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

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

¢

MOTION FOR LEAVE TO FILE A BRIEF

AS AMICI CURIAE AFTER THE FILING

DEADLINE. AND RRIEF AMICI CURIAE OF THE.

HONORABLE JOHN CONYERS, JR. AND

BARNEY FRANK, IN SUPPORT OF PETITIONER

¢

JAMES SEGEL*

LAWRANNE STEWART

*Counsel of Record

Committee on Financial Services

U.S. House of Representatives

2129 Rayburn House Office Building

Washington, D.C. 20515

(202) 225-4247

July 30, 2007

— eC —— ——_—-—-

COCKLE LAW BRIFF PRINTING CO. (800) 225. 964

OR CALL COLLECT (402) 342-2831

1

MOTION FOR LEAVE TO FILE A BRIEF AS

AMICI CURIAE AFTER THE FILING DEADLINE

Pursuant to Supreme Court Rule 37.3, the Honorable

John Conyers, Jr. and Barney Frank, members of the

United States House of Representatives and, respectively,

the Chairman of the House Committee on the Judiciary

and the Chairman of the House Committee on Financial

Services, respectfully move the Court for leave to file the

brief that follows after the deadline for filing amicus briefs

supporting Petitioner (June 11, 2007). Amici apologize for

the late brief. Amici had expected the Solicitor General to

accept the recommendation of the Securities and Ex-

change Commission that the United States file an amicus

brief in support of Petitioner to urge the Court to follow

the Commission’s long-standing interpretation of the

statutory and regulatory provisions at issue in this case.

The Solicitor General’s decision to follow the political and

policy directives of the President rather than to support

the Commission’s legal position, coupled with testimony by

Commission Chairman Cox at a June 26, 2007 oversight

hearing before the Committee on Financial Services, has

persuaded amici of the critical need to give voice to the

points made in their brief.

Petitioner’s blanket consent to the filing of amicus

briefs in support of either party or neither party has been

filed with the Clerk of the Court, and Petitioner has

granted consent to the filing of this brief out of time.

Respondents do not object to the filing of this brief. Since

Respondents have been granted an extension of time to file

2

their brief until August 15, 2007, the granting of this

motion would not prejudice them.

Respectfully submitted,

JAMES SEGEL*

LAWRANNE STEWART

*Counsel of Record

Committee on Financial Services

U.S. House of Representatives

2129 Rayburn House Office Building

Washington, D.C. 20515

(202) 225-4247

TABLE OF CONTENTS

INTEREST OF AMICI CURIAE .........ccccccsseeeeeeeseeeees

SUMMARY OF ARGUMENT..............cccccssseeeeeeeneeeees

ARGUMENT

PoP PPR R RPE REE ERE REE REESE S RRR LA LAA

SPREE conccescopnccesconccessonsnnssoessanasocssconconsosoonses

TABLE OF AUTHORITIES

Page

CASES

A.T. Brod & Co. v. Perlow, 375 F.2d 393 (2d Cir.

ET hnercncnennencniadepeptsciassivinivisimnesiiiiniahbiaiaidlailinit iii ie 4

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

CI TTED vensnccnnciccnpnicctunncannsittiniaciaiiaiiapiiebataitiiagsii tipiabiitades 4

Chevron, U.S.A., Inc. v. Natural Resources Defense

Council, Inc. , 467 U.S. 837 (1984) ...ccccccoccoscoscccccccccecsosees 5

Ernst & Ernst v. Hochfelder, 425 U.S. 185 (1976).............. 5

NLRB v. Ky. River Cmty. Care, Inc., 532 U.S. 706

CED Ses Oi cciscnnscsnssoinnsiscsntcitiniccinisttaciiuiaplbaisitidadllasmanbdhiadiige 8

Regents of the Univ. of California v. Credit Suisse

First Boston (USA), 482 F.3d 372 (5th Cir. 2007),

sub nom. The Regents of the Univ. of Cal. v.

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

for cert. filed (Apr. 5, 2007) (No. 06-1341)................04. 3,7

Santa Fe Indus. v. Green, 430 U.S. 462 (1977).............200008 4

SEC v. Capital Gains Research Bureau, 375 U.S.

