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

FILED

| AUG 15 2007

27 OFFICE OF THE CLERK

Ne. 06-43 ' SUPREME COURT US.

IN THE

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

BRIEF FOR RICHARD I. BEATTIE, KENNETH J.

BIALKIN, ARTHUR FLEISCHER, JR.,

JOSEPH H. FLOM, IRA M. MILLSTEIN, JACK H.

NUSBAUM AND E. NORMAN VEASEY AS —

AMICI CURIAE SUPPORTING RESPONDENTS

RICHARD W. CLARY

Counsel of Record

CRAVATH, SWAINE & MOORE LLP

825 Eighth Avenue

New York, NY 10019-7475

(212) 474-1000

August 15, 2007

TABLE OF CONTENTS

Page

ee ee ciinnrncsceceesncenennimieseesintenainndl ili

INTEREST OF ADICI CURIA q........0...cccrsecrcscecscesscessessess l

TUIEDEARY GP ARGU T ncsceccncccccscecscccessoccssessersesecsnes 2

IE sihteiivhichticesiciitatinianideninianaiientetenaiminiiganiiinmeeantes 3

I. THIS COURT HAS CONSISTENTLY LIMITED

LIABILITY FOR “DECEPTIVE” ACTS UNDER

§ 10(6) TO THOSE ACTORS (WHETHER THEY

BE ISSUERS OR SECONDARY ACTORS) WHO

ACTUALLY MAKE A MISSTATEMENT OR

VIOLATE A DUTY TO DISCLOSE. .................cccceeee 3

A. Prior to Central Bank, This Court’s Decisions

Limited the Types of “Deceptive” Conduct

I aii lecstenicitntniniacintinensanicnnicnsceons 3

B. Central Bank Directly Foreclosed the

“Scheme” Theory of “Deceptive” Conduct

ir circa ctctitntrnctinicrtnscenscsess 10

C. Petitioner’s Theory of “Scheme” Liability

Would Nullify Central Bank. .............c..0cccccceceeeee 15

D. Since Central Bank, This Court Has Continued

To Require a Misrepresentation or Breach of a

Duty To Disclose by the Defendant Before

Imposing § 10(b) Liability for “Deceptive”

ee hiicvitrintecdaltensiuchlaiadlinigbicietnarindibdialntatiidphineppinimnniatie 20

(1)

ii

Page

E. Bankers Life and Herman & MacLean Do Not

Upset the Requirement that the Defendant

Itself Make a Misstatement or Breach Its Duty

PES aiiccneniepciccntecinreeindtinasintttmniguniindiniinenete 25

I]. PETITIONER’S VAGUE “SCHEME” LIABILITY

THEORY WILL HINDER THE ABILITY OF

LAWYERS TO REPRESENT CLIENTS WHO

DO BUSINESS WITH ISSUERS. ....0.........ceeeeeeeeeeeee 28

TED seistarmnchesivsdteadiiinsciciiuijitsiniesninealinniennesintapaniinsiiubia 30

TABLE OF AUTHORITIES

Page(s)

Cases

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

a ITIITTIIT ksi chelbishinbaicpuseeamniiilad piecinateiennibbtetanstapeinens passim

Anixter v. Home-Stake Prod. Co., 77 F.3d 1215

I es anise nh icobiannasensonbietiie 20

Blue Chip Stamps v. Manor Drug Stores, 421 US.

SEER RN ae er a Pen 28

Central Bank of Denver v. First Interstate Bank of

Damar, Sth U.S. 166 (IDPS). .nnccccocoressccsccossccsccseserses passim

Chiarella v. United States, 445 U.S. 222 (1 980)........... passim

Credit Suisse Sec. (USA) LLC v. Billing, 127 S. Ct.

PERSISTS Co 28

Dinsmore v. Squadron, Ellenoff, Plesent, Sheinfeld

& Sorkin, 135 F.3d 837 (2d Cir. 1998)... ceeeeeeeeee 13

Divis v. SEC, 463 US. G46 (1SGS) accceccescccesecscceccesscsecsesessees 10

Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976)................ 8

Feldman v. Pioneer Petroleum, Inc., 813 F.2d 296

EERE AAR eee aS te ve 15

Fidel v. Farley, 392 F.3d 220 (6th Cir. 2004)... eee. 19

First Interstate Bank of Denver v. Pring, 969 F.2d

I TT isc iiniidilaciiidanbantediiintinicteptescancenntas 16

Glaser v. Enzo Biochem, Inc., 126 Fed. Appx. 593

tin echt lisse niatiaiachtnansigmiemensansiin 13

Green v. Santa Fe Indus., 533 F.2d 1283 (2d Cir.

iv

Page(s)

Herman & MacLean v. Huddleston, 459 U.S. 375

CA EETE ecwvecwistnnisiaturintnesianditediisiitapieiebiidedadeadiimiadscsliiaaen 27

HT v. Cornfeld, 619 F.2d 909 (2d Cir. 1980) ..........:cccceecesee 1]

In re Charter Commc'ns, Inc., Sec. Litig., 443 F.3d

FF SI IN ED viinsicnicscssnvidvicncieiiiiingaiabaiambiingsal 19, 23, 24

In re GlenFed, Inc. Sec. Litig., 60 F.3d 591 (9th

RDG. Fee niniteccerenseniennsstiatinntniaiibielihndidhanniiae 13

In re Parmalat Sec. Litig., 414 F. Supp. 2d 428

A So ee recrsstenoinnnseninmisitnationtsiiticeiiaaliiiiiediaiimeaidiintalll 16

K&S P'ship v. Cont’'l Bank, N.A., 952 F.2d 971

REE ee. PUT D cnrncsncsiccconninsnspsinienpipuinansipaaebeiiniundie 15

Levine v. Diamanthuset, Inc., 950 F.2d 1478 (9th

Ce FE Picinneeresenecasssennqasnssnateniaininniaaaaninan 1]

Pinter v. Dahl, 486 U.S. 622 (1988) ........ccccccssecseceseeeseenecees 28

Regents of Univ. of Cal. v. Credit Suisse First

Boston (USA), Inc., 482 F.3d 372 (Sth Cir.

SIT Di censnnnnvsiscesviiectitininsdnhiidaniinbiiiiammaaaaanlaiiiaiinamiaiaelas 19

Santa Fe Indus. v. Green, 430 U.S. 462 (1977)........... 7, 8,27

Schatz v. Rosenberg, 943 F.2d 485 (4th Cir. 1991).............. 15

Schreiber v. Burlington N. Inc., 472 U.S. 1 (1985).............. 10

SEC v. Zandford, 535 U.S. 813 (2002) ............:ccc000 23, 24, 25

SEC v. Zandford, 238 F.3d 559 (4th Cir. 2001) ............-...0+ 25

Simpson v. AOL Time Warner Inc., 452 F.3d 1040

CRG Ce. DEED cccecereseccccssnnnccsentnsisictiitaniesscnsciiiueinsaimaitinasi 20

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

4B4E U.S. 6 (1DTE) .ncccccccsecesorecoccesescemntanmensnannansnmanenn 26, 27

Page(s)

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

ne 26

United States v. O'Hagan, 521 U.S. 642 (1997)......20, 21, 22

The Wharf (Holdings) Ltd. v. United Int'l

Holdings, Inc., 532 U.S. 588 (2001)...........cccccceeeees 22, 23

Woodward v. MetroBank of Dallas, 522 F.2d 84

Een 1]

Wright v. Ernst & Young LLP, \52 F.3d 169 (2d

ET eee i9

Ziemba v. Cascade Int'l, Inc., 256 F.3d 1194 (11th

ESE eee eee 20

Statutes and Regulation

Securities Exchange Act of 1934, 15 U.S.C. 78a

et seq.:

Ss ee Te: A DUE cncnsiccnmecenecescancensensntnnns passim

ene 11

ET passim

Other Authorities

Daniel R. Fischel, Secondary Liability Under

Section 10(b) of the Securities Act of 1934, 69

iia carinii ttienintianiniennents 11,14

vi

Page(s)

Documents Filed in Central Bank of Denver v.

