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

FILED

32 | AUG 15 2007

No. 06-43 | OFFICE OF THE CLERK

SUPREME COURT, U.S.

IN THE

Supreme Court of the Gnited 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 OF MERRILL LYNCH & CO., INC.

AS AMICUS CURIAE IN SUPPORT OF

RESPONDENTS

DICK THORNBURGH*

PAUL GONSON

GLENN R. REICHARDT

KIRKPATRICK & LOCKHART

PRESTON GATES ELLIs LLP

1601 K Street, N.W.

Washington, D.C. 20006

(202) 778-9000

Counsel for Amicus Curiae Merrill Lynch & Co., Inc.

August 15, 2007 *Counsel of Record

WILSON-EPES PRINTING CO., INC. — (202) 789-0096 — WASHINGTON, D.C. 20002

TABLE OF CONTENTS

Page

INTEREST OF AMICUS CURIAE ...........c0ccccscsssseeeeesees l

STATEMENT OF THE CASE. .............ccccssccscssecsessenseess 2

SUMMARY OF ARGUMENT......0.......ccccccesseeeeeeeeeeee 11

TT sciiiiikesntinitctitsincnhicduiicitinigininasninebiiaieitanbiiiian 12

I. THE COURT SHOULD IGNORE THE

REGENTS’ IMPROPER SUGGESTION

THAT THIS COURT DECIDE THIS CASE IN

A WAY THAT ASSURES THE REGENTS OF

A VICTORY IN ENRON ...0.0....cccccssceessssscessssseceeees 12

Il. ENRON ILLUSTRATES FUNDAMENTAL

FLAWS IN “SCHEME” LIABILITY

Fe itecncrecienhicianpnisiitytstiinaiainninniinetinensinenecnades 13

A. Enron Illustrates That “Scheme”-Liability

" Lacks A Workable Theory Of What

Constitutes “Deception” By Commercial

IE ceirecsipssicinceepininnitepiiitinstatininieiavideunsoien 15

B. Enron Ulustrates That, Contrary To Central

Bank, “Scheme” Liability Does Not Satisfy

The Other Requirements For Primary

Liability, Including Reliance and Loss

nee a iehiccatidiinniitipinnnitnitatidibthicbtgidlitnnminadininepieic 18

C.

E.

TABLE OF CONTENTS-Continued

i I I i itealliaiaciaciae 22

Enron Illustrates That The Gravamen Of A

“Scheme” Liability Claim Is Nothing More

Than “Aiding and Abetting” With A

RII eicsisiiacitsasleiuanlininbitioniindnteddinedenianeien 23

Enron Illustrates That Private “Scheme”

Liability Claims, Such As Those Made In

This Case, Are Incompatible With The

Express Private Causes Of Action In The

II ccrcicciinciincsmipnitsnlindestubiisinpanteeetenete 24

Enron Mlustrates The Reality That

Commercial Counterparties Are Subject To

Numerous Deterrents And Remedies That

Make Unnecessary A New Private Cause of

I SD cccctessiccesinibisttedaccttinvcnenttsisin 26

SR IIIIT conscnicscersnnescsnesssntensnseemnsaseenenenimennencininte 29

iil

TABLE OF AUTHORITIES

Cases: Page

In re Adelphia Commc'ns Corp. Sec. & Derivative

Litig., No. 03-CV-5750/5751, 2005 U.S. Dist.

LEXIS 43300 (S.D.N.Y. 2006).........cccccccsseeeeeeeeeeees 25

Arthur Andersen LLP v. United States, 544 U.S.

ERE SENS Pernice Rae non aoe a 13

Bangor Punta Operations, Inc. v. Bangor &

Aroostook R.R. Co., 417 U.S. 703 (1974)................. 26

Blue Chip Stamps v. Manor Drug Stores, 421

ee aihicisioteesiensiciniisinhtvaiinenttinnsesisnitatatnsnnecees 26, 27

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

Bank of Denver, N.A., 511 U.S. 164 (1994) ..... passim

Chiarella v. United States, 445 U.S. 222 (1980) ...16, 19

Citizens Against Rent Control/Coal.- for Fair

Hous. v. City of Berkeley, CA, 454 U.S. 290

Dinsmore v. Squadron, Ellenoff, Plesent,

Sheinfeld & Sorkin, 135 F.3d 837 (2d Cir.

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

Litig., 439 F. Supp. 2d 692 (S.D. Tex. 2006) ........... 17

iv

TABLE OF AUTHORITIES—Continued

Page

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

Litig., No. MDL-1446, 2005 WL 1798423

CB BE TI, Gee ceepencnnvecetesniectenrenvenceesonunesie 17

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

Litig., No. H-01-3624, 2006 U.S. Dist. LEXIS

43146 (S.D. Tex. June 5, 2006) ........... ce eeeeeceeeeeeees 16

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

Sarai sccibsesceicibiadeinniibiaepieeemsnesiibiaaiaiiuieiainlibeciaibeiadéiedbia 26-27

Filler v. Hanvit Bank, 156 F. App’x 413 (2d Cir.

TEE ascressennrchtsncpibinisanesinninsoaniesimaiiacbpiinimnlassininniiniil 20

Glaser v. Enzo Biochem, Inc., 126 F. App'x 593,

599 (4tn Cir. 2005), cert. denied, 127 S. Ct.

| ___, SE en RENN NNT 22

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

Feet. eee necscnnciecenevinentduiensnenasoniineineniieabiiinatiiiiabidaia 22

Heit v. Weitzen, 402 F.2d 909 (2d Cir. 1968)............... 25

Lattanzio v. Deloitte & Touche LLP, 476 F.3d

147 (2d Cir. 2007)..........0000. ssenineacieniiaianminniaiobanaal 20

In re MDC Holdings Sec. Litig., 754 F. Supp. 785

GD. GR Te ctcrccevccnnsepsnsnieseststneincinnasiaiiiidiiinia 25

Mertens v. Hewitt Assocs., 508 U.S. 248 (1993).......... 13

O'Melveny & Myers v. FDIC, 512 U.S. 79 (1994)....... 13

TABLE OF AUTHORITIES-Continued

Page

Pinter v. Dahl, 486 U.S. 622 (1988) .00.......cccccceeeeeeeeee 16

Ray v. Citigroup Global Mkts., Inc., 482 F.3d 991

A 20

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

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

2007), petition for cert. filed (Apr. 5, 2007)

ESR 16

Rodriguez de Quijas v. Shearson/American

Express, Inc., 490 U.S. 477 (1989) .00......cccceceeeeeeeeeeees l

Santa Fe Indus., Inc. v. Green, 430 U.S. 462

TET iidiciieidddeliiitiadiadinabichdbdidenbaeenidibdeddeentineneencencs 14, 28

Shearson/American Express, Inc. v. McMahon,

Ee l

Southland Sec. Corp. v. INSpire Ins. Solutions

Inc., 365 F.3d 353 (Sth Cir. 2004) 00.00.00... ccceeseeeeenees 14

Ultramares Corp. v. Touche, 255 N.Y. 170, 174

lat tia tileirrieicetncpcinmerreyerecs 27

United States v. Brown, 459 F.3d 509 (Sth Cir.