BD CD tccicsrevinssnientsinniantimsetiatnscenenciniamiaiapetiainaniags 4

SEC v. Zandford, 535 U.S. 813 (2002) ..............:sseeeererees 4,5

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

(9th Cir. 2006), petition for cert. filed sub nom.

Cal. St. Teachers Ret. Sys. v. Homestore.com, Inc.,

75 U.S.L.W. 3236 (U.S. Oct. 19, 2006) (No. 06-

Stoneridge Investment Partners, LLC v. Scientific-

Atlanta, Inc. and Motorola, Inc. (In re: Charter

Communications, Inc. v. Stoneridge Investment

Partners, LLC), 443 F.3d 987 (8th Cir. 2006), cert.

granted, 127 S. Ct. 1873 (Mar. 26, 2007)...............0006 6,7

TABLE OF AUTHORITIES — Continued

Page

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

inc creenrerenetetaeapmiatenntimienenennineneenennnes 4

Tellabs, Inc. v. Makor Issues & Rights, No. 06-484,

slip op., 168 L. Ed. 2d 179 (2007)............ccccsssssseeeeeseeeeees 2

Tennessee Valley Auth. v. Hill, 437 U.S. 153 (1978)........... 8

STATUTES AND RULES

sn eetrsreneunsenensrenenennasentanennemdunennemsennes 2

a 2, 3,4

Sten nce dnercebasemmapnomntnnedmmnenend 3, 5,8

OTHER AUTHORITIES

Simpson v. AOL Time Warner, Inc. (Cal. St.

Teachers Ret. Sys. v. Homestore.com, Inc., No. 04-

55665 (9th Cir.), Brief amicus curiae of the SEC

(Oct. 22, 2004), available at www.sec.gov/litigation/

briefs/homestore_ 102104. pdf .............cccccceeseeeeeeeeeeeeeees 4,5

Excerpts from Hearing on Review of Investor

Protection and Market Oversight with the Five

Commissioners of the Securities and Exchange

Commission Before the House Comm. on

Financial Services, 110th Cong., Ist Sess., June

26, 2007 (consisting of complete text of questions

and answers cited or quoted in Brief) (CQ

BI TI innincepeennnsnnnniionsvenmnnetecatnceneecscancene 5,6

Greg Stohr, Bush Administration Rebuffs Investors

at High Court, BLOOMBERG, June 12, 2007 .............c008 7

iv

TABLE OF AUTHORITIES -— Continued

Marcy Gordon and Pete Yost, Bush Gave Policy

Views on Top Court Case, ASSOC. PRESS

Ee 7

Ted Frank, Arbitrary and Unfair, WALL ST. J., May

iis HEIs el ecisinatiaceeninpsinnitiinabeebanieneteneianiaiabegeeitenntaadinlie 7

TABLE OF APPENDICES

Appendix A — Excerpts from Hearing on Review of

Investor Protection and Market Oversight with

the Five Commissioners of the Securities and

Exchange Commission Before the House Comm.

on Financial Services, 110th Cong., Ist Sess.,

June 26, 2007 (consisting of complete text of

questions and answers cited or quoted in Brief)

(COR Trammarigtions, Tine.)............ccccccccccessscosscccssseosee App. 1

1

BRIEF OF THE HONORABLE JOHN CONYERS, JR.

AND BARNEY FRANK, AS AMICI CURIAE

IN SUPPORT OF PETITIONER

Pursuant to Rule 37.3 of the Rules of this Court, The

Honorable John Conyers, Jr. and Barney Frank, respect-

fully submit this brief amici curiae in support of Petitioner.’

¢

INTEREST OF AMICI CURIAE

Amici are the Honorable John Conyers, Jr., a member

of the United States House of Representatives and the

Chairman of the House Committee on the Judiciary, and

the Honorable Barney Frank, a member of the United

States House of Representatives and the Chairman of the

House Committee on Financial Services. Both amici file

this brief in their official capacities as committee chairmen.

The Committee on the Judiciary has jurisdiction over

the federal courts and the Department of Justice. The

Department of Justice is responsible, among other things,

for the criminal prosecution of the anti-fraud provisions of

‘ Pursuant to Rule 37.6 of the Rules of this Court, Petitioner's

consent to the filing of amicus briefs is on file with the Clerk of Court.