First Interstate Bank of Denver, 511 U.S. 164

(1994) (No. 92-854):

Brief for Respondents, 1993 WL 13006274......... 17, 18

Brief for Amicus NASCAT, 1993 WL

TRS RE tS neers ee 18, 19

Brief for Amicus SEC, 1993 WL 13006275 ........ 17, 18

Documents Filed in SEC v. Zandford, 535 U.S.

813 (2002) (No. 01-147):

Petition for Wnt of Certiorari, 2001 WL

ELI Nae Se A 25

INTEREST OF AMICI CURIAE'

Amici Richard |. Beattie, Kenneth J. Bialkin, Arthur

Fleischer, Jr., Joseph H. Flom, ira M. Millstein, Jack H.

Nusbaum and E. Norman Veasey are experienced

transactional lawyers from a variety of prominent law firms.”

Amici regularly represent financing counterparties to issuers,

including underwriters, private equity firms and large

financial institutions, in a wide range of financial

transactions, including public and private offerings,

structured finance, commodities and derivatives transactions,

off-balance sheet financings, joint ventures, limited

partnerships, mergers and acquisitions.

In connection with such transactions, amici often advise

their clients in multiple ways, including negotiating, drafting

and reviewing legal documents, assisting clients in their due

diligence investigations and providing opinion letters. For

years, amici have been providing legal advice to clients

participating in complex structured finance and other

financial transactions with public companies. That legal

advice has, of course, derived from, inter alia, this Court’s

precedents regarding liability under Section 10(b) of the

Securities Exchange Act of 1934 fior actors who mislead the

' Letters reflecting petitioner’s tilianket consent to the filing of

amicus briefs and respondemts’ conseni to the filing of this bnef have

been lodged with the Clerk of Cour. Mo counsel for amy party authored

this bref in whole or in part, and no person or entity other than amici and

their counsel has made a monetary contribution to the preparation or

submission of this brief. Counsel of record for amici is also counsel of

record for certain respondents in Regents of the University of California

» Merrill! Lynch, Pierce, Fenner & Smith, Inc., No. 06-1341 (petition for

cert. filed Aipr. 5, 2007), which presents legal issues similar to those

involved in this case.

? A list of amici, along with the law firms of which they are

members. is included in an appendix hereto

securities markets, and the bright-line rule for secondary

actors that those precedents establish.

Amici have an interest in the outcome of this case

because, if petitioner’s theory of primary liability is accepted

and § 10(b) private liability is extended to any secondary

actor who participates in a transaction with an issuer that is

alleged to have the “purpose and effect” of creating a “false

appearance of material fact” in furtherance of a “scheme”,

the ability of amici, and numerous other lawyers practicing in

these areas, to provide legal guidance to their clients based

upon certain clear and predictable legal standards will be

impaired. Amici accordingly submit this brief discussing this

Court’s decisions on “deceptive” conduct under § 10(b), and

their inconsistency with petitioner’s theory of “scheme”

liability.

SUMMARY OF ARGUMENT

Petitioner and its amici urge this Court to expand

private liability under § 10(b) to secondary actors who do not

themselves commit any deception by making a material

misstatement or breaching a duty to disclose, but who

allegedly participate in a “scheme” with others, the “purpose

and effect” of which is “to create a false appearance of

material fact in furtherance of that scheme” by an issuer.

(E.g., Br. for Pet’r 15.) This invitation should be rejected.

Petitioner’s proposed liability theory flatly contradicts

decades of this Court’s precedents firmly establishing a clear

rule limiting liability under § 10(b) to those persons who

themselves actually make a material misstatement (or

omission in the face of a duty to disclose) or commit a

manipulative trading practice. See, e.g., Central Bank of

Denver v. First Interstate Bank of Denver, 511 U.S. 164, 177

(1994) (“As in earlier cases considering conduct prohibited

by § 10(b), we again conclude that the statute prohibits only

the making of a material misstatement (or omission) or the

commission of a manipulative act.”’).

Indeed, the conspiracy-based theory of “scheme”

liability advanced by petitioner is virtually indistinguishable

from the aiding-and-abetting liability rejected by this Court

in Central Bank, and if adopted would effectively nullify that

decision. Petitioner’s test would allow plaintiffs’ lawyers to

relabel conduct that was previously deemed aiding and

abetting or conspiracy as “primary” participation in a

fraudulent “scheme”, and would even require a different

result on the facts of Central Bank itself.

This Court’s jurisprudence has consistently upheld a

bright-line rule limiting deceptive conduct liability under

§ 10(b) to actors who actually make material misstatements

(or omissions in breach of a duty to disclose}—

notwithstanding numerous attempts to expand the statute by

members of the plaintiffs’ bar and even on occasion the

Securities and Exchange Commission. Those precedents

should not be lightly discarded. The judgment of the court of

appeals should be affirmed.

ARGUMENT

Il. THIS COURT HAS CONSISTENTLY LIMITED

LIABILITY FOR “DECEPTIVE” ACTS UNDER

§ 10(b) TO THOSE ACTORS (WHETHER THEY

BE ISSUERS OR SECONDARY ACTORS) WHO

ACTUALLY MAKE A MISSTATEMENT OR

VIOLATE A DUTY TO DISCLOSE.

A. Prior to Central Bank, This Court’s Decisions

Limited the Types of “Deceptive” Conduct

Covered by § 10(b).

As the Eighth Circuit recognized, this Court’s

precedents have established three principles regarding the

scope of § 10(b). First, the plain language of the statute

prohibits only “manipulative or deceptive” acts, and private

plaintiffs may not bring actions under Rule 10b-5 for conduct

not prohibited by the statute. Second, the term

“manipulative”, as used in the securities context, is a term of

art referring to trading practices that artificially inflate the

price of the traded security. Third, and most critically for

this case, “deceptive” conduct, within the meaning of

§ 10(b), requires deception—namely, a misstatement or

failure to disclose by one who has a duty to disclose. That is

precisely why this Court held unequivocally in Central Bank

that “the statute prohibits only the making of a material

misstatement (or omission) or the commission of a

manipulative act”. 511 U.S. at 177.

Central Bank is firmly grounded in prior decisions

demarcating the scope of § 10(b). As early as Affiliated Ute

Citizens v. United States, 406 U.S. 128 (1972), this Court

required a finding of a duty to disclose before imposing

§ 10(b) liability for deceptive conduct in the absence of an

affirmative misrepresentation. That case involved a suit

brought by Indian sellers of stock in a corporation formed to

manage joint assets derived from tribal holdings. The

corporation had designated a local bank as its transfer agent,

and two of the bank’s managers—Gale and Haslem—aided

the Indian shareholders in selling their stock. The Indian

sellers alleged that the bank and its two employees violated

§ 10(b) and Rule 10b-5 by failing to inform them about a

resale market (created by Gale and Haslem) that offered

higher prices.

The court of appeals concluded that Gale and Haslem

were liable under Rule 10b-5 “only in those instances where

the employee purchased shares for his own account or for

resale . . . at a higher price”. 406 U.S. at 149. This Court

affirmed the court of appeals’ judgment “to the extent that it

held that the two employees had violated Rule 10b-5”. The

Court reasoned that, in those instances, the record revealed

that Gale and Haslem made a misstatement of material fact in

violation of subparagraph (b) of Rule 10b-5—‘namely, that

the prevailing market prices of the . . . shares was the figure

at which their purchases were made”. /d. at 152. But the

Court rejected the lower court’s conclusion that “there was

no violation of the Rule unless the record disclosed evidence

of reliance on material fact misrepresentations by Gale and

Haslem”, finding instead that liability existed under

subparagraphs (a) and (c) of the Rule, which were not limited

to affirmative misrepresentations but extended also to a

“course of business” or “device, scheme, or artifice to

defraud”. Jd. at 152-53. Contrary, however, to the

suggestions of petitioner and its amici that Affiliated Ute

endorseé “scheme” liability in “conduct” cases without any

misrepresentation or violation of a duty to disclose by the

defendant,’ the Court was explicit in noting that what made

the employees’ conduct fraudulent within the meaning of the

statute and subparagraphs (a) and (c) of the Rule was the fact

that Gale and Maslem breached an obligation to disclose:

* (See Br. for Pet’r 30 (arguing that Affiliated Ute demonstrates “that

Section 10(b) amd Rule 10b-5 extend beyond misrepresentations and

omissions”); Br. for Amieus Regents of Univ. of Cal. 27; Br. for Amicus

Cal. State Teachers’ Ret. Sys. 11; Br. for Amici L.A. County Employees

Ret. Ass’n et al. 16; Br. for Amici Change To Win & CtW Inv.

