Petition for Writ of Certiorari — Leykin v. AT&T Corp (No. 07-484)

Supreme Court, U.S.

FILED

—~ 07-484 60) S~ 2007

(CV)

No. 073 OFFICE OF THE CLERK

IN THE

Supreme Court of the United States

SEMEN LEYKIN, et al.,

Petitioners,

v.

AT&T CORPORATION, et al,

Respondents.

On PETITION FOR A WRIT OF CERTIORARI TO THE

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

PETITION FOR A WRIT OF CERTIORARI

CHRISTOPHER LOVELL

Counsel of Record

Gary S. JACOBSON

Tan T. STOLL

LovELL STEWART HALEBIAN LLP

500 Fifth Avenue

New York, New York 10110

(212) 608-1900

Counsel for Petitioners

N

S00: 274-3321 ¢ 800) 359-6859

i

QUESTIONS PRESENTED

The control person of the issuer of stock used lies to

the market for that stock to misappropriate the issuer’s

intellectual property (“IP”) and customers. Initially,

the control person’s deceptions increased the price of

that stock while the control person successfully

misappropriated certain parts of the issuer’s IP. Later,

the control person’s lies somewhat decreased the stock

price in order to gain increased control over the issuer

and pressure the management of the issuer into

complying with the control person’s demands for the

most sensitive portions of the issuer’s IP. After

completing its misappropriation of the IP the control

person consummated its scheme by forcing the issuer

into bankruptcy and taking its customers. Plaintiffs

purchased the issuer’s stock at the increased market

prices and sold the stock at the somewhat decreased

market prices caused by the control person’s scheme.

The questions presented are:

1. Whether an integrated scheme of misrepresentations

and the unlawful acts they conceal qualify as a scheme or

artifice in connection with the purchase or sale of the

security within the meaning of Securities and Exchange

Commission (“SEC”) Rule 10b-5, 17 C.E-R. § 240.10b-5, or,

as the Court below held, a scheme in connection with

the purchase or sale of the security is limited to

misrepresentations and excludes the associated deceptive

or unlawful acts they are designed to conceal?

on

2. Whether pleading loss causation in a Rule 10b-5

scheme claim requires merely allegations that the “act

... Of the defendant alleged to violate this chapter caused

the loss” as set forth in 15 U.S.C. § 78u-4(b)(4) or, as the

Court below held, plaintiff must invariably plead that

loss was caused by either a disclosure to the market of

the misrepresentation or a materialization of the risk

concealed by the misrepresentation?

100

RULES 14.1 AND 29.6 STATEMENT

Petitioners (plaintiffs-appellants below) are Semen

Leykin, Frank Thomas, Ken Pearlman, Mike Katto, At

Home Suit Group, Inc., Kurt Buettler, Gerry Galiger,

Stan Cohn, Channa Unger, Michael Eksler, Frieda

Eksler and Ronald Ventura.

At Home Suit Group, Inc. has no parent corporations

and no publicly held companies own 10% or more of its

common stock.

Respondents (defendants-appellees below) are

AT&T Corporation, C. Michael Armstrong, Mark

McEachen, Frank Ianna, Charles H. Noski, Daniel H.

Somers, Hossein Eslambolchi, Raymond Liguori, and

Mohan Gyani.

iv

TABLE OF CONTENTS

QUESTIONS PRESENTED

RULES 14.1 AND 29.6 STATEMENT

TABLE OF CONTENTS

TABLE OF APPENDICES

TABLE OF CITED AUTHORITIES

OPINIONS BELOW

JURISDICTION

STATUTES AND REGULATIONS

INVOLVED

STATEMENT OF THE CASE

1.

Ys

The AT&T Defendants’ Scheme To Lie To

The Market For At Home Stock In Order

To Misappropriate At Home’s Proprietary

Technology And Customers

At Home’s “Critical” Proprietary

Technology Entitled At Home To 30% Of

AT&T’s Revenues From At Home’s

Service

Contents

3. The AT&T Defendants’ Nineteen

Misappropriations And $400,000,000

Payment To The Bankrupt At Home

Bondholders’ For Misappropriating At

Home’s Intellectual Property

Chronology: The AT&T Defendants Had

To Make Escalating Misrepresentations

In Order To Enable Them To Mis-

appropriate At Home’s Most Sensitive

Intellectual Property

a. The Initial Misrepresentations

Inflated The Price of At Home Stock

Some of The Scheme’s Later

Misrepresentations Decreased At

Home’s Stock Price Substantially ..

False Representations To Agree To

Buy Control Blocks of Stock At The

Reduced Price

AT&T’s Continued Deceptive

Statements Consummate Its Scheme

vi

Contents

REASONS FOR GRANTING THE PETITION

If.

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IN CONFLICT WITH OTHER

CIRCUITS, THIS COURT’S OWN

PRIOR DECISIONS, AND THE

PLAIN LANGUAGE OF RULE 10b-5,

THE ORDER EFFECTIVELY LIMITS

THE SCOPE OF CONDUCT

PROHIBITED BY RULE 10b-5

SOLELY TO MISREPRESENTATIONS

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A. Conflicts With Prior Decisions Of

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B. The Order Conflicts With The Plain

Language Of The Statute And Rule

C. Conflict With Other Circuits .......

THE ORDER’S LOSS CAUSATION

RULING CONFLICTS WITH 15 U.S.C.

§ 78u- 4(b)(4) AND THE PRIOR

DECISIONS OF THIS COURT ........

A. Conflict with 15 U.S.C. § 78u-

ae he ees

vil

Contents

Page

B. Conflict With The Prior Decisions Of

ee ows 59-40 0 haw 33

III. OTHER REASONS FOR GRANTING

jy i oR yy 5} ORR eine mo ue ra 34

Ae IY Wie éveeiedcieieerseiwerwssens 35

vill

‘ ABLE OF APPENDICES

Page

Appendix A — Summary Order Of The United

States Court Of Appeals For The Second

Circuit Filed January 30, 2007

Appendix B — Opinion And Order Of The United

States District Court For The Southern

District Of New York Dated March 23, 2006,

As Amended June 26, 2006

Appendix C — Memorandum Endorsement ....

Appendix D — Memorandum Endorsement ...

Appendix E — Order Of The United States Court

Of Appeals For The Second Circuit Denying

Petition For Rehearing Filed July 9, 2007 ...

