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

d

upon the statutory or common law of any State or subdi-

vision thereof may be maintained in any State or Fed-

eral court by any private party alleging,” among other

things, “a misrepresentation or omission of a material

fact in connection with the purchase or sale of a covered

security.” SLUSA § 101(b), 112 Stat. 3230, 15 U.S.C.

7T8bb(f)(1)(A).

2. Respondent, a former broker of petitioner’s, filed

suit in the United States District Court for the Western

District of Oklahoma alleging state-law claims for

breaches of fiduciary duty and the covenant of good faith

and fair dealing. Pet. App. 4a-5a. Respondent alleged

that petitioner “issued falsely favorable reports” about

certain stocks “in an effort to encourage widespread

purchasing of these stocks and to artificially support the

stocks[’] prices.” J.A.3la. After the alleged manipula-

tion ceased, the stock prices dropped, leaving those

“who purchased these stocks at manipulation-inflated

prices with substantial losses.” J.A. 29a. Respondent

sought to represent a class of petitioner’s brokers who

“ourchased” the relevant stocks and were damaged

thereby. J.A. 4la.

The district court dismissed the complaint as pre-

empted by SLUSA because it alleged misrepresenta-

tions in connection with the purchase of securities. J.A.

49a. The court granted leave to re-plead, however, be-

cause it was “conceivable that claims based on

wrongfully-induced holding could be pleaded.” J/bid.

Respondent filed an amended complaint that gener-

ally refrains from using the words “purchase” and

“sale,” but alleges the same scheme to “manipulate the

price of [certain] stocks, causing these stocks to trade at

artificially inflated prices.” J.A. 53a. The class defini-

5

tion is limited to brokers who “held” the stocks and were

damaged thereby. J.A. 64a.

After the Judicial Panel for Multi-District Litigation

transferred this case to the Southern District of New

York, that court dismissed the amended complaint. Pet.

App. 53a-55a. The court explained that respondent’s

claims are “based on the very same series of transac-

tions and occurrences asserted in the federal securities

actions currently being coordinated before this Court”

and “fall squarely within SLUSA’s ambit.” /d. at 55a.

3. The court of appeals vacated in part and re-

manded. Pet. App. la-52a. Noting that SLUSA pre-

empts claims based on misrepresentations “in connec-

tion with the purchase or sale” of securities, the court

began its analysis with the recognition that “the mean-

ing of ‘in connection with’ under SLUSA is coterminous

with the meaning of the nearly identical language of

§ 10(b) of the [1934 Act] and its corresponding Rule 10b-

5.” Pet. App. 3a. In construing the meaning of that

phrase, however, the court relied on this Court’s holding

in Blue Chip, supra, that persons who neither purchased

nor sold securities lack standing to pursue a private

right of action under Section 10(b) or Rule 10b-5. Pet.

App. 27a-30a. The court recognized that “[(tJhe limita-

tion on standing to bring private suit for damages” un-

der Blue Chip “is unquestionably a distinct concept from

the general statutory or regulatory prohibition on fraud

in connection with the purchase or sale of securities.”

Id. at 27a. Nonetheless, “{bJecause only purchasers and

sellers have a federal private damages remedy,” the

court concluded that “Congress meant to import the

settled standing rule along with the ‘in connection with’

phrase as a substantive standard,” and thereby ex-

6

empted claims of non-purchasers and non-sellers from

preemption. /d. at 28a.

The court of appeals also relied on an “assumption

that the historic police powers of the States were not to

be superseded by the Federal Act unless that was the

clear and manifest purpose of Congress.” Pet. App. 30a-

31a (quoting City of Milwaukee v. Illinois, 451 U.S. 304,

316 (1981)). It determined that Congress had not mani-

fested such a purpose because, although “[t]he legisla-

tive history * * * generally indicates a broad preemp-

tive intent,” it “contains no specific mention of holding

claims or other non-purchaser/non-seller claims.” /d. at

dla.

Finally, the court of appeals held that respondent’s

class action claims are preempted in part. “[C]laims of

brokers who purchased the stock during the class period

in reliance on the misrepresentations” were held to be

preempted, while claims based on holding (but not pur-

chasing or selling) stocks were held not to be pre-

empted. Pet. App. 41a. Because the amended complaint

does not distinguish between the two sets of claims, the

court of appeals remanded with instructions to dismiss

all such claims without prejudice to repleading the non-

preempted claims. /d. at 42a-43a.

SUMMARY OF ARGUMENT

SLUSA preempts state-law class action claims alleg-

ing “a misrepresentation or omission of a material fact

in connection with the purchase or sale of a covered se-

curity.” 15 U.S.C. 78bb(f)(1)(A). The court of appeals

correctly held that “the meaning of ‘in connection with’

under SLUSA is coterminous with the meaning of the

nearly identical language of § 10(b) of the [1934 Act] and

its corresponding Rule 10b-5.” Pet. App. 3a. Because

7

respondent alleges that petitioner made misrepresenta-

tions that inflated the prices at which securities were

bought and sold, his claims fall well within the scope of

Rule 10b-5 and are therefore preempted by SLUSA.

The court of appeals nonetheless held that respon-

dent could avoid preemption by “exclud[ing] from the

class claimants who purchased in connection with the

fraud.” Pet. App. 43a. That holding is incorrect because

it conflates the question of standing to sue with the

question of the conduct alleged. Preemption under

SLUSA turns on whether the defendant allegedly com-

mitted fraud in connection with the purchase or sale of

securities, not whether the plaintiff or class members

themselves purchased or sold securities. Under Blue

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

the latter inquiry determines whether a particular plain-

tiff has standing to sue, but not whether the defendant

committed fraud in connection with the purchase or sale

of securities.

The court of appeals further erred by relying on an

“assumption” of non-preemption and a perceived ab-

sence of relevant legislative history. Because securities

markets and transactions have long been regulated by

the federal government, no such “assumption” applies to

SLUSA’s express preemption provision. In any event,

SLUSA’s text overcomes any applicable assumption by

clearly and manifestly tying its preemptive effect to the

scope of Rule 10b-5’s substantive prohibition against

securities fraud. The legislative history confirms that

Congress intended to apply uniform federal standards

to all securities fraud class actions except those it ex-

pressly exempted. The uniformity that Congress in-

tended to achieve would be illusory if the uniform fed-

eral standards were not binding on plaintiffs who held,

8

rather than purchased or sold, an affected security dur-

ing the period of alleged fraud. Under the court of ap-

peals’ theory, state-law class actions could proceed in

virtually every case of alleged fraud, because it is gener-

ally possible in class actions to allege that the same

fraudulent conduct injured purchasers and holders alike.

Indeed, the decision below would have the perverse

effect of reading a law designed to eliminate abusive and

meritless lawsuits to preserve the suits most likely to be

abusive and meritless. If any set of plaintiffs were to be

exempted from preemption, it would not be those who

neither purchased nor sold securities. Blwe Chip denies

standing to such plaintiffs precisely because their suits

present an especially high risk of abuse in light of the

relative ease of alleging, and difficulty of disproving,

that a plaintiff relied on public representations in not

purchasing or selling a security. Construing Blwe Chip

to immunize “holder” class actions from SLUSA pre-

emption would contravene the intent of Congress and

the policies recognized by this Court in Blue Chip by

permitting a particularly abusive category of state-law

class actions to escape SLUSA’s reach.

ARGUMENT

THERE IS NO PURCHASER/SELLER LIMITATION ON THE

SCOPE OF SLUSA PREEMPTION

In pertinent part, SLUSA provides that “({nJo cov- _

ered class action based upon the statutory or common

law of any State or subdivision thereof may be main-

tained in any State or Federal court by any private

party alleging * * * a misrepresentation or omission

of a material fact in connection with the purchase or sale

of a covered security.” 15 U.S.C. 78bb(f)(1)(A). As the

court of appeals recognized, there is no dispute that this

9

case is a “covered class action” (see 15 U.S.C.

78bb(f)(5)(B)(i)) based on state common law claims (for

breach of fiduciary duty and the duty of good faith and

fair dealing, see Pet. App. 6a), involving securities cov-

ered by SLUSA (because they are traded on national

exchanges, see 15 U.S.C. 78bb(f)(5)(E), 77r(b)(1)). See

Pet. App. 16a-17a.

