Amicus Curiae Brief — Stoneridge Inv. Partners v. Scientific-Atl.

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OFFICE OF THE CLERK

In The SUPREME COURT. U.S.

Supreme Court of the Anited States

+

STONERIDGE INVESTMENT PARTNERS, LLC,

Petitioner,

v.

SCIENTIFIC-ATLANTA, INC. AND MOTOROLA, INC.,

Respondents.

¢

On Writ Of Certiorari To

The United States Court Of Appeals

For The Eighth Circuit

S

BRIEF OF AARP, CONSUMER FEDERATION OF

AMERICA, AND U.S. PIRG AS AMICI CURIAE

IN SUPPORT OF PETITIONER

*

JONATHAN W. CUNEO

ROBERT J. CYNKAR

MICHAEL G. LENETT

MATTHEW WIENER*

CUNEO GILBERT & LADUCA, LLP

507 C Street, NE

Washington, DC 20002

(202) 587-5068

Counsel for All Amici

*Counsel of Record

DEBORAH ZUCKERMAN

AARP

601 E Street, NW

Washington, DC 20049

(202) 434-6045

Counsel for AARP

TABLE OF CONTENTS

Page

ee Ce Far SI ccccccsecccecsccnensscrsccencssesences ii

INTEREST OF AMICI CURIAE .............cccesccsesseeeeees 1

SUMMARY OF ARGUMENT. .................cccceeecceseeeseees 3

EE extiiiceecnisntnnncseccsdicnnecinsennennciniilonnacenineun 4

Investors in Major Securities Fraud Cases Will

Often Be Denied a Remedy for Their Losses

When Outside Actors Are Not Held Liable for

Violating § 10(b) of the Exchange Act.................... 4

I. Major Frauds Cases Often Involve Insolvent

Stock Issuers from Which Defrauded Inves-

tors Cannot Obtain Any Recovery for Their

ID cccnnccnincicncinvitinindataitsianiiiiiniiesdmiintadnianens 6

II. Corporate Insiders Seldom Have Sufficient

Assets to Compensate Defrauded Investors

for Their Losses in Major Fraud Cases .......... 8

Ill. D&O Policies Usually Provide No Or Inade-

quate Coverage in Major Fraud Cases ........... 9

GEIS ORPAAEEIEE ccccccoccsorsecesseecesrevesennsvecnsvsoneonsnsooonnseses 13

ii

TABLE OF AUTHORITIES

Page

CASES:

In re: Am. Cont Corp./Lincoln Sav. and Local Sec.

Litig., 140 F.R.D. 425 (D. Ariz. 1992)..............ccccceeeeee: 5,7

In re Charter Communications, Inc. Sec. Litig., 443

ee I EE I hncsinicactinceenbnndenienmnesvenspiersennctinedin 12

In re Enron Corp. Sec., Derivative, & ERISA Litig.,

235 F. Supp. 2d 549 (S.D. Tex. 2002) .............. ce eeeeeeeeee 4,5

In re Equity Funding Corp. of Am. Sec. Litig., 375

4 EERE SENT ano veer en NN Oe 7

In re Global Crossing, Ltd. Sec. Litig., 322 F. Supp.

ee i creretaseneteicnceiianetsiensssieressneanaitn 5

In re Global Crossing Sec. and ERISA Litig., 225

ee 7, 8,12

Hevesi v. Citigroup, Inc., 366 F.3d 70 (2d Cir. 2004)...... 6,7

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

es ts Fe itiintccteestctimeinmtscennennnnn 5

In re Refco Sec. Litig., 05 Civ. 8626, 2007 U.S. Dist.

