Appendix — Leykin v. AT&T Corp (No. 07-484)

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APPENDIX A — SUMMARY ORDER OF THE

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

FILED JANUARY 30, 2007

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

No. 06-1583-cv

Semen LEYKIN, on behalf of himself and all others

similarly situated,

Plaintiffs-Appellants,

FRANK THOMAS, KEN PEARLMAN, MIKE

KATTO, AT HOME SUIT GROUP, INC., KURT

BUETTLER, GERRY GALIGER, STAN COHN,

CHANNA UNGER, MICHAEL EKSLER, FREIDA

EKSLER and RONALD VENTURA,

Consolidated Plaintiffs-Appellants,

v.

AT & T CORPORATION, KLEINER, PERKINS

CAUFIELD & BYERS, C. MICHAEL ARMSTRONG,

MARK MCEACHEN, FRANK IANNA, CHARLES H.

NOSKI, DANIEL H. SOMERS, JOHN C. PETRILLO,

JOHN C. MALONE, EDWARD S. ROGERS, DAVID

M. WOODROW, HOSSEIN ESLAMBOLCHI, BRIAN

L. ROBERTS, RAYMOND LIGUORI, THOMAS A.

JERMOLUK, WILLIAM R. HEARST III and L. JOHN

DOERR,

Defendants-Appellees,

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Appendix A

COX COMMUNICATIONS, INC., COMCAST CABLE

COMMUNICATIONS, INC. and MOHAN GYANI,

Consolidated-Defendants-Appellees,

PATTI HART and MUFIT CINALI,

Defendants.

Present:

AMALYA L. KEARSE,

HON. ROBERT A. KATZMANN,

Circuit Judges,

DAVID G. TRAGER,

District Judge.”

SUMMARY ORDER

Appeal from the United States District Court for the

Southern District of New York (Stanton, J.).

On consideration whereof, it is hereby ORDERED,

ADJUDGED, and DECREED that the orders of the

district court, dated September 17, 2003, August 9, 2004,

and March 23, 2006 (as amended on June 28, 2006), be

and they hereby are AFFIRMED.

* The Honorable David G. Trager, District Judge, United

States District Court for the Eastern District of New York, sitting

by designation.

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Appendix A

Plaintiffs-appellants appeal the order dismissing

their first amended complaint (“FAC”) and denying them

leave to file second and third amended complaints. These

three complaints all alleged, in pertinent part, that the

defendants violated Sections 10(b), 14(a), and 20(a) of

the Securities Exchange Act and the regulations

promulgated thereunder, as well as committed common

law fraud and breach of fiduciary in violation of Delaware

law. See 15 U.S.C. § § 78j(b), 78n, 78t(a); 17 C.F.R.

$§ 240.10b, 240.14a-9. We assume the parties’ familiarity

with the facts, the proceedings below, and the

specification of issues on appeal.

The primary thrust of the plaintiffs’ complaint is that

the AT & T defendants engaged in a secret scheme to

convert At Home’s proprietary technology and that this

scheme, as well as misrepresentations related to it, led

to a decline in the price of At Home’s stock. To state a

claim under § 10(b) and Rule 10b-5, plaintiffs must allege

(1) a material misrepresentation (or omission), (2)

scienter, (3) a connection with the purchase or sale of a

security, (4) reliance, (5) economic loss, and (6) loss

causation. Dura Pharms., Inc. v. Broudo, 544 U.S. 336,

341-42, 125 S.Ct. 1627, 161 L.Ed.2d 577 (2005). For

substantially the reasons set forth by the district court,

see Leykin v. AT & T Corp., 423 F. Supp. 2d 229 (S.D.N_Y.

2006), the plaintiffs here have failed to allege that the

AT & T defendants’ conversion scheme was in connection

with the purchase or sale of securities, see, e.g., Mutual

Shares Corp. v. Genesco, Inc., 384 F.2d 540, 545-46 (2d

Cir. 1967), and that any misrepresentation associated

with that scheme was the cause of plaintiffs’ loss under

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Appendix A

the standard set forth in Dura Pharmaceuticals, Inc. v.

Broudo, 544 U.S. at 346-47, 125 S.Ct. 1627.

As to plaintiffs’ claims under § 14(a), an “[o|mission

of information from a proxy statement is actionable if

either the SEC regulations specifically require

disclosure of the omitted information in a proxy

statement, or the omission makes other statements in

the proxy statement materially false or misleading.”

Seinfeld v. Gray, 404 F.3d 645, 650 (2d Cir.2005) (internal

quotation marks omitted). Here, nothing in the SEC

regulations required that defendants disclose the AT &

T defendants’ misappropriation scheme, and that

omission did not “make[ ] other statements in the proxy

statement materially false or misleading.” Jd. Because

plaintiffs have failed to allege primary violations of § 10b

or § 14(a), their claims of control person liability under

§ 20(a) must also fail. See, e.g., Boguslavsky v. Kaplan,

159 F.3d 715, 720 (2d Cir.1998) (holding that to bring a

claim under § 20(a), a plaintiff must show, inter alia,

“a primary violation by a controlled person”).

Finally, plaintiffs’ claims for common law fraud and

breach of fiduciary duty of candor toward the

shareholders are preempted by the Securities Litigation

Uniform Standards Act, which provides that “[nJo

covered class action based upon the statutory or common

law of any State or subdivision thereof may be

maintained in any State or Federal court by any private

party alleging ... a misrepresentation or omission of a

material fact in connection with the purchase or sale of

a covered security.” 15 U.S.C. § 78bb(f)(1).

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Appendix A

We have considered all of plaintiffs-appellants’ other

arguments and find them without merit. Accordingly, for

the foregoing reasons, the judgment of the district court

is hereby AFFIRMED.

FOR THE COURT:

THOMAS ASREEN, ACTING CLERK

By: s/ Lucille Carr

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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

UNITED STATES DISTRICT COURT

SOUTHERN DISTRICT OF NEW YORK

No. 02 Civ. 1765 (LLS)

AND ALL CONSOLIDATED

AND RELATED ACTIONS

SEMEN LEYKIN, on behalf of himself and

all others similarly situated,

Plaintiff,

- against -

AT & T CORPORATION; COX COMMUNICATIONS,

INC.; COMCAST CABLE COMMUNICATIONS, INC.;

KLEINER PERKINS CAUFIELD & BYERS; C.

MICHAEL ARMSTRONG; MARK MCEACHEN;

GEORGE BELL; FRANK IANNA; MOHAN GYANT;

CHARLES H. NOSKI; DANIEL H. SOMERS; JOHN

C. PETRILLO; L. JOHN DOERR; THOMAS A.

JERMOLUK; WILLIAM R. HEARST, III; RAYMOND

LIGUORI; JOHN C. MALONE; BRIAN L. ROBERTS;

EDWARD S. ROGERS; DAVID M. WOODROW, and

HOSSEIN ESLAMBOLCHI,

Defendants.

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Appendix B

OPINION AND ORDER

In these consolidated and related securities class

actions, defendants move to dismiss the first amended

(and predecessor) complaints and the proposed third

amended complaint (“PTAC”), which plaintiffs tender

as their best statement of “loss causation.”

FACTS

The facts set forth below are taken from the PTAC,

the documents referenced therein and publicly available

financial filings. Rothman v. Gregor, 220 F.3d 81, 88 (2d

Cir.2000). The facts are presumed to be true for purposes

of this motion. Papasan v. Allain, 478 U.S. 265, 283, 106

S.Ct. 2932, 2943, 92 L.Ed.2d 209 (1986).

