contribution to the preparation or submission of the brief.

2

Bank of New York, state regulators, and self-regulatory

organizations to foster effective, efficient regulation; to

enhance the liquidity and efficiency of the fixed income

markets; to encourage sound credit and business practices for

participants in such markets; and to promote the highest

levels of professional standards and conduct in such markets.

(More information about TBMA is available at www.

bondmarkets.com. )

The issue raised by this case is whether holders of

securities, who “refrained from selling” securities in reliance

upon an alleged misrepresentation, Pet. App.-4a-5a, can bring

state-law class actions that avoid the preemption provision of

the Securities Litigation Uniform Standards Act (“SLUSA”).

This issue is one of great import to the securities industry and

investors in this era of proliferating securities litigation. It is

critically important to the SIA and TBMA that the effort of

Congress to curb vexatious litigation in state law securities

fraud suits by enacting the uniform national requirements of

the Private Securities Litigation Reform Act (“PSLRA”), not

fall prey to creative plaintiffs who attempt to plead around

SLUSA preemption and the strict federal securities standards.

Amici therefore have a vital interest in the issue presented in

this case, and their views can assist the Court in resolving that

issue,

INTRODUCTION

Compelling reasons warrant granting certiorari. The

petition presents an acknowledged conflict in the circuit

courts of appeal. The conflict concerns an important and

recurring issue — whether the preemption provision of SLUSA

applies to securities fraud class actions on behalf of holders of

securities that allege they refrained from selling securities in

reliance on an alleged misrepreseniaiion. This conflict

threatens both the national uniformity that SLUSA and the

PSLRA sought to create and the efficient functioning of the

3

securities markets. Only a decision by this Court will resolve

this recurring and important issue.

REASONS FOR GRANTING THE PETITION

I. THIS CASE PRESENTS AN ACKNOWLEDGED

CONFLICT THAT WILL NOT BE RESOLVED

WITHOUT INTERVENTION BY THIS COURT.

IS U.S.C. § 78bb(f)(1) preempts any class action based

upon state law concerning a material misrepresentation or

omission “in connection with the purchase or sale of a

covered security.” As the Seventh Circuit has acknowledged,

there is a plain and undeniable conflict among the circuits

concerning whether this provision preempts a class action

brought by persons who already held the affected security

before the misrepresentation or omission was made. The

Seventh Circuit has held that such “ho'der” class actions are

preempted. Kircher v. Putnam Funds Trust, 403 F.3d 478,

483-84 (7th Cir. 2005), rehearing denied (May 2, 2005). This

is also the official position of the SEC. Pet. App. 91a-94a.

The Second Circuit (in the decision from which a writ of

certiorari is sought), Eighth Circuit, and Eleventh Circuit have

held that “holder” claims are not preempted. Dabit v. Merrill

Lynch, Pierce, Fenner & Smith, Inc., 395 F.3d 25, 43 (2d Cir.

2005); Riley v. Merrill Lynch, Pierce, Fenner & Smith, Inc.,

292 F.2d 1334, 1342-43 (llth Cir. 2002); Green v.

Ameritrade, Inc., 279 F.3d 590, 596-99 (8th Cir. 2002).

An_ illustration will demonstrate the vastly different

outcomes under the conflicting approaches. Suppose H buys

stock at a price of $40 per share in defendant D before any

alleged fraud. As time passes, the stock price climbs to $50.

D allegedly suffers a business setback that it conceals for a

period of time. After the alleged concealment begins, P

purchases D’s stock at $50 per share. Later, when the setback

is subsequently disclosed, D’s stock price drops to $30. H

has remained a holder of D’s stock throughout. H brings a

class action based on state law alleging that the concealment

4

caused the holder class to refrain from selling at the $50

price.”

Separately, P brings a federal § 10(b) class a tien alleging

that the concealment caused those who purchased after the

concealment to suffer a loss from the post-purchase decline

caused by the disclosure of the setbacks. In all federal

circuits, the purchaser class action may proceed.

The circuit conflict concerns the holder class action. In the

Seventh Circuit, the holder class action is preempted, and

immediately dismissed. In contrast, in the Second, Eighth,

and Eleventh Circuits, the holder case proceeds. Indeed, H's

state law class action probably sues for both fraud and

negligence, and for both compensatory and punitive damages,

“in the hope that a local judge or jury may produce an

idiosyncratic award.” Kircher, 403 F.3d at 484.