Nor is there any dispute that the amended complaint

alleges misrepresentations. See Pet. App. 17a. Instead,

the question is “whether these purported misrepresen-

tations were alleged to be ‘in connection with the pur-

chase or sale’ of the covered securities.” /bid. Because

the amended complaint alleges as a key premise of re-

spondent’s claims that the misrepresentations caused

stocks to trade at inflated prices, the misrepresentations

were plainly made “in connection with the purchase or

_ sale” of securities—regardless of whether this particular

plaintiff class bought or sold securities in connection

with the misrepresentations.

A. The Key Statutory Phrase “In Connection With The Pur-

chase Or Sale” Of A Security Has The Same Meaning In

SLUSA That It Has In Section 10(b) And Rule 10b-5

As the court of appeals correctly concluded, “the

meaning of ‘in connection with’ under SLUSA is coter-

minous with the meaning of the nearly identical lan-

guage in § 10(b) of the [1934 Act] and its corresponding

Rule 10b-5.” Pet. App. 3a. “In using the phrase ‘in con-

nection with the purchase or sale of a covered security,’

Congress * * * was using language that, at the time of

SLUSA’s enactment, had acquired settled, and widely-

acknowledged, meaning in the field of securities law,

through years of judicial construction in the context of

§ 10b-5 lawsuits.” Riley v. Merrill Lynch, Pierce,

10

Fenner & Smith, Inc., 292 F.3d 1334, 1342-1343 (11th

Cir.), cert. denied, 537 U.S. 950 (2002); accord Pet. App.

20a-21a; Disher v. Citigroup Global Mkts. Inc., 419 F.3d

649, 654 (7th Cir. 2005); Rowinski v. Salmon Smith Bar-

ney Inc., 398 F.3d 294, 299 (8d Cir. 2005). When, as

here, “administrative and judicial interpretations have

settled the meaning of an existing statutory provision,

repetition of the same language in a new statute indi-

cates, as a general matter, the intent to incorporate its

administrative and judicial interpretations as well.”

Bragdon v. Abbott, 524 U.S. 624, 645 (1998); see NLRB

v. Amax Coal Co., 453 U.S. 322, 329 (1981); Lorillard v.

Pons, 434 U.S. 575, 580-581 (1978).

Accordingly, “[e]very court of appeals to encounter

SLUSA has held that its language has the same scope as

its antecedent in Rule 10b-5.” Kircher v. Putnam

Funds Trust, 403 F.3d 478, 482 (7th Cir. 2005), petition

for cert. pending, No. 05-409 (filed Sept. 29, 2005); see

Pet. App. 19a-20a; Disher, 419 F.3d at 654; Rowinski,

398 F.3d at 299; Riley, 292 F.3d at 1342-1343; Green v.

Ameritrade, Inc., 279 F.3d 590, 597 (8th Cir. 2002). As

the court of appeals noted, both parties to this case have

agreed with those holdings. Pet. App. 17a, 26a; see Pet.

13; Br. in Opp. 12-13; Resp. C.A. Br. 19. The conclusion

is inescapable that the “in connection with” requirement

in SLUSA has the same meaning as the corresponding

phrase in Section 10(b) and Rule 10b-5.

B. The Amended Complaint Alleges Fraud “In Connection

With” The Purchase And Sale Of Securities

Under the standards governing Rule 10b-5 actions,

the amended complaint alleges numerous misrepresen-

tations and omissions “in connection with the purchase

or sale of a covered security.” 15 U.S.C. 78bb(f)(1).

11

1. Rule 10b-5 is construed “not technically and re-

strictively, but flexibly to effectuate its remedial pur-

poses.” SEC v. Zandford, 535 U.S. 813, 819 (2002) (quot-

ing Affiliated Ute Citizens v. United States, 406 U.S.

128, 151 (1972)); accord Superintendent of Ins. v. Bank-

ers Life & Cas. Co., 404 U.S. 6, 10-12 & n.7 (1971); Pet.

App. 22a. It prohibits not only “garden variety” fraud,

but “all fraudulent schemes in connection with the pur-

chase or sale of securities.” Superintendent of Ins., 404

U.S. at 11 n.7 (quoting A.T. Brod & Co. v. Perlow, 375

F.2d 393, 397 (2d Cir. 1967)).

Under Rule 10b-5, all misrepresentations “touching”

(Superintendent of Ins., 404 U.S. at 12-13) or “coincid-

[ing]” (Zandford, 535 U.S. at 825) with securities trans-

actions are “in connection with” them, such as when a

misrepresentation and a sale are “part of the same

fraudulent scheme,” Alley v. Miramon, 614 F.2d 1372,

1378 n.11 (5th Cir. 1980) (Wisdom, J.), or otherwise

“{ajre not independent events,” Zandford, 535 U.S. at

820. See United States v. O’Hagan, 521 U.S. 642, 655-

656 (1997); Pet. App. 23a. Thus, Rule 10b-5 is violated

“whenever [false] assertions are made * * * in aman-

ner reasonably calculated to influence the investing pub-

lic” in their decisions regarding the purchase or sale of

securities. SEC v. Texas Gulf Sulfur Co., 401 F.2d 833,

862 (2d Cir. 1968) (en banc), cert. denied, 394 U.S. 976

(1969); accord, e.g., McGann v. Ernst & Young, 102 F.3d

390, 393-394 (9th Cir. 1996) (citing cases), cert. denied,

520 U.S. 1181 (1997).

2. The amended complaint alleges that petitioner

employed “the hallmarks of stock manipulation” in order

to “caus[e] [certain] stocks to trade at artificially in-

flated prices.” J.A. 53a (emphasis added). According to

the amended complaint, petitioner’s “ratings, reports,

12

and recommendations regarding [certain] stocks were

false and contained misleading statements.” J.A. 59a.

Those allegedly false representations included “buy rec-

ommendations” and “strong buy recommendations.”

J.A. 62a, 64a; see J.A. 63a. In order to mislead “not only

investors who were brokerage customers * * * but

also individual investors,” petitioner “continually pro-

moted the * * * [s]tocks in the press, on television and

the internet.” J.A. 63a. “[T]hese deceptive reports were

disseminated * * * in an effort to artificially support

the stocks[’] prices.” J.A. 54a.

The amended complaint further alleges that peti-

tioner and its agents “traded against [petitioner’s] pub-

lished research recommendations”—.e., sold the stocks

while encouraging others to buy them. J.A. 54a; see J.A.

64a. At the same time, petitioner allegedly “refus[ed] to

execute * * * [its customers’) orders to sell these

stocks.” J.A. 54a. “As a result of [petitioner’s] efforts,

* * * laffected] companies were better able to use their

stock as currency in transactions.” J.A. 55a.

Those allegations not only assert fraud coinciding

with securities transactions, which is sufficient under

Zandford, they assert that petitioner succeeded in

“causing * * * stocks to trade”—+.e., to be purchased

and sold—“at artificially inflated prices.” J.A. 53a; see

O'Hagan, 521 U.S. at 664. Petitioner’s alleged selling of

the securities at fraudulently inflated prices likewise

constitutes fraud in connection with the purchase or sale

of securities. See Wharf (Holdings) Ltd. v. United Intl

Holdings, Inc., 532 U.S. 588, 596 (2001).

3. Even if the amended complaint had not included

express references to trading and selling, it would still

have alleged fraud in connection with the purchase or

sale of securities. As the court of appeals held, preemp-

13

tion turns on the “substance” of the allegations, not

whether the complaint uses any particular terminology.

Pet. App. 16a; see, e.g., Miller v. Nationwide Life Ins.

Co., 391 F.3d 698, 702 (5th Cir. 2004); Dudek v. Pruden-

tial Sec., Inc., 295 F.3d 875, 879-880 (8th Cir. 2002). A

contrary approach “would allow artful pleading to un-

dermine SLUSA’s goal of uniformity—a result mani-

festly contrary to congressional intent.” Rowinski, 398

F.3d at 300.