Petitioner has consented to the filing of this brief out of time. Respon-

dents do not object to the filing of this brief. This brief was not au-

thored, in whole or in part, by counsel for either party. Matthew Wiener

of the law firm of Cuneo Gilbert & LaDuca, LLP — counsel of record for

AARP, Consumer Federation of America, and U.S. PIRG in submitting

a separate amicus in support of Petitioner in this case — and Jonathan

W. Cuneo, Pamela Gilbert and Michael Lenett of that firm assisted in

the preparation of thie brief, as did Deborah Silberman and Joshua

Kotin of the House Committee on Financia] Services. No person other

than amici contributed monetarily to the preparation or submission of

this brief.

2

the federal securities laws. See, e.g., Tellabs, Inc. v. Makor

Issues & Rights, No. 06-484, slip op. at 1, 168 L. Ed. 2d

179 (2007).

The Committee on Financial Services has jurisdiction

over the federal laws that regulate the nation’s capital

markets — including the statute at issue in this case, the

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

(Exchange Act) — and it has legislative oversight authority

over the Securities and Exchange Commission (Commis-

sion), which is responsible, among other things, for the

civil enforcement of the Exchange Act’s anti-fraud provi-

sion. See, e.g., Tellabs, slip op. at 1.

Amici play a significant role in the development of

federal securities law and in the operation of the federal

courts and, therefore, have an interest in the means by

which the anti-fraud provisions of the federal securities

laws are applied by the courts. Amici have an interest in

the proper differentiation of constitutional responsibilities

among the Executive, the Congress and this Court and

wish to bring certain information to the attention of the

Court.

+

SUMMARY OF ARGUMENT

The interpretation of Section 10(b) and Rule 10b-5

adopted by the Court of Appeals and urged by Respon-

dents ultimately rests on policy considerations at odds

with the statutory text that should more appropriately be

addressed to Congress than to this Court. Ir its merits

brief, Petitioner argues that the conduct at issue is prohib-

ited by the plain language of Section 10(b) of the Exchange

Act, 15 U.S.C. § 78j(b) and its companion Commission

3

regulation, Rule 10b-5, 17 C.F.R. § 240.10b-5, and urges

that any change to the substantive law should be made by

legislative action and not by the courts. This contention is

correct.

S

ARGUMENT

Amici are mindful of the Court’s admonition that

amici raise only relevant matters not already brought to

the attention of the Court by the parties, see Sup. CT. R.

37.1. Therefore the focus of this brief is to clarify the role

of Congress and the relationship among the Executive, the

Congress and the Court in seeking to alter the scope of the

anti-fraud provisions of the Exchange Act. Section 10(b) of

the Exchange Act makes it unlawful for “any person,

directly or indirectly” to “use or employ, in connection with

the purchase or sale of amy security ... any manipulative

or deceptive device or contrivance.” 15 U.S.C. § 78j(b).

Section 10{b) of the Exchange Act and Commission

Rule 10b-5 (in particular, subsections (a) and (c)) proscribe

conduct of the sort alleged in Petitioner’s complaint and by

plaintiffs in other prominent securities fraud cases to have

come before the federal courts. See, e.g., Regents of the

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

482 F.3d 372, 392-93 (5th Cir. 2007), sub nom. The Regents

of the Univ. of Cal. v. Merrill Lynch, Pierce, Fenner &

Smith, Inc., pet. for cert. filed (Apr. 5, 2007) (No. 06-1341).

The Court of Appeals’ interpretation of te law in this case

runs directly counter to a plain reading of the statute.

Section 10(b) of the Exchange Act makes it “unlawful

for any person ... to use or employ, in connection with the

purchase or sale of any security ... , any manipulative or

4

deceptive device or contrivance in contravention of” such

rules and regulations as the Commission may find are

“necessary or appropriate in the public interest or for the

protection of investors.” 15 U.S.C. § 78j(b). Rule 10b-5,

promulgated under this provision, forbids the use, “in

connection with the purchase or sale of any security,” of

“any device, scheme, or artifice to defraud” or any other

“act, practice, or course of business” that “operates... as a

fraud or deceit.”