Group 24.) These arguments rely on a statement taken out of context

from Affiliated Ute that “the second subparagraph of the rule specifies the

making of an wntrue statement of a material fact and the omission to state

a material fact” but that “[t)he first and third subparagraphs are not so

restricted”, 406 U.S. at 152-53. The misstater-:nts and omissions

proscribed by Rule 10b-5(b) to which the Court was referring are only

those of parties who actually speak—that is, those who “make any untrue

statement of a material fact or . . . omit to state a material fact necessary

in order to make the statements made . . . not misleading”, 17 C.F.R.

§ 240.10b-5(b) (emphasis added)—-not omissions by those who make no

misleading statements but who have a duty to disclose. As discussed in

the main text, the Court made clear that, even in an action for

participation in a fraudulent “scheme” under Rule 10b-5(a) and (c),

liability for deceptive conduct by those who remain silent will not lie

absent the breach of a duty to disclose.

“These defendants’ activities . . . disclose, within

the very language of one or the other of those

subparagraphs, a ‘course of business’ or a ‘device,

scheme, or artifice’ that operated as a fraud upon

the Indian sellers. This is so because the

defendants devised a plan and induced the [Indian

sellers} to dispose of their shares without

disclosing to them material facts that reasonably

could have been expected to influence their

decisions to sell. The individual defendants, in a

distinct sense, were market makers, not only for

their personal purchases . . . but for the other sales

their activities produced. This being so, they

possessed the affirmative duty under the Rule to

disclose this fact to the [Indian] sellers.”

Id. at 153 (emphasis added) (citations omitted); see also id.

(describing the case as “involving primarily a failure to

disclose”). The Court left no doubt that it was this duty to

disclose—arising from the special relationship between the

parties—that formed the basis for liability. See id. at 151-52

(“We would agree that if the two men and the employer bank

had functioned merely as a transfer agent, there would have

been no duty of disclosure here.”).* Informing the Court’s

decision was its recognition that the existence of the

defendants’ duty to disclose was necessary for the plaintiff

sellers to be able to satisfy the reliance requirement of the

§ 10(b)/Rule 10b-5 private cause of action:

* Indeed, this Court has since observed that Affiliated Ute

established that “silence in connection with the purchase or sale of

securities may operate as a fraud actionable under § 10(b) . . . /bJut such

liability is premised upon a duty to disclose arising from a relationship of

trust and confidence between parties to a transaction”. Chiarella v.

United States, 445 U.S. 222, 230 (1980) (emphasis added).

“Under the circumstances of this case, involving

primarily a failure to disclose, positive proof of

reliance is not a prerequisite to recovery. All that

is necessary is that the facts withheld be material

in the sense that a reasonable investor might have

considered them important in the making of this

decision. This obligation to disclose and this

withholding of a material fact establish the

requisite element of causation in fact.”

Id. at 153-54 (emphasis added) (citations omitted).

Prior to Central Bank, the Court provided similar

guidance regarding the reach of § 10(b) in Santa Fe

Industries v. Green, 430 U.S. 462 (1977), and Chiarella v.

United States, 445 U.S. 222 (1980). In Santa Fe, minority

shareholders in a company alleged that the majority

shareholder violated Rule 10b-5 in conducting an unfair

“short-form merger” transaction that eliminated minority

shareholders, although full disclosure was made. The court

of appeals reversed the district court’s dismissal of the suit,

holding that a Rule 10b-5 action could be premised on

“breaches of fiduciary duty by a majority against minority

shareholders without any charge of misrepresentation or lack

of disclosure”. Santa Fe, 430 U.S. at 470. The court of

appeals reasoned:

“An{] erroneous assumption is that in order to

allege a claim under Rule 10b-5 there must be

some showing of misrepresentation or lack of

disclosure. . . . But only subdivision [(b)] of 10b-5

deals with nondisclosure and misrepresentation.

The Rule contains two other subdivisions which

state explicitly that fraud other than and in addition

to a failure to disclose or truthfully represent is

also actionable... .”

Green v. Santa Fe Indus., 533 F.2d 1283, 1286-87 (2d Cir.

1976).

This Court reversed. Focusing on the text of the statute,

the Court concluded that “(t]he language of § 10(b) gives no

indication that Congress meant to prohibit any conduct not

involving manipulation or deception”. Santa Fe, 430 U.S.

at 473. Because “the complaint failed to allege a material

misrepresentation or material failure to disclose’, the Court

found “inapposite the cases relied upon by [the plaintiffs] and

the court below, in which the breaches of fiduciary duty held

violative of Rule 10b-5 included some element of deception”.

Id. at 474-75. Nor could the alleged conduct be deemed

manipulative, as that term “is ‘virtually a term of art when

used in connection with securities markets’” that “refers

generally to practices, such as wash sales, matched orders, or

rigged prices, that are intended to mislead investors by

artificially affecting market activity”. Jd. at 476 (quoting

Ernst & Ernst v. Hochfelder, 425 U.S. 185, 199 (1976)).

In Chiarella, the Court similarly considered the scope

of liability under § 10(b), this time for trading on inside

information. The defendant in that case—the employee of a

financial printer that had been engaged to _ print

announcements of corporate takeover bids—used his position

to trade in the securities of target companies before the

takeover attempts were made public. The tnal court

instructed the jury that it could convict Chiarella for

participating in a “scheme to defraud” in violation of

Rule 10b-5(a) and (c) if “he ‘did not disclose material non-

public information in connection with the purchases of the

_ stock’”, reasoning that “‘a ‘scheme to defraud’ is a plan to

obtain money by trick or deceit and that ‘a failure by

Chiarella to disclose material, non-public information in

connection with his purchase of stock would constitute

deceit”. Chiarella, 445 U.S. at 236 (quoting the trial court’s

instructions) (alteration omitted).

This Court reversed Chiarella’s conviction, holding that

Chiarella’s conduct could not be characterized as deception

under the statute because he had made no misstatement and

he had no duty to disclose:

“(T]he element required to make silence

fraudulent—a duty to disclose—is absent in this

case. No duty could arise from [Chiarella’s]

yelationship with the sellers of the target

company’s securities, for fhe] had no prior

dealings with them. He was not their agent, he

was not a fiduciary, he was not a person in whom

the sellers had placed their trust and confidence.”

Id. at 232. The Court refused to “recogniz[e] a general duty

between all participants in market transactions to forgo

actions based on material, nonpublic information”, noting

that “[fjormulation of such a broad duty [would] depart[]

radically from the established doctrine that duty arises from a

specific relationship between two parties”. Jd. at 233.°

Observing that “not every instance of financial unfairness

constitutes fraudulent activity under § 10(b)”, id. at 232, the

Court admonished: “Section 10(b) is aptly described as a

catchall provision, but what it catches must be fraud. When

an allegation of fraud is based upon nondisclosure, there can

be no fraud absent a duty to speak.” /d. at 234-35.

The Court thus made clear in Santa Fe and Chiarella

that the scope of conduct prohibited by § 10(b) and

Rule 10b-5 must be determined by close adherence to the

statutory language. Because the statute prohibits only

manipulation and deception, only those who actually

* The Court's analysis in Chiarella disposes of the suggestions by

petitioner's amici that “scheme” liability should be derived from some

common law “duty” not to scheme. (See, e.g., Br. for Amicus Regents of

Univ. of Cal. 23 n.28; Br. for Amici Arkansas et al. 19-22; Br. for Amici

Change To Win & CtW Inv. Group 21-22.)