As the Third Circuit explained in a materially identi-

cal case, the scheme alleged by respondent “necessarily

‘coincides’ with the purchase or sale of securities” be-

cause “(flor [it] to work, investors must purchase the

misrepresented securities.” Rowinski, 398 F.3d at 302

(quoting Zandford, 535 U.S. at 825); see Disher, 419

F.3d at 655 (holding materially identical claims pre-

empted by SLUSA). If the alleged fraudulent misrepre-

sentations or omissions did not lead investors to pur-

chase the affected securities at inflated prices, the price

inflation that is an essential component of the alleged

fraudulent scheme and respondent’s alleged injury sim-

ply could not occur.’ Thus, claims like those at issue

here are preempted even when they are artfully drafted

to disguise their necessary relationship to the purchase

or sale of securities.”

' Although the alleged fraud in this case involved a manipulation,

publicly disseminated fraudulent representations concerning a publicly

traded security would affect market purchases and sales irrespective

of whether there were a manipulation.

. This case therefore does not require the Court to explore the outer

limits of the “in connection with” requirement. The Court need not

determine, for example, whether that requirement could be satisfied by

fraud that did not induce any investors to purchase or sell securities,

but instead induced them only to hold securities they already owned.

14

C. The “In Connection With” Requirement Is Satisfied Re-

gardiess Of Whether Respondent Or The Class Members

Purchased Or Sold Securities

Although respondent’s amended complaint plainly

alleges fraud “in connection with the purchase or sale”

of covered securities, the court of appeals held that re-

spondent could avoid preemption by “exclud[ing] from

the class claimants who purchased in connection with

the fraud and who therefore could meet the standing

requirement for maintenance of a 10b-5 action.” Pet.

App. 43a. In other words, the court concluded that

SLUSA does not preempt claims that allege fraudulent

misrepresentations in connection with the purchase or

sale of securities if the claims are brought by people who

lack standing to bring Rule 10b-5 actions because they

did not purchase or sell securities.

That conclusion is incorrect. By its plain text,

SLUSA preempts class actions alleging misrepresenta-

tions or omissions “in connection with the purchase or

sale” of securities, regardless of whether the plaintiff

class would have standing to pursue that violation under

federal law. The court of appeals’ contrary holding

would open a gaping and illogical loophole by permitting

potentially the most abusive securities class actions to

escape SLUSA and the PSLRA, contrary to Congress’s

expressed intent to require such class actions to proceed

only under uniform federal standards.

See SEC Br. at 6, 16-17, Blue Chip, supra. Nor need the Court deter-

mine whether or under what circumstances the requirement could be

satisfied by brokers’ misrepresentations to their customers relating to

the customers’ brokerage accounts. See Zandford, 535 U.S. at 819, 825

n.4; Rowinski, 398 F 3d at 301-302.

15

1. The Blue Chip purchaser/seller rule does not apply to the

determination whether a fraud is “in connection with”

the purchase or sale of a security

Neither Section 10(b) nor Rule 10b-5 affords an ex-

press private right of action. See Blue Chip Stamps v.

Manor Drug Stores, 421 U.S. 723, 748-749 (1975). Al-

though this Court has long recognized an implied right

of action for private parties, see, e.g., Superintendent of

Ins., 404 U.S. at 13 n.9, it has held that the implied right

of action does not extend to individuals who “neither

purchased nor sold any of the offered shares,” including

those who “allege that they decided not to sell their

shares because of an unduly rosy representation or a

failure to disclose unfavorable material.” Blue Chip, 421

U.S. at 725, 737-738.

But whether a particular plaintiff has standing to

pursue a private right of action is an altogether different

question from whether a defendant violated the law.

See, e.g., Cannon v. University of Chicago, 441 U.S. 677,

688 (1979). The Blue Chip Court repeatedly emphasized

that its holding applies only to standing and is not a limi-

tation on the scope of Rule 10b-5’s prohibition against

fraud in connection with the purchase or sale of a secu-

rity. Accordingly, the Blue Chip purchaser/seller rule

is irrelevant in determining the coverage of the “in con-

nection with” requirement.

Indeed, the Blue Chip Court analyzed the language

of Section 10(b) and Rule 10b-5, including the “in con-

nection with” requirement, and chose not to rest its deci-

sion on a textual foundation because “[nJo language in

either of those provisions speaks at all to the contours of

a private right of action.” 421 U.S. at 749; see id. at 733-

737. Instead, the Court decided—“as a matter of pol-

icy”—that extending the implied right of action to plain-

16

tiffs who neither purchased nor sold securities in reli-

ance on an alleged violation would present an unwar-

ranted “danger of vexatious litigation” in light of the

ease of alleging, but difficulty of disproving, that a plain-

tiff had relied on public statements in not taking action.

Id. at 739, 740; see id. at 739-749. Thus, “Blue Chip

Stamps came out as it did not because § 10(b) and Rule

10b-5 are limited to situations in which the plaintiff itself

traded securities, but because a private right of action to

enforce these provisions is a judicial creation and the

Court wanted to confine these actions to situations

where litigation is apt to do more good than harm.”

Kircher, 403 F.3d at 483; see SEC v. Rana Research,

Inc., 8 F.3d 1358, 1364 (9th Cir. 1993); United States v.

Newman, 664 F.2d 12, 17 (2d Cir. 1981); Pet. App. 24a-

25a.

Indeed, the Blue Chip Court implicitly recognized

that the substantive coverage of Rule 10b-5 extends far-

ther than the universe of suits brought by private plain-

tiffs with standing. The Court acknowledged that “a

disadvantage” of its policy-based standing rule is that it

“prevents some deserving plaintiffs from recovering

damages which have in fact been caused by violations of

Rule 10b-5.” 421 U.S. at 738 (emphasis added). The

Court later reiterated that its rule “undoubtedly ex-

cludes plaintiffs who have in fact been damaged by viola-

tions of Rule 10b-5.” Jd. at 743. The Court thus made

clear that “(t]he purchaser/seller standing limitation

* * * does not stem from a construction of the phrase

‘in connection with the purchase or sale of any secu-

rity,’” but instead relates solely to the standing of pri-

vate plaintiffs, and that the scope of private lawsuits is

narrower then the substantive scope of the “in connec-

tion with” prohibition. Holmes v. Securities Investor

17

Prot. Corp., 503 U.S. 258, 284 (1992) (O’Connor, J., con-

curring in part and in the judgment); see id. at 289-290

(Scalia, J., concurring in the judgment); O’Hagan, 521

U.S. at 664-665; SEC v. National Sec., Inc., 393 U.S.

453, 467 n.9 (1969) (distinguishing between the “cover-

age” of Rule 10b-5 and the “standing” of private plain-

tiffs).

The Blue Chip Court underscored those points by

explaining that its “purchaser-seller rule imposes no

limitation on the standing of the SEC.” 421 U.S. at 751

n.14; accord O’Hagan, 521 U.S. 642, 664-665 (1997);

United States v. Naftalin, 441 U.S. 768, 774 n.6 (1979);

National Sec., 393 U.S. at 467 n.9; In re Engelman, 52

S.E.C. 271, 283 n.43 (1995) (“The purchaser-seller stand-

ing requirement does not apply to Commission-insti-

tuted cases.”). In a suit for civil penalties or a criminal

prosecution, the government must establish that the

defendant “violated” Rule 10b-5, including its “in con-

nection with” requirement. 15.U.S.C. 78u(d)(3)(A); see

_ 15 U.S.C. 78ff(a) (Supp. II 2002). The government’s

ability to pursue such actions even when a private plain-

tiff would be barred by the Blue Chip standing rule nec-

essarily means that the “in connection with” and stand-

ing inquiries are distinct. As Judge Easterbrook ex-

plained for the Seventh Circuit, the government’s

“{iJnvocation of [Rule 10b-5] does not depend on proof

that the agency or the United States purchased or sold

securities; instead the ‘in connection with’ language en-

sures that the fraud occurs in securities transactions

rather than some other activity.” Kircher, 403 F.3d at

483; cf. O'Hagan, 521 U.S. at 660 (“§ 10(b) refers to ‘the

purchase or sale of any security,’ not to identifiable pur-

chasers or sellers of securities”).