1. At Home and its Proprietary Technology

In 1995, defendant Kleiner Perkins Caufield &

Byers, a venture-capital partnership, and Tele-

Communications, Inc. (“TCI”), a cable television

company, co-founded an Internet services company

named At Home Corporation. At Home developed and

managed complex computer software and systems that

enabled customers with a personal computer and a cable

modem to gain access to the Internet at high speeds over

existing television cable lines (the “proprietary

technology”). (PTAC 4 2(a),(b).) It repeatedly

represented that it regarded its technology as

proprietary and that it attempted to protect its rights

therein. /d. at "i 4.

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Appendix B

2. At Home’s Cable Partners

In 1996, TCI and two other cable companies, Cox

Communications, Ine. and Comcast Cable

Communications, Inc., entered Master Distribution

Agreements (“MDAs”) with At Home, which required

them to use only At Home’s service to provide high-speed

Internet access to their cable television subscribers

through June 4, 2002. (PTAC 4% 49.) Pursuant to those

agreements, the cable companies paid At Home 35% of

the average $45 monthly subscription fee per customer

to provide high-speed Internet access to those

customers. /d. at 113, 49. In addition, Cox and Comcast

each acquired stock in At Home and began offering At

Home’s high-speed Internet service to their cable

television markets. /d. at 1 1 50, 52, 54(c).

In June 1998, AT & T Corporation announced that it

would acquire TCI, including its controlling interest in

At Home, in hopes of using At Home’s proprietary

technology to provide residential video, voice and data

services on a single platform, something no other

company had been able to do. /d. at 1 55. The merger

was finalized in March 1999, and TCI was renamed

AT & T Broadband, LLC. /d. at 9 58.

In December 1998, pursuant to an Indefeasible Right

to Use Capacity Agreement (“IRU”), AT & T sold At

Home the exclusive right to use AT & T’s private fiber

optic data network. The IRU enabled At Home to provide

high-speed Internet service to millions of users without

having to build its own network. /d. at 157. At Home

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Appendix B

and AT & T touted this agreement as enabling At Home

to expand its services for years to come. /d.

3. Misappropriation of At Home’s Technology

On November 8, 1999, the day before the start of

the class period, At Home’s stock price closed at $44.94.

(PTAC 4 8.) However, that price did not reflect a secret

plan AT & T had devised to duplicate At Home’s network

so it could provide high-speed Internet service on its

own. To carry out its scheme, between August 1999 and

August 28, 2001 AT & T demanded, gained access to and

copied all of At Home’s proprietary technology, even

though it had no contractual right to do so. /d. at

91 59(d),(h),(s), 110(b). AT & T also refused to make a

non-disclosure or non-compete agreement with At Home.

Id. at 1 87.

A significant element of AT & T’s plan to

misappropriate At Home’s proprietary technology was

a program known as Open Access, which was first

announced on December 6, 1999. The ostensible purpose

of the program was to offer AT & T’s customers a choice

between several Internet service providers, rather than

only the At Home service. /d. at 11 {1 59(k), 67. Although

that choice was never actually offered during the class

period, AT & T demanded that At Home turn over

virtually all of its proprietary technology, stating that it

was needed for tests in preparation for Open Access. In

reality, AT & T’s demands for At Home’s proprietary

technology went far beyond what was necessary to

conduct such tests. /d. at 1 59(k). Those demands caused

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Appendix B

“many At Home employees to leave the Company for

various reasons, specifically including the suspicion that

AT & T was attempting, in reality, not to conduct any

tests but to take At Home’s proprietary technology’?d.

at 1 59(k)(1) as well as “tremendous dissent and

distraction during At Home’s board meetings for the

remainder of At Home’s existence.” Jd. at 1 59(k)(3).

The Open Access announcement did not disclose

AT & T’s misappropriation. Jd. at 11 59(k). Indeed, the

conversion of At Home’s technology was never disclosed

to the market during the class period. /d. at 1 86. Nor

did AT & T’s misappropriation of At Home’s technology

diminish the technology’s usefulness. Jd. at 1 6.

4. March 2000 Agreements

At Home made a series of agreements with AT & T,

Cox and Comeast on March 28, 2000. The first was a

control agreement whereby AT & T acquired all of Cox

and Comcast’s At Home stock in exchange for shares of

AT & T. That gave AT & T a 74% voting interest and a

23% economic interest in At Home, as well as the ability

to appoint a majority of its board. Cox and Comcast

agreed to resign their seats on At Home’s board. (PTAC

11 61(b), 70(b).)

The March 2000 Agreements also gave Cox and

Comcast the option of terminating the exclusivity

provisions of the 1996 MDAs with At Home, or the 1996

MDAs entirely, as early as June 2001-a year earlier than

they were originally scheduled to expire. /d. at 1 61(c).

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Appendix B

Cox and Comcast also obtained the right to acquire

components of At Home’s technology, which would enable

them to offer aspects of At Home’s service themselves.

Id. at 1 61(d).

AT & T, Cox and Comcast also represented that they

would, as promptly as practicable, execute new non-

exclusive MDAs to govern their relationships with At

Home through 2006. Despite those representations, no

new MDAs were made. /d. at 11 59(t), 62, 75(e). In

addition, Cox and Comcast, who together provided

approximately 25% of At Home’s revenues, id. at 1 75(c),

informed At Home as early as September 2000 and April

2001, respectively, that they intended to provide high-

speed Internet service themselves and end their

relationships with At Home. /d. at 171-75, 102. On June

19, 2001, they each notified At Home that they would

exercise their rights under the March 2000 agreements

to terminate the exclusivity provisions of their 1996

MDAs, effective December 4, 2001. Jd. at 11 102.

5. Promethean Financing and IRU Recapture

Agreement

During the spring and summer of 2001, At Home was

experiencing financial problems. (PTAC {1 98.) AT & T

initially agreed to provide At Home with funding, but

reneged when At Home refused to turn over more of its

proprietary technology. /d. at 1 105. At Home was then

forced to issue and sell $100 million of zero-percent five-

year convertible secured notes in a private offering

arranged by Promethean Capital Group, LLC on or

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Appendix B

about June 8, 2001 (“Promethean Financing”). Jd. at

1 100. At Home was also forced to sell certain rights

under the IRU back to AT & T on June 19, 2001 for $75

to $85 million, although At Home experts had determined

that those rights had a fair market value of

approximately $130 million. Jd. at 1189, 90. At Home’s

stock price declined from $3.92 on June 8, 2001 to $1.90

on June 19, 2001. Jd. at 1 100.

6. At Home’s Bankruptcy

On July 23, 2001, At Home filed an S-3 Registration

Statement in connection with the Promethean Financing,

which stated “We will need to raise additional funds

before the end of 2001 to support our business

operations. If we are unsuccessful at raising funds, this

could have a material adverse impact on our operations

and liquidity.”(PTAC { 106.)

Less than a month later, At Home announced in its

Form 10-K/A filed on August 20, 2002 that there was

“substantial doubt about our ability to continue as a going

concern” and that “We cannot guarantee that we will be

able to obtain additional funding on acceptable terms, if

at all.” Jd. at 1 107. On August 30, 2001, At Home

announced that it could not repay the Promethean loan

due the next day. Jd. at 1109. On September 28, 2001, At

Home sold substantially all of its Internet business

assets to AT & T and filed for bankruptcy. /d. at 1 110(a),

(b). By that date, the price of At Home’s stock had fallen

to $0.15. (Winter Sept. 6, 2005 Aff. Ex. 28.)

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Appendix B

Finally, in December 2001, At Home stopped

servicing AT & T pursuant to a bankruptcy court order

and AT & T stopped paying At Home. (PTAC 1 111.)