As the Commission pointed out in its brief amicus curiae

in support of positions that favor petitioner, Simpson v.

Homestore, Inc., No. 04-55665 (9th Cir. Oct. 22, 2004),

available at www.sec.gov/litigation/briefs/homestore_102104.

pdf, this Court has stated repeatedly that Section 10(b)

should be construed “‘not technically and restrictively, but

flexibly to effectuate its remedial purposes.’” SEC uv.

Zandford, 535 U.S. 813, 819 (2002) (quoting Affiliated Ute

Citizens v. United States, 406 U.S. 128, 151 (1972), quoting

SEC v. Capital Gains Research Bureau, 375 U.S. 180, 195

(1963)); accord Superintendent of Ins. v. Bankers Life &

Cas. Co., 404 U.S. 6, 12-13 (1971); see also Santa Fe Indus.

uv. Green, 430 U.S. 462, 477 (1977) (“No doubt Congress

meant to prohibit the full range of ingenious devices that

might be used to manipulate securities prices.”).

This Court also has stated its belief that Ҥ 10 (b) and

Rule 10b-5 prohibit all fraudulent schemes in connection

with the purchase or sale of securities, whether the arti-

fices employed involve a garden type variety of fraud, or

present a unique form of deception. Novel or atypical

methods should not provide immunity from the securities

laws.” Bankers Life, 404 U.S. at 11 n.7 (quoting A.T: Brod

& Co. v. Perlow, 375 F.2d 393, 397 (2d Cir. 1967)); see also

5

Ernst & Ernst v. Hochfelder, 425 U.S. 185, 203 (1976)

(stating that Section 10(b) is “a ‘catchall’ clause to enable

the Commission ‘to deal with new manipulative (or cun-

ning) devices.’”).

As a whole, Rule 10b-5 encompasses all of the author-

ity granted to the Commission in Section 10(b). See Zand-

ford, 535 U.S. at 816, n.1 (“The scope of Rule 10b-5 is

coextensive with the coverage of § 10(b)....”). Thus, if

conduct is covered by Rule 10b-5, it is necessarily covered

by Section 10(b). Rule 10b-5 should be afforded controlling

weight. See Chevron, U.S.A., Inc. v. Natural Resources

Defense Council, Inc., 467 U.S. 837, 843-44 (1984) (uphold-

ing EPA’s construction of Clean Air Act term “stationary

source”).

The Commission has been consistent in its support for

the proposition that, under appropriate circumstances, a

defendant who committed deceptive acts as a part of a

scheme to defraud investors may be liable under Rule 10b-

5, even if that defendant did not directly issue fraudulent

statements. The Court can fiud a well-articulated state-

ment of the Commission’s position in its amicus briefs in

the Simpson v. Homestore, Inc. case, supra.

Commission Chairman Christopher Cox recently

testified before the House Financial Services Committee

that, at the recommendation of staff and following a three

to two vote of the Commissioners, the Commission recom-

mended to the Solicitor General of the United States that

he file an amicus brief in support of Petitioners. See

Excerpts from Hearing on Review of Investor Protection

and Market Oversight with the Five Commissioners of the

Securities and Exchange Commission Before the House

Comm. on Financial Services, 110th Cong., 1st Sess., June

6

26, 2007 (consisting of complete text of questions and

answers cited or quoted in Brief) (CQ Transcriptions, Inc.),

at App. 3. In response to a request by Representative

Deborah Pryce for comment on the Stoneridge case (Stone-

ridge Investment Partners, LLC v. Scientific-Atlanta, Inc.),

Chairman Cox noted that the Stoneridge case was on all

fours with the 2004 Homestore case, in which the Commis-

sion voted unanimously to file an amicus brief. He made

the astute point that “[lJaw has to have some objective

meaning. It can’t be just a question of how we all feel

about it” and that laws should not be so “effervescent as to

change with” the change in political composition of the

Commission. Jd. at App. 4.

