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

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07a # is) FILED |

45 :

35%e No. o. JUN 1 1 2007

OFFICE OF THE CLERK

nee SUPREME COURT, U.S. _

Supreme Court of the United States

STONERIDGE INVESTMENT PARTNERS, LLC,

Petitioner,

v

SCIENTIFIC-ATLANTA, INC. and MOTOROLA, INC.,

Respondents.

On WRIT OF CERTIORARI TO THE

Unitep STATES COouRT OF APPEALS FOR THE EIGHTH CIRCUIT

Brief oF THE New York State TEACHERS’ RETIREMENT

SYSTEM, THE RETIREMENT SYSTEMS OF ALABAMA, THE

SACRAMENTO County EMPLOYEES’ RETIREMENT SYSTEM, AND

THE GOVERNMENT OF GUAM RETIREMENT FUND AS

Amici CuRIAE tN SUPPORT OF PETITIONER

Max W. BERGER

Counsel of Record

SALVATORE J. GRAZIANO

JoHN C. BROWNE

E.uiott J. WEIss

Jal K. CHANDRASEKHAR

BERNSTEIN LITOWITZ

BERGER & GROSSMANN LLP

1285 Avenue of the Americas

New York, New York 10019

(212) 554-1400

Counsel for Amici Curiae

(Additional Counsel Listed on Signature Page)

June 11, 2007

i

TABLE OF CONTENTS

TABLE OF CITED AUTHORITIES ............

INTEREST OF AMICICURIAE ..............:

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

SED ec byeuacbeudeenonacasduseseces

I.

Il.

iil.

THE PLAIN LANGUAGE OF SECTION

10(b) AND RULE 10b-5 IMPOSES

LIABILITY ON PERSONS WHO ENGAGE

IN MANIPULATIVE OR DECEPTIVE

DRVICBBQRACTS ......2.2...c000:.

THE COURT BELOW MISINTERPRETED

PP or ere

INNOCENT COUNTERPARTIES ARE

PROTECTED FROM LIABILITY UNDER

SECTION 10(b) BECAUSE THEY DO NOT

USE OR EMPLOY MANIPULATIVE OR

DECEPTIVE DEVICES AND BECAUSE

TBR © ACR, DUTIN ES oc ccc ccc ccccees

ET 644 snWhCede de wecessagueeteus’s

Page

il

TABLE OF CITED AUTHORITIES

Page

CASES

Affiliated Ute Citizens v. United States,

ee ce cuted ce ewe eks 8,9

Basic Inc. v. Levinson,

ee ED bo ld bc écctandtenseenbe 13

Bateman Eichler, Hill Richards, Inc. v. Berner,

eer NE EEE 6 ov ka udeeveeeeiuccnaens 15

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

ee ee SE 6 on'b.h6 00060 5-0n0ssn40e" passim

In re Charter Communications, Inc.

Securities Litigation,

443 F.3d 987 (8th Cir. 2006) ............... 14, 15

Chiarella v. United States,

i a ee ee ta ay 10

Dura Pharmaceuticals, Inc. v. Broudo,

EE cndibigaedeceucsacesness 13

Ernst & Ernst v. Hochfelder,

SC co dacas ohwhaudbeedaeaen 7, 8,9

In re Homestore.com, Inc. Securities Litigation,

252 F. Supp. 2d 1018 (C.D. Cal. 2003),

rev'd, 452 F.3d 1040 (9th Cir. 2006) .......... 24-25

ill

Cited Authorities

Page

In re Mutual Funds Investment Litigation,

384 F. Supp. 2d 845 (D. Md. 2005) ........... 10

In re Parmalat Securities Litigation,

376 F. Supp. 2d 472 (S.D.N.Y. 2005) ..... 19, 23, 24

Ratzlaf v. United States,

PED cb 6 6 ce ba ewer edeoeeubes 9

Regents of the University of California

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

SEZ F.26 SFE COG, BOOT) vo cccccvcccseves 25, 26

SEC v. Capital Gains Research Bureau,

ree ll

SEC v. Zandford,

EE «i Gecko nnesddceveedwe passim

Santa Fe Industries, Inc. v. Green,

CPE oc cdepsncdsedsedcancseen 8

Simpson v. AOL Time Warner, Inc..,

452 F.3d 1040 (9th Cir. 2006) .............. passim

Superintendent of Insurance

v. Bankers Life & Casualty Co..,

EE éhvGaked phe seinbcasinwes 11,13

TRW Inc. v. Andrews,

ED G8 io S's hd oe net ean ee ewe i)

iv

Cited Authorities

United States v. Bongiorno,

No. 05 Cr. 390 (SHS), 2006 WL 1140862

PRM 6c bccccesecessssccce 10

United States v. O’ Hagan,

92 F.3d 612 (8th Cir. 1996),

og RE, rr 15

United States v. O’Hagan,

Se SA EE ENOOED oc scvccccnscvvvene 7, 8, 19, 20

Wharf (Holdings) Ltd.

v. United International Holdings, Inc.,

ee 21, 22

DOCKETED CASE

In re HealthSouth Corp. Bondholder Litigation,

No. 03-CV-1500 (N.D. Ala.) ................ 4

STATUTES, RULES,

AND LEGISLATIVE HISTORY

Securities Exchange Act of 1934 § 2,

3 Ee eee 11

Securities Exchange Act of 1934 § 10(b),

ee passim

Securities Exchange Act of 1934 § 21D(a)(3)(B)(vi),

15 U.S.C. § 78u-4(a)(3)(B)(vi) .........-..... 4

Vv

Cited Authorities

Page

Private Securities Litigation Reform Act of 1995,

PU hs DN MY 0 00's 0 00bensenduenedee passim

SEC Rule 10b-5, 17 C.F.R. § 240.10b-5 ........ passim

Conference Report on Securities Litigation Reform,

H.R. Rep. No. 369, 104th Cong.,

SB rere rey rere ree | 3,4, 15

OTHER AUTHORITIES

Gary W. Anderson & Keith Brainard, “Profitable

Prudence: The Case for Public Employer Defined

Benefit Pension Plans,” Pension Research Council

Working Paper 2004-6, The Wharton School,

University of Pennsylvania ................. 2

Taavi Annus, Scheme Liability Under § 10(b) of the

Securities Exchange Act of 1934, 72 Mo. L. Rev.