AT & T then canceled its September 28, 2001 purchase

of At Home’s assets. Jd. With the use of At Home’s

proprietary technology it had finished taking three

months earlier, AT & T then began servicing customers

on its own network, which today services both Cox and

AT & T Broadband/Comcast! subscribers. Jd. at 19 6,

111.

PROCEDURAL HISTORY

On November 7, 2002, plaintiffs filed a consolidated

class action complaint asserting claims under Section

10(b) of the Securities Exchange Act (“Exchange Act”),

Rule 10b-5 promulgated thereunder and control person

liability under Section 20(a) of the Exchange Act against

numerous defendants.’ The consolidated complaint also

1. Comcast merged with AT & T Broadband on December

19, 2001. (PTAC 4 112.)

2. The defendants named in the PTAC are Mark McEachen,

George Bell and John C. Malone (the “At Home defendants”),

AT & T Corporation, C. Michael Armstrong, John C. Petrillo,

Daniel H. Somers, Mohan Gyani, Frank Ianna, Charles H. Noski,

Raymond Liguori and Hossein Eslambolchi (the “AT & T

defendants”), Kleiner Perkins Caufield & Byers, L. John Doerr,

William R. Hearst, III and Thomas A. Jermoluk (the “Kleiner

Perkins defendants”), Comcast Cable Communications, Inc. and

Brian L. Roberts (the “Comcast defendants”), Cox

Communications, Inc. and David M. Woodrow (the “Cox

(Cont'd)

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Appendix B

asserted claims of common law fraud and breaches of

fiduciary duties, which were dismissed in September

2003 as preempted by the Securities Litigation Uniform

Standards Act of 1998, 15 U.S.C. § 78bb(f)(1). The same

order also dismissed, as mere puffery, several statements

alleged as bases for liability.

On February 24, 2004, plaintiffs filed a first amended

consolidated class action complaint, which added a claim

under Section 14(a) of the Exchange Act alleging

misrepresentations and omissions in At Home’s May 26,

2000 Proxy Statement. That claim, and certain control

person claims, were dismissed by order dated August 9,

2004.

By order dated March 10, 2005, a class was certified

of all persons and entities that purchased the common

stock of At Home during the period March 28, 2000

through September 28, 2001.

On May 31, 2005, plaintiffs moved for leave to file a

second amended consolidated complaint to comply with

recently decided cases addressing the issue of loss

causation, and to extend the class period back to

November 9, 1999. At a conference on July 8, 2005,

plaintiffs were directed to file a proposed third amended

(Cont'd)

defendants”) and Edward S. Rogers. The individual defendants

were all directors or officers, or both, of At Home and (except

for Eslambolchi) are alleged to be control persons of At Home.

(PTAC 4 16-36.)

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Appendix B

complaint (the PTAC) setting forth their best possible

allegations of loss causation.

On August 5, 2005, plaintiffs moved to file the PTAC,

which asserts claims under Section 10(b) against

defendants AT & T, Armstrong, McEachen, Noski,

Somers and Petrillo, as well as control person claims

against all defendants under Section 20(a) premised on

primary violations of Section 10(b) by At Home.

Defendants move to dismiss the first amended

complaint, and oppose the filing of the second and

proposed third amended complaints. They argue, among

other things, that AT & T’s scheme was not in connection

with the purchase or sale of any security, that plaintiffs

have not adequately pled loss causation, and that no

fraudulent acts took place during the proposed extended

class period.’

LEGAL STANDARDS

1. Motion to Dismiss

On a motion to dismiss pursuant to Federal Rule of

Civil Procedure 12(b)(6), the court’s function is “not to

3. Plaintiffs seek to extend the class period because At

Home’s representations that it possessed and protected

proprietary technology, and the AT & T defendants’

misappropriation thereof, began before March 28, 2000. Because

plaintiffs do not adequately plead a securities fraud arising from

either of those claims, the issue whether extending the class

period is warranted need not be addressed.

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Appendix B

weigh the evidence that might be presented at trial but

merely to determine whether the complaint itself is

legally sufficient.” Goldman v. Belden, 754 F.2d 1059,

1067 (2d Cir.1985). The court must accept the plaintiff’s

well-pled factual allegations as true and draw all

reasonable inferences in the plaintiff’s favor. Papasan,

478 U.S. at 283, 106 S.Ct. 2932. Thus, a complaint may

be dismissed only where “it appears beyond doubt that

the plaintiff can prove no set of facts in support of his

claim which would entitle him to relief.” Conley v. Gibson,

355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957).

In deciding a motion to dismiss, the court may consider

exhibits to the complaint, documents incorporated in the

complaint by reference, and matters of which judicial

notice may be taken, such as public disclosure documents

that are required by law to be, and have been, filed with

the SEC. Kramer v. Time Warner, Inc., 937 F.2d 767,

773-74 (2d Cir.1991).

2. Section 10(b) of the Exchange Act and Rule 10b-5

The majority of claims asserted under Rule 10b-5,*

4. Rule 10b-5 provides:

It shall be unlawful for any person, directly or

indirectly, by the use of any means or instrumentality

of interstate commerce, or of the mails or of any

facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to

defraud,

(Cont'd)

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Appendix B

promulgated under Section 10(b) of the Exchange Act,°

(Cont’d)

(b) To make any untrue statement of a material

fact, or to omit to state a material fact necessary in

order to make the statements made, in the light of

the circumstances under which they were made, not

misleading, or

(c) To 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 any

security.

17 C.FLR. § 240.10b-5.

5. Section 10 of the Exchange Act provides, in pertinent part:

It shall be unlawful for any person, directly or

indirectly, by the use of any means or instrumentality

of interstate commerce or of the mails, or of any

facility of any national securities exchange—

(b) To use or employ, in connection with the

purchase or sale of any security registered on a

national securities exchange or any security not so

registered, ... any manipulative or deceptive device

or contrivance in contravention of such rules and

regulations as the Commission may prescribe as

necessary or appropriate in the public interest or for

the protection of investors.

15 U.S.C. § 78).

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Appendix B

are brought under subparagraph (b), which prohibits

fraudulent misstatements or omissions. To state a claim

under that provision, a plaintiff must show that the

defendant “(1) made misstatements or omissions of

material fact; (2) with scienter; (3) in connection with

the purchase or sale of securities; (4) upon which

plaintiffs relied; and (5) that plaintiffs’ reliance was the

proximate cause of their injury.” Lentell v. Merrill Lynch

& Co., Inc., 396 F.3d 161, 172 (2d Cir.2005), cert. denied,

__US. __, 126S.Ct. 421, 163 L.Ed.2d 321 (2005).

In addition, the Private Securities Litigation Reform

Act of 1995 (“PSLRA”) requires that a complaint alleging

misleading statements or omissions under Section 10(b)

“specify each statement alleged to have been misleading,

the reason or reasons why the statement is misleading,

and, if an allegation regarding the statement or omission

is made on information and belief, the complaint shall

state with particularity all facts on which that belief is

formed.” 15 U.S.C. § 78u-4(b)(1). Similarly, Federal Rule

of Civil Procedure 9(b)* requires that a complaint

alleging fraud: “(1) specify the statements that the

plaintiff contends were fraudulent, (2) identify the

speaker, (3) state where and when the statements were

made, and (4) explain why the statements were

fraudulent.” Mills v. Polar Molecular Corp., 12 F:3d 1170,

1175 (2d Cir.1993).

6. Rule 9(b) provides that “In all averments of fraud or

mistake, the circumstances constituting fraud or mistake shall

be stated with particularity. Malice, intent, knowledge, and other

condition of mind of a person may be averred generally.”

Fed.R.Civ.P 9(b).