Sis descebdeditbsieeibdaiennetertsiiincnidnccptesinitinenectenrvenseecert 4,8

United States vy. O'Hagan, 521 U.S. 642 (1997).......... 22

vi

TABLE OF AUTHORITIES-—Continued

Page

Statutes, Regulations, and Rules:

i ee 25

ERE RS oF eso ee 25

I ao sciitcinetsihieniniintictiie i paeeiaeee 25

I scinictinsiiniiaddiianiiecaaaeaall 26

I iileitniininiretil sie ee 25

I... ccnicnintntteiamiinindaa passim

OTB Oi ocireccsscxscenecstnrscertiratiamataal 25

RG iinnisicsnccennnisevicisninicsiaiiitasis iia 25

OI a iecitinistinniitiiiciindiaiaidintei Te 25

a. sisisisscsicatiienitinmsintinaidaieemaial 25

Ce 27

I cciecicsrsintnivitiaitiitaateapsinaaiecen a 25

SP ee Oe Se PUN cnrnsnnnscnncitncesiniisicassndentiseatiniibebtied 20

Vii

TABLE OF AUTHORITIES-Continued

Miscellaneous:

Charles McFadden, “UC joins federal class-action

Suit against Enron executives” (Jan. 7, 2002),

available at http://www.ucsc.edu/

currents/O 1 -02/01-07/enron. html .................cc0eceeeeees 10

Complaint, SEC v. Merrill Lynch & Co., Inc., et

al., No. H-03-0946 (S.D. Tex. Mar. 2003),

available at http://www.sec.gov/litigation/

complaints/comp | 8038. HtM................csccsecsseeseeseneees 8

148 CONG. REC. $6584 (daily ed. July 10, 2002).........28

H.R. CONF. REP. No. 104-369 (1995), as

reprinted in 1995 U.S.C.C.A.N. 730 .........ceccceseeeeees 27

H.R. REP. NO. 107-414 (2002) .........:c.cccescesseesseseceeseenes 28

SEC, 2006 Performance and Accountability

Report 23 (Nov. 2006), available at

http://www.sec.gov/about/secpar2006.shtml............ 27

SEC Press Release, “SEC Charges Merrill Lynch,

Four Merrill Lynch Executives with Aiding and

Abetting Enron Accounting Fraud” (Mar. 17,

2003), available at

http://www.sec.gov/news/press/2003-32.htm......... 8,9

S. REP. No. 104-98 (1995), as reprinted in 1995

aE CIE cncricintscnnenpssitininmnnbadiniantiginancinntinniies 28

INTEREST OF AMICUS CURIAE'

Merrill Lynch & Co., Inc. (“Merrill Lynch”) is a diversified

financial services company with over 60,000 employees

worldwide. Merrill Lynch has previously filed amicus briefs

in other cases before this Court that involved the federal

securities laws or that affected the securities industry,

including Dura Pharmaceuticals, Inc. v. Broudo, 544 U.S.

336 (2005); Rodriguez de Quijas v. Shearson/American

Express, Inc., 490 U.S. 477 (1989); and Shearson/American

Express, Inc. v. McMahon, 482 U.S. 220 (1987). Merrill

Lynch is filing this amicus brief principally to respond to the

amicus brief of the Regents of the University of California

(“the Regents”), which have separately filed a petition for

certiorari that apparently is being held pending the disposition

of this case. See Regents of the Univ. of Cal. v. Merrill

Lynch, Pierce, Fenner & Smith, Inc., No. 06-1341 (“Enron”),

petition for cert. filed (Apr. 5, 2007). Merrill Lynch is one of

the respondents in the Enron case.

This brief does not propose to address every issue or

argument in this case. Respondents and other amici will do

that. This brief focuses on two points. First, it responds to

the Regents’ improper suggestion that the Court’s decision in

this case should be guided by the potential-consequences of

‘that decision on the parties in Enron. Second, Enron

illustrates a number of critical flaws in expanding the implied

cause of action under §10(b) of the Securities Exchange Act

' Pursuant to this Court’s Rule 37.6, amicus curiae states that no

counsel for any party authored this brief in whole or in part, and no person

or entity other than amicus curiae made a monetary contribution to the

preparation or submission of this brief.

Pursuant to Rule 37.3, amicus curiae states that petitioner and

respondents have consented to the filing of this brief. Petitioner has filed

with the Clerk of the Court a letter granting blanket consent to the filing of

amicus briefs, and a letter reflecting the consent of respondents to the

filing of this brief has been filed with the Clerk.

2

of 1934 (“Exchange Act”), 15 U.S.C. §78j(b), to include

“scheme” liability.” These flaws include that “scheme”

liability has no workable theory for what constitutes

deception by commercial counterparties; does not satisfy

other requirements for primary liability, such as reliance, loss

causation, and the requirement in §10(b) that the deception be

“in connection with” the purchase or sale of a security; is

incompatible with the express causes of action in the

securities statutes; and is unnecessary to deter wrongdoing by

commercial counterparties. Regarding this last point, Merrill

Lynch notes that it has paid a total of $109 million in cash to

the U.S. Securities and Exchange Commission ("SEC”) and

to Enron’s bankruptcy estate, nearly eight times more than it

earned from its allegedly improper transactions with Enron.

STATEMENT OF THE CASE

Rather than present a traditional statement about the facts in

this case, which will be thoroughly set forth by the

respondents, Merrill Lynch provides a short summary of facts

conceming the Enron case, in order to respond to

misstatements and mischaracterizations in the Regents’ brief.

This is a prelude to our later demonstration that how the

decision in this case may impact Enron is not relevant to the

legal issues presented in this case. See infra, at 12-13.

Indeed, it was improper for the Regents to suggest that the

Court should consider the Enron case in deciding the legal

issues before it in this case given that the Court does not

decide cases that are not before it, nor does the Court interpret

? As used throughout this brief, the phrase “‘scheme’ liability” refers to

a theory of implied private civil liability under §10(b) invented by

resourceful plaintiffs’ class action counsel to ensnare defendants, such as

commercial counterparties, that have made no misrepresentations to the

market and had no duty to make disclosures to the issuer's investors. See,

e.g., Br. of Ohio, et al., as Amicus Curiae in Support of Petitioner at iii

(defining Question Presented as: “Whether shareholders can recover

damages from actors . . . even when the actor has made no false statement

Or Omission and otherwise owes no fiduciary duty to the shareholders.”’).

3

Statutes, such as the Exchange Act, or the elements of an

eee cause of action, such as under §10(b), in an effort to

favor parties in othér cases.

The Regents’ brief contains numerous factual

misstatements or mischaracterizations about the Enron case

that are contradicted by findings of federal judges and the

Enron bankruptcy examiner, who reviewed the relevant

factual records. The Regents’ brief also omits critical facts

about the Enron transactions that involved Merrill Lynch,

ignores the significant payments that Merrill Lynch already

has made in connection with those transactions, and grossly

exaggerates the impact of Merrill Lynch’s alleged conduct on

investors and on the Regents’ beneficiaries. Without

addressing all of the Regents’ factual misstatements and

omissions, Merrill Lynch notes the following:

1. The Regents’ rhetorical references to “the worsi

securities fraud in recent history,” Regents’ Br. at 5, should

not obscure the fact that the Regents’ claims against Merrill

Lynch principally concern only three transactions that had a

relatively insignificant impact on Enron’s financial statements

(see infra, at 21 n.6). Judicial decision makers in the Enron

litigation have characterized these transactions much

differently than have the Regents. The three transactions are:

(1) Merrill Lynch’s purchase of an interest in three barge-

mounted power plants in Nigeria (the “barge” transaction);

(2) Enron’s purchase and sale of energy options from Merrill

Lynch (the “energy option” transactions); and (3) the LJM2

limited partnership (“LJM2”), in which Merrill Lynch was

one of 47 passive investors.

a. In 1999, Enron sold Merrill Lynch an interest in

barges from which power was to be generated and sold to the

Nigerian government. Enron, which initiated the transaction,

booked approximately $12 million in income as a result of

that sale to Mernll Lynch. Six months later, Merrill Lynch

sold its interest in the Nigerian barges to LJM2. The

Government claimed that Enron had booked profits on the

4

original sale to Merrill Lynch in order to inflate its reported

revenues for 1999, but should not have done so because

Enron had guaranteed that it would get Merrill Lynch out of

the barge transaction within six months. The Government

criminally charged certain former Merrill Lynch employees,

who had participated in the barge transaction with Enron’s

Chief Financial Officer, Andrew Fastow, with aiding and

abetting Enron’s fraud.