Appendix F — Statutes And Regulations

Involved

ix

TABLE OF CITED AUTHORITIES

Page

Federal Cases

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

Siac eccviseesscecsse 16, 18, 25, 28

Basic, Inc. v. Levinson, 485 U.S. 224 (1988) ... passim

Blue Chip Stamps v. Manor Drug Stores,

ee 27

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

Bank of Denver, N.A., 508 U.S. 959 (1998) ... 26

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

Bank of Denver, N.A., 511 U.S. 164 (1994) ... 26

Duncan v. Walker, 533 U.S. 167 (2001) ......... 27

Dura Pharmaceuticals v. Broudo, 544 U.S. 336

IN ROE ee ee passim

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

a vewdeesusecuve 27, 32

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

Ned ee eee cevecees 28

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

Dabit, $47 U.S. T1 (2006) ... occ cece ee 22

x

Cited Authorities

Page

Mutual Shares Corp. v. Genesco, Inc., 384 F.2d

COP ae SHE) Saréatisceushicndciae passim

Pinter v. Dahl, 486 U.S. 622 (1988) ............ 28, 34

Regents of the University of California v. Merrill

Lynch, Pierce, Fenner & Smith, Inc., 482 F.3d

ee CE ET kdb ceudaveresucescces 15, 30, 31

Santa Fe Indus. v. Green, 480 U.S. 462 (1977)

Poleieicaie was dukockk waa edeee 19, 26, 27, 28

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

SPCR 6 x iN cuctecassksaasencicon 18, 19, 25, 28

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

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

Se Cae OE 6. ck wewsdkas edwin eae 15, 28, 29

Stoneridge Investment Partners v. Scientific-

Atlanta, Inc., 127 S.Ct. 1873 (2007) ....... passim

Superintendent of Ins. of N.Y. v. Bankers Life &

Casualty Co., 404 U.S.6 (1971) ........... passim

Superintendent of Ins. of N.Y. v. Bankers Life &

Casualty Co., 480 F.2d 355 (2d Cir. 1970) .... 22

United States v. Nordic Village, Inc., 503 U.S.

I a ee oe eae 27

xi

Cited Authorities

Page

Federal Statutes

Es Chace cwinedavacvenuceniaen 1

as Oe PIED io ove cc v-esee cuevcesees passim

Se SEE cc idcccrecenevseeveveewers 1

Federal Regulations

BE re DIPS co ccciscvcscesecntewene 1, 12, 21

Sr I cdivecsvisvdicevseowees passim

Other Authorities

Miller, M. & Modigliani, F., Dividend Policy,

Growth, and the Valuation of Shares,

Pe a EE CUED oe hrc cecccecdvevedctaees 4

1

Petitioners, purchasers of the publicly-traded stock

of Excite At Home Corp., respectfully petition for a writ

of certiorari to review the judgment of the United States

Court of Appeals for the Second Circuit.

OPINIONS BELOW

The opinion of the court of appeals (Petition

Appendix (“App.”) la-5a) is reported at 216 Fed. Appx.

14. The opinion of the district court (App. 6a-45a) is

reported at 423 F'Supp.2d 229.

JURISDICTION

The judgment of the court of appeals was entered

on January 30, 2007. Petitioners filed a timely petition

for rehearing and rehearing en banc on February 14,

2007, which was denied by order dated July 9, 2007. App.

54a-55a. This Court’s jurisdiction is invoked under

28 U.S.C. § 1254(1).

STATUTES AND REGULATIONS INVOLVED

The relevant statutory and regulatory provisions,

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

15 U.S.C. § 78j(b) (the “Exchange Act”), Section

21D(b)(4) of the Exchange Act, 15 U.S.C. § 78u-4(b)(4),

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

Regulation S-K, Item 404(a), 17 C.F.R. § 229.404(a), are

reproduced at App. 56a-58a.

2

STATEMENT OF THE CASE

1. The AT&T Defendants’ Scheme To Lie To

The Market For At Home Stock In Order

To Misappropriate At Home’s Proprietary

Technology And Customers

Plaintiffs, including lead plaintiffs Frank Thomas

and Ken Pearlman, bought Excite At Home (“At Home”)

common stock between November 8, 1999 and

September 29, 2001 (“Class Period”) at the prices

prevailing on the efficient NASDAQ market for At Home

stock. 1913-14, Ex.A;JA2081,2154.

The prices at which they purchased and sold the

stock were based on defendants’ public statements and

other publicly available information. Basic, Inc. v.

Levinson, 485 U.S. 224, 246-247 (1988).

2. At Home’s “Critical” Proprietary Technology

Entitled At Home To 30% Of AT&T’s Revenues

From At Home’s Service

Through its patented and other intellectual

properties, At Home enjoyed a dominant position in

bringing high-speed Internet access to homes and

businesses over existing cable television lines.

192,55;J A2078,2091-92.

So superior were At Home’s proprietary technologies

that large cable television companies were At Home’s

principal customers, owned a majority of its voting stock,

3

and held a majority of the seats on its Board of

Directors.’

AT&T Corporation (“AT&T”) was the largest

shareholder of At Home. 139(r);JA2104.

As a company with publicly traded stock, At Home

made regular filings with the Sec 1rities and Exchange

Commission (“SEC”). These filings were signed by

directors of At Home, including those AT&T defendants

who were At Home directors. 19120-35;JA2082-86. Also,

1. The AT&T defendants are AT&T Corporation (“AT&T”),

C. Michael Armstrong, Frank Ianna, Mohan Gyani, Charles H.

Noski, Daniel H. Somers, John C. Petrillo, Raymond Liguori and

Hossein Eslambolchi. 1916,21,23,27,31,36; JA2081-86. All the AT&T

defendants except for AT&T and Eslambolchi served as directors

of At Home. 936;JA2086. The other defendants are as follows.

Defendants Cox and AT&T were At Home’s largest customer

and largest shareholder. Comcast also was a major shareholder and

large customer of At Home. Their respective designees, defendants

David Woodrow and Brian Roberts, were Series B directors of

At Home whose unanimity was required for certain board actions.

91917-18,33,35;J3 A2082,2085,2086.

Edward S. Rogers was a Class A director for the public

shareholders, a substantial shareholder, and his cable company was

a substantial customer of At Home. 134;JA2085-86.

Defendant Dr. John C. Malone was a large shareholder and

director of both AT&T and At Home. SPA11,132;JA208,1325.

Non-Customer Defendants. Defendant Kleiner Perkins

Caufield & Byers owned an interest in At Home and appointed two

directors, defendants L. John Doerr and William R. Hearst III,

who also was a Class A director for the public shareholders.

1919,28,29;J A2082;2084. Defendants George Bell and Thomas A.

Jermoluk were CEOs and directors, and defendant Mark McEachen

was Chief Financial Officer of At Home. %920,22,29;JA2082-84.

4

AT&T was responsible as a control person of At Home

under Section 20(a) of the Securities Exchange Act of

1934. 116;JA2081-82. In At Home’s filings with the SEC,

the following representation was made repeatedly:

We regard our intellectual property, including

our patents, copyrights, trademarks, trade

secrets, and similar intellectual property as

critical to our success. We rely upon patents,

trademark and copyright law, trade secret

protection and confidentiality or license

agreements to protect our proprietary rights.

1959(x),65(a),96;JA2106,2110-11,2131.

The foregoing protection of At Home’s proprietary

and “critical” intellectual property enabled At Home to

continue to charge its cable customers approximately

30% of the fees for the monthly subscriptions that

the cable companies charged their customers.

1191(e),98;JA2127-28,2131-32. This protection of At

Home’s proprietary intellectual property justified

NASDAQ’s market expectations of a substantial future

cash flow for At Home, 18;JA2080, and a substantial At

Home stock price. /d.*

Without this protection, At Home had virtually

nothing, and its stock was worth virtually zero.

16;JA2079. However, by September 1999, the AT&T

defendants had formulated an undisclosed scheme to lie

to the market for At Home stock in order “to drain all of

2. Merton H. Miller & Franco Modigliani, Dividend Policy,

Growth, and the Valuation of Shares, 34 J.Bus. 411 (1961).