PL re ee 10

4 Alan R. Bromberg & Lewis D. Lowenfels,

BROMBERG & LOWENFELS ON SECURITIES FRAUD (2d

OE 6460066005 k6000kes eae 13

Daniel R. Fischel, Secondary Liability Under Section

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

Cab. bp TOs SUPERIOR 500065004 0enscaavens 17,19

vi

Cited Authorities

National Association of State Retirement

Administrators, “Key Facts Regarding State and

Local Government Defined Benefit Retirement

EE Tach cA ES eee ae a

Simpson v. Homestore.com, Inc., No. 04-55665, Brief

of the Securities and Exchange Commission,

Amicus Curiae, in Support of Positions That Favor

Appellant (9th Cir. Oct. 22, 2004) ............

Simpson v. Homestore.com, Inc., No. 04-55665,

Reply Brief of the Securities and Exchange

Commission, Amicus Curiae, in Support of

Positions That Favor Appellant (9th Cir. Feb. 4,

Peete eke eee nacdwsuenseceess

WEBSTER’S INTERNATIONAL DICTIONARY

Pct edageeeseesesececcececes

Page

I

INTEREST OF AMICI CURIAE'

This brief is filed by public pension systems who

purchase publicly traded securities on behalf of their

beneficiaries and, therefore, have a strong interest in the

proper interpretation of the securities laws. These investors

believe that Section 10(b) of the Securities Exchange Act of

1934 (“Exchange Act”) and Securities and Exchange

Commission (“SEC”) Rule 10b-5 should be interpreted in

accordance with their plain language and to achieve

Congress’s intent to permit investors to recoup their losses

caused by deceptive conduct in connection with purchases

and sales of securities from the perpetrators of the deceptive

conduct, deter future frauds, and maintain fair, honest, and

efficient capital markets.

Each year, amici invest billions of dollars in U.S. capital

markets on behalf of hundreds of thousands of beneficiaries.

The New York State Teachers’ Retirement System

(“NYSTRS”) has over $100 billion in assets as of March 31,

2007, of which over $67 billion is invested in domestic fixed

income and equity securities. NYSTRS is one of the ten

largest public retirement systems in the United States and

provides retirement benefits for approximately 264,000

active and 130,000 retired New York State public school

teachers and administrators. The Retirement Systems of

Alabama (“RSA”) manages 20 funds with aggregate assets

of over $30 billion as of September 30, 2006 for the benefit

1. This brief was not authored, in whole or in part, by counsel

for either party, and no person or entity other than amici and their

counsel contributed monetarily to the preparation or submission of

the brief. The parties have consented to the filing of this brief, and

copies of their consents are being filed herewith.

2

of approximately 213,000 active and 95,000 retired public

school teachers, State judges, and other employees of the

State of Alabama. Approximately 48% of RSA’s assets is

invested in domestic common and preferred stocks, and

approximately 20% in domestic bonds. The Sacramento

County Employees’ Retirement System (“SCERS”) has $5.8

billion in assets as of March 31, 2007, of which over $2.0

billion is invested in domestic equity securities and $1.3

billion in fixed income securities. SCERS provides retirement

benefits for more than 14,000 active and 5,000 retired

employees of Sacramento County, California. The

Government of Guam Retirement Fund is a $3.94 billion

pension plan for employees of the Government of Guam.

In the aggregate, state and local government pension plans

such as these cover more than 14 million workers and 6 million

retirees and other beneficiaries and have assets of more

than $2 trillion.” In 2005, investment earnings accounted for 74

percent of all public pension plan revenue and employer

(i.e., taxpayer) contributions for only 17 percent.’

The amici’s overriding responsibility is to invest for the

retirement and long-term security of their hundreds of

thousands of beneficiaries. As major investors with long-

term outlooks, the amici are vitally concerned with the proper

and efficient functioning of U.S. capital markets, and are

particularly concerned that investors not be harmed by illegal

2. See Gary W. Anderson & Keith Brainard, “Profitable Prudence:

The Case for Public Employer Defined Benefit Pension Plans,” Pension

Research Council Working Paper 2004-6, The Wharton School,

University of Pennsylvania, available at www.nasra.org/resources/

dbdcissues.htm (last visited on June 1, 2007).

3. See National Association of State Retirement Administrators,

“Key Facts Regarding State and Local Government Defined Benefit

Retirement Plans,” available at www.nasra.org/news/article.asp?

newsid=1!12 (last visited on June 1, 2007).

3

conduct affecting the market for publicly traded securities.

Many state and local governments are constitutionally

obligated to guarantee defined benefit retirement plans.

Therefore, investment losses due to securities fraud fall

directly on state and local governments and ultimately on

taxpayers. If public pension funds are prevented from

recovering money lost to securities fraud, the public will

suffer.

The recent scandals at companies such as Enron, WorldCom,

Global Crossing, Tyco, and McKesson-HBOC have unfortunately

shown that even large, well-known companies and their

business partners are not immune to the development of a

culture of greed which encourages short-sighted and ultimately

wrongful business practices and eventually results in billions, if

not trillions of dollars in losses to innocent investors. As investors

who have been materially harmed by corporate fraud, amici are

vitally concerned that the law allow injured investors to recover

from perpetrators of fraud.

The amici strongly believe that investors’ ability to

redress corporate wrongdoing through class and individual

actions under the securities laws is essential to deter improper

conduct and to recoup losses caused by fraud. Indeed, in

passing the Private Securities Litigation Reform Act of 1995,

Pub. L. No. 104-67 (“PSLRA”), Congress sought “to increase

the likelihood that institutional investors will serve as lead

plaintiffs,” based on its belief “that increasing the role of

institutional investors in class actions will ultimately benefit

shareholders and assist courts by improving the quality of

representation in securities class actions.” H.R. Conf. Rep.

104-369, 1995 U.S.C.C.A.N. 730, 732.4 Following the

4. The amici, as long-term investors, also have a strong interest

in preventing meritless, lawyer-driven litigation. As one of many

ways the PSLRA discourages meritless cases, the statute’s

(Cont'd)

4

passage of the PSLRA, the amici have served as lead

plaintiffs in cases resulting in substantial recoveries,

including Jn re HealthSouth Corp. Bondholder Litigation,

No. 03-CV-1500 (N.D. Ala.), in which Retirement Systems

of Alabama is the court-appointed lead plaintiff and has

achieved partial settlements totaling approximately $445

million from HealthSouth and other defendants. Retirement

Systems of Alabama is continuing to prosecute claims against

certain defendants, including “scheme liability” claims under

Rule 10b-5(a) and (c) against HealthSouth’s auditor and

underwriters for their allegedly knowing, deceptive conduct

in furtherance of the scheme to defraud HealthSouth

investors.

SUMMARY OF ARGUMENT

When a defendant knowingly engages in conduct that

has the principal purpose and effect of creating a false

appearance of fact about a public corporation’s business and

financial results in furtherance of a scheme to defraud the

corporation’s investors, the defendant’s acts fall squarely

within the express scope of Section 10(b) of the Exchange

Act and Rule 10b-5(a) and (c). See Simpson v. AOL Time

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

for certiorari filed sub nom. Avis Budget Group, Inc. v.