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Appendix B

Though often conflated with subparagraph (b), the

more general provisions of subparagraphs (a) and (c) of

Rule 10b-5 do not require a misstatement or omission.

To make out a claim under those provisions, plaintiffs

must allege that “(1) they were injured; (2) in connection

with the purchase or sale of securities; (3) by relying on

a market for securities; (4) controlled or artificially

affected by defendant’s deceptive or manipulative

conduct; and (5) the defendants engaged in the

manipulative conduct with scienter.” Jn re Initial Public

Offering Sec. Litig., 241 F.Supp.2d 281, 385

(S.D.N.Y.2003).

Loss Causation

All private plaintiffs asserting securities fraud claims

under Section 10(b) or Rule 10b-5 “must prove that the

defendant’s fraud caused an economic loss.” Dura

Pharmaceuticals, Inc. v. Broudo, 544 U.S. 336, 125 S.Ct.

1627, 1629, 161 L.Ed.2d 577 (2005). The common law loss

causation requirement was codified in the PSLRA: “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.”

15 U.S.C. § 78u-4(b)(4).

The causation element of Rule 10b-5 has two

separate elements: “a plaintiff must allege both

transaction causation, 2.e., that but for the fraudulent

statement or omission, the plaintiff would not have

entered into the transaction; and loss causation, 7.e., that

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Appendix B

the subject of the fraudulent statement or omission was

the cause of the actual loss suffered.” Suez Equity

Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d 87,

95 (2d Cir.2001).

Plaintiffs must show that the defendants’ fraud

caused their losses because the securities statutes make

private securities fraud actions available, “not to provide

investors with broad insurance against market losses,

but to protect them against those economic losses that

misrepresentations actually cause.” Dura, 125 S.Ct. at

1633; cf Castellano v. Young & Rubicam, Inc., 257 F.3d

171, 186 (2d Cir.2001) (“The loss causation requirement

is intended to ‘fix a legal limit on a person’s responsibility,

even for wrongful acts.’ ”), quoting First Nationwide

Bank v. Gelt Funding Corp., 27 F.3d 763, 769 (2d

Cir.1994).

In Dura, the Supreme Court stated that a plaintiff

who has suffered an economic loss must plead “some

indication of the loss and the causal connection that the

plaintiff has in mind.” 125S.Ct. at 1634. Allegations that

the plaintiff purchased shares at an artificially inflated

price do not, without more, plead loss causation. /d.’

7. Plaintiffs continue to rely on my September 17, 2003

opinion, which sustained their loss causation allegations on an

inflated purchase price theory:

that because of the defendants’ failure to disclose

their planned misappropriation of At Home’s

valuable proprietary technology, plaintiffs paid more

(Cont'd)

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Appendix B

The Court of Appeals explained in Lentell, that to

establish loss causation:

(Cont’d)

than the fair value of At Home stock when they

purchased it. On that theory, the loss is that

increment of the market price representing the

market’s ignorance of the undisclosed facts, and the

loss was caused by purchase of the stock at the

market price.

Leykin v. AT & T Corp., No. 02 Civ. 1765(LLS) (S.D.N.Y. Sept.

17, 2003), at *2; (Pl. Reply at 4.) However, that opinion predated

Dura, which states:

[TJhe logical link between the inflated share purchase

price and any later economic loss is not invariably

strong. Shares are normally purchased with an eye

toward a later sale. But if, say, the purchaser sells

the shares quickly before the relevant truth begins

to leak out, the misrepresentation will not have led

to any loss. If the purchaser sells later after the truth

makes its way into the market place, an initially

inflated purchase price might mean a later loss. But

that is far from inevitably so. When the purchaser

subsequently resells such shares, even at a lower

price, that lower price may reflect, not the earlier

misrepresentation, but changed economic

circumstances, changed investor expectations, new

industry-specific or firm-specific facts, conditions, or

other events, which taken separately or together

account for some or all of that lower price.

125 S. Ct. at 1631-32. Thus, that portion of my September 17,

2003 opinion is no longer good law.

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Appendix B

‘a plaintiff must allege ... that the subject of

the fraudulent statement or omission was *he

cause of the actual loss suffered,’ Suez Equity

Investors, L.P. v. Toronto-Dominion Bank,

250 F.3d [at 95], z.e., that the misstatement or

omission concealed something from the

market that, when disclosed, negatively

affected the value of the security. Otherwise,

the loss in question was not foreseeable.

396 F.3d at 173 (emphasis in Lentell ).

“Loss causation” in this setting is concerned less

with the misrepresentation which fooled the victim into

the transaction, and more with whether it was the

concealed or misrepresented fact which caused the harm.

“A foreseeable injury at common law is one proximately

caused by the defendant’s fault, but it cannot ordinarily

be said that a drop in the value of a security is ‘caused’

by the misstatements or omissions made about it, as

opposed to the underlying circumstance that is concealed

or misstated.” Jd. at 173. “Put another way, a

misstatement or omission is the ‘proximate cause’ of an

investment loss if the risk that caused the loss was within

the zone of risk concealed by the misrepresentations and

omissions alleged by a disappointed investor.” /d.

(emphasis in original).

Thus, the first step in analyzing whether a complaint

alleging securities fraud adequately pleads loss causation

is to identify the subject of the misrepresentations or

omission that allegedly caused plaintiff’s loss, 7.e., the

23a

Appendix B

risk concealed by defendant’s fraud. Seeln re Initial

Public Offering Sec. Litig., 399 F.Supp.2d 298, 307

(S.D.N.Y.2005) (“It is vital to understand the nature of

the risks that plaintiffs in the instant action allege were

concealed.”).

The second step is to determine whether the

complaint alleges that the concealed risk led to plaintiff’s

loss. “If that relationship is sufficiently direct, loss

causation is established, but if the connection is

attenuated, or if the plaintiff fails to demonstrate a causal

connection between the content of the alleged

misstatements or omissions and the harm actually

suffered, a fraud claim will not lie.” Lentell, 396 F.3d at

174 (internal quotations and citations omitted).

A concealed risk can lead to a decline in stock price

either because a corrective disclosure reveals the falsity

of the misrepresentations or omissions, or because the

risk which was concealed materializes and causes the

price decline. Seeln re Initial Public Offering Sec. Litig.,

399 F.Supp.2d at 307 (“Where the alleged misstatement

conceals a condition or event which then occurs and

causes the plaintiff’s loss, it is the materialization of the

undisclosed condition or event that causes the loss. By

contrast, where the alleged misstatement is an

intentionally false opinion, the market will not respond

to the truth until the falsity is revealed—z.e., a corrective

disclosure.”); Jn re Parmalat Sec. Litig., 375 F.Supp.2d

278, 305-307 (S.D.N.Y.2005) (loss causation can be pled

by alleging either a corrective disclosure or the

materialization of a concealed risk).

24a

Appendix B

DISCUSSION

Six sets of allegedly fraudulent acts can be distilled

from the PTAC: (1) the AT & T defendants’ scheme to

misappropriate At Home’s proprietary technology and

otherwise impede At Home’s business, (2) At Home’s

misrepresentations that it possessed and protected

valuable proprietary technology and its nondisclosure

of AT & T’s misappropriation, (3) At Home’s false

financial statements and exaggerated subscriber

growth projections, (4) defendant McEachen’s

misrepresentations regarding At Home’s performance,

(5) fraudulent acts and omissions related to the March

2000 agreements, and (6) misrepresentations concealing

Cox and Comcast’s intentions to stop doing business with

At Home.