5

the proprietary technology out of At Home”

(198(f);JA2132), use At Home’s technology to start a

competing business at AT&T (1196,59(e);JA2079,2095),

“weaken At Home’s financial situation” (9191(d);JA2127),

“end At Home’s life” (193;JA2129), and “inherit At Home’s

customers.” 1180,86,89(b),98(f),100,103; JA2119,2124-

25,2132,2134.3

3. The AT&T Defendants’ Nineteen Misappropriations

And $400,000,000 Payment To The Bankrupt At

Home Bondholders’ For Misappropriating At

Home’s Intellectual Property

Pursuant to this scheme, the AT&T defendants’

misrepresentations enabled them to commit at least

nineteen separate misappropriations of At Home’s

intellectual property. 1159,65,77,79-92,100,103,107;

JA2094,2210,2118-28,2132,2134,2135. Each of these takings

is alleged in great detail in plaintiffs’ complaint. /d.

3. Except for AT&T, At Home’s customer shareholders were

all cable television, not technology, companies. 113,49,52;J A2078,

2089-90. AT&T had vast experience in various “narrow band”

technologies. But AT&T had no experience with the specific broad

band technology that At Home had mastered in order to bring high-

speed internet access to homes and offices over television cables.

Also, AT&T had gone deep into debt (80 billion dollars) on a

“bet the company” scheme to become the largest cable television

operator. 1955(c),5%c); JA2092,2094. AT&T was going to make this

bet pay off by transforming its cable wires into a high-speed

internet. 1959(e),59(i),59(q),63(a)-(b); JA2095,2097,2104,2109. But,

in order to service this debt, AT&T wanted to keep the 30% of its

revenues that it was paying to At Home and also obtain for itself At

Home’s revenues from cable customers Cox and Comcast (see fn.1)

by misappropriating At Home’s intellectual property. 193,59(c),66;

JA2078,2094,2111-12.

6

AT&T’s extremely high number of misappropriations

just happened to encompass all aspects of At Home’s

intellectual property. 116,59-65;77-89;J A2079,2094-

2111,2118-2126. This included At Home’s patented network

architecture (181;JA2120), At Home’s proprietary

technology for implementing that architecture (1181-

83;JA2120-22), At Home’s proprietary technology for

customer communications, and all other aspects of

At Home’s proprietary technology and know-how.

1984-85; JA2122.4

As a result of the foregoing, AT&T paid $400,000,000

to settle the bankrupt At Home bondholders’ claims that

AT&T misappropriated At Home’s proprietary technology

in order to start a competing business and supplant

At Home. 1196,59(e) and (q),87;JA2079,2095, 2104,2124.

4. Chronology: The AT&T Defendants Had To Make

Escalating Misrepresentatiors In Order To

Enable Them To Misappropriate At Home’s Most

Sensitive Intellectual Property

a. The Initial Misrepresentations Inflated The

Price of At Home Stock

During September-November 1999, AT&T was able

to misappropriate At Home’s important proprietary back

office system (“BOS”) technology for data searches and

4. AT&T also acquired expensive hardware that copied the

proprietary hardware that At Home used to operate its proprietary

technology and network. 1988,110-111;JA2124,2136. AT&T, per

Scott Russell and others, admitted to At Home engineers that AT&T

intended to use At Home’s proprietary technology, which AT&T

had taken on AT&T's duplicate “head end” hardware in order to

duplicate At Home's service. 1979(c);JA2119,2124.

7

troubleshooting; without this, AT&T could never have

started its competing network. 1958(g)-(h) and

(j),118;JA2096-97,2140.

In order to avoid detection of their misappropriation

of At Home’s intellectual property and continue their

scheme without detection, the AT&T defendants

had to participate in lies contained in At Home’s

representations to the market for At Home stock. For

example, in At Home’s filings with the SEC on and before

November 16, 1999, it was represented as follows:

We regard our intellectual property, including

our patents, copyrights, trademarks, trade

secrets, and similar intellectual property as

critical to our success. We rely upon patents,

trademark and copyright law, trade secret

protection and confidentiality or license

agreements to protect our proprietary rights.

1959(x),65(a),96;JA2106,2110-11,2131. This representation

was false and misleading for many reasons. These included

the AT&T defendants’ undisclosed scheme and

misappropriations, and the fact that the represented

confidentiality and trade secret protections were not in

place between At Home and, its largest customer, AT&T.

1959(x),65(b);JA2106,2111,2131.

Absent disclosure of these misappropriations and the

malign scheme of At Home’s largest customer and

shareholder to destroy At Home, persons purchasing At

Home’s stock on the efficient NASDAQ market bought

into twin mirages: (1) a “normal company mirage” in

which the largest customer and shareholder of At Home

8

was apparently not out to destroy At Home; and (2) a

“proprietary technology mirage” in which At Home’s

apparently exclusive control and possession of its

proprietary “keys to the internet” technology provided

reasonable expectations of substantial future cash flow.

The AT&T defendants’ undisclosed scheme

artificially inflated the prices of At Home stock

throughout the Class Period.

b. Some of The Scheme’s Later Misrepresentations

Decreased At Home’s Stock Price Substantially

However, resistance by At Home officers stopped

AT&T from misappropriating many other parts of At

Home’s proprietary intellectual property during 1999.

1959(k),118(A)(1);JA2097-2102,2141. Without At Home’s

more important intellectual property, AT&T could not

duplicate At Home’s proprietary technology, end its

payments to At Home, and take At Home’s customers.

In order to overcome such resistance, the AT&T

defendants escalated their scheme and began themselves

to make direct misrepresentations to the market for At

Home stock. AT&T intended these misrepresentations

to reduce At Home’s stock price, weaken At Home into

complying with AT&T’s demands for At Home’s

most important intellectual property and increase

AT&T’s control over At Home. E.g., 19149(k),60,91(b)-

(d),100,103,119;JA2097,2107,2126-27,2132,2134,2147.

These deceptions did reduce At Home’s stock price and

somewhat reduce the artificial inflation of such price

caused by the undisclosed scheme.

9

On December 6, 1999, over At Home’s objections,

and at a time when At Home was preparing for a new

equity issuance, AT&T represented that AT&T

supposedly would implement customer choice for

internet companies other than At Home (7.e., “open

access”). 1959(k),118(A)(1);JA2097,2141. This “open

access” representation was false because AT&T never

intended to implement and never did implement open

access. 160;JA2107. On the contrary, AT&T’s corporate

properties and interests were harmed in many ways by

open access and AT&T actively opposed open access in

legal briefs. Jd. However, simultaneously with this

“sham” public announcement, AT&T made internal

demands upon At Home to turn over virtually all of its

proprietary technology to AT&T based on the pretext

of a need to prepare to conduct tests for “open access”.

179(a);JA2097-98. Although open access was never

implemented and AT&T never intended to implement

it, the weakened At Home did turn over further

intellectual property to AT&T in connection with the

open access tests. 1159(f) and (k);JA2095-2102.

AT&T’s false December 6, 1999 announcement made

pursuant to the scheme caused the price of At Home

stock to plummet by 15% (and by more thereafter).

159(k);JA2097. This partially decreased the inflation that

AT&T’s scheme had earlier caused.