18

2. SLUSA’s text expressly ties preemption to the scope of

Rule 106-5’s “in connection with” requirement, not to

whether a particular plaintiff would have standing to

sue for a violation of Rule 10b-5

Because the Blue Chip purchaser/seller rule is a ju-

dicially crafted, prudential standing requirement that is

premised on policy grounds rather than an interpreta-

tion of the statutory “in connection with” requirement,

it does not limit the scope of that statutory phrase. The

court of appeals appeared to recognize as much when it

stated that Blue Chip’s “limitation on standing to bring

private suit(s] for damages * * * is unquestionably a

distinct concept from the general statutory and regula-

tory prohibition on fraud in connection with the pur-

chase or sale of securities,” and “should not be conflated

with the question of whether the ‘in connection with’

requirement ha[s] been met.” Pet. App. 27a (quoting

Ontario Pub. Serv. Employees Union Pension Trust

Fund v. Nortel Networks Corp., 369 F.3d 27, 34 (2d Cir.

2004) (internal quotation marks omitted), cert. denied,

125 S. Ct. 919 (2005)). But the court of appeals then

veered off course by concluding that “[bJecause only

purchasers and sellers have a federal private damages

remedy, itis * * * natural to suppose that Congress

meant to import the settled standing rule along with the

‘in connection with’ phras* as a substantive standard” in

delimiting SLUSA’s preemptive scope. Jd. at 28a (em-

phasis added). Nothing in the text or history of SLUSA

justifies creation of such a limitation on the scope of

SLUSA preemption.’

> The two other courts of appeals that held claims by non-purchasers

and non-sellers not to be preempted under SLUSA erroneously rea-

soned that Blue Chip interpreted Rule 10b-5’s “in connection with”

19

a. The court of appeals did not (and could not) iden-

tify anything in SLUSA’s text that “import[s]” the

standing rule “along with” the separate “in connection

with” requirement. Pet. App. 28a. Congress easily

could have limited preemption to cases involving allega-

tions of fraud “in connection with the purchase or sale of

covered securities by the plaintiff.” It did not do so.

Likewise, Congress could have limited its focus to the

claims of purchasers or sellers, rather than “any private

party,” 15 U.S.C. 78bb(f)(1)(A). Again, it did not do so.

Instead, Congress intentionally employed broad statu-

tory language that ties the preemptive force of SLUSA

directly to the full scope of the prohibitions contained in

Section 10(b) and Rule 10b-5 themselves. As already

explained, no standing requirement limits the scope of

those prohibitions. See supra pp. 15-17.

Congress also tailored the scope of SLUSA preemp-

tion by crafting several express exceptions to preemp-

tion, none of which applies here. See 15 U.S.C.

78bb(f)(3) and (5)(C). Those exceptions relate te deriva-

tive actions; actions based on some contractual rights;

actions brought by States, political subdivisions of

States, and state pension plans; and certain actions aris-

ing under the law of the issuer’s state of incorporation.

Ibid. Congress’s express inclusion of those exceptions

further confirms that it did not intend any others. See,

e.g., TRW Inc. v. Andrews, 534 U.S. 19, 28 (2001)

(“Where Congress explicitly enumerates certain excep-

tions to a general prohibition, additional exceptions are

requirement. See Riley, 292 F.3d at 1343-1345; Green, 279 F.3d at 597-

598. The Second Circuit is the only court of appeals to reach the incon-

gruous conclusion that Blue Chip does not interpret that language but

nonetheless does limit the seope of SLUSA preemption.

20

not to be implied, in the absence of evidence of a con-

___trary legislative intent.”).

The court of appeals was not “moved by the observa-

tion that the standing rule is merely a judge-made gloss

on the statute and the Rule, because private Rule 10b-5

damages actions are themselves a creature of judicial

implication.” Pet. App. 28a. But the relevant factor of

the Blue Chip rule is not that it was judge-made, but

that it is a rule-about the scope of standing as opposed to

an interpretation of the substantive scope of the prohibi-

tions in Rule 10b-5. Moreover, there is no need to infer

anything about SLUSA’s explicit text. Congress focused

on the preemption issue and could have linked the scope

of preemption to the scope of standing, but instead chose

to key the scope of preemption to the conduct alleged.

The court of appeals sought support from a footnote

in Blue Chip stating that the “disadvantage” of the pur-

chaser/seller rule—.e., its tendency to prevent some

victims of Rule 10b-5 violations from recovering dam-

ages—is “attenuated to the extent that remedies are

available to nonpurchasers and nonsellers under state

law.” 421 U.S. at 738 n.9; see Pet. App. 29a. According

to the court of appeals, “SLUSA’s wholesale importation

of the language that gave rise to this balancing judg-

ment must * * * be presumed to represent a ratifica-

tion of that judgment.” /d. at 30a.

This Court’s passing observation in the cited foot-

note, which merely reflects the pre-SLUSA reality that

state-law claims were not preempted, cannot sustain the

weight placed on it by the court of appeals. The Blue

Chip Court made no “balancing judgment” that standing

should be denied under federal law only because and

only to the extent that it was available under state

law—much less that standing should be denied because

21

it was available in state-law class actions, which are the

only actions preempted by SLUSA. To the contrary,

this Court emphasized at length the danger of permit-

ting suits by non-purchasers and non-sellers to proceed

at all. See 421 U.S. at 742-748. Far from conditioning

application of the purchaser/seller rule on the availabil-

ity of state remedies, the Blwe Chip Court adopted that

standing limitation as a uniform requirement applicable

to all private plaintiffs under Section 10(b) and Rule

10b-5, without regard to the'r state-law remedies. 421

U.S. at 749, 755.

Even if this Court had based the Blue Chip standing

rule on the assumption that non-purchasers and non-

sellers could assert securities fraud claims in some

States, moreover, Congress could not have “ratified”

that judgment by preempting all class actions based on

Section 10(b)’s “in connection with” requirement. The

ratification doctrine applies only to congressional re-

enactment of statutory texts with settled interpreta-

tions. See generally Department of Transp. v. Public

Citizen, 541 U.S. 752, 770 n.4 (2004). Blue Chip does not

interpret the “in connection with” requirement, how-

ever, and SLUSA does not address standing. Thus, the

purported “balancing judgment” would not have been an

interpretation of the statutory text at issue here, and the

ratification doctrine provides no support for the court of

appeals’ reasoning. /bid.*

* The extent to which suits by “holder” classes would be actionable

under state law but for the preemptive effect of SLUSA is unclear.

States vary in their receptiveness to holder claims. See Jn re World-

com, Inc. Sec. Litig., 336 F. Supp. 2d 310, 319-323 (S.D.N.Y. 2004) (sur-

veying state laws); Pet. App. 38a n.14. In those States that permit

holder actions, moreover, SLUSA permits individual and derivative

actions to proceed, and persons injured by holding stock may also bene-

22

b. Lacking a textual basis for its conclusion, the

court of appeals turned to an “assumption that the his-

toric police powers of the States were not to be super-

seded by the Federal Act unless that was the clear and

manifest purpose of Congress.” Pet. App. 30a-3la (quot-

ing City of Milwaukee v. Illinois, 451 U.S. 304, 316

(1981)). But that “‘assumption’ of nonpre-emption is not

triggered when the State regulates in an area where

there has been a history of significant federal presence.”

United States v. Locke, 529 U.S. 89, 108 (2000). The

federal government has extensively regulated the na-

tional securities markets and securities transactions for

many decades, and Congress determined that the inter-

state (and increasingly international) character of those

markets confirms the propriety of and need for uniform

national regulation of securities fraud class actions. See

S. Rep. No. 182, 105th Cong., 2d Sess. 3-5 (1998). The

“assumption” of non-preemption is therefore inapplica-

ble here. Indeed, Congress enacted SLUSA for the very

purpose of preempting state-law class action claims.

Even if such an “assumption” were applicable in this

case, “[t]he purpose of Congress [remains] the ultimate

touchstone” and “primarily is discerned from the lan-

guage of the pre-emption statute and the statutory

framework surrounding it.” Medtronic, Inc. v. Lohr,

518 U.S. 470, 485-486 (1996) (internal quotation marks

omitted). Thus, the “assumption” is overcome when, as

here, the statutory text is clear. See ibid.; Cipollone v.

Liggett Group, Inc., 505 U.S. 504, 522-523 (1992) (plural-

ity opinion); 7d. at 548-549 (Scalia, J., concurring in part

and dissenting in part); Shaw v. Delta Air Lines, Inc.,

463 U.S. 85, 97 (1983).

fit from state and federal enforcement actions. See pp. 3-4, 19, supra.