1. The AT & T Defendants’ Scheme

Plaintiffs claim that the AT & T defendants violated

Section 10(b) and Rule 10b-5(a) and (c) by engaging in a

fraudulent scheme to misappropriate At Home’s

technology, diminish its profits and impair its ability to

raise capital. According to the PTAC, the scheme was

carried out in the following ways:

¢ AT & T announced the Open Access program,

which would allow customers to choose Internet

Service Providers other than At Home. AT & T

then used tests to prepare for Open Access as a

pretext to take At Home’s proprietary

technology. (PTAC 9 1 59(f), (k), (t), 60.)

25a

Appendix B

¢ AT & T appointed defendant Eslambolchi and

others to At Home’s management to pressure

its engineers into divulging more of At Home’s

proprietary technology, which created a ‘fear set’

among At Home’s employees, diminished their

productivity and caused some to leave the

company. Jd. at 1 1 59(k), 81, 83(c), 94.

¢ AT&T forced At Home to spend $45 million over

budget on computer equipment. /d. at 1 91(b).

¢ AT & T prevented At Home from charging AT

& T subscribers for certain licenses, thereby

diminishing At Home’s revenues. /d. at 11 91(d).

¢ AT & T prevented At Home from forming a

beneficial partnership or obtaining

advantageous financing, forcing At Home to

enter the Promethean Financing that led to its

financial collapse. /d. at 19 100, 103.

The AT & T defendants argue that the alleged

scheme was not “in connection with the purchase or sale

of any security” as both Section 10(b) and Rule 10b-5

require. 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5.

Plaintiffs respond that “At Home’s proprietary

technology was the key to the value of its stock and the

undisclosed scheme clearly related to (and destroyed)

the investment value of and price of At Home Stock.”

(Pl. Mem. Supp. Mot. Leave to File a Third Am. Compl.

(“Pl.Mem.”) at 22-23.)

26a

Appendix B

Not all conduct that negatively affects a company’s

stock price is actionable as a federal securities fraud.

The scheme to defraud must coincide with the sale of

securities. SEC v. Zandford, 535 U.S. 813, 822, 122 S.Ct.

1899, 1904, 153 L.Ed.2d 1 (2002). In other words, the

fraud itself must be “integral to the purchase and sale

of the securities in question.” Pross v. Katz, 784 F.2d

455, 459 (2d Cir.1986), quoted in Dabit v. Merrill Lynch,

Pierce, Fenner & Smith, Inc., 395 F.3d 25, 37 (2d

Cir.2005), rev'd on other grounds, _ U.S. _ , 126 S.Ct.

1503, 164 L.Ed.2d 179 (2006). Conduct that is merely

incidental or tangentially related to the sale of securities

will not meet the “in connection with” requirement. Ling

v. Deutsche Bank, AG, No. 04 Civ. 4566(HB), 2005 WL

1244689, at *6, 2005 U.S. Dist. LEXIS 9998, at *14

(S.D.N.Y. May 26, 2005).

Indeed, “courts repeatedly have found that

allegations constituting nothing more than assertions of

general mismanagement, or nondisclosures of

mismanagement, cannot support claims under § 10(b) of

the Exchange Act”. In re Donna Karan Int'l, Inc., No.

97 Civ.2011(CBA), 1998 WL 637547, at *9 (E.D.N.Y. Aug.

14, 1998); cf Suez Eouity. 250 F.3d at 99 (“Post-stock-

purchase corporate mismanagement or breach of

fiduciary duty may be just as reprehensible as a

misleading statement regarding the value of a security

to be sold, but the former is not proscribed by § 10(b),

while the latter is actionable.”); Arduini/Messina P’ship

v. Natl Med. Fin. Serv. Corp., 74 FSupp.2d 352, 362

(S.D.N.Y.1999) (allegations of corporate mismanagement

and breach of fiduciary duties might support a derivative

27a

Appendix B

claim but cannot provide the basis for a securities fraud

claim) (collecting cases).

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

540 (2d Cir.1967), the Court of Appeals dismissed a claim

similar to the scheme alleged here. Minority

shareholders claimed, among other things, that the

majority shareholders ran the company in their own

interests rather than the company’s, by diverting

company assets to themselves. /d. at 542. The court held

that those allegations “are primarily corporate abuse and

diversion, claims cognizable under state law but not

under the [Exchange] Act.”/d. at 546. As in Mutual

Shares, the scheme alleged here involved corporate

abuse, misconduct and diversion of assets, but no

transactions in the relevant securities.® [ts success

8. The Mutual Shares court sustained a separate claim that

the majority stockholders manipulated the market price of the

stock by reducing dividends in order to force minority

stockholders to sell at depressed values. 384 F.2d at 547. That

scheme involved market manipulation and is therefore different

from the scheme alleged here. As the Supreme Court has

explained, manipulation is:

‘virtually a term of art when used in connection with

securities markets.’ Ernst & Ernst [v. Hochfelder, 425

U.S. 185, 199, 96 S.Ct. 1375, 1384, 47 L.Ed.2d 668

(1976) |. The term refers generally to practices, such

as wash sales, matched orders, or rigged prices, that

are intended to mislead investors by artificially

affecting market activity.

Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 476, 97 S.Ct. 1292,

1302, 51 L.Ed.2d 480 (1977). Plaintiffs do not allege that defendants

affected market activity in At Home stock in such a way.

28a

Appendix B

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.

Id. at 546.

The cases upon which plaintiffs rely do not support

the imposition of liability under Section 10(b) for the

AT & T defendants’ scheme. In those cases, defendants

either made materially false or misleading statements

upon which investors relied in purchasing or selling

securities,’ or actually traded in securities as part of the

9. See Semerenko v. Cendant Corp., 223 F.3d 165 (3d

Cir.2000); Jn re Ames Dep't Stores, Inc. Stock Litig., 991 F.2d

953 (2d Cir.1993); SEC v. Rana Research, 8 F.3d 1358 (9th

(Cont'd)

29a

Appendix B

fraud.” Here, the alleged scheme did not involve the

trading of At Home shares and, as discussed below, the

alleged misrepresentations and omissions themselves

could not have caused a drop in At Home’s stock price.

In sum, plaintiffs’ claims based on the AT & T

defendants’ scheme itself are dismissed as representing

charges of corporate mismanagement and abuse rather

than of securities fraud."

(Cont’d)

Cir.1993); Int’l Monetary Exchange v. First Data Corp., 63

F.\Supp.2d 1261, 1265 (D.Colo.1999); In re Leslie Fay Cos. Sec.

Litig., 871 F.Supp. 686, 697 (S.D.N.Y.1995).

10. See Zandford, 535 U.S. at 815, 122 S.Ct. 1899 (broker

sold customer’s securities without authorization and embezzled

the proceeds); Superintendent of Ins. of the State of N.Y. »v.

Bankers Life and Cas. Co. , 404 U.S. 6, 7-8, 92 S.Ct. 165, 166-67,

30 L.Ed.2d 128 (1971) (defendants purchased stock with company

assets); SEC v. Capital Gains Research Bureau, Inc., 375 U.S.

180, 181, 84 S.Ct. 275, 277, 11 L.Ed.2d 237 (1963) (defendant

recommended securities for long term investment to raise the

market price and increase his own profits on sales of the

securities); Press v. Chem. Inv. Servs. Corp., 166 F.3d 529 (2d

Cir.1999) (seller of Treasury bond failed to disclose that it would

withhold interest and take a commission from the proceeds); SEC

v. Santos, 355 FSupp.2d 917 (N.D.Ii1.2003) (bribery scheme

involved investing in particular securities).

11. Claims were brought in California State court by At

Home bondholders alleging that “AT & T breached fiduciary

duties it owed At Home including by misappropriating At Home’s

proprietary information and trade secrets to build an AT & T

high-speed Internet access Network to replace the At Home

Network.” (PTAC 4 9 55, 59(e).) AT & T agreed to settle the

claims for $400 million. (P1.’s counsel’s June 3, 2005 and July 8,

2005 letters to Court.)