10

c. False Representations To Agree To Buy

Control Blocks of Stock At The Reduced

Price

Still, At Home’s officers sought to refuse to divulge

to AT&T the most sensitive intellectual property that

AT&T needed to duplicate At Home’s technology. This

caused AT&T to commit its second, escalating

misrepresentation in late March 2000. AT&T then

announced that, subject to At Home’s stockholders’

approval, AT&T had agreed to purchase the control

blocks of At Home stock held by defendants Cox and

Comcast (see fn. 1) by paying more than $1,000,000,000

in AT&T stock to each. Such purchase price was to be at

the then market price of At Home stock. This price

had been decreased by AT&T’s “open access”

representation, thereby providing AT&T with a

substantially lower cost to purchase the Cox and Comcast

control blocks of At Home’s stock. 163;JA2109. AT&T’s

purchase was subject to approval by At Home

shareholders and, if approved, would increase AT&T’s

position to 23% equity control, and 74% overall voting

control, of At Home. 170(b);JA2114.

In order to secure shareholder approval of these

purchase transactions,” AT&T, per defendant

Armstrong, its Chairman, represented in a stock market

“squawk box” public interview that the March 28, 2000

Agreements were a “new commitment by AT&T .. . to

5. At Home’s Class A shares were owned by the public

shareholders. AT&T had no voting control over those shares.

The separate approval of the Class was necessary to approve

the transactions necessary for AT&T’s purchases of the At Home

stock owned by Cox and Comcast.

11

..- [At Home]”, which should “eliminate the uncertainty”

about At Home. 163(a);JA2109. Defendant Armstrong

further represented that “the people, the marketplace,

and the customers now can feel with a great deal of

certainty the commitment of AT&T... to... Excite At

Home.” Jd. [Emphasis supplied.] (This uncertainty had

been created, in large part, by AT&T’s deceptive

December 6, 1999 “open access” announcement.)

AT&T’s foregoing assurances to the “marketplace”

for At Home stock were grossly false and misleading.

163(b);JA2109. In fact, the March 28, 2000 agreements

were an escalation in AT&T’s ongoing efforts to take At

Home’s proprietary technology and customers.

1959(t),60-65;JA2105,2107-2111. The only “commitment”

reflected by such agreements was to buy-off the other

control person customers so that AT&T would have clear

sailing to misappropriate At Home’s intellectual

property, end its life, and take Cox and Comcast as

customers of AT&T. 91966,118(A)(2);JA2111-12,2141-42.

Contrary to AT&T’s assurance, these agreements were

not a commitment by AT&T to the success of At Home.

Consistent therewith, AT&T had no intention to enter,

and did not enter, the new agreement with At Home,

despite AT&T’s representations to the contrary on

March 29, 2000. 1160-65,80,93;J A2107-11,2119,2129.

As the markets digested AT&T’s deceptive

statements and the accompanying SEC filings in late

March and early April 2000, such statements caused the

price of At Home stock to plummet by 60% over a four-

week period. 159(t),118(A)(4); JA2105,2143.

12

The announcement of the March 28, 2000

Agreements, and the AT&T defendants’ associated false

assurances to the “marketplace,” successfully

accomplished the AT&T defendants’ purpose to gain

unfettered access to At Home’s proprietary intellectual

property. Immediately after this announcement, At

Home began, according to its Chief Technology Officer,

to give AT&T unfettered access to At Home proprietary

technology (163(b);JA2109).

Moreover, defendants’ deceptions also caused At

Home shareholders to provide the necessary vote

approving AT&T’s purchase agreement transactions.

In this regard, defendants failed to comply with SEC

Item 404, 17 CFR § 229.404(a) when issuing At Home’s

May 28, 2000 Proxy as well as in all other SEC filings

made during the Class Period. This SEC rule requires

disclosure of related party transactions:

Transactions With Management and Others.

Describe briefly any transaction, or series of

similar transactions, since the beginning of the

registrant’s last fiscal year, or any currently

proposed transaction, or series of similar

transactions, to which the registrant or any of

its subsidiaries was or is to be a party, in which

the amount involved exceeds $60,000, and in

which any of tr 2 following persons had, or will

have, a direct or indirect material interest . . .

(1) Any director or executive officer of the

registrant; (2) Any nominee for election as

a director; (3) Any security holder who is

known to the registrant to own more than five

percent of any class of the registrant’s voting

securities ...

13

AT&T’s undisclosed nineteen takings of At Home’s

proprietary technology involved, in aggregate, more

than $400,000,000 in At Home’s property, including its

proprietary technology, because that is what AT&T paid

to settle the bankrupt At Home bondholders’ claims of

misappropriation. 1110;JA2136. Each taking of At

Home’s proprietary technology, and the series of takings

together, plainly represent a “transaction,” as well as a

series of transactions, of in excess of $60,000 between

At Home and its “security holder who is known to own

more than 5%” of At Home stock.

The failures to disclose the inherently deceptive act

of control person misappropriation from the issuer

constitute a clear violation of the applicable SEC rule

designed to compel such disclosures.

d. AT&T’s Continued Deceptive Statements

Consummate Its Scheme

Once AT&T had obtained At Home shareholder

approval of AT&T’s control of At Home in September

2000, AT&T embarked on a series of steps to complete

its takings of all of At Home’s intellectual property, force

At Home into bankruptcy, start AT&T’s replacement

network, effect a merger of part of AT&T and Comcast,

and secure Cox and Comcast as new customers for

AT&T’s new network. 116,36,58,59(k)(6)-(11),69,70,72,91-

107;JA2079,2086,2093,2097-102,2112-15,2126-35. The

steps that weakened At Home and eventually forced At

Home into bankruptcy included the withholding of

revenues due to At Home by AT&T, Cox and Comcast;

AT&T’s causing At Home to overspend its budget; and

AT&T’s deceptive statement to At Home that AT&T

would provide financing to At Home when, in fact,

14

AT&T had no such intention. 19166,75(c)-(d),91(c)-

(d),100;JA2111-12,2116-17,2127,2132-33.

As a direct result of AT&T’s deceptive and associated

steps pursuant to its scheme, At Home was compelled to

enter into unfavorable (“death spiral”) financing. 1100;JA-

2133. When announced on June 8, 2001, this caused a 52%

drop in At Home’s share price. /d. Ultimately, the AT&T

defendants’ scheme caused a total loss of the investment

of those persons who purchased At Home stock and did

not sell same.

5. Procedural History

In a series of orders from September 18, 2003 through

August 9, 2004, reproduced at App. 46a-53a, the district

court initially denied defendants’ F.R.C.P Rule 12(b)(6)

motions to dismiss the Rule 10b-5 claims. After this Court’s

decision in Dura Pharmaceuticals v. Broudo, 544 U.S. 336

(2005), the court held that that portion of defendants’

integrated scheme that was concealed by their

misrepresentations could not comprise part of a scheme

“fn connection with the purchase or sale of securities” within

the meaning of Rule 10b-5. App. 27a-29a. With the violative

scheme reduced to merely the misrepresentations, the

district court held that, under Dura, plaintiffs had failed

to plead that their loss was caused by either a disclosure to

the market of the misrepresentation or a materialization

of the risk concealed by the misrepresentation. /d. 33a.