23

The court of appeals thought that “[tJhere is no clear

support in the legislative history for the conclusion that

Congress intended SLUSA to preempt claims that do

not satisfy the Blwe Chip rule” because the legislative

history “contains no specific mention of holding claims

or other non-purchaser/non-seller claims.” Pet. App.

31a. Even if the court of appeals’ analysis of the legisla-

tive history were correct (but see pp. 23-26, znfra), the

absence of relevant legislative history would reveal noth-

ing about Congress’s intent and could not overcome the

plain statutory text, which is keyed to the conduct al-

leged, not the plaintiff's status. Morales v. Trans World

Airlines, Inc., 504 U.S. 374, 385 n.2 (1992); Shaw, 463

U.S. at 97. “[I]t would be a strange canon of statutory

construction that would require Congress to state in

committee reports or elsewhere in its deliberations that

which is obvious on the face of a statute.” Harrison v.

PPG Indus., Inc., 446 U.S. 578, 592 (1980); see

Patenaude v. Equitable Life Assurance Soc’y, 290 F.3d

1020, 1025 (9th Cir. 2002) (holding that SLUSA’s defini-

tion of “covered security” encompasses variable annu-

ities even though they are not mentioned in the legisla-

tive history).

3. The legislative history and the policies underlying

SLUSA confirm that Congress did not exempt from pre-

emption the claims of plaintiffs who would lack standing

to pursue a Rule 106-5 claim

The court of appeals also erred in concluding that “to

the extent the legislative history casts any light on the

question, it suggests that Congress intended to preempt

only those state claims that had migrated from federal

court in response to the PSLRA.” Pet. App. 32a. Be-

cause people who neither purchased nor sold securities

24

lacked standing to pursue Rule 10b-5 actions before

Congress enacted the PSLRA, the court concluded that

Congress did not intend to affect their state-law class

action claims. See ibid. That result, however, would

turn congressional intent on its head by exempting an

especially abusive category of securities fraud class ac-

tions from the uniform national standards that Congress

adopted to prevent abuse.

a. The court of appeals was correct insofar as it rec-

ognized that Congress was concerned that plaintiffs

were evading the PSLRA by bringing securities fraud

class actions in state instead of federal courts. See

SLUSA § 2(2) and (3), 112 Stat. 3227; H.R. Conf. Rep.

No. 803, 105th Cong., 2d Sess. 1 (1998); S. Rep. No. 182,

supra, at 3-4. But Congress responded to that develop-

ment not only by permitting the removal of affected

cases from state to federal courts, see 15 U.S.C.

78bb(f)(2), but “[a]dditionally” by “establish{ing] uni-

form national rules for securities class action litigation

involving our national capital markets.” H.R. Conf. Rep.

No. 803, supra, at 138. Concerned about the “dangers of

maintaining differing federal and state standards of lia-

bility for nationally-traded securities,” Congress chose

to give “due consideration to the benefits flowing to in-

vestors from a uniform national approach.” S. Rep. No.

182, supra, at 3. Congress recognized that “[sJome crit-

ics of establishing a uniform standard of liability have

attacked such legislation as being an affront on Federal-

ism,” but it “found the interest in promoting efficient

national markets to be the more convincing and compel-

ling consideration in this context.” /d. at 4.

Thus, there is no support for the improbable conclu-

sion that Congress intended to preempt only those state-

law claims that can be pursued successfully under fed-

25

eral law, while leaving intact all state-law claims that are

legally meritless under federal law. Rather, Congress

intended to apply uniform federal standards to securi-

ties class actions, which it perceived to be the source of

most abusive securities litigation, “while preserving the

appropriate enforcement powers of State securities reg-

ulators and not changing the current treatment of indi-

vidual lawsuits.” SLUSA § 2(5), 112 Stat. 3227. Con-

gress thus drew the line between class actions and other

types of securities litigation, a line that has nothing to

do with whether a class action plaintiff would have

standing to pursue a claim under federal law.

The court of appeals relied on a floor statement by

Senator Dodd to the effeet that SLUSA would work “in

a very targeted and narrow way, essentially preempting

only those class actions that have recently migrated to

State court, while leaving traditional State court actions

and procedures solidly in place.” Pet. App. 32a-33a

(quoting 143 Cong. Rec. 21,357 (1997)) (emphasis

added). That floor statement of a single legislator pro-

vides no support for the court’s conclusion because Sen-

ator Dodd expressly identified the “traditional State

court actions and procedures” he had in mind, and ac-

tions by “holders” were not among them. /bid. See also

Consumer Prod. Safety Comm’n v. GTE Sylvania, Inc.,

447 U.S. 102, 118 (1980) (“{O}rdinarily even the contem-

poraneous remarks of a single legislator who sponsors

a bill are not controlling in analyzing legislative his-

tory.”). Moreover, it is not clear that Senator Dodd used

the term “migrate” narrowly to exclude claims like re-

spondent’s that presumably would have been brought in

federal court on behalf of purchasers before the PSLRA,

migrated to state court to avoid the PSLRA, and were

26

later partially transmogrified into a “holder” suit to cir-

cumvent both the PSLRA and SLUSA.

More illuminating is the Senate Committee report,

which explains that SLUSA is to be “interpreted

broadly” to effectuate Congress’s intent to “effectively

reach[{] those actions that could be used to circumvent”

the PSLRA. S. Rep. No. 182, supra, at 8. Because

state-law “holder” actions would circumvent the uniform

federal standards of Rule 10b-5 and the PSLRA, ex-

empting such suits from preemption would be contrary

to that intent. See generally Rowinski, 398 F.3d at 299

(“Congress envisioned a broad interpretation of SLUSA

to ensure the uniform application of federal fraud stan-

dards.”); Newby v. Enron Corp., 338 F.3d 467, 472 (5th

Cir. 2003) (“{I)n enacting SLUSA Congress sought to

curb all efforts to circumvent the reforms put into place

by PLSRA.”); Miller, 391 F.3d at 702 (same).°

. The court of appeals also pointed to Senator Dodd’s statement that

SLUSA affects only “those types of class actions that are appropriately

heard on the Federal level.” 143 Cong. Rec. at 21,357; see Pet. App.

33a. As the committee reports explain, Congress concluded that class

action claims regarding nationally traded securities are appropriately

heard on the federal level because of the need for uniform national stan-

dards. See p. 24, supra. That such claims may be dismissed for lack of

standing when they pose a particularly high risk of abuse does not mean

that they should be heard on the state level; it means that they

uniformly should be dismissed by federal courts.

Standing is far from the only reason that a claim might fail under

federal but not state law. Federal securities fraud plaintiffs must

satisfy heightened pleading requirements, 15 U.S.C. 78u-4(b), establish

scienter in some cases, Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199

(1976), and prove in some cases that the alleged misrepresentations fall

outside of the PSLRA’s safe harbor for forward-looking statements, 15

U.S.C. 78u-5(c)(1). A plaintiff class's failure to satisfy such require-

ments does not mean that the class should be able to take advantage of

less stringent state-law standards. Instead, it means that the suit is

27

b. Recognition of an implicit exception to SLUSA’s

preemptive scope would be particularly inappropriate in

the context of this case, because an exception for claims

brought by those who neither purchased nor sold securi-

ties would directly frustrate Congress’s goals in enact-

ing the statute.

i. The need for uniform national standards, like the

text of SLUSA’s preemption provision, does not turn on

the identity of the plaintiff in a particular case. In order

to “encourage the voluntary disclosure of information by

corporate issuers,” the PSLRA created a “safe harbor”

for forward-looking statements. S. Rep. No. 98, 104th

Cong., 2d Sess. 4-5 (1995); see 15 U.S.C. 78u-5. That

safe harbor could not accomplish its purpose of encour-

aging disclosure if some plaintiffs could evade it by filing

under state law. Similarly, “to encourage plaintiffs’ law-

yers to pursue valid claims for securities fraud and to

encourage defendants to fight abusive claims,” the

PSLRA adopted a modified proportionate liability stan-

dard, heightened pleading requirements, and a stay of

discovery pending the resolution of motions to dismiss.