30a

Appendix B

2. At Home’s Misrepresentations Regarding its

Proprietary Technology

At Home repeatedly stated in its public filings that:

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.

Effective protection of intellectual property

may not be available in every country in which

our products ard services are available. We

cannot guarantee that the steps we have taken

to protect our proprietary rights will be

adequate.

At Home’s Form S-3 (filed November 16, 1999) at 10,

Prichard Sept. 1, 2005 Decl. Ex. 3: Plaintiffs claim that

statement, and others like it,"* were rendered misleading

12. The same language was reprinted in At Home’s Form

S-3/A (filed December 14, 1999) at 10, Prichard Sept. 1, 2005 Decl.

Ex. 4, Form S-3/A (filed January 4, 2000) at 8, Prichard Sept. 1,

2005 Decl. Ex. 5, Form 10-K (filed March 30, 2000) at 23, Prichard

Sept. 1, 2005 Decl. Ex. 6, and Form 10-K/A (filed April 28, 2000)

at 25, Prichard Sept. 1, 2005 Decl. Ex. 7. See also At Home’s

Form 10-K (filed March 30, 2000), quoted at PTAC 9 65(a) (“We

regard our technology as proprietary and we attempt to protect

it under copyrights, trademarks, trade secret laws, restrictions

(Cont'd)

3la

Appendix B

by AT & T’s misappropriation of At Home’s proprietary

technology, that the failure to disclose the taking was a

material omission, and that those misrepresentations

and omissions artificially inflated the price of At Home

stock. Defendants argue that plaintiffs do not, and

cannot, show that such misstatements and omissions

caused At Home’s stock price to fall.

Such a showing might be made if there were facts

indicating that the market had learned of the AT & T

defendants’ intentions during the class period, or that

the AT & T defendants had gained access to, copied and

used At Home’s proprietary technology to compete with

At Home. No such facts are alleged.

No Corrective Disclosure

Despite numerous assertions that “subsidiary parts

or risks” of the AT & T defendants’ scheme were

disclosed (PTAC 4 118), the PTAC does not allege facts

(Cont'd)

on disclosure and transferring title and other methods, and we

have been issued patents with respect to certain aspects of our

searching and indexing technology.”); At Home’s Form 10-K/A

(filed April 28, 2000), quoted at PTAC {I 65a) (same); At Home’s

Form 10-K (filed April 2, 2001) at 13, quoted at PTAC 9 96 (same

and adding: “We also generally enter into confidentiality or

license agreements with our employees and consultants, and

generally control access to and distribution of our documentation

and other proprietary information. Despite these precautions,

it may be possible for a third party to copy or otherwise obtain

and use our services or technology without authorization, or to

develop similar technology independently.”).

32a

Appendix B

showing that, during the class period, the market became

aware of the AT & T defendants’ misappropriation of At

Home’s proprietary technology. On the contrary,

plaintiffs acknowledge that the AT & T defendants’

taking did not become public knowledge during the class

period. /d. at 1 59(t) (“Pursuant to the undisclosed

scheme, AT & T took a number of steps which enabled

AT & T to copy At Home’s technology. Some of their

steps were disclosed to the public albeit the scheme, the

takings, and the purpose of each step to enable AT & T

to take At Home’s technology were never disclosed.”).

Thus, the PTAC does not allege that a corrective

disclosure caused At Home’s stock price to decline.

See Lentell, 396 F.3d at 175 n. 4 (“These allegations do

not amount to a corrective disclosure, however, because

they do not reveal to the market the falsity of the prior

recommendations. ... Merrill’s concealed opinions

regarding 24/7 Media and Interliant stock could not have

caused a decrease in the value of those companies before

the concealment was made public.”); /n re WorldCom

Inc. Sec. Litig., No. 02 Civ. 3288(DLC), 2005 WL 375314,

at *6 (S.D.N.Y. Feb. 17, 2005) (“A concealed fact cannot

cause a decrease in the value of a stock before the

concealment is made public.”).

No Materialization of the Concealed Risk

According to the PTAC, the AT & T defendants

began copying At Home’s proprietary technology by

August or September 1999 (PTAC { 59(d)), began

designing their own network by October 1999, id. at

1 59(i), and had finished taking all of At Home’s

33a

Appendix B

proprietary technology by August 28, 2001, id. at

7 110(b). However, “AT & T’s secret conversion of At

Home’s proprietary technology did not diminish the

usefulness and general potential of such technology.”

Id. at 1 6.

It was not until December 2001 that AT & T’s own

network became operational and began servicing At

Home’s former customers. Jd. at 1 111. That was more

than a month after At Home had filed for bankruptcy,

its stock had lost nearly all of its value, and, most

importantly, the class period had ended.

Because the PTAC does not allege that, during the

class period, At Home faced competition from its stolen

technology, or that At Home’s use of the technology was

impaired by AT & T’s misappropriation, it makes no

showing that the concealed risk materialized so as to

cause At Home’s stock price to fall.

3. At Home’s Financial Statements and Subscriber

Projections

The PTAC alleges that, beginning with At Home’s

10-Q filed on November 14, 2000, and continuing through

2001, At Home:

* understated accounts payable by as much as $20

million,

* overstated total stockholders’ equity by as much

as $100 million,

34a

Appendix B

overstated the value of its assets by as much as

$80 miiiion,

inflated its projected number of subscribers,

upon which its estimated revenues and financial

performance were based,

concealed the fact that up to $40 million in

accounts payable were withheld from At Home

by Cox and Comeast in 2001, and

concealed the fact that At Home’s revenues were

reduced by AT & T’s refusal to allow At Home

to charge AT & T customers certain network

usage fees. (PTAC 49 1 69, 91-92.)

Defendants argue that those claims must also be

rejected for failure to plead loss causation.

No Corrective Disclosure

Plaintiffs point to At Home’s Form S-3 Registration

Statement filed on July 23, 2001, which stated “We will

need to raise additional funds before the end of 2001 to

support our business operations” and warned that failure

to do so could “have a material adverse impact on our

operations and liquidity” (PTAC 4% 4 106, 118(J)), At

Home’s Form 10-K/A filed August 20, 2001 which

announced “substantial doubt about our ability to

continue as a going concern” and that At Home “cannot

guarantee that we will be able to obtain additional

funding on acceptable terms, if at all” (PTAC % 107), and

35a

Appendix B

the announcements of the Promethean Financing and

At Home’s bankruptcy filing. (Pl. Mem. Supp. Leave to

Amend and Opp. Def. Mot. Dismiss (“Pl.Reply”) at 93-

94.)

As dire as those statements were, and as grave as

the Promethean Financing and bankruptcy filing turned

out to be, nothing in those statements disclosed that the

alleged misrepresentations had been false or misleading.

They did not reveal to the market any misstatements in

At Home’s prior financial reports or subscriber

projections. See Lentell, 396 F.3d at 175 n. 4; In re

Telliuin, Inc. Sec. Litig., No. 02 Civ. 5878(F LW), 2005

WL 2090254, at *4 (D.N.J. Aug. 26, 2005) (“Dura itself

makes clear that loss causation is not pled upon

allegations of drops in stock price following an

announcement of bad news that does not disclose the

fraud.”).

No Materialization of the Concealed Risk

In their reply brief, plaintiffs seem to argue that the

risk concealed by those misrepresentations materialized

when At Home experienced a liquidity crisis in July 2001,

forcing it to engage in the Promethean Financing and

ultimately file for bankruptcy.