The Second Circuit affirmed by Order dated July 9,

2007 (“Order”). It held that the scheme was not “in

connection with the purchase or sale of securities” under

Rule 10b-5, 2d., citing Mutual Shares Corp. v. Genesco,

Inc., 384 F.2d 540 (2d Cir. 1967). It also held, for

15

“substantially the reasons set forth by the district court,”

that plaintiffs had failed to plead loss causation from the

misrepresentations. Jd. 3a-4a.

REASONS FOR GRANTING THE PETITION

The scope of deceptive practices prohibited by § 10(b)

is a recurring issue in the federal courts, including this

Court. This Court granted certiorari in Stoneridge

Investment Partners v. Scientific-Atlanta, Inc., No. 06-43

(“Stoneridge”), to consider whether that scope extends to

“deceptive devices and contrivances” by a defendant who

makes no affirmative misrepresentations, but whose

deceptive acts are concealed by and are part of an issuer’s

scheme and misrepresentations to the market.® See also

The Regents of the University of California v. Merrill

Lynch, Pierce, Fenner & Smith, Inc., 482 F:3d 372 (5" Cir.

2007), petition for cert. filed (April 5, 2007) (No. 06-1341)

(raising virtually the same question of whether the scope

of deceptive practices prohibited by §10(b) extends to non-

speakers whose deceptive acts are concealed by and part

of the issuer’s misrepresentations to the market)

(“Regents”).

In conflict with Stoneridge and Regents, Simpson v.

AOL Time Warner, Inc., 452 F.3d 1040 (9" Cir. 2006),

petition for cert. filed (Oct. 19, 2006) (No. 06-560)

(“Simpson”) held that deceptive practices of non-speakers

are within the scope of acts prohibited by §10(b) where

they further the scheme of an issuer who made

misrepresentations to the market.

6. Petitioners believe that this case should be reviewed with

Stoneridge to afford resolution of the closely related scheme

liability issues. In the alternative, certiorari should be granted

and this case held pending disposition of Stoneridge.

16

The Order constricts the scope of acts prohibited by

§10(b) in a manner that conflicts with each of the Fifth,

Eighth and Ninth Circuits and the prior rulings of this

Court. The Order holds not only that must the violator

make misrepresentations. Also, the violator’s unlawful

and deceptive acts concealed by those misrepresentations

are excluded from the prohibition of Rule 10b-5 against

a deceptive scheme or artifice “in connection with the

purchase or sale of securities.” This directly conflicts

with the scope of prohibition found in Simpson and prior

decisions of this Court. SEC v. Zandford, 535 U.S. 813

(2002); Superintendent of Ins. of N.Y. v. Bankers Life &

Casualty Co., 404 U.S. 6 (1971); Affiliated Ute Citizens

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

Similarly, the Order conflicts with the Exchange

Act’s requirements for proving loss causation and this

Court’s prior securities law causation decisions,

including Dura Pharmaceuticals v. Broudo, 544 U.S. 336

(2005). Over three thousand cases have cited to Dura.

A current and recurring issue of great importance in

the federal securities laws is what private plaintiffs must

allege in tracing loss causation from the violation to the

decline in the share price.

Section 21D(b)(4) of the Exchange Act, 15 U.S.C.

§ 78u-4(b)(4), provides that a private plaintiff must prove

“that the act or omission of the defendant alleged to

violate this chapter caused the loss for which the plaintiff

seeks to recover damages.” By alleging that certain of

the defendants’ misrepresentations directly caused the

price of the stock to decline, plaintiffs alleged facts that,

if proved, complied with the implied requirements of

17

Section 21D(b)(4). In dismissing on loss causation

grounds, the Order clearly conflicts with Section 21 D(b)(4).

The Order also conflicts with Dwra, which recognizes

that where a misrepresentation causes a later act which, in

turn, causes the stock price to decline, a private plaintiff

satisfies loss causation. Here, plaintiffs alleged that

defendants’ scheme caused the stock price to decline and

also caused other acts, which caused the stock price to

decline. By holding that plaintiffs failed to meet the Dura

standard for pleading loss causation, the Order conflicts

with Dura.

This Court has recognized the need for certainty and

predictability in the securities area, and the Second Circuit

handles a large volume of securities cases. Granting the

Petition to clarify the scope of prohibited conduct and the

pleading of causation will resolve the conflict between the

Order and all the foregoing authority on these important

and recurring issues in securities law.

Granting certiorari also satisfies basic justice precepts

of redressing injuries caused by fiduciaries who steal

sensitive property from their beneficiary, lie to the market

about their thefts, and also lie to the market about related

matters in order to enable themselves to consummate their

scheme to steal the most sensitive property and customers

of their beneficiary.

As important as it may be to rein in some private actions

under the federal securities laws, it is equally important

that in the process egregious violations of Section 10(b)

not be immunized. Granting certiorari will allow this Court

to manage this process so as to maintain that balance.

18

I. IN CONFLICT WITH OTHER CIRCUITS, THIS

COURT’S OWN PRIOR DECISIONS, AND THE

PLAIN LANGUAGE OF RULE 10b-5, THE

ORDER EFFECTIVELY LIMITS THE SCOPE

OF CONDUCT PROHIBITED BY RULE 10b-5

SOLELY TO MISREPRESENTATIONS

A. Conflicts With Prior Decisions Of This Court

The Order held that only defendants’ misrepresentations

were in connection with the purchase or sale of securities

within the meaning of Rule 10b-5, and that the deceptive

and unlawful acts that the misrepresentations concealed

were not in connection with the purchase or sale of

securities. App. 3a (court of appeals opinion); id. 25a-

29a (district court opinion).

This holding conflicts with prior decisions of this

Court. SEC v. Zandford, 535 U.S. 813 (2002) (deception

created by breach of fiduciary duty to disclose sales of

securities and conversion of proceeds constitutes scheme

in connection with purchase or sale of securities);

Superintendent of Ins. of N.Y. v. Bankers Life &

Casualty Co., 404 U.S. 6 (1971).

Where misrepresentations conceal breaches of

fiduciary duty, such breaches are part of the fraud in

connection with the purchase or sale of securities. E.g.,

Affiliated Ute Citizens v. United States, 406 U.S. 128

(1972) (misstatements of material fact used by bank

employees in position of market maker to acquire stock

at less than fair value); Superintendent, (seller (of bonds)

was duped into believing that it, the seller, would receive

the preceeds). Cf. SEC v. Capital Gains Research

19

Bureau, 875 U.S. 180 (1963) (injunction under

Investment Advisers Act of 1940 to compel registered

investment adviser to disclose to his clients his own

financial interest in his recommendations). Compare

Santa Fe Indus. v. Green, 430 U.S. 462 (1977) (where no

misrepresentation is alleged, mere breach of fiduciary

duty did not violate Rule 10b-5).

In Zandford, the Court emphasized 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. There a broker’s sale of his customers’ securities

with the undisclosed intent to misappropriate the

proceeds constituted a fraudulent scheme “in connection

with the purchase or sale of any security.”

[EJach sale was made to further

respondent’s fraudulent scheme; each was

deceptive because it was neither authorized by,

nor disclosed to, the Woods. ... Indeed, each

time respondent ‘exercised his power of

disposition for his own benefit,’ that conduct,

‘without more,’ was a fraud. ...

The fact that respondent

misappropriated the proceeds of the sales

provides persuasive evidence that he had

violated § 10(b) when he made the sales, but

misappropriation is not an essential element

of the offense. . . . It is enough that the scheme

to defraud and the sale of securities coincide.