LEXIS 31969 (S.D.N.Y. Apr. 30, 2007).............:ccccccceseeees 7

Regents of the Univ. of California v. Credit Suisse First

Boston (USA), Inc., 482 F.3d 372 (5th Cir. 2007) ....... 4,8,12

In re WorldCom, Inc. Sec. Litig., 354 F. Supp. 2d

a ee i itctncicsntcetiiinniintsisianbiibtcnatinsisndinentinipiaiicans 11

In re WorldCom, Inc. Sec. Litig., 388 F. Supp. 2d

ee I TE siiciaiiceiinicildedeitiiriaiistiamcigiaieeiuntinecanennetaane 6

In re WorldCom Sec. Litig., 02 CV 3288, 2005 Dist.

LEXIS 1805 (S.D.N.Y. Feb. 10, 2005) .....................00 7,9

In re WorldCom, Inc. Sec. & ERISA Litig., No. 02

Civ. 3288, 2002 U.S. Dist. LEXIS 23172 (S.D.N_Y.

SI Sas IT ectiesbcihasiesiiecsiensaeiitiatisitbaadinniamenininieinnsiteimnninestpinnmneniis 7

ili

TABLE OF AUTHORITIES - Continued

Page

STATUTES AND REGULATIONS:

ITT nciicicsscehistetishieniuciaiisitnapiiapiiinianemminnnenesteniicnenntt 6

Employee Retirement Income Security Act (ER-

a Se ees OF Ne OE GU wininctecccsccpenccersnenpevesenesoonnns 10

Section 10(b) of the Securities Exchange Act of

Ry: See re 0 Pea tirercaninnincetsancnsnenecscnsnceconeees passim

Securities and Exchange Commission Rule 10b-5,

a eID ciiiicicsciceinisiirninscntvonmsiiaicnninnbionnes 6, 12

LEGISLATIVE MATERIALS:

Conference Report on Securities Litigation Reform,

H.R. Conf. Rpt. 104-369, 1995 U.S.C.C.A.N.

eee ivsessindesscnicicinieisincnicihiictieumnenitabncioasdiimisnbiudtinbeddaimauiatidnadionnness 5

ARTICLES:

Bernard Black, Brian Cheffins, & Michael Klaus-

ner, Outside Director Liability, 58 Stan. L. Rev.

ccc iaaiidea ce biadalealahialiiatsiiaicetaalaCiaatabin 8, 10, 11, 12

John C. Coffee, Jr., Reforming the Securities Class

Action: An Essay on Deterrence and Its Implemen-

tation, 106 Colum. L. Rev. 1534 (2006).......... 7, 8,9, 10, 11

John C. Coffee, Jr., Gatekeeper Failure and Reform:

The Challenge of Fashioning Relevant Reforms,

es Se ND Ce GM riciisiensestenndiendctionneninininccscnnsens 4,5

John C. Coffee, Jr., Guarding the Gatekeepers, N.Y.

Be ies Se ED cnctntirtsignecdensrnctmnicnmeseniesaneneee 5

Michael H. Diamond, D&O Insurance: Pitfalls in a

New World, Nat’) L. J., Aug. 26-Sept. 2, 2002, at

STE scsbibehsiesiciechpumeteeitiniapisiiiaguiniiianaiaieiaadianieenidiiatadannidionpaneens 10

iv

TABLE OF AUTHORITIES - Continued

Page

John R. Emshwiller & Gary McWilliams, What’s

Left of Lay and Skilling Wealth Is at Risk, Wall

i Bigs I Os A ITED cicnrcienctcnccsinebednddiseiunsccssscesssants 9

John R. Emshwiller, Enron Trial Highlights Issue

of Plea Bargain, Wall St. J., Oct. 11, 2004, at C-1.......... i)

Theo Francis, Directors’ Armor: Adelphia Ruling

Shows Legal Bills Must Be Covered, Wall St. J.,

ee ee He ae paneietcnenssicaceninninicmnestiicemmenntaseermenene 11

Jonathan D. Glater & Joseph B. Treaster, Insurers

Scale Back Corporate Liability Policies, N.Y.