Concurring in the Fifth Circuit's reversal of the criminal

conviction of the former Merrill Lynch employees, Judge

DeMoss disagreed with the Government’s characterization of

the barge transaction as a “sham” and concluded that any

“wrong arising from [the transaction] . . . would be in Enron’s

employees’ reporting of the transaction . . . not in the manner

in which Merrill's employees negotiated the deal.” United

States v. Brown, 459 F.3d 509, 536 (Sth Cir. 2006) (DeMoss,

J., concurring in part and dissenting in part) (emphasis

added). In support of this conclusion, Judge DeMoss noted

that:

(1) Fastow himself averred to the Government that

he, in fact, made only assurances of best efforts to

Merrill, not promises or guarantees to take Merril!

out of the deal; and (2) in conformance with the

written agreement, Merrill actually paid $7 million

to Enron, consistent with its purchase of an interest

in the barge partnership investment, and therefore

had absolutely no legally enforceable claim to be

taken out of the deal.

Id. This analysis of the barge transaction by Judge DeMoss is

completely at odds with the Regents’ sweeping and

unspecified allegations about “fake” transactions and “secret

oral guarantees” by unspecified Enron “Banks.” See Regents’

Br. at 10-11.

5

b. At Enron’s suggestion, Merrill Lynch entered into a

series of call options that involved the purchase and sale of

electricity. Large energy trading companies often engage in

such transactions. See Dep. Tr. of Gary W. Dorris at 132:17

to 133:18 and 150:10-21. Enron booked a profit as a result of

its energy option transactions with Merrill Lynch, with the

approval of its auditors, Arthur Andersen. The only relevant

dispute about the energy option transactions is whether

Merrill Lynch faced risk with regard to those transactions.

The Regents’ own expert conceded that “risk” was “borne

by Merrill Lynch and Enron as a result of these energy

trades.” See Washer Decl. Ex. 2 (in support of SJ motion),

Dep. Tr. of Joel Finard at 199:5-9. Merrill Lynch set aside

reserves in connectior. with these transactions, a practice that

indicates that Merrill Lynch believed at the time that the

trades presented risk. See Washer Decl. Ex. 22, Dec. 1999

Reserves Explanations, MLNBY 0924434. In addition,

another Regents’ expert conceded that Merrill Lynch entered

into hedges in connection with the energy transactions. Hakki

Decl. Ex. D, Dep. Tr. of Saul Solomon at 760:4-7. Hedges

typically were used because a transaction presented risk. /d.

at 760:8-19.

c. LJM2 was an investment fund with 47 limited partner

investors, including Merrill Lynch. Merrill Lynch also

participated in a syndicate loan to LJM2 and acted as private

placement agent for LJM2. Enron’s bankruptcy examiner,

Neal Batson, concluded that Merrill Lynch’s involvement in

LJM2 did not provide a basis for a claim against it of aiding

and abetting Enron’s officers in breaching their fiduciary

duties, noting that he had

discovered no evidence to date that would indicate

Merrill Lynch had any role in the day-to-day

operations of LJM2 or in the selection or approval

of the transactions entered into by LJM2. Rather,

Merrill Lynch’s role appears to have been limited

6

to that of a private placement agent and a passive

limited partner/investor.

Washer Decl. Ex. 16, Appendix I to Third Interim Report of

Neal Batson, Court-Appointed Examiner, Jn re Enron Corp.,

No. 01-16034 (Bankr. S.D.N.Y.) at 46 (June 30, 2003)

(“Batson Report’). Similarly, there have been no enforcement

or criminal proceedings concerning Merrill Lynch's role in

LJM2.

2. To the extent that the Regents have asserted that

Merrill Lynch and other Banks “designed,” “devised,”

“structured” or “contrived” various Enron transactions (see

Regents’ Br. at 2, 4, 6, 10-11, 29), those allegations (at least

insofar as they relate to Merrill Lynch) are contradicted by the

findings of Enron’s bankruptcy examiner.

The examiner ‘specifically found that “the evidence

indicates that Enron designed the Nigerian Barge

transaction” and “that Merrill Lynch was not involved in

structuring the Nigerian Barge transaction.” Batson Report at

30-31 (emphasis added). The examiner also found that

“Enron designed the electricity trade transactions” and that

“Merrill Lynch’s only involvement in structuring the deal

appears to have been its negotiation of the amount of its fee.”

Batson Report at 42. Finally, as previously noted, the

examiner specifically found “no evidence to date that would

indicate Merrill Lynch had any role in the day-to-day

operations of LJM2 or in the selection or approval of the

transactions entered into by LJM2.” Batson Report at 46.

The Regents rely principally upon incomplete and

misleading snippets of testimony from Mr. Fastow, who

became the Government’s star witness after pleading guilty to

> Like the bankruptcy examiner, the district judge at the Enron barge

criminal trial found that executives of Enron, rather than former

employees of Merrill Lynch, were the “organizers, leaders, manager(s),

and supervisors” of the barge transaction. Hakki Decl. Ex. A, Bayly

Sentencing Tr. at 24:14-21.

7

felony charges. See Regents’ Br. at 11-12. But even

Mr. Fastow’s testimony concerning transactions _ that

specifically involved Merrill Lynch shows that Merrill

Lynch did not design or devise those transactions:

a. With respect to the barge transaction, Mr. Fastow

agreed that “it was someone at Enron, rather than Merrill

Lynch, who came up with the idea of having Merrill Lynch

purchase that barge interest.” Dep. Tr. of Andrew Fastow at

1311. Mr. Fastow also could not dispute the fact that “Merrill

Lynch played no role in preparing the actual accounting

entries regarding the barge transaction that flowed into

Enron’s 1999 financial statements.” Fastow Dep. Tr. at 1314.

b. Mr. Fastow’s testimony is that he “created” the

LJM2 partnership entity “with my limited partners and

accountants and attorneys.” Fastow Dep. Tr. at 1071. Mr.

Fastow also testified that LJM2’s structure was legal and it

was Only his subsequent misuse of the partnership in certain

transactions that was improper. Fastow Dep. Tr. at 1076

(“my personal opinion is that the LJM entities were legal, but

that some of the things I did with LJM were not legal”).

Significantly, Mr. Fastow agreed that Mermill Lynch had no

role in selecting LJM2’s investments or in structuring the _ .

individual transactions in which the LJM2 partnership

invested or participated. Fastow Dep. Tr. at 1357-58 (Merrill

Lynch did not “bring[] any of these investment opportunities

to LJM2,” did not “recommend{] that LJM2 participate in

these transactions,” nor did it “actually structure any of the

transactions”). It was Mr. Fastow’s staff at LJM2, “primarily

working with people at Enron,” who “identified these

oppor unities and brought them to the LJM2 limited partners

as prospective investments.” Fastow Dep. Tr. at 1370.