10

manipulate—as that term of art is used in the securities

context—or deceive—which, in the absence of a

misrepresentation, requires a duty to disclose—can be held to

violate § 10(b), even in cases premised on violations of

Rule 10b-5(a) and (c). The Court applied these principles

faithfully in its subsequent cases involving § 10(b). See

Dirks v. SEC, 463 U.S. 646 (1983) (reversing insider trading

conviction of “tippee” on the ground that, in the

circumstances of the case, the tippee possessed no duty to

disclose); Schreiber v. Burlington N. Inc., 472 U.S. 1, 2, 8

(1985) (holding that “misrepresentation or nondisclosure is a

necessary element of a violation of § 14(e) of the Securities

Exchange Act’, after analogizing to decisions under § 10(b)

and concluding that, in light of the “congressional concern

_ with disclosure which is the core of the Act”, “[aJll three

species of misconduct, i.e., ‘fraudulent, deceptive, or

manipulative,’ listed by Congress are directed at failures to

disclose” (emphasis added)).

B. Central Bank Directly Foreclosed the “Scheme”

Theory of “Deceptive” Conduct Advanced by

Petitioner.

At the same time that this Court was requiring fidelity

to the statutory text, lower courts were relying on common

law tort principles in imposing various forms of secondary

liability—including aiding-and-abetting liability and

conspiracy liability—on actors who did not themselves

commit deceptive or manipulative acts but who allegedly had

a connection with someone who did. Indeed, by the time this

Court faced the question directly in Central Bank, virtually

every court of appeals had permitted private actions for

aiding and abetting a violation of § 10(b) and Rule 10b-S.

See Central Bank, 511 U.S. at 192 nl (Stevens, J.,

dissenting) (collecting cases). Although the standards for

such aiding-and-abetting liability varied across the Circuits,

most courts required an independent securities violation by

another actor, and “substantial assistance” and scienter on the

1]

part of the alleged aider and abettor. See, e.g., Levine v.

Diamanthuset, Inc., 950 F.2d 1478, 1483 (9th Cir. 1991);

IIT v. Cornfeld, 619 F.2d 909, 922 (2d Cir. 1980);

Woodward v. MetroBank of Dallas, 522 F.2d 84, 97 (Sth Cir.

1975).

In an influential article repeatedly cited by the Court in

Central Bank, Professor Fischel noted the apparent

inconsistency between this Court’s § 10(b) jurisprudence and

the imposition of secondary liability by the lower courts,

arguing that “the theory of secondary liability [under § 10(b)]

is no longer viable in light of recent Supreme Court decisions

strictly interpreting the federal securities laws”. See

Daniel R. Fischel, Secondary Liability Under Section 10(b)

of the Securities Act of 1934, 69 Cal. L. Rev. 80, 82 (1981).

Professor Fischel concluded that this Court’s precedents

established that “‘defendants can be held liable, if at all, only

if they have engaged in a ‘manipulative or deceptive

practice’ prohibited by section 10(b)”, and that “in order to

fall within this statutory prohibition, a defendant, acting with

scienter, must make a material misrepresentation or

wrongfully fail to disclose despite a fiduciary duty to do so in

connection with the purchase or sale of a security, or engage

in a manipulative practice designed to mislead investors by

artificially affecting market activity”. Jd. at 102-03.

That thesis was validated in Central Bank. The facts of

Central Bank are now familiar: Purchasers of bonds issued

by the Colorado Springs-Stetson Hills Public Building

Authority filed suit under § 10(b) after the Authority

defaulted on the bonds. The purchasers named, among

° Similarly, when Congress responded to Central Bank in 1995 by

expressly authorizing the SEC to bring actions for aiding and abetting

(while specifically declining to permit such actions by private plaintiffs),

it defined aiding and abetting as “knowingly provid{ing] substantial

assistance” to a primary violator. 15 U.S.C. § 78t(e).

12

others, the Authority, the underwriters, and the Central Bank

of Denver, which had served as indenture trustee for the

issuance. The Tenth Circuit concluded that Central Bank

could be held liable under § 10(b) for aiding and abetting the

fraud by agreeing with certain other defendants to delay an

independent appraisal of land that was established as the

security for the bonds, despite having learned that an earlier

appraisal on which the purchasers were relying was outdated

and possibly inaccurate. Central Bank, 511 U.S. at 167-69.

In addressing whether such a claim for aiding and

abetting was cognizable under § 10(b), the Court began by

reviewing its precedents, observing that “our cases

considering the scope of conduct prohibited by § 10(b) in

private suits have emphasized adherence to the statutory

language” and have “refused to allow 10b-5 challenges to

conduct not prohibited by the text of the statute”. Jd. at 173.

Turning to the language of § 10(b), the Court “reach[{ed] the

uncontroversial conclusion, accepted even by those courts

recognizing a § 10(b) aiding-and-abetting cause of action,

that the text of the 1934 Act does not itself reach those who

aid and abet a § 10(b) violation”. Jd. at 177. Unlike those

courts, however, the Court announced that “that conclusion

resolves the case”, observing that “[i]t is inconsistent with

settled methodology in § 10(b) cases to extend liability

beyond the scope of conduct prohibited by the statutory text”.

Id. Synthesizing its prior decisions, the Court stated:

“As in earlier cases considering conduct prohibited

by § 10(b), we again conclude that the statute

prohibits only the making of a _ material

misstatement (or omission) or the commission of a

manipulative act. The proscription does not

include giving aid to a person who commits a

manipulative or deceptive act.”

Id. (citations omitted).

13

As in the Affiliated Ute decision, the Court noted that its

conclusion was particularly supported in the context of a

private civil suit under the § 10(b) implied cause of action

because permitting aiding-and-abetting liability “‘would

impose . . . liability when at least one element critical for

recovery under 10b-5 is absent: reliance”. Jd. at 180.

Because “{a] plaintiff must show reliance on the defendant’s

misstatement or omission to recover under 10b-5”,

permitting aiding-and-abetting liability would impermissibly

allow a plaintiff to recover “without any showing that the

plaintiff relied upon the aider and abettor’s statements or

actions” and would consequently “disregard the careful limits

on 10b-5 recovery mandated by our earlier cases”. Jd.

Central Bark thus reaffirmed without any ambiguity

that liability under § 10(b) is limited to those who themselves

actually make a material misstatement or violate a duty to

disclose, or who employ a manipulative device as that term

of art has been interpreted. Indeed, as the dissent recognized,

the majority’s rationale “at the very least casts serious doubt”

on all forms of secondary liability under § 10(b). Jd. at 200

(Stevens, J., dissenting). The elimination of secondary

liability “does not mean”, however, “that secondary actors in

the securities markets are always free from liability under the

securities Acts”. /d. at 191. On the contrary, the Court made

clear that

” See, e.g., Dinsmore v. Squadron, Ellenoff, Plesent, Sheinfeld &

Sorkin, 135 F.3d 837, 842 (2d Cir. 1998) (“{I}mplying a cause of action

for conspiracy would be ‘inconsistent with settled methodology in

§ 10(b) cases’ for precisely the same reason that the Supreme Court

refused to imply a cause of action for aiding and abetting in Central

Bank—it would ‘extend liability beyond the scope of conduct prohibited

by the statutory text.”” (quoting Central Bank, 511 U.S. at 177)); accord

Glaser v. Enzo Biochem, Inc., 126 Fed. Appx. 593, 599 (4th Cir. 2005);

In re GlenF ed, Inc. Sec. Litig., 60 F.3d 591, 592 (9th Cir. 1995).

14

“Any person or entity, including a _ lawyer,

accountant, or bank, who employs a manipulative

device or makes a material misstatement (or

omission) on which a purchaser or seller of

securities relies may be liable as a primary violator

under 10b-5, assuming a// of the requirements for

primary liability under Rule 10b-5 are met. See

Fischel, 69 Calif. L. Rev., at 107-108.”