Defendants respond that the first allegedly

fraudulent financial report, At Home’s Form 10-Q filed

November 14, 2000, disclosed that At Home might not

be able to obtain financing:

36a

Appendix B

We intend to make investments in our

infrastructure of approximately $250 million

during 2000, including investments in our

network designed to provide stability and

scaleability. Of this amount, we had invested

$199.6 million during the nine months ended

September 30, 2000, including purchases of

property, equipment and improvements,

payments on capital lease obligations and

payments under our backbone agreement. We

believe that we have sufficient liquidity to

continue to support such investments, to meet

the commitments described below and to fund

our operating needs for at least the next 12

months. However, it is possible that we could

experience unexpected costs and expenses

with respect to these or other items.

Thereafter, if cash generated by operations is

insufficient to satisfy our liquidity

requirements, we may need to seek alternative

financing, such as selling additional equity or

debt securities or obtaining additional credit

facilities. However, depending on market

conditions, we may consider alternative

financing even if our financial resources are

adequate to meet presently anticipated

business requirements. Financing may not be

available on terms acceptable to us or at all.

The sale of additional equity or convertible

debt securities may result in additional

dilution to our stockholders.

37a

Appendix B

At Home’s Form 10-Q (filed Nov. 14, 2000) at 27, Brusca

Decl. Ex. 18.

Defendants also argue that the downturn in the stock

market for Internet-related companies, rather than any

firm-specific financial misrepresentations, caused At

Home’s stock to collapse. They point out that, like At

Home’s stock, both market-wide and industry-specific

stock indices declined dramatically between March 2000

and September 28, 2001.* The companies tracked by

BUSNICS and BUSNISE, like At Home, provide

Internet content and services. PTAC { 2(b), Pl. Reply

at 50 n. 17. In addition, At Home’s stock performance

mimicked those indices remarkably closely, especially

after the alleged misrepresentations first appeared in

November 2000.

In Lentell, the court stated that:

where (as here) substantial indicia of the risk

that materialized are unambiguously apparent

13. See AT & T Mem. Opp. Mot. Leave to File Third Am.

Compl. (“AT & T Mem.”) at 8 n. 11 (from March 27, 2000 to

September 28, 2001, At Home’s stock price declined 99.54%, the

NASDAQ Composite Index (on which At Home stock was traded)

declined 69.77%, the DJINET (Dow Jones Internet Composite

Index) declined 91.52%, the BUSNICS (Bloomberg U.S. Internet

Connectivity Services Index) declined 99.13% and the BUSNICE

(Bloomberg U.S. Internet Content Entertainment Index)

declined 89.7% from March 27, 2000 to August 29, 2001, when it

was suspended); Winter Sept. 2, 2005 Aff. Ex. 20-30; Prichard

Sept. 1, 2005 Aff. Ex. 14-21.

38a

Appendix B

on the face of the disclosures alleged to conceal

the very same risk, a plaintiff must allege (i)

facts sufficient to support an inference that it

was defendant’s fraud-rather than other

salient factors—that proximately caused

plaintiff’s loss; or (ii) facts sufficient to

apportion the losses between the disclosed and

concealed portions of the risk that ultimately

destroyed an investment.

396 F.3d at 177.

As a general proposition, whether “the loss was

caused by an intervening event, like a general fall in the

price of Internet stocks ... is a matter of proof at trial

and not to be decided on a Rule 12(b)(6) motion to

dismiss.” Emergent Capital, 343 F.3d at 197. However,

“when the plaintiff’s loss coincides with a

marketwide phenomenon causing comparable

losses to other investors, the prospect that the

plaintiff’s loss was caused by the fraud

decreases,” and a plaintiff’s claim fails when

“it has not adequately ple[{ Jd facts which, if

proven, would show that its loss was caused

by the alleged misstatements as opposed to

intervening events.”

Lentell, 396 F.3d at 174, quoting First Nationwide Bank,

27 F.3d at 772.

39a

Appendix B

The only allegation in the PTAC of a causal link

between the alleged misrepresentations and the liquidity

crisis is: “If the true subscriber growth and prospects

had been as represented, At Home would have had more

financial strength and would not have had to file for

bankruptcy as it did.” (PTAC 1 92(b).) Such an assertion

is too general and conclusory to support an inference

that defendants’ fraud proximately caused the decline

in stock prices. See In re The Warnaco Group, Inc. Sec.

Litig. (II), 388 F.Supp.2d 307, 318 (S.D.N.Y.2005)

(unsupported assertion that “Waranco’s true undisclosed

financial condition rendered Waranco unable to obtain

waivers” from its creditors did not support an inference

that defendant’s fraud proximately caused plaintiff’s

stock market loss). The PTAC does not allege facts

showing that it was the claimed concealment which

caused plaintiffs’ losses, rather than the the market-wide

Internet stock collapse,'“—nor any way to separate the

effect of the misstatements (if there was any) from the

general collapse or other causes. Thus, there is no

effective pleading of a loss caused by those

misrepresentations. See Lentell, 396 F.3d at 174, 177. The

claims based on At Home’s financial statements and

subscriber projections must therefore be dismissed.

14. In fact, the PTAC elsewhere alleges that At Home’s

liquidity crisis was caused by the fact that AT & T obstructed At

Home from accessing capital markets or aligning with a strategic

partner, and the fact that Cox and Comcast refused to enter new

MDAs and planned to end their relationships with At Home.

(PTAC 94 75(e), 103.)

40a

Appendix B

4. McEachen’s Statements Regarding At Home’s

Performance

The PTAC alleges that Mr. McEachen, At Home’s

chief financial officer, misrepresented At Home’s

financial prospects. In a January 25, 2001 Bloomberg

interview, he stated that “The first quarter will be by

far the low-water mark for our financial performance in

2001” (PTAC 49 92(a)(1)) and in a June 19, 2001 investor

conference call he stated that “by getting the $185

Million [from the Promethean Financing and the IRU

recapture agreement] in the till, it allows us to not have

to worry in the near term about financing” (PTAC 9101).

Those statements are dismissed as bases for liability

because they are mere generalized expressions of

puffery and optimism, which are not actionable under

the securities laws. See Rombach v. Chang, 355 F.3d 164,

174 (2d Cir.2004); In re Duane Reade Inc. Sec. Litig.,

No. 02 Civ. 6478(NRB), 2003 WL 22801416, at *4

(S.D.N.Y. Nov. 25, 2003) (“A company’s statements of

hope, opinion, or belief about its future performance or

general market conditions are not actionable under the

securities laws.”), aff’d sub nom. Nadoffv. Duane Reade,

Inc., 107 Fed.Appx. 250, 252 (2d Cir.2004) (summary

order).

Similarly non-actionable, because of their vagueness

and generality, are McEachen’s April 23, 2001 statement

in Business Wire that “We performed very well in our

core broadband operations, which now make up nearly

two-thirds of our total revenue” (PTAC { 97) and

Mr. Bell’s April 17, 2001 statement that “Our core

broadband business is strong.” /d.

4la

Appendix B

5. March 2000 Agreements

The PTAC alleges several fraudulent acts related to

the March 2000 agreements between At Home and its

cable partners.

The claim that AT & T’s acquisition of a 74% voting

interest in At Home violated Section 10(b) because it

allowed the AT & T defendants to further their scheme

to take At Home’s proprietary technology (PTAC 1 61(e))

must be rejected because the PTAC does not allege that

that transaction was independently fraudulent and, as

discussed above, the undisclosed misappropriation of

At Home’s proprietary technology cannot alone support

a federal securities fraud claim.

