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

8

has had to infer what Congress might have done had it

considered the question. Jd. This was because “Congress did

not create a private § 10(b) cause of action and had no

occasion to provide guidance about the elements of a private

liability scheme.” Jd.

Central Bank lists Blue Chip Stamps as a decision

within the second category, a decision in which Section

10(b)’s statutory text did not control the decision because

Congress had provided no “guidance.” Jd. at 172. Because

the purchaser-seller requirement recognized in Blue Chip

Stamps is not imposed by Section 10(b)’s “in connection

with” language, and this Court had long made clear that it is

not, Congress’ borrowing of that language for SLUSA

cannot be understood as evidencing an intention to import

the purchaser-seller limitation into its definition of SLUSA’s

preemptive reach. Indeed, it would be ironic if Blue Chips

Stamps’ limitation, which precludes the private securities

actions this Court thought most likely to be vexatious, were

the mechanism for limiting Congress’ efforts to preclude

state securities class actions it found vexatious and abusive.

II. SLUSA’S “IN CONNECTION WITH” LANGUAGE

REQUIRES ONLY THAT THE MISCONDUCT

INVOLVE SECURITIES TRANSACTIONS.

Section 10(b)’s and Rule 10b-5’s “in connection with”

language has consistently been read to reach conduct

connected to anyone’s securities transactions, rather than

limited to conduct connected to plaintiffs’ purchases or

sales. SLUSA’s use of that language, without providing for a

different meaning, precludes a narrower construction of

SLUSA’s “in connection with” language. That textual

reading is also supported by the statute’s purpose and

legislative history.

9

A. The Borrowed Language Defines Claims In

Which the Alleged Misconduct Coincides

With Securities Transactions.

The established judicial construction of Section 10(b)’s

and Rule 10b-5’s “in connection with” requirement is that it

requires only that the alleged fraud coincide with securities

transactions. It does not require that the plaintiffs them-

selves purchased or sold the securities at issue or, therefore,

that plaintiffs in a class action purchased the securities

during the class period. Section “10(b) bans the use of any

deceptive device in the ‘sale’ of any security by ‘any

pevson.’” Superintendent of Insurance v. Bankers Life &

Casualty Co., 404 U.S. 6, 10 (1971) (emphasis added).

Thus, United States v. O’Hagan, 521 U.S. 642, 656

(1997), ruled that Section 10(b)’s “in connection with”

requirement was satisfied by the defendant’s purchase of

securities. The requirement was satisfied because attorney

O’Hagan’s breach of duty to his firm’s client coincided with

his own purchases of securities. Jd. The Court explained

that the “provision, as written, does not confine its coverage

to deception of a purchaser or seller of securities.” Jd. at 651.

Section 10(b) may be violated “even though the person or

entity defrauded is not the other party to the trade.” Jd. at

656.

Similarly, in SEC v. Zandford, 535 U.S. 813, 822 (2002),

the Court ruled that a broker’s sale of his client’s securities

and theft of the proceeds, without the client’s knowledge,

met the “in connection with” requirement because: “It is

enough that the scheme to defraud and the sale of securities

coincide.” See also Carpenter v. United States, 484 U.S. 19,

24 (1987) (affirming, by divided vote, the conviction under

Section 10(b) and Rule 10b-5 of a newspaper columnist,

based on securities trades by his co-par. ‘“ipants, because the

columnist had breached his duty t« his newspaper by

passing on confidential information, even though “the

victim of the fraud, the Journal, was not a buyer or seller

of the stocks traded in or otherwise a market participant”).

10

Moreover, in these cases, as in other enforcement

proceedings under Section 10(b) «1d Rule 10b-5, none of

the securities transactions found to meet the “in connection

with” requirement were purchases or sales by the plaintiff.

In such proceedings, the plaintiff is a government agency.

Although, in each case, this Court required that the

misconduct alleged must be “in connection with” securities

transactions, it has never required that the plaintiff be the

purchaser or seller. See, e.g., United States v. Naftalin, 441

U.S. 768 (1979).

B. The Statutory Text Precludes Adding A

Purchaser-Seller Restriction.

When Congress borrowed Section 10(b)’s “in connection

with” language for SLUSA, it intended the phrase to mean

for SLUSA purposes what it means for Section 10(b) and

Rule 10b-5 purposes. See, e.g., Bragdon v. Abbott, 524 US.

624, 632 (1998) (“Congress’ repetition of a well-established

term carries the implication that Congress intended the

term to be construed in accordance with pre-existing . . .

interpretations.”); Lorillard v. Pons, 434 U.S. 575, 581

(1978) (Congress “can be presumed to have had knowledge

of the interpretation given to the incorporated law.”).