It is important that this Court resolve the SLUSA

preemption conflict now. In conjunction with the broad stock

market declines between early 2000 and March 2003, there

has been a proliferation of securities litigation. See, e.g.,

Cornerstone Research, Securities Class Action Case Filings -

2004: A Year in Review 2, 16 (2005), available at

http://securities.stanford.edu/clearinghouse_research/2004_ YI

R/2004010305.pdf. This includes numerous holder cases.

See Pet. at 17 n.5 (collecting 24 reported federal decisions

from 2000 to 2005 in holder cases). The Court should resoive

this conflict now before additional judicial resources are

wasted on this existing pipeline of preempted cases.

Most important, a prompt resolution from this Court is

essential to meeting SLUSA’s and the PSLRA’s goals of

national uniformity in securities litigation and an end to

abusive securities cases. See Pet. at 3-4, 11, 16 (discussing

* As we demonstrate infra at 10-11, the premise that a class of holders

could have sold at the $50 price if the truth was disclosed earlier is

economic nonsense.

5

legislative history). As this Court recognized in Blue Chip

Stamps v. Manor Drug Stores, 421 U.S. 723 (1975), faced

with potential securities class actions from all securities

holders — not just purchasers and sellers — potential securities

issuers and securities firms may conclude that ‘“*[t}he hazards

of a business conducted on these terms are [too] extreme.””

Id. at 748 (quoting Ultramares Corp. v. Touche, 174 N.E.

441, 444 (N.Y. 1931) (Cardozo, C.J.)). At a minimum, this

Court has reaffirmed that it is bad policy to permit the “‘in

terrorem’” effect produced by meritless but large class

actions that proceed past the pleading stages to discovery.

Dura Pharms., Inc. v. Broudo, 125 S. Ct. 1627, 1634 (2005)

(quoting Blue Chip Stamps, 421 U.S. at 741). The situation is

particularly bad here. Many defendants face simultaneously a

“holder” class action in state court and a “purchaser/seller”

class action in federal court. This encourages not only a

procedural morass of discovery conflicts and the like, but also

inconsistent substantive rulings. This Court should put a stop

to all of this now.

Il. THE SECOND CIRCUIT’S DECISION IS IN

CONFLICT WITH THE LANGUAGE OF SLUSA

AND THIS COURT’S PRIOR INTERPRETATION

OF BLUE CHIP STAMPS.

SLUSA preemption does not require a misrepresentation

“in connection with the purchase or sale [by the class

members’] of covered securit[ies.]” Rather, SLUSA

preemption requires only a misrepresentation “in connection

with the purchase or sale of a covered security.” 15 U.S.C.

§ 78bb(f)(1) (emphasis added). Holder class actions rely in at

least two ways On a misrepresentation “in connection with the

purchase or sale of a covered security.”

First, as this case illustrates, holder class actions necessarily

allege a misrepresentation “in connection with the purchase or

sale of a covered security” because they allege that a

misrepresentation inflated the company’s publicly-traded

share price. See Pet. App. 6a (discussing respondents’

6

“allegations concerning Merrill Lynch's causing certain

stocks to trade at ‘artificially inflated’ prices through the use

of deceptive devices alleged to be the ‘hallmarks of stock

manipulation’”). Such. alleged market price inflation requires

that numerous purchases be made in reliance on the alleged

material misrepresentation. Specifically, such alleged

inflation occurs only when “the market price of shares traded

on well-developed markets reflects all publicly available

information and, hence, any material misrepresentations.”

Basic, Inc. v. Levinson, 485 U.S. 224, 246 (1988) (emphases

added).

Second, holder class actions necessarily allege an additional

“connection” between the misrepresentation and “the

purchase or sale of a covered security.” Specifically, holder

class actions allege that disclosure of the misrepresentation

caused a decline in the company’s stock price. Such an

alleged decline exists only if a “lower price ... reflect{s]” that

actual purchases and sales were made in reaction to the

corrective disclosure of “the earlier misrepresentation.”

Dura, 125 S. Ct. at 1631-32.