]

Id. at 191 (emphasis in original). The Court’s citation to

Professor Fischel’s article confirms that the sort of liability-

producing conduct by a secondary actor that the Court had in

mind, assuming all of the requirements for primary liability

are met, was “the dissemination or transmission of materially

inaccurate information to investors” by the secondary actor

itself, such as “an accountant’s act of certif[ying]”

misleading financial statements or an attorney’s “prepar[ation

of] false opinion letters”. Fischel, supra, at 107-08. Such a

misstatement (or an omission, where there is a duty to

disclose) by the secondary actor allows the plaintiff to prove

reliance on that defendant's actions, an essential requirement

of the Rule 10b-5 cause of action.

Petitioner’s proposed test—which would impose

liability on any person “if the purpose and effect of his

conduct is to create a false appearance of material fact in

furtherance of” “a scheme to defraud” (Br. for Pet’r 15)}—

thus cannot be reconciled with this Court’s jurisprudence, as

the court below correctly recognized. By extending liability

to cases where the secondary actor defendant itself does not

make a misstatement to investors and does not breach a duty

to disclose (or engage in “manipulative” trading practices),

petitioner’s test lacks any grounding in the text of § 10(b).

As in Central Bank, “that conclusion resolves the case”, for

“{i]t is inconsistent with settled methodology in § 10(b) cases

to extend liability beyond the scope of conduct prohibited by

the statutory text”. 511 U.S. at 177.

15

C. Petitioner’s Theory of “Scheme” Liability

Would Nullify Central Bank.

In addition to being unmoored from the language of the

Statute and, consequently, inconsistent with this Court’s

§ 10(b) jurisprudence, petitioner's “scheme” theory of

liability would effectively render Central Bank a nullity.

Under petitioner’s reasoning, “giving aid to a person who

commits a manipulative or deceptive act”, the precise

conduct held to be outside the scope of § 10(b) in

Central Bank, 511 U.S. at 177, would constitute a primary

violation if done with the “purpose” to deceive. Thus, the

exact conduct that was previously denominated as aiding and

abetting—providing “substantial assistance”, with scienter, to

a primary violator—could in essentially every case be

relabeled through artful pleading as “purposeful”

participation in a “scheme to defraud”.* For all practical

purposes, Central Bank would be rendered a historical relic.

* Claims against tansaction counterparties like those against

respondents here were pursued prior to Central Bank on the precise

theory that participation in deceptive transactions constituted aiding and

abetting. See, e.g., K&S P'ship v. Cont'] Bank, N.A., 952 F.2d 971, 976

(8th Cir. 1991) (involving aiding-and-abetting claim against banks for

making loans that enabled primary actors to “engage in a ‘pyramid’

scheme”); Feldman v. Pioneer Petroleum, Inc., 813 F.2d 296, 301

(10th Cir. 1987) (“Plaintiffs also alleged that Fidelity Bank . . . aided and

abetted in a conspiracy to promote the scheme by engaging in a

fraudulent and deceptive transaction to create the false appearance to

prospective investors that the Bradford Partnerships could and would

obtain the COPP loans from Fidelity Bank.”). Given petitioner's broad

and subjective test for “scheme” liability, it appears that the only conduct

that would be shielded from its reach would be that which would not even

have constituted aiding and abetting before Central Bank, i.e., non-

intentional conduct. See, e.g., Schatz v. Rosenberg, 943 F.2d 485, 497

(4th Cir. 1991) (dismissing an aiding-and-abetting claim because

“plaintiffs never allege{d] any facts tending to show an intent on [the law

firm's} part to violate the securities laws”).

16

Indeed, petitioner’s theory would require a different

result on the facts of Central Bank itself. As noted above,

Central Bank was charged with “agree[ing] to delay” a new,

independent appraisal of the collateral for a bond issuance for

which it was serving as the indenture trustee, despite

knowing of possible problems with the existing appraisal that

the purchasers were using to evaluate the investment.

Central Bank, 511 U.S. at 167-68. Central Bank’s agreement

with the issuer, which enabled it to issue otherwise

unmarketable bonds, could easily be relabeled as conduct

with the “purpose and effect” of deceiving investors in

furtherance of a fraudulent “scheme”. In fact, as the court of

appeals in Central Bank noted, the plaintiffs in that case did

“allege that the . . . bonds were sold as part of a fraudulent

scheme”. First Interstate Bank of Denver v. Pring, 969 F.2d

891, 895 (10th Cir. 1992); see also In re Parmalat Sec. Litig.,

414 F. Supp. 2d 428, 434-35 (S.D.N.Y. 2006) (allowing

“scheme” claim for bank’s knowing use of outdated

valuation). This Court rejected liability nonetheless.

In an effort to dis*inguish the case, petitioner and its

amici attempt to diminish the role of Central Bank in

furthering the fraud in that case (see, e.g., Br. for Pet’r 26),

with some going so far as to claim that “the allegation against

Central Bank was based on a failure to act, rather than on any

active conduct” (Br. for Amici Cox et al. 9; see also Br. for

Amici Adams & von Glahn 12-14), but these arguments

ignore the actual record in that case. The court of appeals,

for example, observed that the plaintiffs’ claim against

Central Bank was for violating the statute by “affirmative

action, specifically by affirmatively agreeing to delay the

independent review of the Hastings appraisal”. First

Interstate Bank, 969 F.2d at 902 (emphasis in orginal). The

purchasers similarly asserted in their brief to this Court that

the bank “provided critical assistance to the fraudulent

scheme by taking affirmative steps to ensure that the shortage

of collateral and the defects of the appraisal would be hidden

17

from plaintiffs and other potential purchasers”. Brief for

Respondents at 2, Central Bank, 511 U.S. 164 (No. 92-854),

1993 WL 13006274; see also Brief for Amicus SEC at 19

n.18, Central Bank, 511 U.S. 164 (No. 92-854), 1993 WL

13006275 (“Central Bank’s] retraction of its demand for an

independent appraisal is unlike conduct that the courts have

held to consist of mere silence and inaction.”’).

Apparently recognizing the inconsistency between their

theory of “scheme” liability and this Court’s decision in

Central Bank, petitioner and its amici go to great lengths to

trivialize the decision’s import, characterizing its reasoning

as “dicta” (Br. for Pet’r 28), describing its holdings as “quite

narrow” (Br. for Amicus Regents of Univ. of Cal. 28-29),

and even implying that it was wrongly decided and should be

limited to its facts (Br. for Amici Adams & von Glahn 2).

They argue that “Central Bank clearly—but merely—stands

for the proposition that no aiding-and-abetting liability exists

under the 1934 Act because neither §10(b) nor Rule 10b-5

contain ‘aiding and abetting’ language”. (Br. for Amicus

Regents of Univ. of Cal. 28.) But Central Bank was not

merely about whether the words “aiding and abetting”

appeared in § 10(b). Rather, the Court carefully examined its

own precedents to determine the scope of conduct prohibited

by § 10(b), concluding that private 10b-5 liability does not

reach those who do not themselves commit deceptive acts on

which the plaintiff has relied. See Central Bank, 511 US.

at 177 (“As in earlier cases considering conduct prohibited

by § 10(b), we again conclude that the statute prohibits only

the making of a material misstatement (or omission) or the

commission of a manipulative act.” (emphasis added)). If

Central Bank is to have any meaning at all, this holding

cannot be limited merely to prohibiting claims expressly

denominated as “aiding and abetting” while allowing exactly

the same allegations to be relabeled as conduct in furtherance

of a “scheme”. Nor can this holding regarding the conduct

prohibited by § 10(b) be circumvented by focusing solely on

18

a defendant’s “purpose” and “effects”. Similarly, the

necessary “showing that the plaintiff relied upon the aider

and abettor’s statements or actions” that Central Bank found

to be lacking, 511 U.S. at 180, cannot now be ignored simply

by redesignating the same conduct by the same defendants as

conduct in furtherance of a “scheme”.