Congress is understood to have “adopted” the pre-existing

interpretations unless it provides otherwise. See Keene Corp.

v. United States, 508 U.S. 200, 212 (1992).3

Thus, the meaning of Section 10(b)’s “in connection

with” language provides its meaning for SLUSA. All six of

the Courts of Appeals to address the question have reached

3 Here, the presumption is particularly appropriate because the “old”

and “new” laws are sections of both the same and related statutes. See,

e.g., Gustafson v. Alloyd Co., 513 U.S. 561, 570 (1995) (adhering to “the

normal rule of statutory construction that identical words used in

different parts of the same act are intended to have the same meaning”)

(quotations omitted); Brooke Group Ltd. v. Brown & Williamson Tobacco

Corp., 509 U.S. 209, 229-30 (1993) (relying on long-settied meaning of

Clayton Act language to interpret identical phra’: in Robinson-Patman

Act).

11

the same conclusion. See Kircher, 403 F.3d at 482 (noting

that “[e]very court of appeals to encounter SLUSA has held

that its language has the same scope as its antecedent in

Rule 10b-5”) (citing decisions from the Second, Third,

Eighth, Ninth and Eleventh Circuits and adding the

Seventh Circuit to that consensus).

As discussed above, the meaning of Section 10(b)’s “in

connection with” requirement—and, thus, SLUSA’s—is

that the misconduct alleged must be in connection with

someone’s securities transactions. It need not be in connec-

tion with plaintiffs’ transactions, much less plaintiffs’

transactions during the class period. See, supra, Pt. II.A.

Nothing in SLUSA’s text offers a toehold for narrowing

SLUSA’s preemptive reach. Congress was certainly aware of

the long-recognized judicially-imposed purchaser-seller re-

quirement on private suits under Section 10(b) and Rule

10b-5, and “knew how to impose [a purchaser-seller

requirement] when it chose to do so.” Central Bank, 511

U.S. at 176. Only ten years before enacting SLUSA,

Congress provided a private right of action to recover losses

caused by insider trading and expressly limited such suits to

contemporaneous purchasers and sellers. See Insider Trad-

ing and Securities Enforcement Act of 1988, P.L. 100-704,

102 Stat. 4677, 4680-81, codified at 15 U.S.C. § 78t-1(a)

(confining application to “any person who, contempora-

neously with the purchase or sale of securities that is the

subject of such violation, has purchased ... or sold... .

securities of the same class”).

Congress did not adopt this language, or any language,

to similarly limit SLUSA’s reach. Had Congress intended to

limit SLUSA’s application to suits alleging misconduct in

connection with plaintiffs’ securities transactions, it could

have done so by changing only one word. It could have

drafted the requirement to provide: “in connection with

plaintiff's purchase or sale of a covered security” instead of

“the” purchase or sale. It did not do so.

12

Congress could also have incorporated such a limitation

in SLUSA by defining “covered class actions” to include only

lawsuits brought by the purchasers or sellers of the

securities. Again, Congress did not do so. Congress could

have included—in the long list of carefully delineated

exceptions that Congress did provide — an express exception

for suits under state law brought by non-purchaser-sellers.

See 15 U.S.C. §§ 78bb(f)(3), ()(4), (N(5)(C). But Congress did

not do that either.

Congress’ use of language with a well-settled meaning,

without including any provision narrowing that meaning,

precludes addition of a narrowing construct. Courts “begin

with the understanding that Congress says in a statute what

it means and means in a statute what it says there.”

Hartford Underwriters Ins. Co. v. Union Planters Bank,

N.A., 530 U.S. 1, 6 (2000) (quotation omitted). When, as

here, “the statute’s language is plain, the sole function of the

courts—at least where the disposition required by the text is

not absurd—is to enforce it according to its terms.” Id.

(quotations omitted).

C. Applying the Settled Meaning of “In Connec-

tion With” to SLUSA Preemption Would Not

Lead to Absurd Results.

Literal application of the “in connection with” provision

is not even outside Congress’ purposes, much less “demon-

strably at odds” with them. See Griffin v. Oceanic

Contractors, Inc., 458 U.S. 564, 571 (1982) (noting that

courts may override statutory language only in the rare case

where “the literal application of a statute will produce a

result demonstrably at odds with the intentions of its

drafters”).

Rather, it would affirmatively further the purposes for

which Congress enacted SLUSA, by helping to ensure that

securities lawsuits are able to impose costs on the securities

markets only if they are sufficiently meritorious to survive

the gatekeeping mechanisms Congress has chosen to rely

13

on. SLUSA was intended to make “Federal court the

exclusive venue for most securities class action lawsuits.”