3. The Regents assert that “Banks reaped huge profits”

by participating in the alleged scheme that they will retain

unless private civil class action plaintiffs can sue them under

§10(b). See Regents’ Br. at 5. This assertion certainly does

8

not apply to Merrill Lynch. Merrill Lynch earned a total of

approximately $14 million from the allegedly improper Enron

transactions (approximately $775,000 from the barge

transaction, approximately $8.5 million from the energy

option transactions, and approximately $5 million from

LJM2). See Brown, 459 F.3d at 516 (“Merrill made $775,000

on its investment in the barges”); “SEC Charges Merrill

Lynch, Four Merrill Lynch Executives with Aiding and

Abetting Enron Accounting Fraud” (Mar. 17, 2003), available

at http://www.sec.gov/news/press/2003-32.htm (“SEC Press

Release”) (“Merrill Lynch agreed to reduce its fee to $8.5

million to terminate the [energy option] transaction’);

MLNBY 0050806 (Merrill Lynch’s fees on the LJM2

transaction were “approximately $5 million”).

In other proceedings, Merrill Lynch already has paid $109

million — nearly eight times more than the $14 miltion it

earned — to resolve claims related to these transactions with

Enron. In 2003, the SEC brought a complaint against Mernill

Lynch and four former employees for aiding and abetting

Enron’s violations of the federal securities laws in connection

with the barge and energy option transactions. See

Complaint, SEC v. Merrill Lynch & Co., Inc., et al., No. H-

03-0946 (S.D. Tex. Mar. 2003), available at

http://www.sec.gov/litigation/complaints/comp18038.htm

(asserting claims against the Merrill Lynch defendants for

aiding and abetting Enron’s violations of §§10(b), 13(a), and

13(b) of the Exchange Act and related rules). Merrill Lynch,

without admitting or denying the SEC’s allegations, paid the

SEC $80 million in disgorgement, penalties, and interest to

settle that case. See SEC Press Release. These funds were to

be distributed to investors in accordance with the Fair Fund

provisions of the Sarbanes-Oxley Act of 2002. /d.

In agreeing to resolve the matter on these terms, the SEC

expressly noted that it

took into account certain affirmative conduct by

Merrill Lynch. Merrill Lynch terminated [two

9

employees] after they refused to testify before the

staff and instead asserted their Fifth Amendment

rights. In addition, Merrill Lynch brought the

energy trade transaction to the staff's attention at a

time when it believed the staff was unaware of its

existence.

Id.

In addition, in the Enron bankruptcy proceeding, Merrill

Lynch paid the Enron estate approximately $29.5 million to

seitle claims brought against it for its role in the barge, energy

option, and LJM2 transactions.

Thus, when the Regents’ inflamed rhetoric is stripped away

and contrasted with the neutral assessments of the Enron

bankruptcy examiner and federal judges, the facts that emerge

are that: (1) Merrill Lynch played a minor role in a small

number of the many transactions that Enron initiated, and

(2) Merrill Lynch has been held fully accountable for that role

through administrative and bankruptcy proceedings that have

required Merrill Lynch to pay many times more than the

amounts that Merrill Lynch earned on the barge, energy

option and LJM2 transactions with Enron.

Despite these facts, the Regents are suing Merrill Lynch for

approximately $40 billion, an amount that is nearly 3000

times as large as those earnings. This can hardly be

characterized as “disgorgement” of Merrill Lynch’s profits,

but is merely an effort to extort huge sums of money from a

deep-pocket defendant because the true malefactors went

bankrupt, lost their assets to Government seizures, or had

inadequate insurance. See Regents’ Br. at 5 (discussing

Enron’s bankruptcy, the collapse of its accountants, limited

insurance, and Government seizure of key insiders’ assets).

4. The Regents make an emotional appeal that the Court

should decide this case in a way that would advantage the

“thousands of investors” who lost “billions of dollars” in the

collapse of Enron. See Regents’ Br. at 5. But the suggestion

10

that Enron investors suffered harm caused by Merrill Lynch's

conduct has been rejected in other contexts. For example, at

the criminal sentencing of the former Merrill Lynch

employees who were convicted of aiding Enron’s fraud.

arising from the barge transaction, the court, using a loss

causation standard based on Dura Pharmaceuticals, Inc. v.

Broudo, 544 U.S. 336 (2005), concluded that “[nJo loss or

intended loss can be proved to [be] reasonably estimate[d] in

this case.” Bayly Sentencing Tr. at 16-17 (noting “the

Government’s inability to prove economic loss or loss

causation in a conventional manner”). The court found that

only “$0.01 per share putative earnings” were derived by

Enron from the barge transaction, which was dwarfed by

Enron’s 1999 earnings per share of approximately $1.10 and

its $44 share price at the time of the transaction. /d. at 18.

5. Finally, the Regents’ brief grossly exaggerates the

extent to which their pension and endowment funds have

‘ suffered losses because of the collapse of Enron. See

Regents’ Br. at 1, 2, 6 n.8. Given that the Regents oversee a

highly diversified institutional portfolio, the aggregate impact

of Enron losses on their portfolio’s value and performance

was, by the Regents’ own admission, relatively small.

Charles McFadden, “UC joins federal class-action suit against

Enron executives,” at 2 (Jan. 7, 2002), available at

http://www.ucsc.edu/currents/O 1-02/01-07/enron.htm!

(quoting the Regents’ treasurer as stating that, even with the

Enron losses, the “University of California Retirement Plan{]

equity portfolio recorded a return of 7.70 percent [for 2001],

which was within 0.08 percent of its performance

benchmark.”). In particular, the Regents stated that their

Enron losses “in no way affect[ed] the ability of the

retirement plan... to meet its obligations to [its]

beneficiaries.” Id.

11

SUMMARY OF ARGUMENT

1. It is improper for the Regents to ask this Court to

decide this case purposefully to dictate a victory for the

Regents in Enron. This Court only decides the case before it

and this Court has not granted certiorari in Enron. More

generally, this Court decides legal issues of statutory

interpretation and determines the elements of private civil

liability based on neutral legal principles, not to assure

favorable outcomes for certain parties.

2. Enron illustrates several legal flaws that require

rejection of “scheme” liability:

(a) “Scheme” liability lacks a workable theory of what

constitutes deception by commercial counterparties. The fact

that the district court in Enron repeatedly flip-flopped on

whether particular defendants and transactions fell within the

reach of “scheme” liability demonstrates this point.

(b) The Court’s decision in Central Bank of Denver, N.A. v.

First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994),

requires that the particular defendant’s device or contrivance

satisfy all elements of primary liability under §10(b). But in

Enron, as in this case, plaintiffs have improperly sought to

--use “scheme” liability to avoid dealing with key elements of a

claim under §10(b), including reliance and loss causation.

(c) No matter what label is chosen by plaintiffs’ class action

counsel, the core of “scheme” liability is assisting the issuer's

misstatement. That is aiding and abetting.

(d) Contrary to Central Bank, “scheme” liability under

§10(b) would improperly expand the defendant class for Rule

10b-5 actions “beyond the bounds delineated for comparable

express causes of action,” Sil U.S. at 180, in particular

§18(a) of the Exchange Act. The Regents did not sue Merrill

Lynch under §18(a) because it could not satisfy the elements

of that express cause of action.

12

(e) Because other potent remedies are available, “scheme”

liability is not needed to deter potential wrongdoing by

commercial counterparties. This is illustrated by the fact that

Merrill Lynch has paid $109 million to the SEC and Enron’s

bankruptcy trustee. In 1995, Congress decided to create an

express action that allowed the SEC, but not private plaintiffs,

to sue secondary actors. This dichotomy was “a deliberate

congressional choice with which the courts should not

interfere.” Central Bank, 511 U.S. at 184.

ARGUMENT

. THE COURT SHOULD IGNORE THE REGENTS’

IMPROPER SUGGESTION THAT THIS COURT

DECIDE THIS CASE IN A WAY THAT ASSURES

THE REGENTS OF A VICTORY IN ENRON.