Id. at 820-23 (citations omitted) (emphasis supplied).

Zandford concerned neither misrepresentations nor

20

omissions, but deceptive conduct. Here, far more than

in Zandford, the violator engaged in affirmative

misrepresentations that “we protect” the IP in order to

enable itself to misappropriate such IP through these

and other escalating misrepresentations and deceptions

in an integrated scheme or artifice. See Statement of the

Case supra. This scheme inflated the market price of

At Home stock and, thus, satisfied the “in connection

with” test in a way that Zandford did not. See Zandford,

535 U.S. at 822 (inflation of publicly traded securities

prices sufficient though not necessary to satisfy the “in

connection with” test). Thus, the Order directly conflicts

with Zandford in this respect.

Moreover, one of the deceptions that the violator

used to misappropriate the IP here successfully induced

sharehclder approval of AT&T’s purchase of control

blocks of stock of At Home owned by Cox and Comcast.

See Statement of the Case supra. This purchase

increased AT&T’s control over At Home to the following

point: At Home’s most sensitive IP which At Home had

previously resisted turning over to AT&T, was then

provided to the omnipotent AT&T. This “coinciding” of

the scheme and the purchase or sale of securities was

what satisfied and was “enough” to satisfy the “in

connection with” test in Zandford. Here, also, AT&T’s

scheme employed AT&T’s purchase of securities, and

shareholder approval thereof, to effect the scheme.

Even more than in Zandford, such scheme or artifice

was in connection with the purchase and sale of

securities. This constitutes a second conflict between the

Order and Zandford.

21

Third, the Order appears to hold that “nothing in

the SEC regulations required that defendants disclose

the misappropriation scheme.” App. 4a (court of

appeals); see id. 26a, 31a (district court). However, SEC

Regulation S-K, Item 404(a), 17 CFR § 229.404(a), as

then in effect expressly required disclosure of related

party transactions as follows:

Transactions With Management and Others.

Describe briefly any transaction, or series of

similar transactions, since the beginning of the

registrant’s last fiscal year, or any currently

proposed transaction, or series of similar

transactions, to which the registrant or any of

its subsidiaries was or is to be a party, in which

the amount involved exceeds $60,000, and in

which any of the following persons had, or will

have, a direct or indirect material interest .. .

(1) Any director or executive officer of the

registrant; (2) Any nominee for election as

a director; (3) Any security holder who is

known to the registrant to own more than five

percent of any class of the registrant’s voting

securities...

Thus, even more than in Zandford, the misappropriation

here triggered an explicit SEC disclosure requirement

designed to inform prospective or actual shareholders

about any looting or improper transactions by insiders

of an issuer of public stock. Zandford merely involved

general fiduciary principles. Clearly, the unlawful

scheme here was, in toto, in connection with the purchase

or sale of securities. This constitutes a third conflict

between the Order and Zandford.

22

Zandford relied upon Superintendent. There the

directors of Manhattan Casualty Company authorized

the sale of treasury bonds because they had been

“duped” into believing that the company would receive

the proceeds of the sale. 404 U.S. at 9. The Court held

that “Manhattan was injured as an investor through a

deceptive device which deprived it of any compensation

for the sale of its valuable block of securities.” /d., at 10.

The Court explicitly rejected the Second Circuit’s

narrow reading of § 10(b) in Superintendent of Ins. of

N.Y. v. Bankers Life & Casualty Co., 430 F.2d 355, 361

(2d Cir. 1970),’ that because the fraud against Manhattan

did not occur on a securities exchange, it was not

prohibited by § 10(b). 404 U.S. at 10. Noting that § 10(b)

“must be read flexibly, not technically and restrictively,”

id. at 12, the Court stated that while the interest in

“preserving the integrity of the securities markets” was

one of the purposes of the statute, it was not limited to

that objective. Jd.

Here, At Home stock was traded on the Nasdaq and

the “integrity of the market” test is satisfied, though it

is not necessary to satisfaction of the “in connection with”

test. However, relying on Mutual Shares Corp. v.

7. This Court again found fault with the Second Circuit’s

narrow reading of § 10(b)’s “in connection with” language in

Merrill Lynch, Pierce, Fenner & Smith, Inc. v. Dabit, 547 U.S.

71, 85 (2006) (“Under our precedents, it is enough that the fraud

alleged ‘coincide’ with a securities transaction - whether by the

plaintiff or by someone else. The requisite showing, in other

words, is ‘deception “in connection with the purchase or sale of

any security,” not deception of an identifiable purchaser or

seller.’”) (citations omitted).

———— a ee

23

Genesco, Inc., 384 F.2d 540 (2d Cir. 1987), the district

court determined below that

the scheme alleged here involved corporate

abuse, misconduct and diversion of assets, but

no transactions in the relevant securities. Its

success depended on the misappropriation of At

Home’s proprietary technology, without regard

to any transactions in At Home stock. ...

The PTAC does allege that in March 2000

AT & T increased its control over At Home by

acquiring At Home shares from Cox and

Comcast in exchange for AT & T shares.

However, an otherwise legitimate stock

transaction that is antecedent, but not integral,

to the alleged fraud does not meet the ‘in

connection with’ requirement. See Zandford, 535

U.S. at 820, 122 S.Ct. 1899 (neither an otherwise

legitimate securities transaction that is an

independent event from the alleged fraud, or is

merely followed by the theft of the proceeds of

the transaction, supports a claim under Section

10(b)). Indeed, the defendants in Mutual Shares,

like AT & T here, acquired a controlling position

in the issuer before carrying out their scheme,

384 F.2d at 542, but the Court of Appeals

nevertheless dismissed plaintiffs’ claim based on

the subsequent diversion of assets from the

issuer. [d. at 546.

App. 27a-28a. The district court’s above “finding” is

contrary to the plain allegations of the complaint that

the integrated scheme had gone on for six months before

24

AT&T had to escalate the scheme. AT&T then made

expensive purchases of At Home stock in order to

misappropriate the most sensitive IP from At Home,

which had theretofore resisted divulging same.

Also, in Mutual Shares, plaintiffs alleged that

defendants, as part of the tender offer through which

they would become controlling shareholders of a public

company, defrauded them by remaining silent as to

(1) their true intentions to manage the acquired company

for their benefit, and (2) the actual (higher) value of real

estate owned by the acquired company. 384 F.2d at 544.

Plaintiffs were not sellers to defendants in the tender

offer but were purchasers (at allegedly depressed prices)

who continued to hold their shares, and who failed

to allege that defendants had any non-public

information as to the value of the real estate. Jd. at

544-45. The Court characterized the secret intention to

abuse the acquired company as a “failure to disclose by

an outsider,” or “at best” an allegation “that defendants

impliedly represented to the world at large that they

would not mismanage [the acquired company] if they

acquired control and that plaintiffs relied on this when

they bought their .. . stock. Plaintiffs cite no cases in

which [Rule 10b-5] has been applied in this expansive

manner, nor have we been able to find any.” /d. at 545

(footnote omitted).