H. R. Conf. Rep. No. 105-803, at 13 (1998) (“Conf. Rep.”).

“The legislation is designed to protect the interests of

shareholders and employees of public companies that are

the target of meritless ‘strike’ suits. The purpose of these

strike suits is to extract a sizeable settlement from

companies that are forced to settle, regardless of the lack

of merits of the suits, simply to avoid the potentially

bankrupting expense of litigating.” Jd. Applying the terms

of the statute furthers these purposes by requiring private

class action plaintiffs who complain of being deceived to

bring federal securities fraud suits subject to federal

procedural safeguards, and private class action plaintiffs

who complain of corporate mismanagement to bring

derivative suits, which are expressly exempted from SLUSA

preemption but subject to state law procedural safeguards.

Although the primary impetus for SLUSA was an

interest in staunching the increasing flow of securities class

actions brought in state courts to avoid the strictures

Congress had imposed three years earlier in the PSLRA,’

the statute Congress enacted is broader. See SLUSA, 112

Stat. at 3227, 3228, 3230. Indeed, it is commonplace for

Congress to have focused on the need to respond to a

particular problem but to enact broader legislation. See

Brogan v. United States, 522 U.S. 398, 403 (1998) (recogniz-

ing “the reality that the reach of a statute often exceeds the

precise evil to be eliminated”). When Congress enacts

broader legislation, as this Court has repeatedly explained,

“it is not, and cannot be, our practice to restrict the

unqualified language of a statute to the particular evil that

Congress was trying to remedy.” Id. See also Engine Mfrs.

Ass’n v. S. Coast Air Quality Mgmt., 541 U.S. 246, 253-55

(2004) (applying federal statute to preempt state restrictions

on vehicle purchasers, although Congress’ expressed focus

* The Private Securities Litigation Reform Act of 1995, P.L. 104-67,

109 Stat. 743, 758, codified at 15 U.S.C. §§ 77z-1, 78u-4.

14

was on eliminating the restrictions on manufacturers); H.J.

Inc. v. Northwestern Bell Tel. Co., 492 U.S, 229, 245-49

(1989) (recognizing that the language of the RICO statute

reaches far more than organized crime and declining to

narrow that reach).

Moreover, Congress was well aware that SLUSA

precluded a wider range of state law securities suits than

those that could have been filed in federal court but were

filed in state court to avoid the PSLRA. Some members of

Congress, consumer organizations, and law professors had

argued strenuously during the legislative process that

SLUSA would deprive investors of any remedy at all in

many circumstances and should be amended to avoid that.

Senators Sarbanes, Bryan and Johnson had filed a separate

statement to accompany the committee report from the

Senate, stressing that “in too many cases, investors will be

left without any effective remedies at all.” S. Rep. 105-182,

at 11 (1998) (Additional views of Senators Sarbanes, Bryan

and Johnson). The statement emphasized that SLUSA

would withdraw a number of protections investors had

enjoyed under state law, mentioning specifically the ability

to impose aiding and abetting liability and longer statutes of

limitation. Id. at 20-22.

Their argument for amending SLUSA to avoid such

broad preemption did not prevail. In addition to closing the

PSLRA loophole, the majority was concerned more generally

with the harmful effects of subjecting nationally traded

securities to state law in private class actions. The PSLRA

itself was enacted in reaction to “abuse in private securities

lawsuits,” which Congress determined was undermining the

“integrity of American markets . . . by those who seek to line

their own pockets by bringing abusive and meritless suits.”

H.R. Conf. Rep. No. 104-369 at 31 (1995). But, in the three

years following enactment of the PSLRA, Congress’ efforts

to prevent abusive suits was increasingly thwarted by savvy

litigators filing actions against securities companies under

state law. 112 Stat. at 3227.

15

Thus, the Senate Committee noted that “state-court

class actions involving nationally traded securities were

virtually unknown prior to the [PSLRA, but] they are

brought with some frequency now.” S. Rep. No. 105-182, at 4

(1998). It expressed concern that “this state class-action

trend has . . . created a ripple-effect that has inhibited small,

high growth companies in their efforts to raise capital, and

has damaged the overall efficiency of our capital markets.”

Id.

After weighing states’ rights and federalism interests, it

“found the interest in promoting efficient national markets

to be the more convincing and compelling consideration in

this context,” id., because “fraudulent and abusive secu-

rities class action litigation distorts the efficient operation of

those markets and the optimal allocation of available

capital,” id. at 5. The Conference Committee similarly

expressed the concern of majorities in both houses of

Congress with plaintiffs’ lawyers’ “filing frivolous and

speculative lawsuits in State court,” and “a single state

{being able to] impose the risks and costs of its peculiar

litigation system on al) national issuers.” Conf. Rep. at 15.

Whether Congress specifically anticipated every in-

stance in which SLUSA would preempt a state law action

that—in fact or as drafted—could not be brought under

federal law has no bearing. See Griffin, 458 U.S. at 576

(imposing the terms of a statute as written, notwithstanding

its conclusion that Congress had not precisely envisioned

the result, and noting many other statutes that had been

applied as written regardless of whether Congress had

anticipated the situation to which they were applied). “[T}he

fact that a statute can be applied in situations not expressly

anticipated by Congress does not demonstrate ambiguity. It

demonstrates breadth.” Pa. Dep’t of Corr. v. Yeskey, 524 US.