The Second Circuit therefore properly did not say that the

plain or literal language of SLUSA’s preemption provision

fell short of covering a holder class action. Rather, its

decision rests entirely on the premise that when SLUSA was

enacted in 1998, Blue Chip Stamps was the existing,

authoritative interpretation of the exact same “language”

appearing in § 10(b) of the 1934 Securities and Exchange

Act, 15 U.S.C. § 78j(b). Pet. App. 27a, 29a. But this premise

is flawed. Indeed, this Court held in 1997, before SLUSA’s

enactment, that Blue Chip Stamps did not rest on interpreting

the “in connection with” language of § 10(b).

Specifically, in United States v. O'Hagan, 521 U.S. 642

(1997), the Court, quoting Blue Chip Stamps, 421 U.S. at 737,

held: “We so confined the §10(b) private right of action

because of ‘policy considerations.’"” 521 U.S. at 664. If

Congress in 1998 was borrowing the existing judicial

7

interpretation of the “in connection with” language in § 10(b)

when it enacted SLUSA, Congress surely would have been

borrowing this Court’s then-most recent decision, O’ Hagan.

See also Holmes v. Securities Investor Prot. Corp., 503 U.S.

258, 284 (1992) (O’Connor, J., joined by White and Stevens,

JJ., concurring in part and concurring in the judgment) (“The

purchaser/seller standing limitation in Rule 10b-5 damages

actions thus does not stem from a construction of the phrase

‘in connection with the purchase or sale of any security.’”);

Id. at 289-90 (Scalia, J., concurring in the judgment) (“[T]he

limitation we approved in Blue Chip Stamps was essentially a

legislative judgment rather than an interpretive one.”).

O'Hagan authoritatively held that Blue Chip Stamps was not

an interpretation of § 10(b)’s language. 521 U.S. at 664-65.

O'Hagan was right. The text of Blue Chip Stamps itself

demonstrates that Blue Chip Stamps addressed not the

interpretation of § 10(b)’s language, but rather the policy

question of how to confine the judicially-created implied right

of action for § 10(b) violations. The majority stated, “we

would by no means be understood as suggesting that we are

able to divine from the language of § 10(b) the express ‘intent

of Congress’ as to the contours of a private cause of action

under Rule 10b-5.” 421 U.S. at 737. The Court concluded,

we are not dealing here with any private right created by

the express language of §10(b) or Rule 10b-5. No

language in either of those provisions speaks at all to

the contours of a private cause of action for their

violation. . . . We are dealing with a private cause of

action which has been judicially found to exist, and

which will have to be judicially delimited one way or

another unless and until Congress addresses the

question.

Id. at 748-49 (emphases added).

Once it is recognized that Blue Chip Stamps is not based on

the “in connection with” language, there is no basis on which

8

to constrict that language in SLUSA to less than its natural

meaning. Under that meaning, holder class actions that

claim injury from the effects of a misrepresentation on a

stock’s market price, supra, at 5-6, are alleging a mis-

representation “in connection with the purchase or sale of a

covered security.” 15 U.S.C. § 78bb(f)(1) (emphasis added).

Ill. CONGRESS COULD NOT HAVE INTENDED

THAT HOLDER CLASS ACTIONS WOULD

HAVE MORE ROBUST REMEDIES THAN

THOSE FOR PURCHASER AND SELLER CLASS

ACTIONS.

Blue Chip Stamps plainly held that “holder” actions are

abusive. As Blue Chip Stamps elucidated,

a putative plaintiff, who neither purchases nor sells

securities but sues instead for intangible economic injury

such as loss of a noncontractual opportunity to buy or

sell, is more likely to be seeking a largely conjectural

and speculative recovery in which the number of shares

involved will depend on the plaintiff's subjective

hypothesis.

421 US. at 734-35.

‘Nothing in SLUSA’s legislative history refers to holder class actions.

The Second Circuit relied upon floor comments of Senator Dodd that

“(t}his legislation has been carefully crafted only to affect those types of

class actions that are appropriately heard on the federal level.” 143 Cong.

Rec. 10475, 10477 (daily ed. Oct. 7, 1997), available at 1997 WL 614735.

This sentence is merely a conclusion based on the prior sentence’s

statement that seven kinds of actions will remain “in State court.” /d.

Holder class actions were omitted from this list of preserved actions. The

ambiguous comments of a single Senator provide no basis to constrict

SLUSA’s natural meaning. See, e.g., Morales v. Trans World Airlines,

Inc., 504 U.S. 374, 383-85 & n.2 (1992) (holding that “natural meaning”

of preemption provision of “‘any . . . regulation . . . relating to rates,

routes, or services’ reached state regulation of advertising even though

the “legislative history contains no statements specifically addressed to

state regulation of advertising”).