The Regents suggest that, in deciding whether there is an

implied cause of action for “scheme” liability in this case, the

Court should consider how that decision would impact the

ability of the Regents to prevail in Enron. Regents’ Br. at 5,

21. This suggestion is improper and is contrary to this

Court’s well-established practice.

The Court has not granted certiorari in the Enron case.

Thus, in this case, the Court does not have before it either the

voluminous Enron record (the appellate record alone exceeds

39,000 pages) or any arguments particular to Enron. After

the Court announces the legal rule in this case, it can, if it

chooses, address the petition being held in Enron.

As the Regents should be aware, this Court does not decide

cases that are not before it and there is no reason to expect the

Court to depart from that practice here. See Citizens Against

Rent Control/Coal. for Fair Hous. v. City of Berkeley, CA,

454 U.S. 290; 299 n.6 (1981) (rejecting position that “argues

a case not before the Court”). Moreover, this Court

repeatedly adopts legal rules and renders legal decisions

without regard to the media attention a particular case

13

receives. For example, despite the publicity associated with

Enron’s collapse, when this Court adjudicated a prior Enron-

related case, it unanimously reversed a criminal conviction.

See Arthur Andersen LLP vy. United States, 544 U.S. 696

(2005).

Contrary to the Regents’ preference, in cases such as this,

which require interpretation of “enormously complex and

detailed statute[s] that resolve{] innumerable disputes

between powerful competing interests,” the Court does not

merely resolve all questions “in favor of potential plaintiffs.”

Mertens v. Hewitt Assocs., 508 U.S. 248, 261-62 (1993).

This Court has repeatedly adhered to neutral legal principles

dictated by the rule of law, even when substantial financial

crises have given rise to improper requests that the federal

courts consciously establish pro-plaintiff rules. See, e.g.,

O'Melveny & Myers v. FDIC, 512 U.S. 79, 88 (1994) (“Our

cases have previously rejected ‘more money’ arguments

remarkably similar to the one made here.”).

Il. ENRON ILLUSTRATES FUNDAMENTAL FLAWS

IN “SCHEME” LIABILITY THEORIES.

Enron illustrates the fact that the petitioner’s “scheme”

liability theory is unworkable and fatally flawed. This is

significant because petitioner’s amici repeatedly suggest that

Enron is the paradigm for how “scheme” liability should

work. If Enron is the paradigm, then the conclusion is

inescapable that “scheme” liability theories are nothing more

than dangerous vehicles for allowing clever and resourceful

plaintiffs’ class action lawyers artfully to recast aiding and

abetting claims for exorbitant civil damages against

commercial counterparties that played minor roles in

transactions mischaracterized by others.

At the outset, it is important to note that Merrill Lynch is

being sued for “scheme” liability in Enron because of its

14

commercial activities. * Any commercial company can buy or

sell an asset (a barge) or a commodity hedge (an energy

option). Thus, if Merrill Lynch’s commercial activity is a

basis for dragging it into a private §10(b) lawsuit about

another company’s securities, then any commercial

counterparty, with hindsight, is potentially subject to a private

§10(b) civil claim about another company’s securities if it

should later turn out that the company engaged in a fraud.

This Court has rejected expansions of implied private civil

liability under Rule 10b-5 that “could not be easily

contained.” Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 478

(1977).

Aware of these troubling implications of their “scheme”

liability theory, the Regents seek to obscure the problem by

suggesting that an implied private cause of action for

“scheme” liability is necessary in Enron to hold Merrill

Lynch and other Banks responsible for statements made by

their employees when commenting on Enron’s stock in

analyst reports. See Regents’ Br. at 6, 25 n.29, 30.

The Regents misleadingly fail to disclose that the district

court, which favored “scheme” liability, nonetheless

dismissed §10(b) claims that were premised on statements of

research analysts — on the entirely independent ground that

the Regents had not alleged that the specific employees

associated with the analyst reports had acted with scienter.

See Enron Pet. App. 230a-231la; Southland Sec. Corp. v.

INSpire Ins. Solutions Inc., 365 F.3d 353, 366 (Sth Cir. 2004)

* Because §10(b) makes it “unlawful for any person ...(tJo use or

employ ... any manipulative or deceptive device,” 15 U.S.C. §78)(b)

(emphasis added), §10(b) liability turns on the activities of the defendant,

not whether the defendant is denominated “a lawyer, accountant, or bank,”

or anything else. Central Bank, 511 U.S. at 191. Thus, what matters for

purposes of analyzing the Regents’ “scheme” claims in Enron is that the

Regents are suing Merrill Lynch for acting as a counterparty in a

commercial transaction, not because Merl] Lynch provided investment

banking or underwriting services.

15

(“For purposes of determining whether a statement made by

the corporation was made by it with the requisite Rule 10(b)

scienter we believe it appropriate to look to the state of mind

of the individual corporate official or officials who make or

issue the statement . . . rather than generally to the collective

knowledge of all the corporation’s officers and employees

acquired in the course of their employment.”). After that

ruling, the Regents also stopped pursuit of another §10(b)

claim against Merrill Lynch based on its underwriting

activities. The Regents did not cross-appeal the district

court’s scienter ruling to the Fifth Circuit, or even mention

the dismissal of their analyst claims in the court of appeals.

The respondents in Enron pointed out all this in their

opposition to the Regents’ petition for certiorari. See Brief in

Opposition, Regents of the Univ. of Cal. v. Merrill Lynch,

Pierce, Fenner & Smith, Inc., No. 06-1341, at 10-11 (June 1,

2007). The Regents did not respond to these points in their

reply brief. They simply cannot dispute that the Fifth

Circuit’s rejection of “scheme” liability in Enron occurred in

the context of Merrill Lynch’s commercial activities. The

Fifth Circuit’s decision does not immunize any entity from

private civil liability under §10(b) if, with scienter, it makes

material misstatements to the market, including as an analyst

or as an underwriter.

A. Enron Illustrates That “Scheme” Liability Lacks

A Workable Theory Of What Constitutes

“Deception” By Commercial Counterparties.

The Regents have conceded, in the questions presented in

their certiorari petition and in their amicus brief in this case,

that Merrill Lynch “itself made] no _ affirmative

misrepresentations to the market.” Enron Pet. at i; Regents’

Br. at i. Likewise, all the judges on the Fifth Circuit panel in

Enron and the Enron district court agreed that Mernll Lynch

owed no duty of disclosure to Enron shareholders given the

absence of any fiduciary or special relationship between

Merrill Lynch and those investors. Enron Pet. App. 15a,

4

16

123a.° Enron illustrates that even after six years of litigation,

“scheme” liability lacks a workable theory of what constitutes

deception by such a commercial counterparty. The Regents

note in passing that the district court in Enron spent five years

“refin[ing] its rulings regarding scheme liability to ‘tighten’

the standard.” Regents’ Br. at 6. This is an unavailing

attempt to put a positive spin on the fact that the district court

understandably was unable to apply the “scheme” liability

theory in a consistent and predictable manner.

Central Bank held that liability under §10(b) is “‘an area

that demands certainty and predictability.”” 511 U.S. at 188

(quoting Pinter v. Dahl, 486 U.S. 622, 652 (1988)). This is

because uncertainty drives up the costs of numerous

legitimate transactions and eliminates some altogether. See

511 U.S. at 188-89. Yet the record in the Enron case

graphically illustrates that “scheme” liability inevitably

creates “decisions ‘made on an ad hoc basis, offering little

predictive value’ to those who provide services.” Central

Bank, 511 U.S. at 188 (quoting Pinter, 486 U.S. at 652). For

example, the claims against Barclays in the Enron case

initially were upheld, then were dismissed, and then the

district court granted the Regents leave to replead those

* Commercial counterparties do not have a duty of disclosure with

respect to an issuer’s investors because “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) (referencing “the established doctrine that duty arises

from a specific relationship between two parties”). As both the Fifth

Circuit and the Enron district court agreed, Merrill Lynch and Enron's

investors were not “parties to a transaction,” and certainly were not in a

relationship of trust and confidence. Regents of the Univ. of Cal. v. Credit

Suisse First Boston (USA), Inc., 482 F.3d 372, 384 (Sth Cir. 2007); In re

Enron Corp. Sec., Derivative & “ERISA” Litig., No. H-01-3624, 2006

U.S. Dist. LEXIS 43146, at *101-02 (S.D. Tex. June 5, 2006). The Enron

case is a fortiori one without a duty because Merrill Lynch never engaged

in a securities transaction with Enron's investors and the investors were

not aware of the Merrill Lynch transactions with Enron.