In response to later questioning about the Commis-

sion’s decision to recommend that the Solicitor General file

a brief in support of Petitioner, Chairman Cox said:

And so I did not reflexively follow the unanimous

decision of 2004, but rather looked carefully at

what was before me. ... What is going on in that

case, though is that we are focused on when con-

duct is fraudulent, and whether conduct can be

fraudulent. I think the commissioners believe it

can. And also the circumstances of a particular

case and whether or not that case should go for-

ward.

Id. at App. 6.

The Solicitor General rejected the Commission’s

specific recommendation that the United States file an

amicus brief in support of Petitioner and urge the Court to

follow the Commission’s long-standing interpretation of

the statutory and regulatory provisions at issue. Disturb-

ingly, this appears to have been done as a result of White

House intervention. Allan Hubbard, director of the Presi-

dent’s National Economic Council, told reporters on a

7

conference call on June 12, 2007 that the President per-

sonally weighed in with his view that it is important to

reduce unnecessary lawsuits and that federal securities

regulators are in the best position to sue. See Marcy

Gordon and Pete Yost, Bush Gave Policy Views on Top

Court Case, ASSOC. PRESS NEWSWIRES, June 12, 2007. Mr.

Hubbard said “[w]e are a society that is overly litigious.

And that is very harmful for our economy and very harm-

ful for investors.” According to Mr. Hubbard, the Presi-

dent’s policy views were conveyed to the Solicitor General

by Deputy White House counsel William Kelley. “On the

policy matter, there was a difference of opinion that was in

the administration. Ultimately, the president makes up

his own mind. He shared his opinion with the solicitor

general.” Id. See also Greg Stohr, Bush Administration

Rebuffs Investors at High Court, BLOOMBERG, June 12,

2007.

The Solicitor General’s decision to follow the political

and policy directives of the President rather than to

support the Commission’s legal position plots a dangerous

course that has persuaded wmici of the critical need to

bring these developments to the Court’s attention.

A number of commentators have called for the Court

to decide this case by reference to policy considerations

nowhere found in the statute. See, e.g., Ted Frank, Arbi-

trary and Unfair, WALL ST. J., May 31, 2007, at A-14. No

doubt Respondents and many of their supporting amici

will ask the Court to substitute one policy argument or

another in lieu of the clear statutory text, much as several

lower courts have done in rejecting scheme liability. See,

e.g., Credit Suisse First Boston, 482 F.3d at 392-93 (5th Cir.

2007); Stoneridge Investment Partners, LLC v. Scientific-

Atlanta, Inc. and Motorola, Inc. (In re: Charter Communi-

cations, Inc. v. Stoneridge Investment Partners, LLC), 443

8

F.3d 987, 992-93 (8th Cir. 2006), cert. granted, 127 S. Ct.

1873 (U.S. Mar. 26, 2007) (No. 06-43). That will be an

invitation to engage in precisely the sort of policy-based

judicial activism this Court has repeatedly condemned in

statutory interpretation cases. See, e.g., NLRB v. Ky. River

Cmty. Care, Inc., 582 U.S. 706, 720-21 (2001) (Scalia, J.).

The separate powers created by the Constitution

invest the different branches of government with distinct

roles delegated to them by the Constitution. It is not for

the Executive or the Judicial branches of our government

to formulate legislative policies; that function is the

exclusive province of the Congress. See Tennessee Valley

Auth. v. Hill, 437 U.S. 153, 194 (1978). It is then for the

Executive to administer the laws and for the courts to

enforce them. Jc’. The branch of government to which

Respondents and their amici should direct their policy

arguments is Congress. The Committee on Financial

Services of the U.S. House of Representatives stands ready

to facilitate through hearings a discussion of whether to

amend Section 10(b) to immunize from liability persons

who knowingly engage, directly or indirectly, through

conduct or speech, in manipulative or deceptive acts as a

part of a scheme to defraud investors.

Unless and until Congress so amends Section 10(b),

however, the Court should honor the legislative policies

established by the Congress reflected in the clear language

of the statute, and as reflected in the Commission’s rules,

as well as this Court’s precedents. That outcome, we

respectfully submit, compels the reversal of the judgment

of the Court of Appeals.

CONCLUSION

For the foregoing reasons, the Court should reverse

the judgment of the Court of Appeals.