206, 212 (1998) (quotation omitted).

Thus, whether or not the current rash of securities

lawsuits, artfully drafted as state law actions, had been

expressly anticipated by Congress, the statute Congress

16

enacted plainly, and properly, covers them. That Congress’

purposes are furthered by SLUSA’s preemption of all

actions it reaches, regardless of whether the plaintiffs

purchased or sold securities, “only underscores [the courts’)

duty to refrain from reading a phrase into the statute when

Congress has left it out.” Keene, 508 U.S. at 208.

D. The Second Circuit’s View Is Based on a

Misreading of the Statutory Text.

The Second Circuit’s conclusion in the instant case—-

that the purchaser-seller requirement is contained in the “in

connection with” language of Section 1u(b), and therefore in

SLUSA—strayed too far from the statutory text and

misread Blue Chip Stamps. See Pet. App. 52a. The court

below offered no explanation as to how the text of Section

10(b) could have one meaning when applied to a case

brought by the SEC and another when applied to a case

brought by a private plaintiff. The court’s conclusion that

the SEC could bring a Section 10(b) claim as long as someone

buys or sells the security during the period of allegedly

fraudulent conduct, id. at 24a, should have resolved the

statute’s application to all potential plaintiffs. Its reliance

upon Blue Chip Stamps to supply controlling precedent, in

the absence of textual analysis, is misplaced. As discussed

above, Blue Chip Stamps did not rule that Section 10(b),

much less its “in connection with” provision, supplied the

purchaser-seller requirement; rather, the Court explained

repeatedly that it did not. See, supra, Pt. I.

None of the ancillary arguments relied on by the court

below apply. Its focus on whether Congress, in enacting

SLUSA, had expressly indicated that it intended to reach

suits by non-purchasers/non-sellers is backwards. See Pet.

App. 2la, 27a, 3la. Congress had already indicated it

intended to reach such suits by borrowing language that

had long been read to reach such suits. The appropriate

question would have been whether Congress had expressly

indicated that it intended to exclude suits by non-purcha-

sers/non-sellers because courts may only disregard statutory

17

text if there is “something to make plain the intent of

Congress that the letter of the statute is not to prevail.”

Crooks v. Harrelson, 282 U.S. 55, 60 (1930). Accord Tenn.

Valley Auth. v. Hill, 437 U.S. 153, 188 n.33 (1978). There

was not. See, supra, Pts. I]. B&C.

The Second Circuit’s reliance on the presumption

against preemption is also inapposite. See Pet. App.

30a-31a. Congress provided an express preemption provision

in SLUSA, leaving “the task of statutory construction

... in the first instance [to] focus on the plain wording of

the clause, which necessarily contains the best evidence of

Congress’ preemptive intent.” CSX Trans., Inc. v. Easter-

wood, 507 U.S. 658, 664 (1993).

Finally, the court below cannot derive support from

Blue Chip Stamps’ conclusion that the purchaser-seller

restriction it fashioned would be counterbalanced by the

existence of remedies under state law. See Pet. App.

29a-30a. Blue Chip Stamps noted such remedies in a

footnote in its consideration of the practical policies

weighing in favor of and against adopting such a limitation

on private securities actions. The Court’s weighing of the

practical implications of a judge-made restriction under

consideration has no force in this context. Congress has

spoken since Blue Chip Stamps’ policy discussion. It enacted

a statute that preempts state law private securities class

actions, using language long understood to reach actions by

non-purchasers/non-sellers. Therefore, “(t]he issue . . . is not

whether [permitting plaintiffs to bring actions under state

law that may not be maintained by them under federal law]

is good policy but whether [it] is covered by the statute.”

Central Bank, 511 U.S. at 177. Thus, even if the Second

Circuit viewed such preemption as unwise or unfair, it may

not “substitute its policy judgment for that of Congress.”

Hodel v. Indiana, 452 U.S. 314, 331 (1981).

In sum, SLUSA’s “in connection with” requirement,

like Section 10(b)’s, is met if the alleged misrepresentations,

18

omissions or manipulative conduct is connected to some-

one’s securities transactions.

Ill. APPLICATION OF SLUSA’S “IN CONNECTION

WITH” REQUIREMENT TO INDIVIDUAL

CASES.