The arguments now advanced by petitioner and its

amici in support of “scheme” liability are indeed the very

arguments advanced in support of aiding-and-abetting

liability and rejected by the Court in Central Bank. The

purchasers in Central Bank, for instance, seized on the “any

person” and “indirectly” language of § 10(b)}—like petitioner

and its amici do here—to argue that § 10(b) should be

applied “to a broad class of defendants”. Brief for

Respondents at 15, Central Bank 511 U.S. 164 (No. 92-854),

1993 WL 13006274; see also Brief for Amicus SEC at 8-9,

Central Bank, 511 U.S. 164 (No. 92-854), 1993 WL

13006275. This Court, of course, rejected that argument,

holding that a defendant must itse/f commit a deceptive or

manipulative act to violate § 10(b), 511 U.S. at 175-76, and

that the plaintiff “must show reliance on the defendant's

misstatement or omission”, id. at 180 (emphasis added).

The arguments advanced by the National Association of

Securities and Commercial Law Attorneys (“NASCAT”)

(essentially, the plaintiff class action securities lawyers) in

Central Bank further underscore the virtual identity between

the “scheme” liability theory petitioner urges here and the

aiding-and-abetting liability rejected in Central Bank. As

amicus in support of the purchasers, NASCAT argued that

because “[t]o knowingly render substantial assistance to a

fraudulent course of conduct is, in essence, to participate in

it”, “{a]ll members of such a scheme are responsible”. Brief

for Amicus NASCAT at 4 (internal quotation marks

omitted), Central Bank, 511 U.S. 164 (No. 92-854),

1993 WL 13006273. NASCAT further contended that the

statute and rule went “far beyond imposing liability for

19

individual misrepresentations or omissions” and imposed

liability for “knowingly participat{ing] in such a fraudulent

practice or course of conduct”. /d. Central Bank rejected

these arguments as well, making clear that the statute’s

proscription of deceptive conduct “prohibits only the making

of a material misstatement (or omission)”. 511 U.S. at 177.

For these reasons, virtually every Circuit to address

theories of liability like petitioner’s, including the court

below, has ruled that a secondary actor that neither makes a

misstatement (or omission in the face of a duty to disclose)

nor employs a manipulative device may not be held liable in

a private action under § 10(b), even if it is alleged to have

participated in some manner in a “conspiracy” or “scheme”

to defraud. See Wright v. Ernst & Young LLP, 152 F.3d 169,

175 (2d Cir. 1998) (“{I]f Central Bank is to have any real

meaning, a defendant must actually make a false or

misleading statement in order to be held liable under Section

10(b). Anything short of such conduct is merely aiding and

abetting . . . .” (internal quotation marks omitted)); Regents of

Univ. of Cal. v. Credit Suisse First Boston (USA), Inc.,

482 F.3d 372, 388 (Sth Cir. 2007) (““{[D]eceptive’ conduct

involves either a misstatement or a failure to disclose by one

who has a duty to disclose.” (internal quotation marks

omitted)), petition for cert. filed sub nom. Regents of Univ. of

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

75 U.S.L.W. 3557 (U.S. Apr. 5, 2007) (No. 06-1341); Fidel

v. Farley, 392 F.3d 220, 235 (6th Cir. 2004) (“[H]olding

Emst & Young liable for either its alleged implicit

endorsement of the unaudited financial figures or for its

failure to insist on a correction to these figures would

effectively revive aider and abettor liability in contravention

of the Supreme Court’s holding in [Central Bank]. In

Central Bank, the Supreme Court held that Section 10(b)

‘prohibits only the making of a material misstatement (or

omission) or the commission of a manipulative act.’”’); Jn re

Charter Commc'ns, Inc., Sec. Litig., 443 F.3d 987, 992

20

(8th Cir. 2006) (“[A]ny defendant who does not make or

affirmatively cause to be made a fraudulent misstatement or

omission, or who does not directly engage in manipulative

securities trading practices, is at most guilty of aiding and

abetting and cannot be held liable under § 10(b) or any

subpart of Rule 10b-5.”); Anixter v. Home-Stake Prod. Co.,

77 F.3d 1215, 1226 (10th Cir. 1996) (“[W]e conclude that in

order for accountants to ‘use or employ’ a ‘deception’

actionable under the antifraud law, they must themselves

make a false or misleading statement (or omission) that they

know or should know will reach potential investors.”);

Ziemba v. Cascade Int'l, Inc., 256 F.3d 1194, 1205 (1 Ith Cir.

2001) (“In order for a secondary actor, such as a law firm or

accounting firm, to be primarily liable under § 10(b), the

Plaintiffs must show reliance on the defendant’s

misstatement or Omission to recover under ]0b-5.” (internal

quotation marks omitted)). Only the Ninth Circuit, in

adopting a version of the standard that petitioner now urges

this Court to endorse, has deviated from this otherwise

unbroken line of appellate authority. See Simpson v. AOL

Time Warner Inc., 452 F.3d 1040, 1048 (9th Cir. 2006),

petition for cert. filed sub nom. Avis Budget Group, Inc. v.

Cal. State Teachers’ Ret. Sys., 75 U.S.L.W. 3236

(U.S. Oct. 19, 2006) (No. 06-560).

D. Since Central Bank, This Court Has Continued

To Require a Misrepresentation or Breach of a

Duty To Disclose by the Defendant Before

Imposing § 10(b) Liability for “Deceptive”

Conduct.

Contrary to petitioner’s contentions that Central Bank’s

holdings have been undermined by subsequent decisions, this

Court has continued to require a misrepresentation or breach

of a duty to disclose by the defendant itself before finding

liability for “deceptive” conduct under § 10(b). For example,

in United States v. O'Hagan, 521 U.S. 642 (1997)—

consistent with Affiliated Ute, Santa Fe, Chiavella and

21

Central Bank—the Court explicitly conditioned liability

under the “misappropriation theory” of insider trading’ on the

defendant’s breach of his duty to disclose. Thus, the Court

explained that “[d]jeception through nondisclosure is central

to the theory of liability for which the Government seeks

recognition”:

“(Fjull disclosure forecloses liability under the

misappropriation theory: Because the deception

essential to the misappropriation theory involves

feigning fidelity to the source of the information, if

the fiduciary discloses to the source that he plans

to trade on the nonpublic information, there is no

‘deceptive device’ and thus no § 10(b) violation—

although the fiduciary-turned-trader may remain

liable under state law for breach of a duty of

loyalty.”

Id. at 654-55. Consequently, “it was O’Hagan’s failure to

disclose his personal trading to [his client and law firm

employer], in breach of his duty to do so, that made his

conduct ‘deceptive’ within the meaning of § 10(b)”. /d.

at 660 (alterations and internal quotation marks omitted). '°

* “The ‘misappropriation theory’ holds that a person commits fraud

‘in connection with’ a securities transaction, and thereby violates § 10(b)

and Rule 10b-5, when he misappropriates confidential information for

securities trading purposes, in breach of a duty owed to the source of the

information.” O'Hagan, 521 U.S. at 652.

'° Petitioner and its amici invoke O’Hagan’s statement that § 10(b)

liability is not limited to situations where the “purchaser or seller of

securities” itself is the subject of the defendant’s allegedly deceptive

conduct, 521 U.S. at 651, 664, arguing that O'Hagan undermines

Central Bank’s holding that a secondary actor may be held liable under

Rule 10b-5 only if it “employs a manipulative device or makes a material

misstatement (or omission) on which a purchaser or seller of securities

relies”, 511 U.S. at 191 (emphasis added). (See Br. for Pet’r 27; Br. for

22

Amicus Regents of the University of California asserts

(Br. 23) that the duty to disclose required by Chiarella and

O'Hagan applies only to claims based on “a failure to speak”

and not to claims based on “conduct”. No such distinction

appears in those cases. Both cases clearly involved

conduct—trading in the market on inside information and

misappropriating confidential information for personal gain,

respectively—and indeed the conviction in Chiarella

(reversed by this Court) was explicitly premised on

participation in a “scheme to defraud” or “conduct...

operating as a fraud” in violation of Rule 10b-5(a) and (c),

see 445 U.S. at 236. Affiliated Ute, another case requiring a

duty to disclose, likewise involved a fraudulent “course of

business” or “device, scheme, or artifice” in violation of

_ Rule 10b-5(a) or (c). See 406 U.S. at 153. All of these cases

establish that, in the absence of a misstatement by the

defendant, the relevant conduct that makes an “act”,

“artifice”, “course of business”, “contrivance”, “device”,

“practice” or “scheme’”—whatever label the plaintiff decides

to pursue—‘“deceptive” within the meaning of § 10(b) must

involve the breach by the defendant of its duty to disclose.