Regardless of the rule announced in this case, Con-

gress will continue to revisit and review the federal

securities laws when necessary. Any congressional action

will take place within the structure and with the powers

defined by the Constitution. Congress has the constitu-

tional authority and the institutional ability to consider

fully the policy interests and the public interests that are

implicated in this case.

HONORABLE JOHN CONYERS, JR.

Chairman, United States

House of Representatives

Committee on the Judiciary

2138 Rayburn House

Office Building

Washington, DC 20515

(202) 225-3951

July 30, 2007

Washington, DC

Respectfully submitted,

JAMES SEGEL*

LAWRANNE STEWART

*Counsel of Record

HONORABLE BARNEY FRANK

Chairman, United States

House of Representatives

Committee on

Financial Services

2129 Rayburn House

Office Building

Washington, DC 20515

(202) 225-4247

eee —

App. 1

APPENDIX A

Transcribed by FCDH e-Media for Congressional Quar-

terly, Inc.

REP. BARNEY FRANK HOLDS A HEARING ON THE

SECURITIES AND EXCHANGE COMMISSION - COM-

MITTEE HEARING

36,728 words

26 June 2007

Political Transcripts by CQ Transcriptions English

(C) 2007 CQ Transcriptions, Inc. All Rights Reserved.

(CORRECTED COPY: CORRECTS SPEAKERS LIST)

HOUSE COMMITTEE ON FINANCIAL SERVICES

HOLDS A HEARING ON THE SECURITIES AND EX-

CHANGE COMMISSION

JUNE 26, 2007

SPEAKERS: REP. BARNEY FRANK, D-MASS. CHAIR-

MAN REP. PAUL E. KANJORSKI, D-PA. REP. MAXINE

WATERS, D-CALIF. REP. CAROLYN B. MALONEY, D-

N.Y. REP. LUIS V. GUTIERREZ, D-ILL. REP. NYDIA M.

VELAZQUEZ, D-N.Y. REP. MELVIN WATT, D-N.C. REP.

GARY L. ACKERMAN, D-N.Y. REP. JULIA CARSON, D-

IND. REP. BRAD SHERMAN, D-CALIF. REP. GREGORY

W. MEEKS, D-N.Y. REP. DENNIS MOORE, D-KAN. REP.

MICHAEL E. CAPUANO, D-MASS. REP. RUBEN

HINOJOSA, D-TEXAS REP. WILLIAM LACY CLAY, D-

MO. REP. CAROLYN MCCARTHY, D-N.Y. REP. JOE

BACA, D-CALIF. REP. STEPHEN F. LYNCH, D-MASS.

REP. BRAD MILLER, D-N.C. REP. DAVID SCOTT, D-GA.

REP. AL GREEN, D-TEXAS REP. EMANUEL CLEAVER

II, D-MO. REP. MELISSA BEAN, D-ILL. REP. GWEN

MOORE, D-WISC. REP. LINCOLN DAVIS, D-TENN. REP.

ALBIO SIRES, D-N.J. REP. PAUL W. HODES, D-N.H.

REP. KEITH ELLISON, D-MINN. REP. RON KLEIN, D-

FLA. REP. TIM MAHONEY, D-FLA. REP. CHARLIE

WILSON, D-OHIO REP. ED PERLMUTTER, D-COLO.

App. 2

REP. CHRISTOPHER S. MURPHY, D-CONN. REP. JOE

DONNELLY, D-IND. REP. ROBERT WEXLER, D-FLA.

REP. JIM MARSHALL, D-GA. REP. DAN BOREN, D-

OKLA.

REP. SPENCER BACHUS, R-ALA. RANKING MEMBER

REP. RICHARD H. BAKER, R-LA. REP. DEBORAH

PRYCE, R-OHIO REP. MICHAEL N. CASTLE, R-DEL.

REP. PETER T. KING, R-N.Y. REP. ED ROYCE, R-CALIF.