S. Rep. No. 98, supra, at 6-7 (emphasis omitted); see 15

U.S.C. 78u-4(b), (c) and (f). Those and other require-

ments would likewise fail to discourage the filing of

meritless suits if such suits could be brought under state

law on behalf of people who did not purchase or sell se-

curities.

The artificiality of any distinction based on an indi-

vidual plaintiff's trading activity (or lack thereof) is fur-

precisely the type of class action that Congress targeted. As Judge

Easterbrook explained, SLUSA’s “pre-emptive effect is not confined to

knocking out state-law claims by investors who have winning federa!

claims * * * It covers both good and bad securities claims—especially

bad ones.” Kircher, 403 F.3d at 484.

28

ther underscored by the fact that a single securities

fraud scheme will frequently victimize purchasers, sell-

ers, and holders—and there will often be substantial

overlap among those classes, because purchasers gener-

ally become holders, and sellers tend to be former hold-

ers. Thus, in related proceedings before the district

court that dismissed this case, purchasers and sellers

are pursuing actions against petitioner based on the

same underlying transactions. Pet. App. 55a. The origi-

nal and amended complaints in this case likewise allege

a class of purchasers and sellers, as well as holders.

Id. at 4a-5a, 40a-41a; cf. id. at 42a-43a (recognizing the

“close relationship” between claims based on purchases

and those based on holdings as well as the difficulty in

disentangling the two).

To apply uniform national! standards in cases brought

by purchasers and sellers, but differing state-law stan-

. dards in cases brought by holders based on the same

underlying conduct, would deprive the uniform national

standards of any semblance of uniformity. In cases in

which some of the misrepresentations occurred before

a plaintiff's purchase of a security, it would also elevate

artful pleading over substance, because such plaintiffs

might attempt to avoid preemption by focusing on mis-

representations made between their purchases and sales

and limiting the scope of requested damages. Respon-

dent has done just that: after the district court dis-

missed respondent’s original complaint because it al-

leged that he purchased securities in reliance on a fraud-

ulent scheme, respondent recast himself as a “holder” in

his amended complaint in hopes of avoiding preemption.

See pp. 4-5, supra. As explained above, SLUSA was

intended in part to combat artful pleading, not to en-

courage it. See pp. 12-13, supra. That is another reason

29

why a plaintiff should not be able to “avoid preemption

by asserting it is only claiming damages suffered as a

result of holding its stock.” Professional Mgmt. Assocs.,

Inc. Employees’ Profit Sharing Plan v. KPMG, 335

F.3d 800, 803 (8th Cir. 2003), cert. denied, 540 U.S. 1162

(2004).

ii. If any set of plaintiffs were to be exempted from

preemption, it would not be those who neither purchased

nor sold securities. As the court of appeals appeared to

recognize, such an exemption would “allow the very cat-

egory of claims that the Supreme Court identified in

Blue Chip as posing a particularly high risk of vexatious

litigation.” Pet. App. 29a. Although private securities

class actions are an important supplement to govern-

ment enforcement actions, this Court recognized in Blue

Chip that “[t]he risk of strike suits is particularly high”

in eases not brought by purchasers or sellers because

such plaintiffs could reach trial merely by asserting that

they relied on a public misrepresentation or material

omission in not buying or selling stock. 421 U.S. at 742.

The potential for abuse is further underscored by

respondent’s theory of injury and damages. Although

some persons who are fraudulently induced not to pur-

chase or sell securities may be injured thereby, see Blue

Chip, 421 U.S. at 738, 743, the amended complaint al-

leges that respondent was injured by petitioner’s failure

to disclose that it had fraudulently inflated the stock

prices because respondent would have sold his shares

before the prices declined had he known the truth, see

J.A. 58a-54a. That is not even a cognizable injury. Ab-

sent the alleged fraud, the prices never would have be-

come fraudulently inflated. And if petitioner had dis-

closed the alleged fraud, the stock prices likely would

have fallen immediately to reflect that information, pre-

30

venting respondent from selling at the inflated levels.

See Crocker v. FDIC, 826 F.2d 347, 351 (5th Cir. 1987),

cert. denied, 485 U.S. 905 (1988); Arent v. Distribution

Scis., Inc., 975 F.2d 1370, 1374 (8th Cir. 1992); Levine v.

Seilon, Inc., 489 F.2d 328, 333-334 (2d Cir. 1971)

(Friendly, J.); ef. Basic, Inc. v. Levinson, 485 U.S. 224,

246-247 (1988). In any event, respondent “could hardly

be heard to claim compensation for the premium he

might have extracted from some innocent victim if he

had known of the fraud and the buyer did not.” Levine,

439 F.2d at 333. Respondent had no legally-protected

right to benefit from the alleged fraud.

Because Blue Chip and SLUSA constrain potentially

abusive suits in compatible ways, and suits by plaintiffs

who neither purchased nor sold securities in connection

with alleged fraud epitomize the potential for abusive

suits that this Court and Congress sought to combat,

“(i]t would be more than a little strange if [this] Court’s

decision to block private litigation by non-traders be-

came the opening by which that very litigation could be

pursued under state law.” Kircher, 403 F.3d at 484.

Permitting SLUSA and Blue Chip to complement one

another would be far more consistent with congressional

intent than treating the judicial restriction as annulling

the congressional one.

CONCLUSION

The judgment of the court of appeals should be re-

versed.

Respectfully submitted.

31

PAUL D. CLEMENT

GIOVANNI P. PREZI080 Solicitor General

General Counsel THOMAS G. HUNGAR

Jacos H. STILLMAN Deputy Solicitor General

Solicitor DARYL JOSEFFER

ERIC SUMMERGRAD Assistant to the Solicitor

Deputy Solicitor General

SUSAN S. MCDONALD

Senior Litigation Counsel

JEFFREY T. TAO

Senior Counsel

Securities and Exchange

Commission

NOVEMBER 2005

FILED

(7) NOV 14 2005

No. 04-1371 OFFICE OF THE CLERK

In the Supreme Court of the Gnited States

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

Petitioner,

v.

SHADI DABIT, on behalf of himself and all

others similarly situated

Respondents.

On Writ of Certiorari to the

United States Court of Appeals for the Second Circuit

BRIEF OF THE CHAMBER OF COMMERCE OF THE

UNITED STATES OF AMERICA AS AMICUS CURIAE

IN SUPPORT OF PETITIONER

ROBIN S. CONRAD CHARLES A. ROTHFELD

AMAR D. SARWAL Counsel of Record

National Chamber Litiga- ANDREW J. PINCUS

tion Center, Inc. Mayer, Brown, Rowe &

1615 H Street, NW Maw LLP

Washington, DC 20062 1909 K Street, NW

(202) 463-5337 Washington, DC 20006

(202) 263-3000

STEPHEN M. SHAPIRO

Timothy S. BISHOP

Mayer, Brown, Rowe &

Maw LLP

71 South Wacker Drive

Chicago, IL 60606

(312) 782-0600

QUESTION PRESENTED

- Whether the Securities Litigation Uniform Standards Act

of 1998 preempts state law class action claims brought by

persons who assert that they were induced by fraudulent ma-

terial statements or omissions to “hold,” rather than purchase

or sell, securities.

(i)

QUESTION PRESENTED

TABLE OF AUTHORITIES

ETT, sccdcupniscerssmestistcinintinnnanindineeniagitins

FE Siicictiptesiseiscbiaiintineaiinaiasaviniinitinptiniaiabtibainansiesiibiaii

1. THE PLAIN LANGUAGE OF THE SLUSA

PREEMPTS “HOLDER” CLASS ACTIONS

BASED UPON STATE LAW .......00....cceseeeeeee

Il. THE POLICY AND UNAMBIGUOUS

TABLE OF CONTENTS

CONGRESSIONAL INTENT UNDERLY-

ING THE SLUSA PREEMPTS “HOLDER”

CLASS ACTIONS BASED UPON STATE

A. The Pressure To Settle Even Meritless

Securities Class Actions Imposes An

Enormous Toll On The National

B. The PSLRA Adjusted Litigation In-

centives And Reoriented Securities

Class Action Litigation To Deter

Fraud And Compensate Investors Who

Trby Were Enjuated.........00ccscccssseseserseeees

os The SLUSA Was Enacted To Prevent

Frustration Of The PSLRA’s Reforms....