eT i Sete Oe CD ericepentnsesncevesscntintsncncenconsnces 10

Robert W. Hamilton, The Crisis in Corporate

Governance, 40 Hous. L. Rev. 1 (2003)................06. 4, 6, 10

Joann S. Lublin, Theo Francis, & Jonathan Weil,

Directors Are Getting the Jitters - Recent Settle-

ments Tapping Executive’ Personal Assets Put

Boardroom on Edge, Wall St. J., Jan. 13, 2005, at

SO sicsinheihcsittcinteihnesseitdindeiiatiuidibieaiae dita didaitd tibiatiecetnimntagias 8

Geoffrey P. Miller, Catastrophic Financial Failu»s:

Enron and More, 89 Cornell L. Rev. 423 (2004) ............. 4

Two Insurers Seek Right to Challenge Claims from

Enron Lawsuits, Wall St. J., Feb. 22, 2002, at B-4........ 1)

David Wessel, What’s Wrong - Venal Sins: Why the

Bad Guys of the Boardroom Emerged En Masse,

| OU ee) 8 ES ee 4

MISCELLANEOUS:

Pet. Writ Cert., Regents of the Univ. of California v.

Merrill Lynch Pierce Fenner & Smith, Inc., No.

ue OUTTE sunsicitenieiciituiniinieinniuiiinpindaincietanniinaiinaiatisiaenituntiniseiniine we 5, 6

INTEREST OF AMICI CURIAE*

AARP is a non-profit, non-partisan organization with

more than 38 million members, dedicated to addressing

the needs and interests of Americans aged 50 and older. As

the largest membership organization representing the

interests of older Americans, AARP has long been con-

cerned about fraudulent practices in the securities indus-

try. Older Americans are frequent targets of fraud because

they often have significant assets and look for investment

opportunities that will supplement Social Security and

other sources of retirement income. As a result, AARP has

made the need to combat securities fraud a high priority.

It has regularly commented on legislative and regulatory

proposals that address investment fraud, filed amicus

briefs in cases involving the federal securities laws, and

opposed legislative efforts to limit the remedies of de-

frauded investors.

AARP’s advocacy and consumer education activities

are informed by the many studies it has undertaken over

the years to understand investors’ knowledge, behaviors,

and concerns. See, e.g., AARP, Investor Perceptions and

Preferences Toward Selected Stock Market Conditions and

Practices: An AARP Survey of Stock Owners Ages 50 and

Older 21 (March 2004), available at http://www.assets.

aarp.org/rgcenter/econ/investor.pdf. These studies show

that individual investors often lack basic knowledge of

how the securities markets operate and are unaware of the

important features of their own investments. This problem

* No party’s counsel wrote this brief (in whole or in part), and no

person other than amici and their counsel contributed monetarily to

this brief’s preparation or submission. The parties’ letters consenting to

the filing of this brief have been lodged with the Clerk of the Court.

2

is of particular concern given the entry of many first-time

investors into the market and the responsibility for re-

tirement investing that pensioners have had to assume as

a result of the shift from defined benefit pension plans

(under which employers bear the risk of loss) to defined

contribution pension plans (under which plan participants

bear the risk of loss). Integrity in the securities markets

and the remediation of securities fraud is therefore more

important today than ever.

The Consumer Federation of America (CFA) is a

nonprofit association of 300 consumer groups, which in

turn represent more than 50 million Americans. It ad-

vances the consumer interest through research, education,

and advocacy. As increasing numbers of Americans have

come to rely on the nation’s financial markets to fund their

retirement and invest their savings, CFA has made en-

hancing investor protections a top legislative and regula-

tory priority. CFA’s policies in this area are based on a

fundamental belief that investors are entitled to a mar-

ketplace that provides them with a choice of appropriate

investments and service providers, the information neces-

sary to make informed choices, protection against fraud

and abuse, and effective remedies when they are de-

frauded. CFA has for nearly two decades been a leader in

efforts to promote investor protection legislation and

regulations, and to oppose efforts to weaken those protec-

tions, at both the state and federal levels. One of CFA’s

particular areas of concern has been the ability of inves-

tors to seek legal redress for their losses. Toward these

ends, CFA has testified before Congress, participated in

Securities and Exchange Commission (SEC) roundtables,

submitted amicus briefs on a range investor-protection

3

issues, and consulted with members of Congress, SEC

Commissioners, and state securities regulators.