(Cont’d)

“professional! plaintiff’ provision bars a plaintiff from serving as

lead plaintiff in more than five actions filed within three years, except

as permitted by the court. See 15 U.S.C. § 78u-4(a)(3)(B)(vi).

Notably, Congress gave courts discretion to allow “[ijnstitutional

investors seeking to serve as lead plaintiff. . . to exceed this limitation

[because they] do not represent the type of professional plaintiff

this legislation seeks to restrict.” H.R. Conf. Rep. 104-369, 1995

U.S.C.C.A.N. 730, 734.

5

California State Teachers’ Retirement System, No. 06-560

(U.S. Oct. 19, 2006). Regardless of whether such a defendant

made a public statement concerning the deceptive transaction,

the defendant has engaged in deceptive conduct constituting

a primary violation of Section 10(b), which makes it unlawful

for “any person, directly or indirectly, . . . [t]o use or employ,

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

any manipulative or deceptive device or contrivance in

contravention of [Rule 10b-5].” 15 U.S.C. § 78}(b). Rule

10b-5, which is coextensive with Section 10(b), imposes

primary liability on persons who “directly or indirectly .. .

employ any device, scheme or artifice to defraud” or “engage

in any act, practice or course of business which operates or

would operate as a fraud or deceit upon any person, in

connection with the purchase or sale of a security.” 17 C.F.R.

§ 240.10b-5(a) and (c). To find otherwise — to immunize

parties who enter into sham transactions that have the

principal purpose and effect of artificially distorting a public

company’s financial statements — would be to rewrite and

unduly narrow both the statute and rule.

This Court’s precedents, including Central Bank, N.A.

v. First Interstate Bank, N.A., 511 U.S. 164 (1994), support

liability for such persons. Central Bank states that “any

person or entity, including a lawyer, accountant, or bank, who

employs a manipulative device or makes a material

misstatement (or omission) on which a purchaser or seller

of securities relies may be liable as a primary violator under

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

under Rule 10b-5 are met.” 511 U.S. at 191 (emphasis in

original). Central Bank’s holding “that a private plaintiff may

not maintain an aiding and abetting suit under § 10(b)” did

not eliminate primary liability for violations of Rule 10b-

5(a) and (c) and could not do so without ignoring the plain

6

language of the statute and reading subsections (a) and (c)

out of the rule. Post-Central Bank decisions of this Court

confirm that, in addition to making a material misstatement,

using a manipulative or deceptive device can give rise to

liability under Section 10(b) and Rule 10b-5. See, e.g.,

SEC v. Zandford, 535 U.S. 813, 815 (2002) (“Indeed, each

time respondent ‘exercised his power of disposition [of his

customers’ securities] for his own benefit,’ that conduct,

without more, was a fraud.”).

Construing Section 10(b) and Rule 10b-5 in accordance

with their plain language does not threaten to impose liability

for securities fraud on those who participate in legitimate

commercial transactions with public corporations.

A legitimate transaction becomes neither a “device, scheme

or artifice to defraud” under Rule 10b-5(a) nor an “act,

practice, or course of business which operates or would

operate as a fraud or deceit” under Rule 10b-5(c) simply

because a public corporation involved in the transaction

chooses to misrepresent that transaction in its financial

statements. A commercial counterparty is subject to scheme

liability under Rule 10b-S(a) and (c) only if the commercial

counterparty itself engages in deceptive conduct — i.¢., if the

principal purpose and effect of the counterparty’s own

conduct is to artificially distort the public corporation’s

financial statements or otherwise create a false appearance

about its business. A commercial counterparty that enters into

an inherently legitimate loan or other transaction with a

securities issuer does not engage in deceptive conduct, even

if the counterparty knows that the issuer plans to make false

statements about the transaction, so long as the principal

purpose and effect of the counterparty’s action is not to distort

the public company’s financial statements. In that

circumstance, the counterparty is at most an aider and abettor

7

and, as such, is not subject to liability for securities fraud.

See Simpson v. AOL Time Warner Inc., 452 F.3d at 1050.

The stringent pleading standards for allegations of fraud

under Rule 10b-5 further protect legitimate commercial

counterparties. In particular, plaintiffs must adequately allege

that the commercial counterparty acted with scienter under

the demanding pleading standard of the PSLRA.

ARGUMENT

I. THE PLAIN LANGUAGE OF SECTION 10(b) AND

RULE 10b-5 IMPOSES LIABILITY ON PERSONS

WHO ENGAGE IN MANIPULATIVE OR

DECEPTIVE DEVICES OR ACTS

“With respect. . . to the first issue, the scope of conduct

prohibited by § 10(b), the text of the statute controls [the

Court’s}] decision.” Central Bank, 511 U.S. at 173. This

Court’s “cases considering the scope of conduct prohibited

by § 10(b) in private suits have emphasized adherence to the

Statutory language, ‘[t]he starting point in every case

involving construction of a statute.” Jd. (quoting Ernst &

Ernst v. Hochfelder, 425 U.S. 185, 197 (1976); alteration in

Central Bank). Section 10(b) of the Exchange Act explicitly

delegates authority to the SEC to prescribe rules, “as

necessary or appropriate in the public interest or for the

protection of investors,” making it “unlawful for any person,

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

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

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

SEC has implemented Section 10(b) by adopting Rule 1 0b-

5, which is “coextensive with the coverage of § 10(b).” SEC

v. Zandford, 535 U.S. at 816 n.1 (citing United States y.

O'Hagan, 521 U.S. 642, 651 (1997), and Ernst & Ernst v.

8

Hochjelder, 425 U.S. at 214); see also Central Bank, 511

U.S. at 172 (“Rule 10b-5 . . . casts the prohibition in similar

terms” to Section 10(b)).

Rule 10b-S(a) makes it unlawful for “any person,”

“directly or indirectly,” to “employ any device, scheme, or

artifice to defraud.” This Court has held that “any

manipulative or deceptive device or contrivance” in Section

10(b) includes a “project,” “scheme” (including “a scheme

to deceive”), “stratagem,” “artifice,” and “plan,” Ernst &

Ernst v. Hochfelder, 425 U.S. at 199 n.20 (citing definitions

of “device” and “contrivance” from WEBSTER’s INTERNATIONAL

Dictionary (2d ed. 1934)), and that Section 10(b) applies to

“complex securities frauds” in which “there are likely to be

multiple violators,” Central Bank, 511 U.S. at 191. Rule 10b-

5(c) makes it unlawful for “any person,” “directly or

indirectly,” to “engage in any act, practice, or course of

business which operates or would operate as a fraud or deceit

”

upon any person. ...