In contrast, AT&T was an insider and control person

which was misappropriating IP and falsely stating that

the IP was protected at the same time that it was

engaged in other misrepresentations to enable it to

misappropriate the IP Only after its scheme had long

been under way, did AT&T purchase additional control

25

blocks of At Home stock on false pretenses in order to

enable it to misappropriate the most sensitive parts of At

Home’s IP AT&T’s undisclosed and unlawful scheme had

been inflating the prices of At Home stock paid by plaintiffs

long before AT&T engaged in its lies to induce shareholder

approval of AT&T’s purchase of the control block of At

Home’s stock. Thus, Mutual Shares is extremely

distinguishable.

Similarly, the Order conflicts with other decisions of

this Court insofar as the Order severed the deceptive and

unlawful acts concealed by the misrepresentations from

the integrated scheme or artifice. Having thus severed

these deceptive acts, the Order erroneously held that they

are not prohibited by Section 10(b). But prior decisions of

this Court hold to the contrary. Affiliated Ute Citizens; SEC

v. Capital Gains Research Bureau, 375 U.S. 180 (1963).

Certiorari should be granted to resolve all of the foregoing

conflicts between this Court’s prior decisions and the Order.

B. The Order Conflicts With The Plain Language

Of The Statute And Rule

Under the plain language of the statute, defendants’

integrated scheme or artifice, 77 toto, constitutes a violation

of the statute “in connection with” plaintiffs’ purchases and

sales of At Home’s securities as well as AT&T’s purchases.

Under extensive precedent of this Court, it is incorrect to

dumb down “scheme” or “artifice” violations into merely

the “misrepresentation.”

Thus, the Order further conflicts with this Court’s clear

precedent that statutes be interpreted in accordance with

their plain language.

26

This Court has often stated that it will rely on the

text of the statute to determine the scope of rights and

remedies under the Exchange Act. For example, in

granting certiorari in Central Bank of Denver, N.A. v.

First Interstate Bank of Denver, N.A., 508 U.S. 959

(1993), the Court sua sponte directed the parties to brief

the question “[w]hether there is an implied private right

of action for aiding and abetting violations of Section

10(b) of the Securities Exchange Act of 1934 and SEC

Rule 10b-5.” In holding that there was no such implied

right of action, the Court relied almost exclusively on

the text of Section 10(b), which does not reach actors

who aid and abet a violation of the section by another.

With respect ... to... the scope of conduct

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

controls our decision. ... We have refused to

allow 10b-5 challenges to conduct not

prohibited by the text of the statute.

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

of Denver, N.A., 511 U.S. 164, 173 (1994). See also Santa

8. The Court further noted that

[t]he absence of § 10(b) aiding and abetting liability does

not mean that secondary actors in the securities

markets are always free from liability under the

securities Acts. 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 all

of the requirements for primary liability under Rule

10b-5 are met.

511 U.S. at 191.

27

Fe Indus., 430 U.S. at 472-74; Ernst & Ernst v.

Hochfelder, 425 U.S. 185, 197 (1976) (“In addressing [the

elements of a cause of action under Section 10(b) and

Rule 10b-5], we turn first to the language of § 10(b), for

‘t]he starting point in every case involving construction

of a statute is the language itself.” (quoting Blue Chip

Stamps v. Manor Drug Stores, 421 U.S. 723, 756 (1975)

(Powell, J., concurring))).

Moreover, a “statute must, if possible, be construed

in such fashion that every word has some operative

effect.” United States v. Nordic Village, Inc., 503 U.S.

30, 36 (1992). See also Duncan v. Walker, 533 U.S. 167,

174 (2001) (“It is our duty to give effect, if possible, to

every clause and word of a statute.”). Here the critical

language of § 10(b) makes it unlawful “for any person,

directly or indirectly ...[t]o use or employ...any...

deceptive device or contrivance.” The Court has

understood “device” to mean “that which is devised, or

formed by design; a contrivance; an invention; project;

scheme; often, a scheme to deceive; a stratagem; an

artifice.” “Contrivance,” according to the Court, means

“a thing contrived or used in contriving; a scheme, plan

or artifice.” Hochfelder, 425 U.S. at 199 n. 20 (quoting

Webster’s New International Dictionary 580, 713 (2d ed.

1934).

In construing the “in connection with” language of

Section 10(b) and Rule 10b-5 to extend only to certain

misrepresentations, the Order conflicts with Congress’

plain language and prior decisions of this Court

interpreting this language.

28

Moreover, numerous decisions of this Court make

clear that Section 10(b) “should be ‘construed not

technically and restrictively, but flexibly to effectuate

its remedial purposes.””® Flexible construction of the

plain language of the statute does not permit a narrow

interpretation which would require, absent textual

support, that a “deceptive device or contrivance” be

permitted when Congress and the SEC have prohibited

same. The Order conflicts with the prior decisions of this

Court in this respect as well.

C. Conflict With Other Circuits

In each of three recent circuit court decisions

construing the scope of conduct prohibited by Rule 10b-

5, the court held that deceptive acts could constitute,

together with misrepresentations, a scheme or deception

in violation of Rule 10b-5.

In Simpson, plaintiffs alleged that defendants

engaged in a scheme to overstate the reported revenues

of Homestore.com by entering into sham transactions

in which payments were made to Homestore, which then

returned monies to the “vendors.”

We conclude that conduct by a defendant

that had the principal purpose and effect of

creating a false appearance in deceptive

9. E.g., Zandford, 535 U.S. at 819, quoting Affiliated Ute

Citizens, 406 U.S. at 151 (internal quotation marks omitted);

accord, Pinter v. Dahl, 486 U.S. 622, 653 (1988); Herman &

MacLean v. Huddleston, 459 U.S. 375, 386-87 (1983); Santa Fe

Indus., 430 U.S. at 475-76; Superintendent, 404 U.S. at 12; SEC

v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 195 (1963).

29

transactions as part of a scheme to defraud is

conduct that uses or employs a deceptive

device within the meaning of § 10(b).

Furthermore, such conduct may be in

connection with the purchase or sale of

securities if it is part of a scheme to

misrepresent public financial information

where the scheme is not complete until the

misleading information is disseminated into

the securities market. Finally, a plaintiff may

be presumed to have relied on this scheme to

defraud if a misrepresentation, which

necessarily resulted from the scheme and the

defendant’s conduct therein, was disseminated

into an efficient market and was reflected in

the market price.

452 F.3d at 1050-52. The court affirmed the dismissal of

Rule 10b-5 claims but remanded to allow plaintiffs to seek

leave to replead under the new standard. /d. at 1048.

By limiting the scope of conduct prohibited by Rule

10b-5 to misrepresentations, and by further excluding

deceptive conduct from consideration as part of ascheme

to defraud, the Order directly conflicts with the Ninth

Circuit’s decision in Simpson.

The scope of conduct prohibited by Rule 10b-5 is

currently before this Court in Stoneridge. There, the

Eighth Circuit refused to hold non-speaking defendants

liable under § 10(b) for a course of business whose sole

purpose was to allow a public company to report falsely

inflated earnings. In so limiting the scope of prohibited

conduct, the Eighth Circuit adopted a “bright line” test:

30

[A]Jny defendant who does not make or

affirmatively cause to be made a fraudulent

statement or omission, or who does not

directly engage in manipulative securities

trading practices, is at most guilty of aiding

and abetting and cannot be held liable under

§ 10(b) or any subpart of Rule 10b-5.