D. Excepting State-Court “Holder” Suits

From SLUSA Preemption Would

Frustrate The Congressional Purpose.....

CONCLUSION

SEER EERE EEE EERE EE EEE EEE EEE EEE HEHEHE HEHE EE EHD

ill

TABLE OF AUTHORITIES

Page(s)

Cases:

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

PIs UTC cccisctaparisinstapititdnesccimeibesticsbibinnbennhinicinesiteloctaen, 24

Basic, Inc. v. Levinson, 485 U.S. 224 (1988)............:c:cc0 25

Birnbaum v. Newport Steel Corp., 193 F.2d 461

(2d Cir.), cert. denied, 343 U.S. 956 (1952)... 26

Blue Chip Stamps v. Manor Drug Stores, 421

SRA FER TIED arehsssicnctibiiatisupessctinbitnmniestnemniashapoanaaes passim

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

of Denver, N.A., 511 U.S. 164 (1994) ooo. cece cecceeeeees ll

Crocker v. FDIC, 826 F.2d 347 (Sth Cir. 1987) ........... 24, 25

Dirks v. SEC, 463 U.S. 646 (1983) ........cccceeeceeseeeeeeeeeeeeenes 12

Dura Pharms., Inc. v. Broudo, 125 S. Ct. 1627

IIIT chsiicouniiidisdsnihteccidinidiahianpaincdaiiatbaniiliinioeseaeds 15, 16, 24

Holmes v. Sec. Investor Prot. Corp., 503 U.S. 258

Eee nisncctceddobccnatnabshanalidstiabalieddpelinipdiatiuiigabachesdyidédbiies 6, 24

Huddleston v. Herman & MacLean, 640 F.2d 534

(Sth Cir. 1981), aff'd in part and rev’d in part on

other grounds, 459 U.S. 375 (1983) .0.....ccceeeceeeeeeeees 15

In re Philip Morris Sec. Litig., 8372 F. Supp. 97

(S.D.N.Y. 1995), aff'd in part and rev’d in part,

75 F.3d 801 (2d Cir. 1996) ...c.cccccssscsscessssecessesssnseee 13, 14

SEC v. Texas Gulf Sulphur Co., 401 F.2d 833 (2d

I i re no 5, 24

~ SEC v. Zandford, 535 U.S. 813 (2002) ..csccc..ccscsvecsesseseevee 5,6

Santa Fe Indus., Inc. v. Green, 430 U.S. 462 (1977)............ 5

iv

TABLE OF AUTHORITIES — (Cont’d)

Superintendent of Ins. v. Bankers Life & Cas. Co.,

Bee CEE ye cececenisbcincsaictnstiabbonniptniiiiindesincniintnidadin 5

TSC Indus. v. Northway, Inc., 426 U.S. 438 (1976) ........... 12

United States v. Naftalin, 441 U.S. 768 (1979)........ccccccceeees 6

United States v. O'Hagan, 521 U.S. 642 (1998)..............06. 6

STATUTES, RULES, AND REGULATIONS

Private Securities Litigation Reform Act of 1995,

Pub. L. No. 104-67, 109 Stat. 737 0.......eeccceceseeeeeeeeeesee 3

Securities Litigation» Uniform Standards Act of 1998,

Pub. L. No. 105-353, 112 Stat. 3227 oo... eee eee 2, 21

SS EEL. Be sntotnccinlsesssshosinsiahctlieaipieaiaipedaaaae 26

BS SIL. 6 FGD <asorcinrshictiedarcssccenstintnnncegiiaiabihiilignamigaaal 26

FIA. Ben cccnitbenssicssccvevicidenpesitebuhgheetiainissidudmamie 27

BD A. BIO ccctcininsintinisissivinctshatintesichcinisibietimimadananlia 3

FF Giice TIED ctcesintsotnctiensectmmisagnenncenaiimaaae 15

Lat Tole |, EMSS Seen ENEEE IE em 4,21

BS CRBS. Be aicicscinitensssonscicinsitiiatintendindilaiiaititaaadiaiiiamaia 21

SL. 6: Fail sisevtssnssccscomstanithlitieseistelinnicmaiamanan 4

SERB Fae isictererescitevainienecessiapiasbetiineidigiiiiiiaicniiis demas 27

SS SETAC. BF incoshsenissiniesseeceeniciitdipaiiaiaiamaincdmaaaae 27

5S SRL... BF iccicchsccnceciciittitninsisiddaliiendieaiain 13, 14

SS CEA... FU iictintestcevesscsersstininionimiiesiaiciadiiaaee 15

OS SE. Br iaciccadvesniciscnenibtasiesssiistipiiiiaiiaiens inndisiigia 15

GS 8 Va i scenicictsiensncnsntnsiittiabiinnsseniaias 14, 16

Lk REIN ais OPENS Foy 21

V

TABLE OF AUTHORITIES — (Cont'd)

Nt A I aa 4,5, 21

EE Sa a eee 27

SSRIS SA eA 5

a 16

SRSA Ce 1

SIERRAS Ry ene 16

EET Rate ee a 27

GEER a 27

a 13,14

EE ETE 15

STE 15

aa 16

ST a 16

SEY ae ee 14

cl aS i a Gea 26

ETS a 16

LE 15

EGE te a a 4

SLE LEE passim

MISCELLANEOUS

Alexander, Do the Merits Matter? A Study of Settle-

ments in Securities Class Actions, 43 STAN. L.

a ih icici ininretintsenieemnnnete 8, 11

Alexander, Rethinking Damages in Securities Class

Actions, 48 STAN. L. REV. 1487 (1996)...........cccccccceees 10

vi

TABLE OF AUTHORITIES — (Cont’d)

Bajaj et al., Securities Class Action Settlements, 43

SANTA CLARA L. REV. 1001 (2003) 000.00... .cccccccccceececees 17

Black, et al., Outside Director Liability (Univ. of

Mich. John M. Olin Center for Law & Econom-

ics, Working Paper No. 250, 2003) ..0...........:ccccccececeeeees 19

Bohn & Choi, Fraud in the New-Issues Market: Em-

pirical Evidence on Securities Class Actions, 144

aU aioe Ss Di Oe ccticntietiscnsintnintcsnctinstiincencetencosen 8

Buckberg et al., NERA, Recent Trends in Securities

Class Action Litigation: Are WorldCom and En-

ron the New Standard? (July 2005) ...................0000+ 1,17

Chao, Securities Class Actions and Due Process,

es Sa i Be Bt ccetetenaciectnccccntcininstiontisnées 20

Choi, The Evidence on Securities Class Actions, 57

VAND. L. REV. 1465 (2004)... ccccccceeseeceeeeeereneeenees 18

Coffee, Causation by Presumption? Why the Su-

preme Court Should Reject Phantom Losses and

Reverse Broudo, 60 Bus. LAW. 533 (2005) .................. 10

Coffee, Understanding the Plaintiff's Attorney: The

Implications of Economic Theory for Private En-

forcement of Law Through Class and Derivative

Actions, 86 COLUM. L. REV. 669 (1986) ...............0.c.00 7

Common Sense Legal Reform Act: Hearings on H.R.