9

It is completely illogical to think that in SLUSA Congress

intended holder class action plaintiffs to have more robust

remedies and litigation tools than are available to class action

plaintiffs who actually purchased or sold securities in reliance

upon a misstatement or omission. SLUSA prevents

purchasers and sellers of a security from bringing class action

claims based on state law even if they are pendent to their

federal claims. See 15 U.S.C. § 78bb(f)(1) (preempting state

law class actions claims “in any State or Federal court”);

Rieger v. Drabinsky (In re Livent, Inc. Noteholders Secs.

Litig.), 151 F. Supp. 2d 371, 385, 442-43 (S.D.N.Y. 2001)

(dismissing pendent state claims for common law fraud,

negligence and negligent misrepresentation by purchasers).

Purchasers and sellers bringing a § 10(b) class action must

prove scienter and loss causation, satisfy heightened pleading

standards, and comply with an initial stay of discovery, and

(if they prevail) their remedies exclude punitive damages.

See Boguslavsky v. Kaplan, 159 F.3d 715, 721 (2d Cir. 1998)

(“punitive damages are unavailable”); Cyrak v. Lemon, 919

F.2d 320, 326 (Sth Cir. 1990) (“Punitive damages are not

recoverable in a 10b-5 action.”); Pelletier v. Stuart-James

Co., 863 F.2d 1550, 1557 (llth Cir. 1989) (“Actual

damages’ has been interpreted to mean some form of

economic loss and does not include punitive damages.”).

If holders are permitted to bring state law class actions, the

arsenal at their disposal would often include punitive

damages, the exaction of burdensome, costly discovery prior

to the motion to dismiss stage, and relaxed pleading

standards. Holder class plaintiffs often would have multiple

state-law theories of recovery at their disposal including

fraud, negligent misrepresentation, and statutory remedies

such as unfair and deceptive trade practices (often with treble

damages). Many such state causes of action are also accorded

a lengthier statute of limitations period. It is incompre-

hensible that Congress (or anyone) would have created a

system where class actions for securities holders have more

10

robust potential remedies and litigation tools than class

actions for purchasers and sellers.

Such an incomprehensible disparity would be even more

inexplicable because every federal court to examine a holder

claim before SLUSA concluded that, as a class, holders

cannot be injured.’ This is best explained in Crocker v.

FDIC, 826 F. 2d. 347, 351 (Sth Cir. 1987) (footnote omitted):

The flaw in the [holders’] argument is that it assumes

a market for the stock existed at an artificially high

price. This inflaied price, and hence the particular

market for the stock, was maintained only because of the

wrongdoing of the [defendants], who concealed material

financial information from the shareholders and the

public that would have demonstrated the failing

condition of the [company]. It follows that, had this

information been released, the stock price would have

immediately and precipitously fallen especially if, as is

implicit in the [holders’] theory, an entire class of

shareholders had simultaneously dumped their stock on

the market. . Thus, there would have been no market for

the stock at the artificially high price. Without such a

market, the [holders’] envisioned “profit opportunity”

evaporates into hardly more than an illusion.

Applying Crocker’s analysis to our earlier illustration,

supra, at 3-4, it is clear what would have happened to the

holder class if there had been no post-purchase misrepre-

sentation concerning the business setback. If the business

setback had been promptly disclosed, D’s stock price would

have fallen from $50 to $30 sooner. The misrepresentation

thus postponed the holders’ recognition of a loss but it did not

cause any loss. For the holder class, the business setback

caused any loss. Accord Kagan v. Edison Bros. Stores, Inc.,

907 F.2d 690, 691-92 (7th Cir. 1990); Arent v. Distribution

* Such “holder” claims were brought in either diversity or RICO cases.