The prohibitions of Section 10(b) and Rule 10b-S(a) and

(c) apply to conduct beyond the making of false statements

and misleading omissions, which are prohibited by Rule 1 0b-

5(b). As this Court has held, Section 10(b) also applies to

deceptive “practices,” Santa Fe Indus., Inc. v. Green, 430

U.S. 462, 475-76 (1977), deceptive “conduct,” id. at 475

n.15; O’Hagan, 521 U.S. at 659, and deceptive “acts,”

Central Bank, 511 U.S. at 173. “To be sure, the second

subparagraph of the rule [i.e., Rule 10b-5(b)] specifies the

making of an untrue statement of a material fact and the

omission to state a material fact. The first and third

subparagraphs [i.e., Rule 10b-5(a) and (c)] are not so

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

128, 152-53 (1972). Indeed, Rule 10b-5 forbids “any course

9

of conduct that has the effect of defrauding investors.” Ernst

& Ernst v. Hochfelder, 425 U.S. at 212. Section 10(b) and

Rulel0b-5’s “proscriptions, by statute and rule, are broad

and, by repeated use of the word ‘any,’ are obviously meant

to be inclusive.” Affiliated Ute Citizens, 406 U.S. at 151.

Were the Court to hold that a person who engages directly

or indirectly in conduct which has the primary purpose and

effect of creating a false appearance about an issuer’s business

and financial results is not a primary violator of Section 10(b)

and Rule 10b-5, the Court would effectively be eliminating

the express language “directly or indirectly ... to use or

employ ... any manipulative or deceptive device or

contrivance” from the statute, as well as reading subsections

(a) and (c) out of the rule. As the Court has often held, a

statute should not be construed in a way that renders some

of its provisions superfluous. See, e.g., TRW Inc. v. Andrews,

534 U.S. 19, 31 (2001); Ratzlaf v. United States, 510 U.S.

135, 141 (1994).

Zandford demonstrates that Rule 10b-5(a) and (c) are

indeed not superfluous. In that case, the Court held that a

broker’s course of conduct in selling his customers’ securities

in order to misappropriate the proceeds, without making any

misrepresentations actionable under Rule 10b-5(b),

constituted a fraudulent scheme under Rule 10b-5(a) and a

course of business that operated as a fraud under Rule 10b-

5(c): “Indeed, each time respondent ‘exercised his power of

disposition [of his customers’ securities] for his own benefit,’

that conduct, ‘without more, was a fraud.” 535 U.S. at 815

(emphasis added).° Similarly, a party who engages in

5. Respondents may seek to distinguish Zandford by arguing

that the broker’s liability in that case depended on his omission to

(Cont’d)

10

inherently deceptive transactions with a securities issuer —

transactions whose principal purpose and effect is to create

a false appearance about the issuer’s business and financial

results — engages in deceptive conduct that is designed to

and has the effect of defrauding investors. Such inherently

deceptive conduct by a “secondary” actor gives rise to

primary liability under Rule 10b-5(a) and (c). It differs from

aiding and abetting that does not itself involve deceptive

conduct by the secondary actor, such as making a legitimate

loan that the lender knows or believes the issuer intends to

account for improperly as equity. By contrast, aiding and

abetting a fraud by entering into a loan or other intrinsically

legitimate transaction should not be actionable under any

(Cont’d)

state material facts when he had a duty to disclose the truth to his clients.

See, e.g., Taavi Annus, Scheme Liability Under § 10(b) of the Securities

Exchange Act of 1934, 72 Mo. L. Rev. No. 3 (forthcoming), available

at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=980025, at *26

(“supporters of the restrictive view [of scheme liability] . . . claim that

the theory used in Zandford was based on a violation of a duty to disclose

(i.e. omission) on the part of the broker who had fiduciary duties towards

his client”). However, the Court’s opinion in Zandford describes

“conduct, ‘without more,” not “omissions,” as constituting the fraud,

535 U.S. at 821, and cases finding liability for deceptive conduct in the

absence of any disclosure are sometimes, like Zandford, based on Rule

10b-5(a) and (c), not Rule 10b-5(b), because Rule 10b-5(b) prohibits

omissions only when there is a duty to correct previous statements. See

Chiarella v. United States, 445 U.S. 222, 225 n.5 (1980); United States

v. Bongiorno, No. 05 Cr. 390(SHS), 2006 WL 1140862, at *7-9(S.D.N.Y.

May |, 2006). Thus, Zandford’s holding that conduct without more

constituted fraud did not depend on whether the broker had a duty to

disclose the truth to his clients. See also In re Mutual Funds Investment

Litig., 384 F. Supp. 2d 845, 855-62 (D. Md. 2005) (holding that brokerage

firms and investment funds that created and profited from scheme to

engage in late trading of mutual fund shares could be held liable under

Rule 10b-5 (a) and (c)).

1]

section of Rule 10b-5, even if the party entering into the

loan or other intrinsically non-deceptive transaction knows

or has reason to know that the issuer intends to make false

statements about the transaction.

This Court has consistently held that Section 10(b)

should be construed “‘not technically and restrictively, but

flexibly to effectuate its remedial purposes.’” Zandford, 535

U.S. at 819 (quoting SEC v. Capital Gains Research Bureau,

375 U.S. 180, 186 (1963)). One of Congress’s principal stated

purposes in enacting the Exchange Act, including Section

10(b), was “to insure the maintenance of fair and honest

markets in [securities] transactions.” 15 U.S.C. § 78b. Under

this Court’s flexible construction of their broad and inclusive

terms in light of that purpose, Section 10(b) and Rule 10b-5

“prohibit all fraudulent schemes in connection with the

purchase or sale of securities, whether the artifices 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.” Superintendent

of Ins. v. Bankers Life & Cas. Co., 404 U.S. 6, 11 n.7 (1971).

The standard advocated by amici in this brief is

consistent with the standard adopted by the Ninth Circuit in

Simpson v. AOL Time Warner Inc., 452 F.3d 1040 (9th Cir.

2006), in which the court accepted the SEC’s argument that

“{a]ny person can be primarily liable under Section 10(b)

and Rule 10b-5(a) for engaging in a scheme to defraud, so

long as he himself, directly or indirectly, engages in a

manipulative or deceptive act as part of the scheme.” Simpson

v. Homestore.com, Inc. , No. 04-55665, Brief of the Securities

and Exchange Commission, Amicus Curiae, in Support of

Positions That Favor Appellant, at *16 (9th Cir. Oct. 22,

2004), available at www.sec.gov/litigation/briefs/

homestore_102104.pdf. In that case, the SEC urged the

12

following test for determining when a party’s conduct as part

of a scheme to defraud constitutes a primary violation:

Any person who directly or indirectly engages in

a manipulative or deceptive act as part of a scheme

to defraud can be a primary violator of Section

10b-5 and Rule 10b-5(a); any person who provides

assistance to other participants in a scheme but

does not himself engage in a manipulative or

deceptive act can only be an aider and abettor.