With respect to whether alleged misconduct is con-

nected to someone’s securities transactions in a specific case,

this Court has repeatedly held, in interpreting Section 10(b),

that “in connection with” should be read broadly and

flexibiy, not technically and restrictively. Zandford, 535

U.S. at 819. In many contexts, such as the market timing

class actions, a broad and flexible reading of the “in

connection with” requirement is not even needed to find

the requirement met. Amicus presents its view of SLUSA’s

application to market-timing class actions in order to inform

this Court’s framing of its decision, if it reaches the

application of SLUSA’s “in connection with” requirement

to the instant case.

A. The Market-Timing Class Action Allegations

Many of the market-timing class actions brought over

the last two years allege that variable annuity and mutual

fund companies facilitated transactions by arbitrageurs that

diluted the value of shares owned by longer-term holders,

including plaintiffs, by the manner in which they are alleged

to have set share prices. Mutual funds, and the subaccounts

by which variable annuity contract-holders invest in them,

set share prices once a day as of the close of the New York

Stock Exchange. These class actions allege that the

companies set share prices for these funds and subaccounts

based on the most recently availatle market value for each

security. For securities traded in the United States, the most

recently available market value is a current price. For

securities traded on foreign stock exchanges, the most

recently available market value is five to fifteen hours old,

because they operate in different time zones.

19

The class actions allege that arbitrageurs can predict

whether foreign securities will rise or fall, based on what has

happened in the U.S. markets while the foreign exchanges

were closed and other indices, and that the arbitrageurs can

therefore time purchases and sales of shares in fund

portfolios that include foreign securities to take advantage

of the allegedly “stale” pricing. The actions further allege

that, by doing so, these market-timers reap profits that

would otherwise belong to long-term investors and avoid

losses that are left to the long-term investors. They further

allege that the companies facilitated the market-timers’

transactions and thereby breached duties to their long-term

investors by exposing them to dilution of the value of their

securities. In some complaints, the class actions allege that

the companies failed to disclose that the pricing was “stale,”

that arbitrage was a risk, and that it would lower the value

of securities held long-term.

B. “In Connection With” Transactions By

Market Timers

The first way in which these market-timing class

actions meet SLUSA’s “in connection with” requirement is

by alleging that the variable annuity and mutual fund

companies breached their duties by facilitating purchases

and sales of covered securities by market timers. The

plaintiffs specifically allege both the existence of market-

timed securities transactions based on the allegedly wrong-

ful pricing and that these transactions injured them.

Allegations that securities are wrongfully valued con-

cern conduct that is inherently “in connection with” the

purchase or sale of securities, because each day’s price exists

solely to determine how much each investor must pay or will

receive for a purchase or sale. Here, in addition, the

allegations assert that the defendant’s alleged misconduct

would not have caused plaintiffs’ alleged injuries absent the

purchases and sales by the market timers. Thus, the alleged

misconduct in market timing class actions is “in connection

20

with” securities transactions so as to fall within SLUSA’s

preemptive reach.

C. “In Connection With” Plaintiffs’ Own

Purchases, Either Before or During the Class

Period.

In addition, as is the case for many state law actions

filed on behalf of a class of “holders,” the market-timing

class actions explicitly or implicitly involve allegations under

Section 10(b) and Rule 10b-5, based on plaintiffs’ and class

members’ own securities purchases. In the past two years,

hundreds of cases have been brought, complaining of

market-timing in mutual funds and variable annuity

subaccounts. Most of these have been brought in federal

court asserting federal] causes of action.

Implicit in any “holder” allegations about market--

timing is the complaint that the plaintiffs were misled or

manipulated into purchasing the securities. If the plaintiffs

had purchased the securities expecting other investors to

make market-timed transactions, they would have no basis

for complaint. On the other hand, if the securities were

represented as arbitrage-proof or if purchasers were assured

that market-timed trades would be prevented, Section 10(b)

or Rule 10b-5 potentially provides investors claiming to have

been harmed by market-timed trades with a means of

redress. See Kircher, 403 F.3d at 484 (“plaintiffs’ claims

depend on statements made or omitted in connection with

their own purchases of the funds’ securities”).

Indeed, in the original complaint filed against Pacific

Life, the plaintiff alleged that the defendant had convinced

the plaintiff and other investors to purchase variable

annuity contracts by marketing the advantages of long-term

ownership of variable annuities over direct investment

without providing complete and truthful information to

plaintiff and the class about its pricing and the risks of

dilution of long-term contract holders’ investments as a

result of arbitrage facilitated by that pricing. However, in

21

his current complaint - an effort at SLUSA-proofing the

allegations — plaintiff has carefully worded the complaint to

focus almost uniformly on conduct that affected him after he

purchased the security and has expressly excluded claims

based on Pacific Life’s conduct in connection with his or

class members’ purchases or sales of securities.” The alleged

events out of which these claims arise, and the relief

requested, are identical.