REP. FRANK D. LUCAS, R-OKLA. REP. RON PAUL, R-

TEXAS REP. PAUL E. GILLMOR, R-OHIO REP. STEVEN

C. LATOURETTE, R-OHIO REP. DONALD MANZULLO,

R-ILL. REP. WALTER B. JONES, R-N.C. REP. JUDY

BIGGERT, R-ILL. REP. CHRISTOPHER SHAYS, R-

CONN. REP. GARY G. MILLER, R-CALIF. REP. SHEL-

LEY MOORE CAPITO, R-W.VA. REP. TOM FEENEY, R-

FLA. REP. JEB HENSARLING, R-TEXAS REP. SCOTT

GARRETT, R-N.J. REP. GINNY BROWN-WAITE, R-FLA.

REP. J. GRESHAM BARRETT, R-S.C. REP. RICK RENZI,

R-ARIZ. REP. JIM GERLACH, R-PA. REP. STEVE

PEARCE, R-N.M. REP. RANDY NEUGEBAUER, R-

TEXAS REP. TOM PRICE, R-GA. REP. GEOFF DAVIS, R-

KY. REP. PATRICK T. MCHENRY, R-N.C. REP. JOHN

CAMPBELL, R-CALIF. REP. ADAM H. PUTNAM, R-FLA.

REP. MICHELE BACHMANN, R-MINN. REP. PETER

ROSKAM, R-ILL. REP. KENNY MARCHANT, R-TEXAS

WITNESSES: CHRISTOPHER COX, CHAIRMAN,

SECURITIES AND EXCHANGE COMMISSION

PAUL ATKINS, COMMISSIONER, SECURITIES AND

EXCHANGE COMMISSION

ROEL CAMPOS, COMMISSIONER, SECURITIES AND

EXCHANGE COMMISSION

ANNETTE NAZARETH, COMMISSIONER, SECURI-.

TIES AND EXCHANGE COMMISSION

KATHLEEN CASEY, COMMISSIONER, SECURITIES

AND EXCHANGE COMMISSION

_—

App. 3

[*} FRANK: The hearing of the Committee on Financial

Services will convene. I am very pleased, along with the

ranking members and the others, to welcome all five

commissioners.

* * *

PRYCE: Real time? All right. Thank you. Would you like

to comment at ail — in some of the opening statements, we

heard mention of the amicus brief filed by the SEC. My

time’s expired?

FRANK: Yes, but make it the last question, and get a

quick answer.

PRYCE: It’s the last question. Do you want to comment

on that now? Or would you rather have a more pointed

question?

COX: Well, I need a more pointed question just to know

which amicus brief you're talking about.

FRANK: Go ahead and point.

PRYCE: All right. The Stoneridge case amicus brief.

Thank you.

COX: All right. The Stoneridge case — and you can get a

variety of opinions here, because as you know that was

three-to-two vote. But the Stoneridge case was very

similar to a prior case that the SEC had considered in

2004 called Homestore. It was my view, and it is my view

generally with respect to decisions that are recently taken

by the SEC, that precedent matters. And because

Homestore and Stoneridge were very much on all fours

with one another, I thought it important for the SEC to be

consistent and be clear on these points.

App. 4

As I mentioned in my opening statement, I don’t believe

that SEC rules or policies and so on should be so efferves-

cent as to change with one or two people coming on board.

It would be awfully nice if the regulatory process were

sufficiently transparent that people would know what to

expect. And I think this is doubly so when what we're

doing is trying to interpret law, what law means. Law has

to have some objective meaning. It can’t be just a question

of how we all feel about it.

So the SEC, having voted in 2004, just one year before I

arrived on this very point, I thought it important for us to

be consistent. And I should point out that that 2004 vote

was not a three-to-two vote. It was a unanimous vote of

the SEC.

PRYCE: Thank you.

Thank you, Mr. Chairman.

/” * ~

FRANK: The gentleman from Illinois.

May I just ask to the commissioners, I’m very grateful. I

know we’ve been here three hours. We only have a few

members who’ve been very faithful. And I think we can

clean this up in about a half hour or so, if that’s possible.

And I'd very much appreciate your indulgence. And I think

we want to be respectful of the members who stay.

The gentleman from Illinois. Thank you.

MANZULLO (?): Thank you, Mr. Chairman.

Long-time listener, first-time caller this afternoon. Mr.