Id. (emphasis added). See also Simpson v. Homestore.com,

Inc., No. 04-55665, Keply Brief of the Securities and

Exchange Commission, Amicus Curiae, in Support of

Positions That Favor Appellant (9th Cir. Feb. 4, 2005),

available at www.sec.gov/litigation/briefs/homestore _

020405.pdf.°

6. The amici, of course, advocate a “no” answer to the question

presented as stated in the Court’s Order granting certiorari in this

case:

Whether this Court’s decision in Central Bank...

forecloses claims for deceptive conduct under § 10(b)

... and Rule 10b-5(a) and (c) ... where [defendants]

engaged in transactions with a public corporation with

no legitimate business or economic purpose except to

inflate artificially the public corporation’s financial

statements, but where [defendants] themselves made no

public statements concerning those transactions.

Order, No. 06-43 (U.S. Mar. 26, 2007) (emphasis added). However,

amici respectfully urge that, when answering the question presented

in the negative, the Court also make clear that conduct having no

legitimate business or economic purpose will not be saved from

liability through the addition of some insubstantial business purpose

(Cont'd)

13

To establish a defendant’s liability under Section 10(b)

and Rule 10b-5, the plaintiff must prove not only (1) that the

defendant used or employed a manipulative or deceptive

device or contrivance, (2) with scienter, but also (3) a

connection with the purchase or sale of a security, (4) reliance,

(5) economic loss, and (6) loss causation. See Dura Pharmas.,

Inc. v. Broudo, 544 U.S. 336, 341-42 (2005). Economic loss

and loss causation in scheme liability cases generally present

no different problems than in misrepresentation cases under

Rule 10b-5(b). The reliance and “in connection with”

elements of claims under Rule 10b-5 call for brief comment

in relation to scheme liability.

A plaintiff may be presumed to have relied on a

misrepresentation if the misleading or false information was

injected into an efficient market. See Basic Inc. v. Levinson,

485 U.S. 224, 247 (1988). The fraud-on-the-market

presumption requires the dissemination of the

misrepresentation into an efficient market, but not personal

involvement by each defendant in disseminating the

information. See AOL Time Warner, 452 F.3d at 1051;

see also 4 Alan R. Bromberg & Lewis D. Lowenfels,

BROMBERG & LOWENFELS ON SECURITIES FRAUD § 7:469 (2d

ed. 2006) (fraud-on-the-market presumption “applies to all

(Cont'd)

proffered by crafty perpetrators of fraud as a purported cover for

their predominantly deceptive conduct in furtherance of the scheme.

In accordance with this Court’s teaching that Section 10(b) prohibits

not only “garden type variet[ies] of fraud,” but also “unique form[s]

of deception” and “[nJovel or atypical methods” of committing

securities fraud, Bankers Life, 404 U.S. at 11 n.7, the standard for

scheme liability should look to whether each defendant engaged in

conduct that had the principal purpose and effect of creating an

artificial appearance of fact about a transaction involving the issuer.

14

three clauses of Rule 10b-5: (1) scheme to defraud,

(2) misrepresentation or omission, and (3) fraudulent course

of business”). The Eighth Circuit in this case erroneously

held that plaintiffs could not establish reliance because

respondents did not make any misstatements to the investing

public about Charter. See Jn re Charter Communications,

Inc. Sec. Litig., 443 F.3d 987, 992 (8th Cir. 2006). The court

below thus ignored this Court’s holding that there need not

be a misrepresentation for a defendant to “run afoul of the

[Exchange] Act.” Zandford, 535 U.S. at 820. The Eighth

Circuit also failed to recognize that a “device, scheme, or

artifice to defraud” or “act, practice, or course of business

which operates or would operate as a fraud or deceit on any

person” is complete only upon the dissemination to investors

of the false appearances created by the scheme or course of

business. Thus, reliance in scheme liability cases may be

established under the fraud-on-the-market theory.

Similarly, a scheme to misrepresent the financial results

or other facts about a company coincides with the purchase

or sale of the company’s securities because the scheme is

incomplete until the fraudulent information generated by the

conduct of the participants in the scheme is disclosed to

investors. See AOL Time Warner, 452 F.3d at 1051. There is

no requirement that every participant in the scheme release

the information to the public for all defendants in the scheme

to have caused the dissemination of false information to the

market. See Central Bank, 511 U.S. at 191 (“In any complex

securities fraud . . . there are likely to be multiple violators.”).

Indeed, the Eighth Circuit in this case did not deny that

plaintiffs adequately pled that defendants’ conduct was in

connection with purchases or sales of Charter securities.

Thus, properly pled scheme liability claims under Rule 10b-

5 can satisfy every element of a valid claim.

15

Private securities litigation is “a most effective weapon”

in enforcing the securities laws, serving as a necessary

supplement to SEC enforcement actions. Bateman Eichler,

Hill Richards, Inc. v. Berner, 472 U.S. 299, 310 (1985).

Congress, in adopting the PSLRA, reaffirmed that “[p]rivate

securities litigation is an indispensable tool with which

defrauded investors can recover their losses” and that private

lawsuits “promote public and global confidence in our capital

markets and help to deter wrongdoing and guarantee that

corporate officers, auditors, directors, lawyers and others

properly perform their jobs.” Conference Report on Securities

Litigation Reform, H.R. Rep. No. 369, 104th Cong., Ist Sess.

31 (1995). Investors who are defrauded by sophisticated

deceptive schemes such as the sham, round-trip advertising

transactions alleged in this case should be permitted to sue

all the parties that engaged in deceptive conduct.

Il. THE COURT BELOW MISINTERPRETED

CENTRAL BANK

In this case, as it did in United States v. O’Hagan, 92

F.3d 612 (8th Cir. 1996), rev'd, 521 U.S 642 (1997), the

Eighth Circuit interpreted Central Bank far too broadly. Here,

the Eighth Circuit construed Central Bank to mean that a

“device or contrivance is not ‘deceptive’ within the meaning

of § 10(b) absent some misstatement or a failure to disclose

by one who has a duty to disclose. .. .” 443 F.3d at 992.

This sweeping interpretation of Central Bank cannot be

squared with either the Court’s actual holding in Central Bank

or the text of Section 10(b) and Rule 10b-5.