U.S. PIRG is a national, non-profit advocacy group

with over one million members around the country. Its

mission is to protect the interests of consumers and

ordinary citizens using the tools of investigative research,

media reports, grassroots organizing, legislative and

public policy advocacy, and litigation. Investor protection

has been a long-standing area of concern to U.S. PIRG. It

has appeared as an amicus curiae in support of investor

rights in several of the important securities fraud cases

that have come before the Court during recent years.

+

SUMMARY OF ARGUMENT

The answer the Court gives to the question presented

in this case will have significant consequences for victims

of major corporate frauds of the sort that brought down

Enron, WorldCom, and other companies during the last

decade. Recent history shows that investors harmed by

these frauds all too often go uncompensated for their

losses when the accountants, bankers, lawyers, and others

who are not affiliated with the corporate issuer but who

actively scheme with the issuer to defraud investors —

amici call them “outside actors” here for ease of reference

— are not held to account for their violations of § 10(b) of

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

Outside actors are often the only culpable defendants with

assets sufficient to satisfy a judgment or fund a settlement

that secures any real measure of relief for defrauded

investors. Of course, the Court should not fashion a § 10(b)

jurisprudence around an indiscriminate search for deep

4

pockets. But neither should it lose sight of the conse-

quences that would result if it were to adopt the Court of

Appeals’ unduly restrictive interpretation of § 10(b).

+

ARGUMENT

Investors in Major Securities Fraud Cases Will

Often Be Denied a Remedy for Their Losses When

Outside Actors Are Not Held Liable for Violating

§ 10(b) of the Exchange Act

This past decade has seen corporate fraud on an

unprecedented scale. See, e.g., In re Enron Corp. Sec.,

Derivative, & ERISA Litig., 235 F. Supp. 2d 549, 565, 593,

687 (S.D. Tex. 2002); John C. Coffee, Jr., Gatekeeper

Failure and Reform: The Challenge of Fashioning Relevant

Reforms, 84 B.U. L. Rev. 301, 302 (2004) [hereinafter

“Gatekeeper Failure”|; Geoffrey P. Miller, Catastrophic

Financial Failures: Enron and More, 89 Cornell L. Rev.

423, 423-24 (2004); Robert W. Hamilton, The Crisis in

Corporate Governance, 40 Hous. L. Rev. 1, 1-33 (2003);

David Wessel, What’s Wrong - Venal Sins: Why the Bad

Guys of the Boardroom Emerged En Masse, Wall St. J.,

June 20, 2002, at A-1. The costs of recent frauds to share-

holders — many of them individual investors and pension

funds — have been enormous. Investor losses in many

individual § 10(b) cases have run into the billions of

dollars. The Enron fraud alone resulted in claimed dam-

ages totaling $40 billion See, e.g., Regents of the Univ. of

California v. Credit Suisse First Boston (USA), Inc., 482

F.3d 372, 379 (5th Cir. 2007).

Few, if any, of the major corporate frauds of the last

decade have been perpetrated by corporate securities

5

issuers (including their officers, directors, managers, and

other insiders) acting alone. Outside actors have played

significant roles in nearly every one — in some instances by

making false statements calculated to deceive investors

about the issuer’s financial condition and in others by

participating in deceptive financial transactions calculated

to achieve the same result.’