17

claims (expressly subject to potential dismissal at the

summary judgment stage). The district court explicitly

attributed each change of decision to the difficulty of

assessing “scheme” liability of secondary actors. Enron Pet.

App. 678a; In re Enron Corp. Sec., Derivative & “ERISA”

Litig., 439 F. Supp. 2d 692, 713-16, 724 (S.D. Tex. 2006);

Enron Pet. App. 315a-320a. Indeed, the Regents conceded

the inherent uncertainty and shifting contours of “scheme”

liability in arguing that the district court should revive their

claims against Barclays:

In its current motion, Lead Plaintiff seeks “a fair

opportunity to plead this case in accordance with

the coalescing standard of scheme liability that is

to be ultimately applied in this matter” so as to

“avoid being caught unawares by refined rules

being articulated in the middle of briefing

dispositive motions and then applied to pleadings

that were crafted years before those rules were

refined... .”

Enron Pet. App. 315a (italics added, bold in original).

The district court in Enron also first dismissed, then

reinstated and then dismissed again the Regents’ claims

against Deutsche Bank, another counterparty that allegedly

participated in the same “scheme.” Enron Pet. App. 578a-

58la, 670a; Enron Pet. App. 333a, 344a-364a; In re Enron

Corp. Sec., Derivative & “ERISA” Litig., No. MDL-1446,

2005 WL 1798423, at *1-*3 (S.D. Tex. July 26, 2005); Exron

Pet. App. 284a-294a. The Deutsche Bank example is

particularly noteworthy because the district court dismissed

claims against Deutsche Bank relating to its involvement in

LJM2 on the ground that the allegations against Deutsche

Bank amounted to no more than aiding and abetting, even

though, unlike Merrill Lynch, Deutsche Bank (1) served on

LJM2’s advisory board with respect to LJM2’s ongoing

operations; and (2) structured transactions involving LJM2.

Enron Pet. App. 29la. Compare supra, at 7. The

18

inconsistency between the district court’s dismissal of the

claims against Deutsche Bank relating to LJM2 and the

Regents’ claims against Merrill Lynch for its more remote

association with LJM2 further demonstrates why the vague

and overbroad theory of “scheme” liability could never

provide the “certainty and predictability” required by Central

Bank.

B. Enron Illustrates That, Contrary To Central

Bank, “Scheme” Liability Does Not Satisfy The

Other Requirements For Primary Liability,

Including Reliance and Loss Causation.

Under Central Bank, the line between primary liability and

aiding and abetting requires that the defendant's own “device

or contrivance” satisfy all of the requirements for primary

liability. Central Bank states:

Any person or entity, including a _ lawyer,

accountant, or bank, who employs a manipulative

device or makes a material misstatement (or

omission) on wiich a purchaser or seller of

securities relies may be liable as a primary violator

under 10b-5, assuming all of the requirements for

primary liability under Rule 10b-5 are met.

511 U.S. at 191 (first emphasis added; second emphasis in

original). Accordingly, in order for a defendant to be liable as

a primary violator in a private §10(b) case, that defendant

must employ a deceptive device or contrivance that is itself

relied on by the plaintiff and that satisfies the other

requirements for §10(b) primary liability, including loss

causation. A plaintiff cannot mix and match the elements of

primary liability by relying upon the conduct of one

defendant for some elements and the conduct of another

defendant for other elements.

19

Thus, for example, a plaintiff cannot rely upon a device or

contrivance allegedly used by defendant A (e.g., an allegedly

misleading confirmation to auditors) to satisfy the deception

element of §10(b), with a different device or contrivance

(e.g., an allegedly misleading financial statement) used by

defendant B to satisfy the reliance or loss causation elements

of primary liability against defendant A. The Enron case

demonstrates that commercial counterparties do not satisfy all

of the requirements for primary liability under §10(b) in a

private civil case.

1. Reliance: As Central Bank held, when a private

plaintiff seeking “recovery under Rule 10b-5” cannot

establish that he or she relied upon the alleged misstatements

or omissions of a particular defendant, the claim against that

defendant is no more than a claim seeking to impose aiding

_ and abetting liability:

[R]espondents’ argument would impose 10b-5 aiding

and abetting liability when at least one element critical

for recovery under 10b-5 is absent: reliance. A plaintiff

must show reliance on the defendant’s misstatement or

Omission to recover under 10b-5. Were we to allow the

aiding and abetting action proposed in this case, the

defendant could be liable without any showing that the

plaintiff relied upon the aider and abettor’s statements

or actions. See also Chiarella [v. United States], 445

U.S. [222, 228 (1980)] (omission actionable only where

duty to disclose arises from specific relationship

between two parties). Allowing plaintiffs to circumvent

the reliance requirement would disregard the careful

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

511 U.S. at 180 (emphases added; citation omitted).

Even if a commercial counterparty were to participate in a

“sham” transaction that enabled an issuer to make a

misstatement to investors, a plaintiff could only establish that

he or she relied on the issuer’s misstatement and not on the

20

actions of the commercial counterparty. For example, in

Enron, the Regents’ claim against Merrill Lynch is premised

on the plaintiffs’ reliance on the financial statements of the

issuer, Enron. See Enron Pet. at 25 (asserting reliance

because the market “was impacted by the company’s falsified

financial statements”). This is an aiding and abetting claim

barred by Central Bank’s requirement that the plaintiffs

demonstrate “reliance on the defendant's misstatement or

omission.” 511 U.S. at 180 (emphasis added); see Wright v.

Ernst & Young LLP, 152 F.3d 169, 173-76 (2d Cir. 1998)

(because investors relied on the issuer’s statements, not on the

defendant’s false but undisclosed statement, defendant's

Statement constituted aiding and abetting, not primary

liability); Filler v. Hanvit Bank, 156 F. App’x 413, 415 (2d

Cir. 2005) (same ruling applied to bank’s undisclosed “sham”

transaction and to “false loan confirmations” sent to the

issuer’s auditor).

2. Loss Causation: The Private Securities Litigation

Reform Act of 1995 (“PSLRA”) requires that “the act or

omission of the defendant alleged to violate this title caused

the loss” for which the plaintiffs seek damages. 15 U.S.C.

§78u-4(b)(4) (emphasis added). Once again, Enron illustrates

that “scheme” liability for a commercial counterparty does

not satisfy “all of the requirements for primary liability.”

Central Bank, 511 U.S. at 191 (emphasis in original).

As Dura Pharmaceuticals holds, loss causation requires

that the issuer’s stock price declined because of the revelation

of the defendant’s deceptive act or omission. 544 U.S. at 344;

see also Ray v. Citigroup Global Mkts., Inc., 482 F.3d 991,

995 (7th Cir. 2007) (“plaintiffs must show both that the

defendants’ alleged misrepresentations artificially inflated the

price of the stock and that the value of the stock declined once

the market learned of the deception”) (emphasis added);

Lattanzio v. Deloitte & Touche LLP, 476 F.3d 147, 158 (2d

Cir. 2007) (plaintiffs failed to allege loss causation because

they “have not alleged facts to show that Deloitte's

21

misstatements, among others (made by Warnaco) that were

much more consequential and numerous, were the proximate

cause of plaintiffs’ loss”) (emphasis added).