In Central Bank, this Court addressed a fairly limited

question: “whether private civil liability under § 10(b)

extends . . . to those who do not engage in the manipulative

or deceptive practice, but who aid and abet the violation.”

16

5il U.S. at 167 (emphasis added). The plaintiffs in Central

Bank conceded that the defendant was only an aider and

abettor, not a primary violator. See id. at 191. Thus, contrary

to the Eighth Circuit’s overbroad misinterpretation, Central

Bank did not address whether a device is “deceptive” absent

a misstatement or duty to disclose — which is a question

regarding the scope of primary liability under the statute and

rule. Rather, the Court “reach[ed] the uncontroversial

conclusion .. . that the text of the 1934 Act does not reach

those who aid and abet a § 10(b) violation [and held] that

conclusion resolves the case.” 511 U.S. at 177.

Moreover, other statements in Central Bank demonstrate

that the Court did not intend to narrowly proscribe Section

10(b) and Rule 10b-5 such that a “deceptive” device would

always require an affirmative misstatement or a violation of

a duty to disclose (a reading that is inconsistent with the

plain text of the statute and the rule). For instance, after noting

that “the text of the statute controls our decision,” the Court

described the statute as prohibiting all “manipulative or

deceptive acts in connection with the purchase or sale of

securities,” id. at 173 (emphasis added), a prohibition that

encompasses far more than making a material misstatement,

refusing to speak when one has a duty to disclose, or engaging

in market manipulation. The Court also noted, when

explaining why Section 10(b)’s “‘directly or indirectly’

language” does not justify imposing lliability on one who

merely aids or abets the violation of another, that “aiding

and abetting liability extends beyond persons who engage,

even indirectly, in a proscribed activity; aiding and abetting

liability reaches persons who do not engage in the proseribed

activities at all, but who give a degree of aid to those who

do.” Jd. at 176. Thus, Central Bank does nothing more than

reach the “uncontroversial conclusion” that Section | 0(b)

17

and Rule 10b-5 liability do not attach to actors, including

aiders and abettors, unless they engage, directly or indirectly,

in conduct proscribed by the statute and rule.

The Court’s statement in Central Bank about the

potential primary liability of “secondary actors,” including

lawyers, accountants, and banks, discussed above, cannot be

squared with the Eighth Circuit’s constricted reading of that

case. See 511 U.S. at 191. The mere fact that a party who

committed a primary violation could also, by virtue of the

same conduct, be said to have “aided and abetted” another’s

violation, does not shield the wrongdoer from liability for

iheir own unlawful primary violation. The key question with

respect to primary liability remains: Did the secondary actor,

who may have aided and abetted another’s unlawful conduct,

also directly or indirectly engage in the conduct prohibited

by Section 10(b) and Rule 10b-5? If yes, the secondary actor

can be held liable as a primary violator in a private action.

This unsurprising conclusion finds support in the Court’s

citation to Daniel R. Fischel, Secondary Liability Under

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

L. Rev. 80, 107-08 (1981), in Central Bank. See 511 U.S. at

191. On the specific pages cited by the Court, Professor

Fischel stated:

Deceptive conduct by attorneys and accountants,

whether previously analyzed as aiding and

abetting or as a direct violation, should continue

to be prohibited by the section and the rule,

provided the other elements of liability ... are

satisfied.

Id. at 108. Exactly the same conclusion should apply to

business counterparties who, like Respondents in this case,

18

allegedly engaged in “deceptive conduct” that acted as a fraud

on purchasers and sellers of Charter Communications stock.

Thus, Central Bank establishes three points: (1) the Court

in that case was concerned only with deciding whether

liability could be imposed on one who did not directly or

indirectly engage in the prohibited, deceptive conduct, but

simply aided or abetted another party’s violation; (2) read as

a whole, Central Bank establishes that any manipulative or

deceptive act in connection with a purchase or sale of

securities violates Section 10(b), but that decision does not

narrowly confine the acts that fall within the statute’s

prohibition to require an affirmative misstatement or

violation of a duty to disclose; and (3) conduct by a secondary

actor that can be characterized as aiding and abetting can

also constitute a primary violation of the statute if the

secondary actor directly or indirectly uses or employs, in

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

the deceptive devices and contrivances prohibited by Rule

10b-S.

It was appropriate for the Court in Central Bank not to

attempt to specifically delineate the distinction between

aiding and abetting, on the one hand, and primary liability

of secondary actors, on the other. Drawing that distinction

would fave required the Court to address issues that were

not presented by Central Bank's facts. Central Bank

appropriately left the scope of primary liability of secondary

actors to be decided on the basis of pertinent facts.

Moreover, before Central Bank, the distinction between

aiding and abetting and secondary actors’ primary liability

did not receive much attention, because a party who aided

and abetted a violation of Section 10(b) and Rule 10b-5 could

be held liable without regard to whether the defendant also

a

19

directly or indirectly engaged in a manipulative or deceptive

act or practice. As Professor Fischel observed, “under a strict

aiding and abetting analysis, it is irrelevant whether an aider

and abettor has engaged in a manipulative or deceptive

practice within the meaning of section 10(b).” 69 Cac. L.

REV. at 88; see also In re Parmalat Sec. Litig., 376 F. Supp.

2d 472, 495-98 (S.D.N.Y. 2005) (Kaplan, J.). Thus, this Court

and the lower courts in earlier, pre-Central Bank cases had

little occasion to define when secondary actors are primarily

liable.

This Court’s statements interpreting Section 10(b) and

Rule 10b-5 in decisions handed down after Central Bank,

on the other hand, have particular relevance to the issue in

this case, because when it made them, the Court did so

knowing both that liability could not be imposed for aiding

and abetting and that the outer limits of what constitutes a

primary violation of the statute and the rule had yet to be

defined. The Court, in all three of its decisions interpreting

Section 10(b) and Rule 10b-5 handed down after Central

Bank, has defined more broadly than did the court below the

range of conduct that violates the statute and rule.

In United States v. O'Hagan, 521 U.S. 642 (1997), the

issues under Section 10(b) and Rule 10b-5 were whether

O’ Hagan, who had misappropriated material information

from his law firm employer and that firm’s client, (a) had

used a deceptive device and (b) had done so in connection

with the purchase and sale of securities. The Court in

reversing the Eighth Circuit’sdecision found that O’ Hagan’s

trading on the basis of misappropriated information, without

disclosing that he was doimg so, involved the use of a

deceptive device, even though O’Hagan did not make any

material misstatements and did not owe any duty to speak to

the persons with whom he traded. The Court quoted Rule

20

10b-5(a) and (c) and acknowledged that “[I]iability under

Rule 10b-5 . . . does not extend beyond § 10(b)’s prohibition.”