If the Exchange Act is to serve as the “indispensable

tool with which defrauded investors can recover their

losses” that Congress intended, Conference Report on

Securities Litigation Reform, H.R. Conf. Rpt. 104-369, at

31, 1995 U.S.C.C.A.N. at 730 (1995); see Merrill Lynch,

Pierce, Fenner & Smith, Inc. v. Dabit, 126 S. Ct. 1503,

1510 (2006), then outside actors must be held accountable

' We anticipate that the plaintiffs in the Enron securities fraud

case (and perhaps others) will appear as an amicus curiae in this case

and detail the fraudulent misrepresentations that Enron’s banks made

to the investing public through their financial transactions with Enron.

See, e.g., In re Enron: 235 F. Supp. 2d at 637-57, 695-704; Pet. Writ

Cert., Regents of the Univ. of California v. Merrill Lynch Pierce Fenner

& Smith, Inc., No. 06-1341. Enron, though, is not the only example of a

notorious fraud case that arose in large part from the conduct of outside

actors. Other examples include the frauds involving Global Crossing,

see In re Global Crossing, Ltd. Sec. Litig., 322 F. Supp. 2d 319, 335-37

(S.D.N.Y. 2004), and Lincoln Savings & Loan, see, e.g., In re: Am. Cont'l

Corp./Lincoln Sav. and Local Sec. Litig., 140 F.R.D. 425, 428 (D. Ariz.

1992).

Amici also anticipate that petitioner and other amici will point out

that outside actors are hardly blameless for many of recent history's

securities frauds Some distinguished commentators — not all of them

sympathetic to the securities plaintiffs’ bar - have assigned much of the

blame for these frauds to the accountants, bankers, lawyers, and other

professionals (called “gatekeepers” by one commentator) on whom the

investing public relies to ensure that our markets operate with integ-

rity. See, e.g., Coffee, Gatekeeper Failure, supra; John C. Coffee, Jr.,

Guarding the Gatekeepers, N.Y. Times, May 13, 2002, at A-2.

6

when (as alleged in this case) their conduct violates the

explicit language of § 10(b) and its companion SEC rule,

Rule 10b-5, 17 C.F.R. § 240.10b-5. The victims of several of

the most notorious recent frauds have achieved a substan-

tial measure of recovery (though in each case far from all

of their losses) only because courts allowed them to pro-

ceed against culpable outside actors. See, e.g., Jn re World-

Com, Inc. Sec. Litig., 388 F.Supp. 2d 319, 322, 325

(S.D.N.Y. 2005); Pet. Writ. Cert., Regents of the Univ. of

Calif. v. Merrill Lynch Pierce Fenner & Smith, Inc. (No. 06-

1341), at ii, 3 (Enron). be

As amici establish below, none of the other usual

sources of recovery in securities fraud cases - i.e., the

corporate issuer, the issuer’s officers, directors, and other

insiders, or the issuer’s directors’ and officers’ (D&O)

liability policies - can provide any meaningful relief for

the victims of most major frauds.

I. Major Fraud Cases Often Involve Insolvent

Stock Issuers from Which Defrauded Inves-

tors Cannot Obtain Any Recovery for Their

Losses.

Nearly all of recent history's most notorious securities

fraud cases — including those involving Enron, Equity

Funding, Global Crossing, Lincoln Savings and Loan,

Refco, Sunbeam, U.S. Financial, and WorldCom — involved

securities issuers that were insolvent by the time (or soon

after) the filing of a § 10(b) case. See, e.g., Hevesi v. Citi-

group, Inc., 366 F.3d 70, 73 (2d Cir. 2004); Hamilton, The

Crisis in Corporate Governance, supra, at 20-26. The

result for investors defrauded by insolvent issuers is

usually the same: The issuer files for bankruptcy, and the

automatic stay provision of the bankruptcy code, 11 U.S.C.

7

§ 362(a), then shields the issuer from suit, leaving the

defrauded shareholder with a usually-worthless (pre-

petition) claim against the insolvent issuer that is not

worth pursuing and is seldom pursued.’ See, e.g., Hevesi,

366 F.3d at 74 n.1 (noting that WorldCom’s bankruptcy

filing “prevent(ed] litigation against WorldCom from going

forward”).