If SLUSA is to have the result Congress intended, it is

necessary to consider not only the allegations as carefully

drafted by counsel eager to avoid SLUSA, but also whether

the events complained of necessarily include conduct subject

to Section 10(b) and Rule 10b-5 prohibitions, and therefore

could have been addressed in a private or government

enforcement action under those provisions. Absent the

safeguard of considering the underlying nature of the

complaint, any but the most inept or inattentive of

plaintiffs’ counsel will quickly hone the techniques of

drafting complaints to avoid preemption. And SLUSA will

be rendered wholly ineffective for preventing federal

securities fraud actions involving nationally traded secu-

rities from being brought in state courts and subjected to

varying state laws. Because this “is the very sort of

maneuver that SLUSA was designed to prevent,” Kircher,

403 F.3d at 484, courts must look behind the words of the

complaint to determine whether a plaintiffs grievance is

properly addressed as a securities fraud claim. Accord

Rowinski v. Salomon Smith Barney Inc., 398 F.3d 294, 300

(3d Cir. 2005); Dudek v. Prudential Sec., Inc., 295 F.3d 875,

879-80 (8th Cir. 2002).

With respect to market timing in variable annuity

subaccounts and mutual funds, the inherent nature of the

claims is rendered particularly apparent by the SEC’s

®° Plaintiff voluntarily dismissed his first complaint and filed a

redrafted complaint soon thereafter.

22

decisions to bring such claims under Section 10(b) and Rule

10b-5, and to successfully settle them.®

Such actions meet the “in connection with” require-

ment of Section 10(b) and Rule 10b-5 because the

defendants’ alleged misconduct is “in connection with” the

purchases of investors who were misled. That connection

provides a second basis for finding that private class actions

arising out of market-timed trades meet SLUSA’s “in

connection with” requirement.

® See, e.g., In re CIHC, Inc., No. 3-11578, Securities Act Release No.

8455, Exchange Act Release No. 50165, Investment Co. Act Release No.

26526 (Aug. 9, 2004) (SEC found, in connection with settlement, that

defendants, including issuer of variable annuity products, violated

Section 10(b) and Rule 10b-5 by misrepresenting that action would be

taken to limit market timing and then facilitating market-timed

transactions); Jn re Inviva, Inc., No. 3-11579, Securities Act Release No.

8456, Exchange Act Release No. 50166, Investment Co. Act Release No.

26527 (Aug. 9, 2004) (same).

23

CONCLUSION

For the foregoing reasons, the Court should rule that

the Blue Chip Stamps purchaser-seller limitation was net

incorporated into SLUSA, and does not confine SLUSA’s

preemptive scope. Thus, many “holder” allegations allege

misconduct “in connection with” securities transactions and

therefore within SLUSA’s preemptive reach.

Respectfully submitted,

Steven B. Feirson*

Nory Miller

DECHERT LLP

2929 Arch Street

Philadelphia, PA 19104

(215) 994-4000

Kathleen N. Massey

DECHERT LLP

30 Rockefeller Plaza

New York, NY 10112

(212) 698-3500

Counsel for Amicus Curiae

November 14, 2005 *Counsel of Record

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

Petitioner,

V.

SHAD! DAB!i, 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 AMICI CURIAE OF THE SECURITIES

INDUSTRY ASSOCIATION AND THE BOND

MARKET ASSOCIATION

IN SUPPORT OF PETITIONER

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

November 14, 2005 * Counsel of Record

AE cia

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

QUESTION PRESENTED

Whether the preemption provision of the Securities

Litigation Uniform Standards Act, which bars class actions

based upon state law that allege “a misrepresentation or

omission of a material fact in connection with the purchase or

sale of a covered security,” applies to securities class actions

by persons who allege they held securities in reliance upon a

misrepresentation or omission about a covered security.

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TABLE OF CONTENTS

QUESTION PRESENTED.......cccrcccccoscsoscocssessvocsessonsceses

TABLE OF AUTHORITIES

INTEREST OF THE AMICT CURIAE .........ccccecsereeeeeeeees

STATUTORY PROVISIONS INVOLVED ...............0000

INTRODUCTION AND SUMMARY OF ARGU-

I. THE NATURAL MEANING AND POLICY OF

II.

THE SLUSA PREEMPTION PROVISION RE-

QUIRES PREEMPTION OF HOLDER CLASS

PE See ei cnitvininineninitititinstinitdbcnmianapbinticlnnvene

A. The Text Of SLUSA Supports Preemption........

B. This Court’s Interpretation Of Section 10(b) In

O'Hagan Cannot Be Squared With A Non-

Preemptive Reading Of SLUSA..................00004

C. Blue Chip Stamps Was Not Based On An

Interpretation Of The “In Connection With”

TIED vcesiidnnsiniastntocidesnbiisnbetiaisantalininisdiationinein

D. SLUSA’s Policy Of Achieving Uniformity In

The Standards Governing U.S. Securities

Litigation Supports Preemption....................004+

NO POLICY RATIONALE SUPPORTS READ-

ING SLUSA NOT TO PREEMPT HOLDER

CLASS ACTION STATE LAW CLAIMG..............