The Wharf (Holdings) Ltd. v. United International

Holdings, Inc., 532 U.S. 588 (2001), similarly confirms the

necessity of a misrepresentation or breach of a duty to

disclose by the defendant for a finding of deceptive conduct.

Wharf presented the question whether selling an option to

Amici N.Y. State Teachers’ Ret. Sys. et al. 20.) But while O’Hagan’s

observation is correct in the context of the criminal prosecution involved

in that case, it has no application to a private suit under the § 10(b)

implied cause of action, for which this Court has imposed additional

requirements—including that the plaintiff establish reliance on the

defendant’s conduct. The O'Hagan Court expressly recognized as much.

See 521 U.S. at 664 (“Central Bank’s discussion concerned only private

civil litigation under § 10(b) and Rule 10b-5, not criminal liability.

Central Bank’s reference to purchasers or sellers of securiwes must be

read in light of a longstanding limitation on private § 10(b) suits.”’).

23

buy stock while secretly intending never to honor the option

constitutes conduct violating § 10(b). 532 U.S. at 589-90.

Although the Court could have simply characterized this

conduct as a fraudulent “scheme” or “practice”, it instead

based its finding of liability on the fact that the seller’s

“secret reservation was. . . a misrepresentation”:

“To sell an option while secretly intending not to

permit the option’s exercise is misleading, because

a buyer normally presumes good faith. Cf., e.g.,

Restatement (Second) of Torts § 530, Comment c

(1976) (‘Since a promise necessarily carries with it

the implied assertion of an intention to perform{,]

it follows that a promise made without such an

intention is fraudulent’).”

Id. at 596 (alteration in original)."'

Most recently, SEC v. Zandford, 535 U.S. 813 (2002),

in which a stockbroker secretly sold his clients’ securities in

order to steal the proceeds, explicitly premised § 10(b)

'' Petitioner and various amici assert that the Eighth Circuit's

decision is inconsistent with the Court’s reference in Wharf to “a

misrepresentation (or other conduct forbidden by the Rule)”, 532 US.

at 594, as well as with the Court's statement that a Rule 10b-5 plaintiff

“must show that the defendant used . . . one of the four kinds of

manipulative or deceptive devices to which the Rule refers”, id. at 593

(setting forth the text of the Rule with subparagraph (b) divided into two

parts). (See Br. for Pet’r 30-31; Br. for Amicus Am. Ass’n for

Justice 8-9; Br. for Amici N.Y. State Teachers’ Ret. Sys. et al. 21.) As

with the invocation of similar statements in Affiliated Ute, these

arguments miss the point. See supra note 3. The Eighth Circuit

appreciated that § 10(b) and Rule 10b-5 reach conduct beyond

misrepresentations (and omissions that make statements already made

misleading) covered by Rule 10b-5(b); it correctly noted that this Court’s

precedents also prohibit manipulative trading practices and omissions by

those who remain silent but have a duty to disclose. See Charter,

443 F.3d at 990.

24

liability on the broker’s breach of his fiduciary duty to

disclose. Thus, although petitioner is correct (Br. 31) that

this Court stated that “each time [the broker] exercised his

power of disposition for his own benefit, that conduct,

without more, was a fraud”, 533 U.S. at 821 (internal

quotation marks omitted), the Court made clear that “each

{sale] was deceptive because it was neither authorized by, nor

disclosed to, the [clients]”, id. at 820-21. The Court

explained:

“[Ajny distinction between omissions and

misrepresentations is illusory in the context of a

broker who has a fiduciary duty to her clients. See

Chiarella v. United States, 445 U.S. 222, 230

(1980) (noting that ‘silence in connection with the

purchase or sale of securities may operate as a

fraud actionable under § 10(b)’ when there is ‘a

duty to disclose arising from a relationship of trust

and confidence between parties to a transaction’);

Affiliated Ute Citizens of Utah v. United States,

406 U.S., at 153.”

Id. at 823. Thus, the assertions of petitioner’s amici that

Zandford “confirms that liability can apply even in the

absence of a material misstatement” (Br. for Amicus Cal.

State Teachers’ Ret. Sys. 9; see also Br. for Amici Change

To Win & CtW Inv. Group 27; Br. for Amici N.Y. State

Teachers’ Ret. Sys. et al. 22; Br. for Amici Cox et al. 7) are

beside the point. The decision below recognizéd—consistent

with Zandford—that “deceptive” act liability may be

premised on “‘a failure to disclose by one who has a duty to

disclose”, Charter, 443 F.3d at 990. The critical issue under

Zandford was whether the defendant either made a

misrepresentation or breached his fiduciary duty to speak;

where—as in the present case—there is neither a

misrepresentation by the secondary actor nor a breach by that

actor of a fiduciary duty to disclose (or “manipulative”

25

trading practices), then this Court’s precedents consistently

lead to the conclusion that there is no § 10(b) liability.’

E. Bankers Life and Herman & MacLean Do Not

Upset the Requirement that the Defendant

Itself Make a Misstatement or Breach Its Duty

To Disclose.

In addition to mischaracterizing several of the cases

discussed above, petitioner and its amici mistakenly argue

that isolated language from two early decisions—not

addressing the meaning of “deceptive” conduct-—-somehow

undermines this Court’s subsequent interpretation of that

term.

'2 The suggestions of petitioner and its amici that Zandford

expanded liability for deceptive conduct beyond misrepresentations and

violations of a duty to disclose are belied by the fact that the question that

was actually decided by the court of appeals, presented by the petition for

certiorari and addressed by this Court was not whether the broker’s

conduct was “deceptive” under § 10(b)}—which was undisputed—but

only “whether the alleged fraudulent conduct was ‘in connection with the

purchase or sale of any security’ within the meaning of the statute and the

Rule”. Zandford, 535 U.S. at 815; see also SEC v. Zandford, 238 F.3d

559, 564 (4th Cir. 2001) (“The precise issue before us is whether

Zandford’s alleged fraud is sufficiently connected to a securities

transaction . . . .”); Petition for Writ of Certiorari at 1, Zandford, 535 U.S.

813 (No. 01-147), 2001 WL 34092101 (stating question presented as

“{w]hether a stocbroker’s fraud is ‘in connection with the .. . sale’ of

securities under [§ 10(b) and Rule 10b-5], when the stockbroker sells his

customer’s securities for his own benefit and uses the proceeds for

himself, without disclosure to his customer and without authorization to

do so” (ellipsis in original)); Brief for Respondent at 1, Zandford,

535 U.S. 813 (No. 01-147), 2002 WL 405094 (“The parties agree that the

outcome turns on the proper interpretation of § 10(b)’s requirement that a

deception be ‘in connection with’ a securities transaction.”). In any

event, as discussed in the main text, to the extent it discussed the fraud,

the Court made clear that it was the broker's breach of his fiduciary duty

that made his conduct deceptive.

26

For instance, petitioner and its amici misread isolated

statements from the Court’s early decision in Superintendent

of Insurance v. Bankers Life & Casualty Co., 404 U.S. 6

(1971), as supporting their theory of “scheme” liability. (See,

e.g., Br. for Pet’r 30.) Although several securities

transactions were involved in that case, the only transaction

before the Court was one in which an officer of an insurance

company and others caused the company to sell almost five

million dollars of U.S. Treasury bonds and_ then

misappropriated the proceeds. See 404 U.S. at 13 n.10.

Despite allegations that “a majority of the board of directors

of [the company] was deceived by misrepresentations of

other members of the board and some of the defendants that

the sale of the bonds was intended only to effectuate a

substitution of those assets for a certificate of deposit equal in

value”, the Second Circuit dismissed § 10(b) claims brought

by the company’s liquidator because there was no claim that

“the full and fair market price was not paid for those bonds

by their purchaser” and consequently the alleged “deception

did not infect the subsequent sales _ transaction”.