As a result, only culpable stock issuer’s officers and

managers, directors, and outside actors remain viable

defendants in these cases.’ See, e.g., id.; see also, e.g., In re

Refco Sec. Litig., 05 Civ. 8626, 2007 U.S. Dist. LEXIS

31969, at *11 (S.D.N.Y. Apr. 30, 2007); In re Global Cross-

ing Sec. and ERISA Litig., 225 F.R.D. 436, 441 (S.D.NLY.

2004); In re: Am. Cont’l Corp./Lincoln Sav. and Loan Sec.

Litig., 140 F.R.D. at 427; In re Equity Funding Corp. of

Am. Sec. Litig., 375 F. Supp. 1378, 1380 (1974). See gener-

ally Coffee, Reforming the Securities Class Action, supra,

at 1551 n.64 (noting that “insiders and secondary partici-

pants fi.e., outside actors] are the only parties that can be

sued once bankruptcy has been filed”).

* Criminal proceedings against individual defendants in civil cases

may also result in stays. In the WorldCom securities litigation, for

instance, the district court stayed all proceedings against the company’s

former CEO (Bernard Ebbers) pending the resolution of criminal

proceedings against him. See In re WorldCom Sec. Litig., 02 CV 3288,

2005 Dist. LEXIS 1805, at *5 n.1 (S.D.N_Y. Feb. 10, 2005); see also In re

WorldCom, Inc. Sec. & ERISA Litig., No. 02 Civ. 3288, 2002 U.S. Dist.

LEXIS 23172 (S.D.N.Y. Dec. 5, 2002) (staying litigation against other

executives).

* Securities class actions are actually seldom filed (against the

stock issuer or anyone else) if the stock issuer declares bankruptcy. See,

e.g., John C. Coffee, Jr., Reforming the Securities Class Action: An Essay

on Deterrence and Its Implementation, 106 Colum. L. Rev. 1534, 1551

n.64 (2006) [hereinafter “Reforming the Securities Class Action”).

8

II. Corporate Insiders Seldom Have Sufficient

Assets to Compensate Defrauded Investors

for Their Losses in Major Fraud Cases.

As for the issuer’s officers, directors, managers, and

other insiders, their personal assets can usually cover

only (at best) a small fraction of investor losses in any

sizable fraud. See, e.g., Coffee, Reforming the Securities

Class Action, supra, at 1554-55. The damages in major

securities fraud cases can and often do run into the bil-

lions of dollars. See, e.g., Regents of the Univ. of California,

482 F.3d at 379; In re Global Crossing, 225 F.R.D. at 460;

see also Coffee, Reforming the Securities Class Action,

supra, at 1555 (cataloguing settlement amounts in major

securities fraud cases). Few, if any, corporate officers and

directors have the kind of assets needed to make their

victims whole. See, e.g., In re Global Crossing, 225 F.R.D.

at 460 (noting that settlement was being funded by indi-

viduals “whose assets individually and collectively do not

come close to the tens of billions of dollars of liability

claimed”). The combined assets of Enron’s CEO (Jeffrey

Skilling) and board chairman (Kenneth Lay) just after

their convictions, for example, represented less than one

* While outside directors are often sued, they usually do not face

liability or contribute personally to settlements. See Bernard Black,

Brian Cheffins, & Michael Klausner, Outside Directors Liability, 58

Stan. L. Rev. 1055, 1063-64 (2006); Joann S. Lublin, Theo Francis, &

Jonathan Weil, Directors Are Getting the Jitters - Recent Settlements

Tapping Executive’ Personal Assets Put Boardroom on Edge, Wall St. J.,

Jan. 13, 2005, at B-1. A recent study found only 13 securities fraud

cases before Enron and WorldCom in which outside directors made out-

of-pocket payments to fund a settlement. See id. As for Enron’s and

WorldCom's outside directors, they contributed only $18 million and

$13 million out of pocket, respectively, to the Enron and WorldCom

settlements. See Black, Cheffins, & Klausner, Outside Directors Liability,

supra, at 1057.