As the district court in the Enron barge criminal case ruled,

no loss caused by Merrill Lynch’s conduct could be proved

under the Dura standard. See supra, at 10. In the Enron civil

case, the plaintiffs’ experts testified that they did not isolate

any stock price decline caused by revelation of Merill

Lynch’s transactions, as opposed to revelation of far broader

misstatements and omissions by Enron. E.g., Appellants’

Record Excerpt No. 11 before the Fifth Circuit at 30973-74

(“Sth Cir. R.E.”), Dep. Tr. of Scott D. Hakala at 63, 254; 5th

Cir. R.E. No. 10 at 30978, 30986, Dep. Tr. of Blaine F. Nye

at 540-43, 584-86.° Enron’s statements and omissions,

however, were not “the act or omission of the defendant”

from which the Regents seek to recover, i.e., Merrill Lynch,

which the PSLRA requires the Regents to show in order to

establish loss causation as to Merrill Lynch.

It is not surprising, therefore, that the Regents are pursuing

a “scheme” liability claim against Merrill Lynch that, they

argue, permits loss causation based upon the “conduct of

other scheme participants about which [Mernll Lynch] knew

nothing.” Enron Pet. App. 194a (emphasis added). That

approach, however, flies in the face of the PSLRA’s loss

causation requirement and with Central Bank. It suggests that

the courts should create an implied cause of action for

conspiracy to violate §10(b), which is directly contrary to the

° The Regents’ accounting expert conceded that the challenged Enron

transactions that involved Merrill Lynch had only a negligible impact on

Enron’s financial results. Specifically, he concluded that the barge and

energy option transactions accounted for only $7 million of Enron’s

$12.87 billion in misstated debt (approximately five one-hundredths of a

percent), $62 million of the $3.28 billion im misstated income

(approximately 1.89%), and none of the misstated cash flow (0%). Sth

Cir. R.E. No. 6 at 31036-37, 31040-43, excerpts from the February 22,

2006 Supplement to the Expert Report of Saul Solomon.

22

uniformly accepted view that under Central Bank there can be

no such cause of action. See, e.g., Dinsmore v. Squadron,

Ellenoff, Plesent, Sheinfeld & Sorkin, 135 F.3d 837, 842 (2d

Cir. 1998) (concluding that Central Bank precludes

conspiracy liability under §10(b)); Glaser v. Enzo Biochem,

Inc., 126 F. App’x 593, 599 (4th Cir. 2005), cert. denied, 127

S. Ct. 1876 (2007) (same); Jn re GlenFed, Inc. Sec. Litig.., 60

F.3d 591, 592 (9th Cir. 1995) (same).

3. “In Connection With”: Section 10(b) applies to a

particular defendant only if that defendant used or employed

a deceptive device or contrivance * ‘in connection with” the

purchase or sale of a security.’ In United States v. O'Hagan,

this Court held that §10(b)’s “in connection. with”

requirement is satisfied only when the consummation of the

particular defendant’s fraud and “[tj]he securities

transaction ... coincide.” 521 U.S. 642, 656 (1997).

Assuming, for the sake of argument, that a commercial

counterparty’s participation in an undisclosed transaction can

constitute a “deceptive device or contrivance,” that

counterparty’s conduct stops at that transaction and thus does

not “coincide” with any securities transaction. There are at

least three intervening steps between the counterparty’s

conduct and any securities transaction. The first is that the

issuer has to prepare false financial statements. The second is

that the auditor has to certify those financial statements. The

third is that the false financial statements have to be circulated

to the public. The “in connection with” requirement would

not be satisfied if a commercial counterparty engaged in a

“sham” transaction but the issuer ultimately accounted for

that transaction properly or never circulated financial

statements that were affected by that transaction. See

O’Hagan, 521 U.S. at 656 (the “fraud is consummated .. .

’ See §10(b) (“It shall be unlawful for any person ...[t]o use or

employ, in connection with the purchase or sale of any security... , any

manipulative or deceptive device or contrivance . . . .”) (emphasis added).

23

when . . . the information [is used] to purchase or sell

securities”).

This example demonstrates that the counterparty’s liability

under the Regents’ “scheme” theory depends on and derives

from the statements and actions of the issuer. That, in a

nutshell, reduces the Regents’ claim to nothing more than a

claim of aiding and abetting.

C. Enron. Illustrates That The Gravamen Of A

“Scheme” Liability Claim Is Nothing More Than

“Aiding and Abetting”’ With A Different Label.

As previously discussed, the Regents’ assertion that Merrill

Lynch and other Banks “designed,” “devised,” “structured” or

“contrived” the Enron transactions (Regents’ Br. at 2, 4, 6,

10-11, 29) is demonstrably false insofar as those allegations

are made against Merrill Lynch. See supra, at 6-7.

Moreover, the Regents’ rhetorical flourishes illustrate the

lengths to which resourceful plaintiffs’ lawyers will go to

avoid the words aid, abet, or assist. Regents’ choice of verbs

is part of an effort to rewrite §10(b) to reach aiding and

abetting. None of the verbs proposed by the Regents is in

§10(b). The statute makes it unlawful to “use or employ. . .

any manipulative or deceptive device or contrivance,” not to -

“design “or devise” a deceptive device or contrivance. 15

U.S.C. §78j(b)(emphasis added). The Regents canm« change

the scope or meaning of the statutory prohibition by changing

the nouns “device” and “contrivance” into verbs, or by

choosing other verbs that suit their goals better than “use or

employ.” See Central Bank, 511 U.S. at 175 (“the statutory

text controls the definition of conduct covered by §10(b)”).

Nor is “designed” or “devised” a synonym for “used” or

“employed.” For example, Hillerich & Bradsby designs the

Louisville Slugger baseball bats used by 60% of major league

players. But it is the players, not the manufacturer, who use

or employ the bats.

24

Most important, the gravamen of any claim that a

commercial counterparty improperly “designed” a

commercial transaction is that the counterparty “aided” or

“assisted” the issuer in its efforts to issue false financial

Statements. Thus, whether a counterparty “designed” or

merely “participated in” an improper transaction, a plaintiff

could not establish key elements of a §10(b) claim against

that counterparty, such as reliance or loss causation, by

pointing to the counterparty’s conduct (as opposed to the

issuer’s alleged misstatements).

Regardless of which label is used to describe a

counterparty’s responsibility for an allegedly deceptive

transaction (i.e., that the counterparty “designed” or

“contrived” that transaction), the plaintiffs’ §10(b) claim

would fail because the counterparty (1) made no

misstatements to the market and had no duty to make

disclosures to the issuer’s investors; (2) the plaintiffs’ loss

causation theory would be improperly based on the acts or

omissions of the issuer and not on the acts or omissions of the

counterparty; and (3) the counterparty’s conduct would not

have coincided with a securities transaction. As a result,

commercial counterparties should not be subject to primary

private civil liability under §10(b) regardless of the verb

choice of plaintiffs’ class action counsel.

D. Enron Illustrates That Private “Scheme”

Liability Claims, Such As Those Made In This

Case, Are Incompatible With The Express

Private Causes Of Action In The Securities

Statutes.

In Central Bank, this Court held that the line between

aiding and abetting and primary liability must be carefully

defined to ensure that §10(b) private civil liability does not

“expand the defendant class for 10b-5 actions beyond the

bounds delineated for comparable express causes of action.”