443 F.3d at 992.

In Regents, the Fifth Circuit adopted the Eighth

Circuit’s bright line test, requiring misrepresentations

or omissions in a private § 10(b) action. Defendant were

alleged to have participated in transactions which

allowed Enron Corp. to take liabilities off its books

temporarily and to book revenues from transactions

when it was actually incurring debt. The Fifth Circuit

cited the split between the Eighth and Ninth Circuits

on the issue of scheme liability in the absence of

misrepresentation, aligning itself with the Eighth Circuit

in Stoneridge.

An act cannot be deceptive within the

meaning of § 10(b) where the actor has no duty

to disclose. ...

(T]he Court, in its ... cases interpreting

§ 10(b), has established that a device, such as

a scheme, is not ‘deceptive’ unless it involves

breach of some duty of candid disclosure.

482 F.3d at 386, 389 (citations and footnotes omitted).

However, neither Stoneridge nor Regents went so far as

to exclude the deceptive non-speaking conduct

31

altogether from the scope of prohibited activity. In doing

so, the Order goes far beyond and conflicts with

Stoneridge and Regents as well. Granting certiorari is

necessary to resolve the foregoing conflicts on the

recurring and important issue of the scope of conduct

prohibited by Section 10(b).

II. THE ORDER’S LOSS CAUSATION RULING

CONFLICTS WITH 15 U.S.C. § 78u-4(b)(4) AND

THE PRIOR DECISIONS OF THIS COURT

A. Conflict with 15 U.S.C. § 78u-4(b)(4)

An additional issue of recurring importance calling

for resolution in this case is the conflict between the

Order and the text of the Exchange Act setting forth

the requirements of proving loss causation. Congress

provided that:

In any private action arising under this

chapter, the plaintiff shall have the burden of

proving that the act or omission of the

defendant alleged to violate this chapter

caused the loss for which the plaintiff seeks

to recover damages.

Section 21 D(b)(4) of the Exchange Act, 15 U.S.C. § 78u-

4(b)(4) (emphasis supplied); App. 57a.

Here, plaintiffs expressly alleged that certain of

defendants’ misrepresentations on December 6, 1993 and

March 29, 2000 directly caused the price of the stock of

At Home to decline. See Statement of Case supra. If

proved, these allegations satisfy Section 21D(b)(4). In

32

holding against plaintiffs, neither the Order nor the

district court ever mentioned these misrepresentations

that directly decreased the price of At Home stock.

Whether intentionally or by inadvertence, the

Order, in rejecting loss causation based on these

misrepresentations, clearly conflicts with the implied

pleading requirement of Section 21D(b)(4).

In this regard, the plain language of Section

21D(b)(4) controls. See Ernst & Ernst v. Hochfelder, 425

U.S. 185, 197 (1976), and cases collected at Point I.A.

supra. The text of §21D(b)(4) does not specify a burden

of proving causation from a “statement or omission” or

a “misrepresentation or omission,” but rather from an

“act or omission.” Congress thus clearly contemplated

that “the act... of the defendant alleged to violate this

chapter” could include not merely the “act of speaking”

but also “any act, practice, or course of business which

operates or would operate as a fraud or deceit upon any

person,” as set forth in Rule 10b-5(c). See Point I.A.

supra.

Absolutely nothing in the statutory text suggests

that employment of a “deceptive device or contrivance”

in connection with the purchase or sale of securities be

limited only to instances where a misrepresentation

accompanies the conduct. In this context, plaintiffs

separately satisfied §21D(b)(4) by alleging that the

violator’s deceptions caused other acts (desperation

financing) that caused the price of At Home stock to fall.

See Statement of Case supra. By holding to the contrary,

the order further conflicts with §21D(b)(4).

-

33

Finally, plaintiffs also argued below that they

‘satisfied loss causation by pleading a leak of the truth

and the materialization of the concealed risk in numerous

respects.

B. Conflict With The Prior Decisions Of This

Court

This Court has recognized that “[t]here is ... more

than one way to demonstrate the causal connection” for

purposes of Rule 10b-5. Basic, Inc. v. Levinson, 485 U.S.

224, 243 (1988). Specifically with regard to loss causation,

this Court has held that, in a pure misrepresentation

case, causation is adequately pleaded where a

misrepresentation allegedly causes a later leak or

corrective disclosure that, in turn, causes a decline in

the stock price. Dura, 544 U.S. at 347. Dura specifically

relied on common law proximate cause. 544 U.S. at 345.

Where intentional harm or injury is alleged, the common

law is astute to find causation of injury at the pleading

stage.°

10. In Dura, this Court cited (twice) to W. Page Keeton,

Prosser & Keeton On THE Law OF Torts § 8 at 37 n. 27 (5" ed.

1984) as an authoritative source of common law proximate cause

principles. Prosser quotes from Derosier v. New England Tel. &

Tel. Co., 1380 A. 145, 152 (N.H. 1925) (emphasis supplied) as follows:

In determining how far the law will trace causation

and afford a remedy, the facts as to defendant'’s intent,

his imputable knowledge, or his justifiable ignorance

are often taken into account. The moral element is the

factor that has turned close cases one way or another.

For an intended injury, the law is astute to discover

even very remote causation. For one which the

(Cont'd)

34

Per force, where, as here, plaintiff explicitly alleges

that the misrepresentations themselves intentionally

caused the decline in the price of the stock, loss causation

is adequately pleaded under Dura and 15 U.S.C. § 78u-

4(b)(4) supra. The Order clearly conflicts with Dura in

this respect.

Similarly, in a scheme case, where the scheme or

deceptive acts caused other acts—here including

desperation financing—that caused the decline in stock

price, loss causation is adequately pleaded under Dura’s

reasoning. In holding to the contrary, the Order once

again directly conflicts with Dura.

Ill. OTHER REASONS FOR GRANTING THE

PETITION

Liability under the Exchange Act is “an area that

demands certainty and predictability” for those who

provide services to participants in the securities

business. E.g., Pinter v. Dahl, 486 U.S. 622, 652 (1988).

The Second Circuit handles a high proportion of actions

filed under the federal securities laws. This case presents

the opportunity for this Court to provide certainty and

predictability regarding the previously demonstrated

conflicts in the “in connection with” and the loss

causation standards in the context of scheme liability.

(Cont’d)

defendant merely ought to have anticipated it has often

stopped at an earlier stage of the investigation of causal

connection. And as to those where there was neither

knowledge nor duty to foresee, it has usually limited

accountability to direct and immediate results.

30

Granting certiorari also satisfies basic justice

precepts of redressing injuries caused by fiduciaries who

steal sensitive property from their beneficiary, lie to the

market about their thefts, and also lie to the market

about related matters in order to enable themselves to

consummate their scheme to steal the most sensitive

property and customers of their beneficiary.

As important as it may be to rein in some private

actions under the federal securities laws, it is equally

important that in the process egregious violations of

Section 10(b) not be immunized. Granting certiorari here

will allow this Court to manage this process so as to

maintain that balance.

CONCLUSION

The petition for a writ of certiorari should be granted.

Respectfully submitted,

CHRISTOPHER LOVELL

Counsel of Record

Gary S. JACOBSON

IAN T. STOLL

LOVELL STEWART HALEBIAN LLP

500 Fifth Avenue

New York, New York 10110

(212) 608-1900

Counsel for Petitioners