Id. at 651. But the Court also pointed out: “The provision,

as written, does not confine its coverage to deception of a

purchaser or seller of securities; rather, the statute reaches

any deceptive device used ‘in connection with the purchase

or sale of any security.’” Jd. (citation omitted).

The Court also observed:

The misappropriation theory comports with

§ 10(b)’s language, which requires deception “in

connection with the purchase or sale of any

security,” not deception of an identifiable

purchaser or seller. The theory is also well tuned

to an animating purpose of the Exchange Act: to

insure homest securities markets and thereby

promote inwestor confidence.

Id. at 658 (emphasis added). Finally, the Court faulted the

Eighth Circuit for reading too narrowly the statement in

Central Bank concerning secondary actors’ potential liability.

It explained that “this Court, in the quoted passage, sought

only to clarify that secondary actors, although not subject

to aiding and abetting liability, remain subject to primary

liabilityander § 10(b) and Rule 10b-5 for certain conduct.”

Id. at 664 (emphasis added).’

7. Similarly, the Court’s statement in Central Bank that “As in

earlier cases considering conduct prohibited by § 10(b), we again

conclude that the statute prohibits only the makin; of a material

misstatement (or omission) or the commission of a manipulative act,”

511 U.S. at 177, was not a definitive description of the outer limits

of the conduct proscribed by § 10(b) and Rule 10b-5, nor was it

(Cont'd)

21

In Wharf (Holdings) Ltd. v. United International

Holdings, Inc. , 532 U.S. 588 (2001), a unanimous Court again

reaffirmed that Section 10(b) and Rule 10b-5 prohibit a broad

range of manipulative and deceptive acts and practices, not

simply misrepresentations, omissions, and market

manipulation. First, the Court described Rule 10b-5 as

follows:

That Rule forbids the use, ‘in connection with the

purchase or sale of any security,’ of (1) ‘any

device, scheme or artifice to defraud’; (2) ‘any

untrue statement of a material fact’; (3) the

omission of ‘a material fact necessary in order to

make the statements made not misleading’; or

(4) any other ‘act, practice or course of business’

that ‘operates... as a fraud or deceit.’

Id. at 593 (emphasis added). Then, the Court held:

To succeed in a Rule 10b-5 suit, a plaintiff must

show that the defendant used, in connection with

the purchase or sale of any security, [any] one of

the four kinds of manipulative or deceptive devices

to which the Rule refers, and must also satisfy

certain other requirements not at issue here.

Id. (emphasis added).

Finally, the Court addressed Wharf’s policy argument

that holding it liable would open the door to “numerous

(Cont'd)

necessary to the Court’s holding in that case. As explained above,

Central Bank holds that what the statute proscribes can only be

determined by reference to the statutory language, which is

considerably more inclusive than the foregoing statement, on which

amici believe Respondents nonetheless are likely to rely.

22

plaintiffs to bring federal securities claims that are, in reality,

no more than ordinary breach-of-contract claims—actions that

lie outside the Act’s basic objectives.” Jd. at 596. The Court

observed that “Wharf has not shown us that its concern has

proved serious as a practical matter in the past.” /d. at 597. It

then added: “Nor does Wharf persuade us that it is likely to

prove serious in the future,” id., and cited in support of this

proposition the strict pleading requirements of the PSLRA,

including the requirement that a complaint must state facts that

support a strong inference that each defendant acted with

scienter.

In SEC v. Zandford, 535 U.S. 813 (2002), a unanimous

Court again held that Section 10(b) and Rule 10b-5 make it

unlawful to engage not only in the manipulative and deceptive

acts and practices to which the Court alluded in passing in

Central Bank, but also in other acts and practices that fall within

the broadly worded prohibition of the statute and rule. The Court

pointed out that “neither the SEC nor this Court has ever held

that there must be a misrepresentation about the value of a

particular security in order to run afoul of the Act.” Jd. at 820.

Rather, the Court held that Zandford’s practice of selling his

client’s securities and then pocketing the proceeds “was properly

viewed as a ‘course of business’ that operated as a fraud and

deceit on [his] customer.” /d. at 821.

In sum, in all three cases in which the Court has interpreted

Section 10(b) since Central Bank, the Court has construed the

statute to prohibit acts and practices that are outside the Eighth

Circuit’s overly narrow reading of Central Bank. The correct

reading of Central Bank, as these cases make clear, is that

Section 10(b) prohibits the direct or indirect use or employment

of all manipulative and deceptive devices and contrivances,

including those barred by subsections (a) and (c) of Rule

10b-5.

23

lil, INNOCENT COUNTERPARTIES ARE PRO-

TECTED FROM LIABILITY UNDER SECTION

10(b) BECAUSE THEY DO NOT USE OR EMPLOY

MANIPULATIVE OR DECEPTIVE DEVICES AND

BECAUSE THEY LACK SCIENTER

Lower courts that have upheld the theory of scheme liability

post-Central Bank also have developed meaningful distinctions

between aiding and abetting and scheme liability. In numerous

cases, they have also dismissed some or all of the claims against

secondary defendants, which demonstrates that scheme liability

can be imposed in a manner consistent with Central Bank’s

holding that liability cannot be imposed on one who does no

more than aid and abet the violation of another.

For example, in Parmalat, Judge Kaplan held that two

banks which factored and securitized invoices that they knew

to be worthless used deceptive devices or contrivances in

violation of Section 10(b). 376 F. Supp. 2d at 504. “The

transactions in which the defendants engaged were by nature

deceptive. They depended on a fiction, namely that the invoices

had value.” /d. By contrast, the same court dismissed claims

based on allegations that the banks made loans which Parmalat

improperly accounted for as equity investments or assets in its

financial statements. See id. at 505. “In each of these cases,

what remains when the bluster is stripped away are financings

and investments. These transactions were not shams... . Any

deceptiveness resulted from the manner in which Parmalat or

its auditors described the transactions on Parmalat’s balance

sheets and elsewhere.” /d. Judge Kaplan explained why the

scheme liability allegations that he upheld were consistent with

Central Bank:

This analysis is not an end run around Central

Bank. |f a defendant has committed no act within

24

the scope of Section 10(b) and Rule 10b-5 — as in

fact was the case in Central Bank — then liability

will not arise on the theory that that defendant

assisted another in violating the statute and rule.

But where, as alleged here, a financial institution

enters into deceptive transactions as part of a

scheme in violation of Rule 10b-5(a) and (c) that

causes foreseeable losses in the securities markets,

that institution is subject to private liability under

Section 10(b) and Rule 10b-S.

376 F. Supp. 2d at 509-10. A commercial counterparty cannot

be liable unless it engages in deceptive conduct with scienter.