Seis., Inc., 975 F.2d 1370, 1374 (8th Cir. 1992) (“[A]ny

injury to plaintiffs was not caused by [defendant's] failure to

disclose. Plaintiffs were not harmed because they were

unable to realize the true value of their stock — they were

harmed because the true value of their stock was zero.”);

Chanoff v. United States Surgical Corp., 857 F. Supp. 1011,

1018 (D. Conn. 1994), aff'd, 31 F.3d 66 (2d Cir. 1994) (per

curiam), see also Levine v. Seilon, Inc., 439 F.2d 328, 329,

333-34 (2d Cir. 1971) (Friendly, J.) (holding that even if the

purchaser-seller requirement was overruled, a holder could

not prove injury, because “if the representation had not been

made, the price of the stock would not have been inflated, and

there would have been no gain to be realized by a sale”). It is

simply senseless to read SLUSA’s preemption provision as

preserving more robust state law remedies for classes of

uninjured securities holders than for classes of potentially

injured securities purchasers and sellers.

IV. THIS COURT SHOULD GRANT CERTIORARI

TO BLOCK THE SLIPPERY SLOPE INVITED BY

THE SECOND CIRCUIT’S APPROACH.

As the SEC has noted, Pet. App. 96a & n.5, if failure to

satisfy the purchaser/seller element for private § 10(b) actions

may be used to defeat SLUSA preemption, plaintiffs will

surely argue that so too does failure to satisfy 10(b)’s scienter

requirement. See Green v. Ameritrade, Inc., 120 F. Supp. 2d

795, 798-99 (D. Neb. 2000) (holding, in part, that a state law

“claim [was] not preempted by SLUSA because no proof of

scienter [was] required” by the state law claim), aff d on other

grounds, 279 F.3d 590 (8th Cir. 2002); Burns v. Prudential

Secs., 116 F. Supp. 2d 917, 924-26 (N.D. Ohio 2000)

(“[P)laintiffs’ allegations do not satisfy the scienter

requirement for securities fraud under § 10(b) and Rule 10b-

5. Because § 10(b) and Rule 10b-5 are nearly identical to the

removal criteria set forth at § 78bb(f)(1) of SLUSA, it follows

that removal is improper, and remand to state court is the

appropriate course.”). Thus, the Second Circuit's approach

}?

~

invites a slippery slope where arguably, even purchaser/seller

class actions could end up in state court as negligence class

actions. That path is inconsistent with SLUSA’s goals of

national uniformity and ending vexatious securities lawsuits.

Instead, this Court should grant certiorari and establish a

nationwide rule that SLUSA’s “preemptive effect is not

confined to knocking out state-law claims by investors who

have winning federal claims, as plaintiffs suppose. It covers

both good and bad securities claims — especially bad ones.”

Kircher, 403 F.3d at 484.

CONCLUSION

For the foregoing reasons, the Court should grant certiorari.

Respectfully submitted,

GEORGE R. KRAMER CARTER G. PHILLIPS

SECURITIES INDUSTRY RICHARD D. BERNSTEIN*

ASSOCIATION APRIL E. FEARNLEY

1425 K Street, N.W. SIDLEY AUSTIN BROWN &

Seventh Floor Woop LLP

Washington D.C. 20005 1501 K Street, N.W.

(202) 216-2000 Washington, D.C. 20005

(202) 736-8000

MARJORIE E. GROSS

SARAH M. STARKWEATHER

THE BOND MARKET

ASSOCIATION

360 Madison Avenue

New York, New York 10017

(646) 637-9200

Counsel for Amici Curiae

May 16, 2005 * Counsel of Record

Qo)

No. 04-1371

IN THE

Supreme Court of the United States

MERRILL LYNCH, PIERCE, FENNER & SMITH, INC.,

Petitioner,

V.

SHADI DABIT, on behalf of himself and all

others similarly situated,

Respondents.

On Writ or CERTIORARI TO THE

UNITED STATES COURT OF APPEALS FOR THE SECOND CIRCUIT

JOINT APPENDIX

WILLIAM B. FEDERMAN Jay B. KASNER

Counsel of Record Counsel of Record

STuART W. EMMONS Preeta D. BANSAL

FEDERMAN & SHERWOOD Epwarp J. Yopowrz

120 North Robinson Avenue Scott D. Musorr

Suite 2720 JOANNE GABORIAULT

Oklahoma City, OK 73102 SKADDEN, ARPS, SLATE,

(405) 235-1560 MEAGHER & FLom LLP

Counsel for Respondents Four Tunes Square

New York, NY 10036

(212) 735-3000

Counsel for Petitioner

PETITION FOR CERTIORARI FILED APRIL 11, 2005

CERTIORARI GRANTED SEPTEMBER 27, 2005

i

TABLE OF CONTENTS

Appendix A — Relevant Docket Entries Of The

United States Court Of Appeals For The Second

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Appendix B— Relevant Docket Entries Of The

United States District Court For The Southern

District Of New York (Foley Square) .........