Superintendent of Ins. v. Bankers Life & Cas. Co., 430 F.2d

355, 360 (2d Cir. 1970).

The question before this Court was not whether the

defendants’ conduct was “deceptive” within the meaning of

the statute—there was no dispute that the insurance company

was “allegedly deceived into authorizing th{e] sale by the

misrepresentation that the proceeds would be exchanged for a

certificate of deposit of equal value”, Bankers Life, 404 U.S.

at 8 n.1—but only whether that deception was covered by

§ 10(b) even though “the full market price was paid for those

bonds”. Jd. at 9. Concluding that § 10(b) “is not”, as the

Second Circuit had held, “limited to preserving the integrity

of the securities markets” but instead reaches all deceptive

conduct “in connection with” the “sale” of a security , id.

at 12 (internal quotation marks omitted), the Court held that

§ 10(b) encompassed the defendants’ misrepresentation, by

27

which “the seller was duped into believing that it, the seller,

would receive the proceeds”, id. at 9. The Court expressly

declined to consider the potential liability of secondary actor

defendant Bankers Life. /d. at 13. This early case involving

affirmative misstatements by defendants actually relied upon

by the plaintiffs is not inconsistent with and does not detract

from the Court’s subsequent decisions interpreting deceptive

conduct to require a misstatement or breach of a duty to

disclose. Indeed, this Court has noted that Bankers Life is

“inapposite” to cases where “there [is] no ‘omission’ or

‘misstatement’”. Santa Fe, 430 U.S. at 474-75 & n.15.

Nor does Herman & MacLean v. Huddleston, 459 U.S.

375 (1983), assist petitioner. That case held simply that

purchasers of registered securities could maintain a § 10(b)

action against an accounting firm that had issued an opinion

concerning financial statements contained in the registration

statement and prospectus, “notwithstanding the express

remedy for misstatements and omissions in registration

statements provide by § 11 of the Securities Act of 1933”.

Id. at 377. Petitioner and its amici invoke a statement in a

footnote in which the Court noted that if “purchasers in

registered offerings were required to rely solely on § 11, they

would have no recourse against [individuals who play a part

in preparing the registration statement but who cannot be

reached by § 11] even if the excluded parties engaged in

fraudulent conduct while participating in the registration

statement”, id. at 386 n.22. (See Br. for Pet’r 30; Br. for

Amici Arkansas et al. 26-27; Br. for Amici Cox et al. 7; Br.

for Amicus N. Am. Sec. Adm’rs Ass’n 13-14.) Because the

secondary actor defendant there had made actual

misrepresentations upon which the plaintiffs could rely—

conduct that is unquestionably deceptive—the Court had no

occasion in this pre-Central Bank case to expound further on

the scope of “fraudulent conduct” under § 10(b).

Thus, neither Bankers Life nor Herman & MacLean is

inconsistent with the long line of precedents, discussed

28

above, upon which the Eighth Circuit properly relied in

affirming the dismissal of § 10(b) claims against the

secondary actor defendants in the absence of any

misrepresentations by those defendants and of any fiduciary

duty to disclose by those defendants.

II. PETITIONER’S VAGUE “SCHEME” LIABILITY

THEORY WILL HINDER THE ABILITY OF

LAWYERS TO REPRESENT CLIENTS WHO DO

BUSINESS WITH ISSUERS.

This Court has repeatedly recognized that the legal

standard for private liability under the securities laws is “‘an

area that demands certainty and predictability’”; “‘a shifting

and highly fact-oriented disposition of the issue of who may

[be liable for] a damages claim for violation of Rule 10b-5’ is

not a ‘satisfactory basis for a rule of liability imposed on the

conduct of business transactions”. Central Bank, 511 U.S.

at 188 (quoting Pinter v. Dahl, 486 U.S. 622, 652 (1988), and

Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 755

(1975)) (alteration in original). Vague tests for liability —

under § 10(b) “lead{] to the undesirable result of decisions

‘made on an ad hoc basis, offering little predictive value’ to

those who provide services in the securities business”, and

consequently force defendants “to abandon substantial

defenses and to pay settlements in order to avoid the expense

and risk of going to trial”. Jd. at 188-89 (quoting Pinter,

486 U.S. at 652); see also Credit Suisse Sec. (USA) LLC v.

Billing, 127 S. Ct. 2383, 2394-97 (2007) (discussing the

disadvantages of rules creating “complex, sinuous line[s]

separating securities-permitted from _ securities-forbidden

conduct”).

The Court’s decisions interpreting § 10(b)’s prohibition

of “deceptive” conduct have heeded these concers,

establishing a clear rule as discussed above confining private

liability to those situations where the defendant itself has

made a material misstatement or breached its duty to disclose

29

to the plaintiff. Petitioner’s vague theory of “scheme”

liability, by contrast, would expose companies who do

business with issuers to § 10(b) litigation whenever a

plaintiff can plausibly allege that the counterparty’s conduct

had the “purpose and effect” of furthering the issuer’s

“fraudulent scheme”. Such “scheme” allegations—always

made in hindsight, after something bad has happened at the

issuer—may be too readily made, particularly in a business

environment in which transactions are frequently

complicated and the applicable accounting principles are

continuously evolving and require numerous judgment calls.

Such a vague standard of liability will impose particular

burdens on transactional lawyers who, like amici, represent

an issuer’s counterparties. If petitioner’s standard of liability

is adopted, counterparties and their lawyers could be called

upon to determine if the issuer—not the secondary actor

client—intends to or could conceivably use the transaction to

create a “false appearance of material fact”. That

determination would add a substantial burden to those

lawyers and their counterparty clients, potentially requiring

them not only to delve into the business affairs of the issuer,

but also to review the work of the issuer’s own advisors,

including its accountants and lawyers. Such review could

require expertise that transactional lawyers usually do not

have, including expertise necessary to determine

independently the proper accounting treatment for a complex,

“cutting edge” transaction.

This is not a situation in which the counterparty client

itself is making a statement (which counsel can review), or

has a duty to disclose (on which counsel can advise). The

counterparty client normally is not involved whatsoever in

preparing or commenting upon the (audited) financial

statements that constitute the alleged misstatement of the

issuer. Rather, the counterparty client is engaged in a

commercial transaction with the issuer; the issuer and its

advisors (its lawyers and accountants) will ultimately

30

determine what the issuer should disclose regarding the

transaction. The broad “scheme” liability theory advanced

by petitioner potentially could force counsel for the

counterparty client somehow to insert himself or herself into

the issuer’s disclosure discussions and decisions, or leave the

counterparty client exposed to potential litigation for a

decision by the issuer that the counterparty client ultimately

had no ability to control.

There is no question that a vague, expansive theory of

private liability for secondary actors places substantial

burdens on the ability of counsel to advise their clients on

prospective complex transactions, and could lead both to

substantially higher transaction costs for clients and issuers

and to a natural reluctance to proceed with financing

transactions with new or potentially financially troubled

issuers. A clear and predictable rule for liability of

secondary actors, which amici believe is already found in this

Court’s precedents, places the burdens where they belong—

on each actor and its own advisors—and is the most efficient

means of ensuring a fair and open securities market.

CONCLUSION

For the foregoing reasons, the judgment of the court of

appeals should be affirmed.

August 15, 2007

Respectfully submitted,

RICHARD W. CLARY

Counsel of Record

CRAVATH, SWAINE & MOorRE LLP

825 Eighth Avenue

New York, NY 10019-7475

(212) 474-1000

Appendix

Amici, along with the law firms of which they are members,

are as follows:

Richard I. Beattie

Simpson Thacher & Bartlett LLP

Kenneth J. Bialkin

Skadden, Arps, Slate, Meagher & Flom LLP

Arthur Fleischer, Jr.

Fried, Frank, Harris, Shriver & Jacobson LLP

Joseph H. Flom

Skadden, Arps, Slate, Meagher & Flom LLP

Ira M. Millstein

Weil, Gotshal & Manges LLP

Jack H. Nusbaum

Willkie Farr & Gallagher LLP

E. Norman Veasey

Weil, Gotshal & Manges LLP