A. The Non-Preemptive Reading Of SLUSA

Would Illogically Create Greater Potential

Remedies For Holders Of Securities Than For

Purchasers And Sellers .................sccccssececeeseseeees

SSSR SHEET RERHHHTHHEHHEERe eee e

>

iV

TABLE OF CONTENTS -— continued

B. A Class Of Holders Of Securities Cannot Be

Injured By A Misrepresentation .................s000+

Ill. SLUSA’S LEGISLATIVE HISTORY DOES

NOT SUPPORT AN EXCEPTION FOR

HOLDER CLASS ACTION STATE LAW

CA ATI wreccerececcceessntcnnsncneneosaessonanvecssiecnssenstsnesnniasin

Vv

TABLE OF AUTHORITIES

CASES Page

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

NG St ininnndicsinsteilhiatnceranetibpiiamntenemensecatinies 18

Basic, Inc. v. Levinson, 485 U.S. 224 (1988)........... 9,18

Blue Chip Stamps v. Manor Drug Stores, 421

ee 5, 12, 13, 14

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

Ss ST ITE ccetaheliasiensdnsenntiagdbsseccedentensbabietee 20

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

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

SD STI hcohinticeiencitiadtitieneatertpectadnainmncnssinemaentienenn 18

Crocker v. FDIC, 826 F.2d 347 (Sth Cir. 1987) ... 17, 18

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

Rl taittcinihincetiettaiashdiaiadenndnintintitmasinadee’ 2, 8, 9, 14, 18

Edgar v. MITE Corp., 457 U.S. 624 (1982)............ 21

Ernst & Ernst v. Hochfelder, 425 U.S. 185

all etsieilenedinbpmnaattiineninastnasenansteatatiteabanetteaentunianations 16

Ganino v. Citizens Utils. Co., 228 F.3d 154 (2d

Ss Saree icteacilindincrinntanntnalipenenecnnstendabninaesasemetianuoun 16

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

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

Fe ee Ge, UTED cccnesccceccscesnescescesncscnanensces 20

Holmes v. Securities Investor Prot. Corp., 503

ee Se eenennscetcticnsensicenesencieemecsnmesttentones 10, 12

Howsam v. Dean Witter Reynolds, Inc., 537 U.S.

Ee ee 2

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

SEE NEE hchemnapattietentiennmndnintgnpnemauimasintngunice 18

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

(7th Cir. 2005), rehearing denied, 2005 U.S.

App. LEXIS 7914 (7th Cir. May 2, 2005),

petition for cert. filed, No. 05-409 (U.S. Sept.

SP) SD cccesenssesssesnesccpsennncnnensnensneqesscessessensessesecees 5, 20

Lampf, Pleva, Lipkind, Prupis & Petigrow v.

Gilbertson, 501 U.S. 350 (1991).........ccccccccceeeeeees 2

vi

TABLE OF AUTHORITIES — continued

Page

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

FPO crcenscissnspenttninnscmmnnislagmnneneemmenenmmeineisin 7, 18

Metropolitan Life Ins. Co. vy. Massachusetts, 471

Se Pe cnstnscnsetisninnemnnitatnntersinmnssnneitite 13

Morales v. Trans World Airlines, Inc., 504 U.S.

Pee itctsinicsiinncensncsincnaitnmancnssclsstitjamipeiianeigua 7, 20

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

ee 16

Rieger v. Drabinsky (In re _ Livent, Inc.

Noteholders Sec. Litig.), 151 F. Supp. 2d 371

8 Re eee 15

Rodriguez De Quijas v. Shearson/Am. Express,

Oe 2

Scheidler v. National Org. for Women, Inc., 537

2 Ee 10

Shearson/Am. Express, Inc. v. McMahon, 482

ek ee nienerninninnicpniaitneseinciciatininniaidiinsasins 2

State Farm Mut. Auto. Ins. Co. v. Campbell, 538

es Se Ce aeserecnetsistmianienetecsninipesninnntesmnepiinns 21

United States v. O'Hagan, 521 US. 642

Oe teneicesttensiapiinennnnnineciiiecniicmnnsiniats 5,6, 10, 11, 12

Voskamp v. Arnoldy, 749 S.W.2d 113 (Tex. App.