Appendix C — Relevant Docket Entries Of The

United States District Court For The Western

District Of Oklahoma (Oklahoma City) .......

Appendix D — Class Action Complaint Dated April

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Appendix E — Order Of The United States District

Court For The Western District Of Oklahoma

Dated And Filed October 11,2002 ...........

Appendix F — First Amended Class Action

Complaint With Exhibits Dated October 21, 2002

Appendix G — Transfer Order Dated October 11,

EE oh oe nb aneededuseds handed bas esinaedas

The following opinions, statutes, regulations and brief

have been omitted in printing this joint appendix because

they appear on the following pages in the appendix to the

Petition for a Writ of Certiorari:

Page

Opinion Of The United States Court Of Appeals For

The Second Circuit Decided January 11,2005... — la

Opinion And Decision Of The United States District

Court For The Southern District Of New York

I Ob nni<n donde cégccanennase 53a

Relevant Statutes And Regulations ............. 56a

Brief Of The Securities And Exchange Commission

CIID oils 0 epee bide bean debanale 72a

a

la

APPENDIX A — RELEVANT DOCKET ENTRIES

OF THE UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

GENERAL DOCKET

US Court of Appeals for the Second Circuit

Court of Appeals Docket #:03-7499-cv

Nsuit: 3850 STATUTES-Secur Comm Exchange

Dabit v. Merrill Lynch Filed: 5/14/03

Appeal from: SDNY (NEW YORK CITY)

Case type information:

Civil

Private

None

Lower court information:

District: 02-cv-8472

Trial Judge Milton Pollack

MagJudge:

Date Filed: 10/23/02

Date 4/10/2003

order/judgement:

Date NOA filed: 5/9/2003

2a

Appendix A

Fee status:Paid

Panel Assignment:

Panel: JLO SS RCW 40 Foley Sq.

Date of decision 1/11/05 :

Prior cases: NONE

Curreni cases: NONE

Docket as of April 25, 2005 7:11 pm

Docket No. [s] : 03-7499-cv(L), 03-7458-cv(CON)

SHADI DABIT, on behalf of himself and all others similarly

situated, JG INVESTMENTS and IRLYS GUY, on behalf

of themselves and all others similarly situated,

Plaintiffs-Appellants,

Vv.

MERRILL LYNCH, PIERCE, FENNER & SMITH, INC., a

corporation and MERRILL LYNCH & CO., INC.,

Defendants-Appellees.

3a

Appendix A

Shadi Dabit Clell I. Cunningham Esq.

Plaintiff- Appellant [ ret ]

Dunn Swan & Cunningham

210 Park Ave.

Oklahoma City , OK , 73102

405-235-8318

SEC Eric Summergrad Esq.

Amicus Curiae [LDn]

U.S. Securities & Exchange Commis

450 Sth St., NW Principal Assista

Washington , DC , 20549

202-942-0955

Merrill Lynch, Pier Jay B. Kasner Esq.

Defendant-Appellee [ ret }

Skadden Arps Slate Meagher & Flom

4 Times Square

New York , NY , 10036

212-735-3000

Shadi Dabit William B. Federman Esq.

Plaintiff-Appellant [ ret ]

Federman & Sherwwod

120 N. Robinson Ave.

Oklahoma City , OK , 73102

405-235-1560

6/11/03

6/11/03

7/8/03

8/1/03

8/1/03

9/5/03

4a

Appendix A

Scheduling order #1 filed. Record on appeal due

on 7/28/03. Appellant’s brief and appendix due on

8/1/03. Appellee’s brief due on 9/5/03. Argument

as early as week of 10/20/03. It is recommended

that this appeal be heard in tandem with 03-7458,

IJG v. Merrill Lynch. (SB)

Ordered that the following appeals Docket

Nos: 03-7458 are to be heard together. SEE

SCHEDULING ORDER #1.

Letter dated 6/16/03 from William B. Federman

notifying the Court that this appeal and appeals

no. 03-7458 and 03-7999 are not similar and

should not be consolidated received

* * *

Appellant Shadi Dabit brief FILED with proof of

service.