Similarly, the Ninth Circuit held in AOL Time Warner

“that to be liable as a primary violator of § 10(b) for

participation in a ‘scheme to defraud,’ the defendant must

have engaged in conduct that had the principal purpose and

effect of creating a false appearance of fact in furtherance of

the scheme.” 452 F.3d at 1048. The court held that this test

comports with Central Bank because “[t]he focus of the

inquiry on the deceptive nature of the defendant’s own

conduct ensures that only primary violators (that is, only

those defendants who use or employ a manipulative or

deceptive device) are held liable under the Act.” /d. at 1049.

The Ninth Circuit’s test genuinely protects both innocent

counterparties and counterparties who engage in legitimate

transactions that they know or believe will be misrepresented

by others. In AOL Time Warner, Homestore.com allegedly

agreed to purchase shares in other companies for inflated

values or to purchase products or services it did not need, in

exchange for the other companies’ buying advertising from

AOL, which, in turn, paid over much of the revenue to

Homestore.com. /n re Homestore.com, Inc. Sec. Litig., 252

F. Supp. 2d 1018, 1023 (C.D. Cal. 2003), rev'd, 452 F.3d

25

1040 (9th Cir. 2006). The Ninth Circuit held that under its test

for scheme liability, plaintiffs failed to allege valid claims against

AOL because it had a legitimate contractual relationship with

Homestore.com and did not itself engage in any deceptive acts.

See 452 F.3d at 1053. The AOL transactions were not mere

shams, but rather had economic substance and became deceptive

only after Homestore.com accounted for them incorrectly.

See id.*

By contrast, the Enron case illustrates the danger that

reading scheme liability out of Section 10(b) and Rule 10b-5

would immunize cunning parties who engage in deceptive

conduct wit! the primary purpose and effect of creating a false

appearance about an issuer’s financial condition in connection

with purchases and sales of securities, but carefully refrain from

making direct misrepresentations to investors. See Regents of

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

Inc., 482 F.3d 372 (Sth Cir. 2007), petition for certiorari filed,

No. 06-1341 (U.S. Mar. 5, 2007).’ In the Enron case, plaintiffs

alleged that several firms knowingly engaged in sham

transactions with Enron that lacked any economic substance;

for example, plaintiffs alleged that Merrill Lynch agreed to “buy”

several electricity-generating barges in Nigeria from Enron at

the end of Enron’s fiscal year to enable it to book revenue and

meet analysts’ estimates, while at the same time Enron and

Merrill Lynch entered into a secret side agreement whereby

Enron would buy the barges back the following year at a profit

to Merrill Lynch. See 482 F.3d at 377.

8. The court reached the same conclusion as to other companies

with which Homestore.com entered into legitimate transactions that

Homestore.com then misrepresented in its financial statements.

9. The facts set forth in the petition for certiorari in the Enron

case starkly illuminate the stakes of this Court’s determination about

the scope of scheme liability under Section 10(b) and Rule 10b-5.

26

Notwithstanding allegations that Merrill Lynch and the

other bank defendants deliberately engaged in inherently

deceptive conduct to create a false appearance about Enron’s

revenue and debt levels, the majority of a panel of the Fifth

Circuit held that these defendants did not engage in

“deceptive” conduct because they had no duty to disclose

information to Enron’s stockholders. See id. at 390.'° Thus,

the Fifth Circuit panel’s majority effectively deleted

subsections (a) and (c) from Rule 10b-5, leaving only Rule

10b-5(b)’s prohibition of material misrepresentations and

omissions. The majority also failed to acknowledge this

Court’s holdings in Zandford that “conduct, without more”

can constitute a deceptive device or contrivancé under

Section 10(b) and Rule 10b-5 and that “neither the SEC nor

this Court has ever held that there must be a misrepresentation

about the value of a particular security in order to run afoul

of the Act.” 535 U.S. at 820-21. At the same time, the majority

recognized that “the court’s interpretation of § 10(b) could

have gone in a different direction and might have established

liability for the actions the banks are alleged to have

undertaken,” and that its decision “may not coincide. . . with

notions of justice and fair play.” 482 F.3d at 393. In the view

of amici, the Fifth Circuit majority’s decision cannot be

10. Judge Dennis of the Fifth Circuit concurred in the judgment

reversing class certification, on the ground that the district court

misinterpreted the PSLRA’s joint and several liability provision and

should reconsider whether common damages issues would

predominate over individual issues under the correct standard.

See 482 F.3d at 395 (Dennis, J., concurring in judgment). However,

Judge Dennis identified the errors of the panel majority’s “cramped

interpretation of the statutory language of section 10(b)” and

criticized the majority for “immuniz[ing] a broad array of undeniably

fraudulent conduct from civil liability under Section 10(b),

effectively giving secondary actors license to scheme with impunity.”

Id. at 394.

27

squared with the language of Section 10(b). Like the decision

below, it reflects an overbroad reading of Central Bank.

This Court has given weight to the policy concern that

securities litigation against secondary actors poses the risk

of coercive settlements divorced from the merits of the cases.

See Central Bank, 511 U.S. at 189. That concern, and more

importantly the text of Section 10(b) and Rule 10b-5, justified

Central Bank’s rejection of aiding and abetting liability. That

concern should not and cannot justify negating the plain

language of the statute and rule to eliminate primary liability

of secondary actors who themselves knowingly engage in

deceptive conduct in connection with purchases and sales of

securities, especially because the requirement that the

defendant itself have engaged in deceptive conduct, with

scienter, will prevent non-meritorious claims.

28

CONCLUSION

The judgment of the court of appeals should be reversed.

Respectfully submitted,

Max W. BerGcer Wayne T. SCHNEIDER

Counsel of Record General Counsel

SALVATORE J. GRAZIANO New York State TEACHERS’

JoHN C. BROWNE RETIREMENT SYSTEM

E.uiorr J. Weiss 10 Corporate Woods Drive

Jai K. CHANDRASEKHAR Albany, New York 12211

BERNSTEIN Lrrowirz (518) 447-2722

BERGER & GROSSMANN LLP

1285 Avenue of the Americas JAMES G. Line

New York, New York 10019 | General Counsel

(212) 554-1400 SACRAMENTO COUNTY

EmPLOYEES’ RETIREMENT SYSTEM

WILLIAM F. KELLey, Jr. 980 9th Street, Suite 1800

General Counsel Sacramento, California 95814

RETIREMENT SYSTEMS (800) 336-1711

OF ALABAMA

135 South Union Street

P.O. Box 302150

Montgomery, Alabama 36130

(334) 241-0676

Counsel for Amici Curiae

June 11, 2007