Chairman, this past week, I’ve been to two baseball games

out at RFK. I saw the Nationals lose to the Detroit Tigers

App. 5

last night — far more exciting game, the congressional

game. And I paid a lot of attention to the umpires when

they were there. And it strikes me that your demeanor

today, transitioning from your role as a policymaker to

your role now is really — you're calling balls and strikes.

And I noticed in the earlier conversation that you had with

Mr. Kanjorski from Pennsylvania, your careful use of

language. And I mean that respectfully — not parsing use

of language, but careful use of language — how you charac-

terize the American economy as robust and dynamic and

so forth, and that you’d sign on to that characterization.

But you also said hey, there’s more opportunity for us to

improve.

You also used that same admonition to the Congress

about, well, let’s make sure that there’s a sense of equity

between public company taxation and private company

taxation or private equity taxation. And of course people

like me, we all tend to hear in your words what we want to

hear. And I think that you'll probably see quotations later

on about how we've interpreted what you’ve said in differ-

ent debates. And in the months to come we'll all recollect,

well, we had Chairman Cox here. And he said — and we'll

have different recollections of that.

But one of the things that is interesting to me is your high

view of what you didn’t say, but I think is the doctrine of

stare decisis and your decision to move forward with the

request in the Stoneridge case, to move forward with the

amicus brief request and so forth. Can you just give me your

thinking on that? Was that a decision that was, look, I’ve got

this new role. And stability is very, very important here. And

I understand that thinking. Or, alternatively, do you believe

first and foremost that animating the plaintiffs’ bar in this

App. 6

class action type of environment helps the SEC to do its

enforcement? Or is there some rationale in between there?

COX: Well first, thank you for your compliment. And I

think your interpretation of what I’ve been attempting to

get across here today is fairly accurate, including the

priority that I place on predictability in rulemaking and

enforcement from Securities and Exchange Commission. I

think it is absolutely vitally important that our actions be

noble in advance. Otherwise, there is not law, but some-

thing else — a lot of government power being exercised

arbitrarily.

I don’t think that there’s anywhere where it could be more

important for there to be predictability and clarity in

rulemaking than when it comes to our capital markets,

because so much is at stake that people have to make big

bets on whether or nov what they’re doing is the right

thing to do. And then they got it wind up the right way. So

I think we do a great disservice when we are anything but

clear and predictable, rule-based and law-based.

Now, that’s not to say that this was an easy case, or that

there was an automatic outcome. I think you also put your

finger on the fact that sometimes getting it right means

undoing what you’ve done once before. And so I did not

reflexively follow the unanimous decision of 2004, but

rather looked carefully at what was before me.

The staff recommended that the Commission request the

solicitor general’s office to file an amicus curiae brief, as

you know, in support of the plaintiffs in Stoneridge. The

Commission, on May 29 and 30, voted — because we have a

seriatim process; it occurred over two days — voted to

approve that recommendation. | think it is probably not

App. 7

well-known that there were two parts to that recommen-

dation in support of the plaintiffs. And on one point, the

Commission was unanimous.

So I think all of us paid a great deal of attention to, as you

put it, stare decisis. And all of us also paid a good deal of

attention to whether or not we had it exactly right. We

came out slightly differently as commissioners — well

exactly opposite in the end. Although these are closer calls

than, as you know, when you push the red button and

green button, you’re completely one way. That doesn’t

mean it’s always easy. But I think everyone here, which-

ever way they decided that case — and they’re all here, so

you can ask them - but I think everyone here is concerned

that litigation be used to proper ends; and that we to open

a Pandora’s Box and so on. What is going on in that case,

though is that we are focused on when conduct is fraudu-

lent, and whether conduct can be fraudulent. The commis-

sioners believe it can. And also the circumstances of a

particular case and whether or not that case should go

forward.

So I hope that provides a little bit more context to...

FRANK: Mr. Manzullo (ph), I just would add, the gen-

tleman commented on the precision of the chairman’s

language. Those of us who served with him can tell you

that there was nothing new about his being very precise in

his language. We remember similar precision when he was

here; probably because when he was here, precision in

language stood out by contrast.

The gentleman from North Carolina.

* * *