9

percent of the total damages suffered by Enron’s de-

frauded investors. See, e.g., John R. Emshwiller & Gary

McWilliams, What’s Left of Lay and Skilling Wealth Is at

Risk, Wall St. J., May 27, 2006, at A-2; see also, e.g., In re

WorldCom, 2005 Dist. LEXIS 1805, at *5 (noting that the

outside directors’ $18 million contribution to the settle-

ment in WorldCom represented 20 percent of the directors’

total combined assets). It is telling that the largest payout

in a securities fraud settlement by a corporate insider

(Gary Winnick, the chairman of Global Crossing) was $55

million in a suit involving claimed damages in the billions

of dollars. See, e.g., Coffee, Reforming the Securities Class

Action, supra, at 1552.

Even the limited assets of insiders, though, are not

always available for recovery by defrauded investors.

Sometimes they are seized in connection with, or ex-

hausted on defense costs in, the related criniinal proceed-

ings that often accompany civil securities fraud cases. See,

e.g., Emshwiller & McWilliams, What’s Left of Lay and

Skilling Wealth Is At Risk, supra; John R. Emshwiller,

Enron Trial Highlights Issue of Plea Bargain, Wall St. J.,

Oct. 11, 2004, at C-1.

Ill. D&O Policies Usually Provide No or Inade-

quate Coverage in Major Fraud Cases.

While D&O policies fund much of the plaintiffs’ and

class members’ recovery in garden-variety fraud cases, see,

e.g., Coffee, Reforming the Securities Class Action, supra,

at 1551, they do the victims of major frauds involving

10

insolvent stock issuers little good in most cases. There are

four main reasons why:

First, nearly all D&O policies exclude from coverage

the kind of fraud that normally gives rise to § 10(b) liabil-

ity. Once the defendant is found liable for securities fraud,

the insurer may decline coverage. See, e.g., Black, Chef-

fins, & Klausner, Outside Directors Liability, supra, at

1086; Coffee, Reforming the Securities Class Action, supra,

at 1574. Matters are only likely to get worse in the future.

Insurers have begun to cut back on coverage, see, e.g.,

Jonathan D. Glater & Joseph B. Treaster, Insurers Scale

Back Corporate Liability Policies, N.Y. Times, Sept. 7,

2002, at C-1, and some insurers have even refused to issue

policies altogether in perceived “high-risk” industries, see,

e.g., Hamilton, The Crisis in Corporate Governance, supra,

at 38.

Second, a D&O policy may be impaired. The insurer of

an insolvent company embroiled in allegations of fraud

will often seek to rescind the company’s D&O policy on the

claimed ground that the company made misrepresenta-

tions (deliberately or negligently) when it purchased the

policy. See, e.g., Coffee, Reforming the Securities Class Action,

supra, at 1551, 1556, 1578-79; Michael H. Diamond, D&O

Insurance: Pitfalls in a New World, Nat'l L. J., Aug. 26-Sept.

2, 2002, at A-22. Oftentimes the misrepresentations that

* Amici exclude from consideration here fiduciary and other

insurance policies that may cover pension plan losses arising from the

investment of pension plan assets in the security issuer’s stock.

Recovery of those losses are not sought in § 10(b) actions but instead in

breach-of-fiduciary actions brought under the Employee Retirement

Income Security Act (ERISA), 29 U.S.C. § 1001 et seg. ERISA suits, of

course, benefit only pension plan participants, not stock purchasers

generally.

11

forms the basis of the rescission reside in the very SEC

filing that forms the basis of the securities fraud claim.