10 Before the Subcomm. on Telecommunications

and Finance of the H. Comm. on Commerce,

a 12

144 Cong. Rec. (daily ed. Oct. 13, 1998)... 21, 22

Easterbrook & Fischel, THE ECONOMIC STRUCTURE

OF CORPORATE LAW (1991 )..0........cccccccceecceeeeeees 10, 11, 12

Easterbrook & Fischel, Optimal Damages in Securi-

ties Cases, 52 U. CHI. L. REV. 611 (1985).....c.ccc0c.sse0eve 10

vii

TABLE OF AUTHORITIES — (Cont'd)

Garry et al., The Irrationality of Shareholder Class

Action Lawsuits: A Proposal for Reform,

49 S.D. L. REV. 275 (2005) -.cceescssesececcecescsssseseeseees 8, 9, 20

Grundfest, Why Disimply?, 108 HARV. L. REV. 727

ee 8, 10

Gulati, et al., Fraud by Hindsight, 98 Nw. U. L. Rev.

| ARS ha CS ae aE 14

H.R. Conf. Rep. No. 104-369 (1995) .......cccscsssssseeesven 8, 13

H.R. Conf. Rep. No. 105-803 (1998) ......cccccccssseesseeee 22, 25

H.R. Rep. No. 104-50 (1995) .....-.ccccccceccscssesessesesesenseees 11, 13

HLR. Rep. No. 105-640 (1998) ....cc..ccccccssssssessssseeeseen . 19,20

Kassis, The Private Securities Litigation Reform Act

of 1995: A Review of Its Key Provisions and an

Assessment of Its Effects at the Close of 2001, 26

SETON HALL LEGIS. J. 119 (2001) ........-ceccecccccseseceeeeeeeeees 7

Martin et al., Recent Trends IV: What Explains Fil-

ings and Settlements in Shareholder Class Ac-

tions, 5 STAN. J. L. Bus. & FIN. 121 (1999) ...00000..0 9

NASD, Five Year Statistical Review 2001-2005, at

http://www.nasd.com/web/idcplg?IdcService=SS

_GET_PAGE&nodeld=749&ssSourceNodeld=6......... 28

New York Stock Exchange, Enforcement, at http://

www .nyse.com/regulation/howregworks/1022221

ei iiccpictnhctsitasibiiueceastiiiaiétiteptabintinttietninmmceetini 28

Office of New York State Attorney General Settle-

ments and Press Releases

Alliance Capital Management Assurance of

Discontinuance, at http://www.oag.state

ny.us/investors/alliance cap _mgmt_aod.

ibe scasinudcenteniastichthdiddintnaiiamsihemipadibvbmanatennntie 28

Vili

TABLE OF AUTHORITIES — (Cont'd)

Banc of America Assurance of Discontinu-

ance, at http://www.oag.state.ny.us/press/

CIBC Settles Market Timing Investigation, at

http://www.oag.state.ny.us/press/2005/jul/

SUE Se iniititeiscncctitnstncsntniantcmevatgnaiclinnitia 28

Columbia Management Advisors Assurance

of Discontinuance, at http://www.oag.

state.ny.us/press/2005/feb/Banc.pdf.................. 28

Janus Capital Management Assurance of Dis-

continuance, at http://www.oag.state.ny.

us/investors/jom/aod. pdf.................ccceeeeseeeeeees 28

Spitzer, Merrill Lynch Reach Unprecedented

Agreement to Reform Investment Prac-

tices, at http://www.oag.state.ny.us/

press/2002/may/may21la_02.html...................... 28

Painter ef al., Private Securities Litigation Reform

Act: A Post-Enron Analysis (2002), available at

http://www.fed-soc.org/pdf/PSLRAFINALIL PDF. 18, 19

Perino, Did the Private Securities Litigation Reform

Act Work?, 2003 U. ILL. L. REV. 913 200.0... cceeceeceeee: 10

Perino, Fraud and Federalism: Preempting Private

State Securities Fraud Causes of Action, 50

RR eee 20

Posner, ECONOMIC ANALYSIS OF THE LAW (Sth ed.

eve ae aE Te TR OEE eT ee 10

PricewaterhouseCoopers LLP, 2004 Securities Liti-

gation Study 2 (Mar. 2005), available at

http://www.10bS.com/ 2004 _study.pdf.....................0.. 12

Pritchard, Markets as Monitors: A Proposal to Re-

place Class Actions with Exchanges as Securities

Fraud Enforcers, 85 VA. L. REV. 925 (1999) .............000 7

ix

TABLE OF AUTHORITIES — (Cont'd)

Pritchard, Should Congress Repeal Securities Class

Action Reform? (Univ. of Mich. John M. Olin

Center Working Paper No. 03-003, 2003).............. 18, 19

Pritchard & Sale, What Counts as Fraud? An Empiri-

cal Study of Motions to Dismiss Under the Pri-

vate Securities Litigation Reform Act (Univ. of

Mich. John M. Olin Center for Law & Econom-

ics, Working Paper 03-011, 2003) ..0........cccccseeeeereenees 19

Private Litigation Under the Federal Securities

Laws: Hearings Before the Subcomm. on Sec. of

the S. Comm. on Banking, Hous., & Urban Af-

fairs, 103d Cong., Ist Sess. (1993) ..........cccceeceeeeee 9,14

Radom, Balkanization of Securities Regulation: The

Case for Federal Preemption, 39-F ALL TEx. J.

i ie SEE isitnnrentescinincietinnniminnnititebiesnéeimeniios 20

Rosen, The Statutory Safe Harbor for Forward- _

Looking Statements After Two and a Half Years:

Has It Changed the Law? Has It Achieved What

Congress Intended?, 76 WASH. U. L.Q. 645

Siu indncitentintinpafiihamenininsiiapesthnistdtainsiabddiaimaieritimtiasiiitndndiaatnievens 19

S. Rep. No. 104~98 (1995), reprinted in 1995

irate Se a carteanieenventinneticoninascenictnsinnmeendes 7, 8, 11

S. Rep. No. 105-182 (1998).............cccsccserossorsesereeseees 4, 5,21

SEC 2004 Annual Report, available at http://www.

sec.gov/about/secpar/sec parO04stats.pdf. .................00+ 27

SEC, Office of General Counsel, Report to the Presi-

dent and the Congress on the First Year of Prac-

tice Under the Private Securities Litigation Re-

form Act of 1995, Apr. 1997 .........ccccccccceeeseeeeeseceneees 20, 21

SEC, Release No. 33-7881, 65 Fed. Reg. 51716

” * * ESTOS RIA EO GATS EL ee 12

x

TABLE OF AUTHORITIES — (Cont’d)

SEC, Release No. 33-8400, 69 Fed. Reg. 15594

LEG TEI 1S RM 26

Second Year Report to the President: Corporate

Fraud Task Force 2.3 (2004), at http://www.udoj.

gov/dag/cftf/2ndyr_fraud_report.pdf..............cccceeeeeeees 28

Securities Class Action Clearinghouse, at

http://securities.stanford.eduy ...............ccseeeeereereees 17, 27

Securities Litigation Reform Proposals: Hearings on

S. 240, S. 667, and H.R. 1058 Before the Sub-

comm. on Securities of the S. Comm. on Banking,

Housing, and Urban Affairs, \04th Cong., |st

By ee nthiitinicrcieesateibttoensssscheitnepvencapeseen 9, 10, 11, 14

Shad, Introduction to Securities Class Actions:

Abuses and Remedies (1996)............:cccceccceeeeseesceereeeeees 10

Simons & Ryan, Post-Reform Act Securities Settle-

ments: Updated Through December 2004, avail-

able at http://securities. stanford.edu/Settlements/

REVIEW_1995-2004/Settlements_Through 12_

ee crvisncntsinitscsnsstocttsieaincntinciinintniinmmengiolatin 17, 18, 19

Staff Report on Private Securities Litigation: Hearing

Before the Subcomm. on Sec. of. the S. Comm. on

Banking, Hous., and Urban Affairs, 103d Cong.,

Fe AR seidincscstiditialipitinnetiontrinceccieensiecmciinitesaies 9

Thakor, et al., U.S. Chamber Institute for Legal Re-

form, The Economic Reality of Securities Class

Action Litigation (2005), available at http://www.

instituteforlegalreform.com/pdfs/EconomicReal-

i caccopsascecsnnviasecnsocarconseecssnseensnatubannatanenaess 10

Thompson & Sale, Securities Fraud as Corporate

Governance: Reflections Upon Federalism, 56

VAND. L. REV. 859 (2003)............ccccccesesseecesseesseneneenees 8,9

xi

TABLE OF AUTHORITIES — (Cont’d)

Walker, Evaluating the Preemption Evidence: Have

the Proponents Met Their Burden?, 60 L. & CON-

TEMP. PROBS. 237 (1997) .cscceccscsssssssvecessssssssnssueceseeseee

Weil, Win Lawsuit—and Pay $300 Million, Wall St.

Weiss & Beckerman, Let the Money Do the Monitor-

ing, 104 YALE L.J. 2053 (1995) .....cccccccccssecssosssssssseee

Winter, Paying Lawyers, Empowering Prosecutors,

and Protecting Managers: Raising the Cost of

Capital in America, 42 DUKE L.J. 945 (1993) ..........