Appellant Shadi Dabit joint appendix filed w/pfs.

Number of volumes: |.

Appellee Merrill Lynch, Pier brief filed with

proof of service.

9/22/03

12/15/03

3/22/04

3/22/04

Sa

Appendix A

Appellant Shadi Dabit reply brief filed with proof

of service.

Case heard before OAKES, SOTOMAYOR,

WESLEY, C.JJ. . (TAPE: CD dated: December

15, 2003)

Letter sent to Allan Capute: requesting an amicus

brief.

Notice to counsel in re: 3/22/04 letter sent

requesting amicus brief.

Dear Mr. Capute:

The panel in the above-referenced appeals

would like to invite the SEC to submit its views

on these cases with regard to the questions listed

below:

1. Whether the jurisprudence interpreting “in

connection with” under § 10(b) of the Securities

Exchange Act of 1934, 15 U.S.C. § 78j(b)

(“§ 10(b)”), and Rule 10b-5, 17 C.F.R. § 240.10b-

5 (“Rule 10b-5”), should be adopted for the

Securities Litigation Uniform Standards Act of

1998, 15 U.S.C. §§ 77p and 78bb(f) (“SLUSA”)?

6a

Appendix A

2. Whether the purchaser-seller rule of standing or

otherwise enunciated in Blue Chip Stamps v. Manor

Drug Stores, 421 U.S. 723 (1975), should be

adopted for SLUSA, so that an action will be

preempted under SLUSA only if the action alleges

that the plaintiff(s) actually purchased or sold a

security as a result of the alleged misrepresentation

or omission?

3. Whether SLUSA preempts actions that could

not have been brought pursuant to § 10(b) and

Rule 10b-5?

4. Where a brokerage allegedly issued

intentionally false and biased research reports to

garner investment banking business, whether the

following state law claims arising from that

activity meet SLUSA’s “in connection with”

requirement:

(a) claims brought by the brokerage’s clients

for annual flat fees paid to the brokerage for

unbiased investn ‘ent research, which fees are not

triggered by any actual purchases or sales of

securities;

(b) claims brought by the brokerage’s clients

for commissions fees paid to the brokerage for

investing in securities recommended by the

biased research;

7a

Appendix A

(c) claims brought by the brokerage’s broker-

employees for investment losses suffered in

retaining securities as a result of the brokerage’s

falsely touting the securities’ values; and

(d) claims brought by the brokerage’s broker-

employees for the loss of future commissions to

be paid by their clients who left the brokerage as

a result of the biased research?

5. Whether the SEC takes a position on any other

claims or arguments raised by the parties in these

cases?

The Court hereby respectfully requests that

the Securities and Exchange Commission submit

its response addressing these questions, within

forty-five (45) days after the date of this letter.

Upon the request of the Commission, I will

furnish the Commission with a copy of the briefs

and the appendices on appeal in these cases.

The parties are allowed fifteen (15) days to

respond to the SEC’s submission. The parties

response is limited to ten (10) typewritten, single-

spaced pages.(RBM)

8a

Appendix A

6/22/04 AMICUS CURIAE SEC, brief filed (as per the

1/11/05

Court’s 3/22/04 order) with proof of service.

Judgment of the district court is Affirmed in part

and Vacated and Remanded in part by published

signed opinion filed. (SS)

* . * *

9a

APPENDIX B— RELEVANT DOCKET ENTRIES

OF THE UNITED STATES DISTRICT COURT FOR

THE SOUTHERN DISTRICT OF NEW YORK

(FOLEY SQUARE)

U.S. District Court

Southern District of New York (Foley Square)

CIVIL DOCKET FOR CASE #: 1:02-cv-08472-MP

Dabit v. Merrill Lynch Date Filed: 10/23/2002

Assigned to:

Judge Milton Pollack Jury Demand: None

Demand: $0 Nature of Suit: 850

Securities/Commodities

Jurisdiction: Federal Question

Case in other court: USDC-WDOK, 5:02-cv-564

MDL PANEL, MDL1484

Cause: 28:1331 Fed. Question: Other

No. 1:02-cv-08472-MP

SHADI DABIT,

on behalf of himself and all others similarly situated,

Plaintiff,

V.

MERRILL LYNCH, PIERCE, FENNER & SMITH, INC..,

a corporation,

Defendant.