GER cestnnntssciistnsitnanensinnsrinenaiaenmmigaienntintmapamen 16

STATUTES

Fs Oe enrnticnserinettpettnenttcienveninne 9

it PRI cxessnnenennqenepmnepemmnetnendapmmemenmeenesie 9

ESA aE 8

By Ga imnntnnsasasnttencinetsmastentoenatingaareds 4

eee 9

EERE AILS 9

| SE 16

vii

TABLE OF AUTHORITIES — continued

Page

Se las Oe itticctctastatcternrtecemnminneccines 14

iy SEE isichibiininciinleanitintinigiinitesiiendipaiiintiabidial 16

Ind. Code Amn. § 23-2-1-19(g)..........c.cccccceseeeeeeeeees 16

N.H. Rev. Stat. Ann. § 421-B:25(VID) ...............000 16

a, Ge a, Be chccettnicernnnitsncnnsscccsccinnss 16

Wash. Rev. Code § 21.20.430(4)(b)..............ccccccc0e 16

RULE

I aly tt i crcnrentocmnenstonneescigtiamnediinumeneniags 16

LEGISLATIVE HISTORY

S. Rep. No. 105-182 (1998) ............ccccccecseeeeeeseeeeees 13

i, SR, RR, re IE ctesretresecnsnssecnscensgeeneennciie 14

143 Cong. Rec. $10475 (daily ed. Oct. 7, 1997),

available at 1997 WL 614735 0.00... 14, 15, 19

OTHER AUTHORITIES

Securities Industry Association, at http://www.

sia.com (last visited Nov. 14, 2005) .................... l

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

bondmarkets.com (last visited Nov. 14, 2005).... 2

INTEREST OF THE AMICI CURIAE'

The Securities Industry Association (“SIA”) brings together

the shared interests of approximately 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

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 $236.7 billion

in domestic revenue and an estimated $340 billion in global

revenues. (More information about SIA is available at

Wwww.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

' 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. Counsel of

record for both parties have consented to the filing of this brief, and the

letters of consent have been filed with the Clerk.

2

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

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.

TBMA’s efforts to encourage efficient regulation of U.S.

markets serves to encourage foreign as well as domestic

securities issuance in the United States. In 2004, there were

$46.4 billion in dollar-denominated debt securities issued in

the United States by foreign companies, most through TBMA

members.’ (More information about TBMA is available at

www. bondmarkets.com.)

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/Amer. Express, Inc., 490 U.S. 477 (1989);

Shearson/Amer. Express, Inc. v. McMahon, 482 U.S. 220

(1987).

The issue raised by this case is whether holders of securities

who refrained from selling, ie., those who held onto

securities, in reliance upon an alleged misrepresentation can

bring state-law class actions that survive 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

? This figure does not include foreign issues with matunties of one year

or less, certificates of deposit, or convertible bonds.

3

the effort of Congress to curb vexatious litigation in state law

securities class actions by enacting the uniform national

requirements of SLUSA, not fall prey to plaintiffs who

attempt creatively to plead around SLUSA preemption and

the stricter federal securities standards. Such uniform

standards are critical to the use of U.S. securities markets by

both domestic and foreign issuers. Amici therefore have a

vital interest in the issue presented in this case, and their

views and experience can assist the Court in resolving that

issue.

STATUTORY PROVISIONS INVOLVED

Securities Litigation Uniform Standards Act:

No covered class action based upon the statutory or

common law of any State or subdivision thereof may be

maintained in any State or Federal court by any private

party alleging — (A) a misrepresentation or omission of a

material fact in connection with the purchase or sale of a

covered security; or (B) that the defendant used or

employed any manipulative or deceptive device or

contrivance in connection with the purchase or sale of a

covered security.

15 U.S.C. § 78bb(f)(1).

Securities and Exchange Act § 10(b):

It shall be unlawful for any person, directly or indirectly,

by use of any means or instrumentality of interstate

commerce or of the mails, or of any facility of any

national securities exchange . . . (b) To use or employ, in

connection with the purchase or sale of any security

registered on a national securities exchange or any

security not so registered, or any securities-based swap

agreement ... any manipulative or deceptive device or

contrivance in contravention of such rules and

regulations as the Commission may prescribe as

4

necessary or appropriate in the public interest or for the

protection of investors.

15 U.S.C. § 78)(b).

INTRODUCTION AND SUMMARY OF ARGUMENT

This case presents the question whether the SLUSA

preemption provision applies to state law class action claims

brought by holders of securities. 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.

Afier 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.

P brings a federal § 10(b) class action alleging that the

concealment caused those who purchased after the

concealment began to suffer a loss from the post-purchase

decline caused by the disclosure of the setbacks. Of course,

the purchaser class action may proceed.

Separately, H brings a class action based on state law

alleging that the concealment caused the holder class to

refrain from selling at the $50 price.’ This case concerns

whether the holder class action may proceed in state court.

The position of respondents and the plaintiff class action bar

is that the holder case proceeds. Under their approach, the

holder’s state law class action would probably sue for both

fraud and negligence, and for both compensatory and punitive

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

> As we demonstrate infra at 17-18, the premise that a class of holders

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

economic nonsense.