See, e.g., In re WorldCom, Inc. Sec. Litig., 354 F. Supp. 2d

455, 462 (S.D.N.Y. 2005). Disputes over rescission have

become common. See, e.g., id. at 455, 456-66; Two Insurers

Seek Right to Challenge Claims From Enron Lawsuits,

Wall St. J., Feb. 22, 2002, at B4. Insurers have responded

by writing policies that expand their rights of rescission in

cases of alleged fraud. See, e.g., Theo Francis, Directors’

Armor: Adelphia Ruling Shows Legal Bills Must Be

Covered, Wall St. J., Mar. 24, 2004, at C-5.

Third, even an unimpaired D&O policy will cover only

a modest fraction of the total damages. Losses in major

securities fraud cases dwarf coverage limits. See, e.g.,

Black, Cheffins, & Klausner, Outside Directors Liability,

supra, at 1119, 1125; Coffee, Reforming the Securities

Class Action, supra, at 1555-56, 1577-78. Most large U.S.

companies carry D&O policies with coverage limits of

between $100 and $200 million, see, e.g., Coffee, Reforming

the Securities Class Action, supra, at 1577-78, and not

even the largest corporations can afford to insure against

losses on the order of those suffered by the investors of

issuers like WorldCom, see id. at 1556. (Few insurers even

sell policies with coverage exceeding $300 million. See id.

at 1578.) All of Enron’s D&O policies together provided

only $350 million in coverage. See, e.g., Two Insurers Seek

Right to Challenge Claims from Enron Lawsuits, Wall St.

J., Feb. 22, 2002, at B-4. WorldCom, whose fraud likewise

caused billions gf dollars in investors losses, had only $100

million in D&O coverage. See In re WorldCom, 354

F. Supp. 2d at 460.

Fourth, defense costs in securities fraud cases often

quickly exhaust whatever limited D&O coverage may

12

exist. See, e.g., Black, Cheffins, & Klausner, Outside

Directors Liability, supra, at 1125. Securities fraud cases

are complex, protracted, and expensive to defend. The

longer a suit’s life, the less insurance money there will be

to fund a settlement or satisfy a judgment. For example,

by the time of the ‘partial) settlement in the Enron securi-

ties fraud case, $150 million of Enron’s $350 million

(combined) policies had been spent on defense costs, see,

e.g., Black, Cheffins, & Klausner, Outside Directors Liabil-

ity, supra, at 1125; in the WorldCom securities case, $15

million of a $100 million policy had been spent on defense

costs, id. at 1119; and in the Global Crossing securities

fraud case, to give a last example, $40 million of a $50

million policy had been spent on defense costs. See Global

Crossing, 225 F.R.D. at 443, 445, 460.

* * *

Several of the lower courts (including the Court of

Appeals in this case) that have interpreted § 10(b) to

exclude so-called “scheme liability” from its reach have

justified their interpretation by indulging dubious policy

considerations of one sort or another. See, e.g., Credit

Suisse First Boston, 482 F.3d at 391-92; In re Charter

Communications, Inc. Sec. Litig., 443 F.3d 987, 992-93 (8th

Cir. 2006). There are, however, important countervailing

policy considerations that support the plain-meaning

reading of § 10(b) (and its companion SEC regulation, Rule

10b-5) urged by the petitioner in this case. None of them is

more important, to be sure, than the ability of defrauded

investors to recover their losses in the sort of major fraud

cases addressed in this brief.

+

13

CONCLUSION

The Court should reverse the judgment of the Court of

Appeals.

Respectfully submitted,

JONATHAN W. CUNEO DEBORAH ZUCKERMAN

ROBERT J. CYNKAR AARP

MICHAEL G. LENETT 601 E Street, NW

MATTHEW WIENER* Washington, DC 20049

CUNEO GILBERT & LADucA, LLP (202) 434-6045

507 C Street, NE

Washington, DC 20002

(202) 587-5068

Counsel for All Amici Counsel for AARP

*Counsel of Record

June 11, 2007