511 U.S. at 180. Section 18(a) of the Exchange Act expressly

imposes liability on a defendant that “cause[d] to be made” a

j

25

misstatement by another party, but expressly requires not only

that the plaintiff “purchased or sold a security at a price which

was affected by such statement” but additionally that the

plaintiff made that purchase or sale “in reliance upon such

Statement” and that plaintiffs loss was caused by the

defendant's actions. 15 U.S.C. §78r(a).

Petitioner concedes that a “scheme” liability claim is one

against “persons who caused misrepresentations to be made.”

Pet. Br. at 30. Regents and petitioner, however, did not and

* could not sue under §18(a) because their “fraud on the

market” allegations do not satisfy §18(a)’s requirement that

the plaintiffs individually relied upon the defendants’ alleged

misstatements.® E.g., Heit v. Weitzen, 402 F.2d 909, 916 (2d

Cir. 1968); In re Adelphia Commc'ns Carp. Sec. & Derivative

Litig., No. 03-CV-5750/5751, 2005 U.S. Dist. LEXIS 43300,

at *31 (S.D.N.Y. 2006); In re MDC Holdings Sec. Litig., 754

F. Supp. 785, 798 (S.D. Cal. 1990).

Thus, Enron illustrates that a claim that a commercial

counterparty, such as Merrill Lynch or the respondents in this

case, “caused” the misstatements of an issuer would often fall

“beyond the bounds” of §18(a) liability. Central Bank, 511

U.S. at 180. Accordingly, the same claim shovld fail under

§10(b). Otherwise, “the defendant class for 10b-5. actions”

* None of the express causes of action available under the federal

securities laws, including claims under §§11 and 12 of the Securities Act

of 1933 (“Securities Act”), 15 U.S.C. §§77k, 77/, and §§9, 16(b), 18 and

20A of the Exchange Act, 15 U.S.C. §§78i, 78p(b), 78r, 781-1, allows

recovery on the basis of “scheme” liability. Nor do the “control person”

provisions in §15 of the Securities Act, 15 U.S.C. §770, and in §20 of the

Exchange Act, 17 U.S.C. §78t. Taken together, the absence of “scheme”

liability in these express causes of action suggests that Congress did not

intend for there to be any form of derivative or secondary liability under

§10(b) for persons who did not themselves use or employ a deceptive or

manipulative device or contrivance, except for persons who “control”

those who did.

26

would expand “beyond the bounds delineated for comparable

express causes of action.” 511 U.S. at 180.

E. Enron Illustrates The Reality That Commercial

Counterparties Are Subject To Numerous

Deterrents And Remedies That Make

Unnecessary A New Private Cause of Action

Under §10(b).

The sum of $109 million paid by Merrill Lynch illustrates

that the absence of §10(b) private civil liability for

commercial counterparties does not mean that they “get away

with” participating in deceptive transactions. They are

subject to a variety of express SEC claims, including under

§20(e) of the Exchange Act for aiding and abetting. See also

§17(a) of the Securities Act, 15 U.S.C. §77q (authorizing

SEC action against “scheme” participants). They and their

employees are subject to federal and state criminal

investigation and prosecution. They may be subject to state

common law claims for aiding and abetting, where such

claims are recognized, and they are subject to enforcement

proceedings by state attorneys general.

In any event, this Court has rejected arguments that it

should expand the scope of the §10(b) implied cause of action

based on policy arguments about deterrence. See, ¢.g.,

Central Bank, 511 U.S. at 188-90; Bangor Punta Operations,

Inc. v. Bangor & Aroostook R.R. Co., 417 U.S. 703, 717

(1974) (“If deterrence were the only objective, then in logic

any plaintiff willing to file a complaint would suffice. No

injury or violation of a legal duty to the particular nase

would have to be alleged.”).

Similarly, this Court has repeatedly expressed “concern that

the inexorable broadening of the class of plaintiffs who may

sue in this area of the law will ultimately result in more harm

than good.” Blue Chip Stamps v. Manor Drug Stores, 421

U.S. 723, 747-48 (1975); accord Est & Ernst v. Hochfelder,

27

425 U.S. 185, 214 n.33 (1976). In Blue Chip Stamps, the

Court recognized and approved the admonition of Chief

Judge Cardozo in Ultramares Corp. v. Touche, 255 N.Y. 170,

174 N.E. 441 (1931), that courts should hesitate to allow

claims that create “a liability in an indeterminate amount for

an indeterminate time to an indeterminate class.” 421 U.S. at

747-48.

Most importantly, after Central Bank, Congress refused to

expand the private right of action to deter misconduct by

secondary actors. Both the SEC and the private plaintiffs’ bar

asked Congress to overrule Central Bank and extend private

civil liability under §10(b) to secondary actors. In enacting

the PSLRA in 1995, Congress chose to provide the SEC, but

not private plaintiffs, with the ability to pursue secondary

actors, as the SEC did in Enron.

In the PSLRA, Congress specifically granted the SEC

authority to bring actions in federal district court for aiding

and abetting violations of §10(b) by providing that, in actions

brought by the SEC, “any person that knowingly provides

substantial assistance to another person in violation of a

provision of this chapter, or of any rule or regulation issued

under this chapter, shall be deemed to be in violation of such

provision to the same extent as the person to whom such

assistance is provided.” 15 U.S.C. § 78t(e) (emphases added).

Since 2002, the SEC has used its aiding and abetting and

other enforcement authority to recover approximately $8

billion for distribution to investors. SEC, 2006 Performance

and Accountability Report 23 (Nov. 2006), available at

ttp://www.sec.gov/aboul/ sht

Congress concluded that allowing §10(b) claims by private

plaintiffs against secondary actors would undermine the

PSLRA’s goal of reducing meritless lawsuits. See H.R.

CONF. REP. No. 104-369 (1995), as reprinted in 1995

U.S.C.C.A.N. 730. The Senate Report summarized the

resolution that was codified:

28

The Committee considered testimony endorsing the

result in Central Bank and testimony seeking to

overturn this decision. The Committee believes

that amending the 1934 Act to provide explicitly for

private aiding and abetting liability actions under

Section 10(b) would be contrary to S. 240's goal of

reducing meritless securities litigation. |The

Committee does, however, grant the SEC express

authority to bring actions seeking injunctive relief

or money damages against persons who knowingly

aid and abet primary violators of the securities

laws.

S. REP. No. 104-98, at 19 (1995) (emphasis added), as

reprinted in 1995 U.S.C.C.A.N. 679, 698.”

This Court has emphasized that any decision to expand

§ 10(b) private civil liability must be left to Congress. Central

Bank, 511 U.S. at 176-78, 188-90; Santa Fe Indus., 430 U.S.

at 479-80. “The fact that Congress chose to impose some

forms of secondary liability, but not others, indicates a

deliberate congressional choice with which the courts should

not interfere.” Central Bank, 511 U.S. at 184.

* After Enron collapsed, Congress, in the Sarbanes-Oxley Act of 2002,

modified the Exchange Act in several respects, but Congress again

declined to extend private civil liability to aiders and abettors,

notwithstanding arguments to do so. See H.R. REP. NO. 107-414, at 54

(2002); 148 CONG. REC. S6584 (daily ed. July 10, 2002).

29

CONCLUSION

The decision of the court of appeals should be affirmed.

Respectfully submitted,

DICK THORNBURGH*

PAUL GONSON

GLENN R. REICHARDT

KIRKPATRICK & LOCKHART

PRESTON GATES ELLIs LLP

1601 K Street, N.W.

Washington, D.C. 20006

(202) 778-9000

Counsel for Amicus Curiae Merrill Lynch & Co., Inc.

August 15, 2007 *Counsel of Record