In March 2000, AT & T allegedly represented that

it would execute a new non-exclusive MDA covering its

relationship with At Home from June 4, 2002 through

June 4, 2006 as promptly as practicable." (PTAC 91 59(t),

62, 119(A)(5).) That representation was allegedly

fraudulent because AT & T had no intention of executing

anew MDA or continuing its relationship with At Home.

Although the 1996 MDA between At Home and AT & T

provided that it would remain in effect through June

2002, plaintiffs claim that the failure to execute a new

MDA after March 2000 caused At Home’s stock price to

15. The PTAC also alleges that Cox and Comcast

misrepresented their intentions to enter new MDAs with At

Home in March 2000. (PTAC % 4 62, 119(A)(5).) Those alleged

misrepresentations need not be considered as bases for liability,

however, because no Section 10(b) claim is asserted against them.

42a

Appendix B

fall: “According to defendant Bell, this tactical, on-going

failure to achieve any amended MDA concerned market

analysts and participants during 2000 and reduced the

price of At Home’s stock during 2000.” (PTAC 91 118(B).)

Accepting the proposition that there could be such a

market perception, plaintiffs point to no fact (such as an

analyst’s report or investor communication) evincing that

there actually was. Plaintiffs plead no fact which, if

proven, would indicate that the gradual decline in At

Home’s stock price during all of 2000 was caused by any

concern about the absence of a new MDA, rather than

other causes such as the contemporaneous market-wide

Internet stock collapse. As the Supreme Court stated in

Dura,”that lower price may reflect, not the earlier

misrepresentation, but changed economic circumstances,

changed investor expectations, new industry-specific or

firm-specific facts, conditions, or other events, which

taken separately or together account for some or all of

that lower price.” 1258.Ct. at 1632. Therefore, plaintiffs

have “ ‘not adequately pled facts which, if proven, would

show that its loss was caused by the alleged

misstatements as opposed to intervening events.’

Lentell, 396 F.3d at 174, quoting First Nationwide Bank,

27 F.3d at 772. Nor does the PTAC suggest any theory

by which a loss attributable to such a market suspicion

could be quantified. See supra p. 246; Lentell, 396 F.3d

at 174, 177.

”

43a

Appendix B

6. Cox’sand Comcast’s Undisclosed Intentions to End

their Relationships with At Home

The PTAC refers to several statements as

misrepresenting the strength of At Home’s relationship

with Cox and Comcast. Only two such statements survive

my order dated September 17, 2003. The first is

Mr. McEachen’s statement in the June 19, 2001 investor

and analyst conference call. Responding to a question

whether Cox and Comcast would revoke their business

relationships with At Home, Mr. McEachen stated that “

There isn’t going to be one day where we wake up in a

different world and all of the co-branded Subs that we have

with both of these great partners are going to migrate over

to somebody else. That won’t happen.” (PTAC 4 102.) That

statement was allegedly false and misleading because by

that time both Cox and Comcast (1) had told At Home that

neither had any interest in any future relationship with At

Home, (2) were seeking to obtain At Home’s technology to

offer broadband services themselves and (3) also on June

19, 2001, notified At Home that they were terminating

certain exclusivity provisions in their 1996 MDAs with At

Home effective December 4, 2001. (PTAC 4 102.)

However, the PTAC does not allege that Cox or

Comcast stopped doing business with At Home or provided

high-speed Internet services on their own during the class

period. Nor did the market learn of Cox’s and Comcast’s

intentions to do so. McEachen’s June 19, 2001 statement

must therefore be dismissed for failure to plead loss

causation. Lentell, 396 F.3d at 173.

The PTAC also alleges that At Home’s statement that,

“our cable partners may determine in the future that they

44a

Appendix B

can provide broadband services themselves, rather than

offering our services” in its Form 10-K filed April 2, 2001

was false or misleading in light of Cox’s and Comcast’s

intentions to end their relationships with At Home and to

provide aspects of At Home’s services themselves. (PTAC

195.) There is no allegation, however, that any of At Home’s

cable partners actually provided broadband services

themselves during the class period. At most, there was a

risk that they might do so in the future, which is the risk of

which At Home warned. Thus, that statement must be

dismissed as a basis for liability.

Section 20(a) Claims

“In order to establish a prima facie case of liability

under § 20(a), a plaintiff must show: (1) a primary violation

by a controlled person; (2) control of the primary violator

by the defendant; and (3) ‘that the controlling person was

in some meaningful sense a culpable participant’ in the

primary violation.” Boguslavsky v. Kaplan, 159 F:3d 715,

720 (2d Cir.1998), quoting SEC v. First Jersey Sec. Inc.,

101 F.3d 1450, 1472 (2d Cir.1996).

The control person claims under Section 20(a)"®

asserted against all defendants are premised on a primary

16. Section 20(a) of the Exchange Act provides:

Every person who, directly or indirectly, controls any

person liable under any provision of this chapter or of

any rule or regulation thereunder shall also be liable

jointly and severally with and to the same extent as

such controlled person to any person to whom such

controlled person is liable, unless the controlling person

(Cont'd)

45a

Appendix B

violation of Section 10(b) by At Home. (PTAC 91 130-132.)

Because all claims of primary liability have been dismissed,

the Section 20(a) claims must also be dismissed. Rombach,

355 F.3d at 177-78.

CONCLUSION

For the reasons above, (1) defendants’ motions dated

September 2, 2005 to dismiss the first amended complaint

are granted, (2) plaintiffs’ motion dated May 31, 2005 for

leave to file a second amended complaint is denied and

(3) plaintiffs’ motion dated August 5, 2005 for leave to file a

third amended complaint is denied.

The Clerk will enter judgment dismissing all the

complaints in this and the consolidated actions and

dismissing as moot all other pending motions, with costs

and disbursements to defendants according to law.

So ordered.

Dated: New York, NY

March 23, 2006

s/ Louis L. Stanton

LOUIS L. STANTON

U.S.D.J.

(Cont'd) a

acted in good faith and did not directly or indirectly

induce the act or acts constituting the violation or cause

of action.

15 U.S.C. § 78t(a).

46a

APPENDIX C — MEMORANDUM

ENDORSEMENT

Semen Leykin, On Behalf of Himself and All Other

Persons Similarly Situated, v. AT&T Corporation,

et al., 02 Civ. 1765 (LLS)

All motions to dismiss the complaint are denied,

except that:

1. Mr. Armstrong’s August 28, 2000 news-release

statement that “[wJorking together, Excite@Home and

AT&T will bring high-speed Internet services to millions

of homes and businesses and seize a great growth

opportunity” [Complt 4 70(d)] and Mr. Armstrong’s and

Mr. Roberts’ statements on March 29, 2000 that the

March 28, 2000 agreements were “really a new

commitment by AT&T, Comcast, and Cox to both our

broadband business and technology, as well as

Excite@Home” and “I think both the company, the

people, the marketplace and the customers now can feel

with a great deal of certainty the commitment of AT&T,

Cox and Comcast to broadband and to Excite@Home”

(Complt 1 63) and “From the outset, we have viewed

Excite@Home as an invaluable strategic partner....

The extension of our agreements gives us clarity and

the ability to continue our aggressive deployment of

Comcast@ Home” and “We are pleased to extend our

relationship with Excite@Home” (Complt 9 64) and

Mr. Jenner’s February 14, 2001 statement “Working

together we’ve got it all” (Complt 1 93) are dismissed as

bases of liability, as merely generalized expressions of

confidence and optimism, constituting “puffery” which

cannot mislead a reasonable investor or constitute

47a

Appendix C

actionable statements under the securities laws, see San

Leandro Emerg. Med. Plan v. Philip Morris Cos., Inc.,

75 F.3d 801, 811 (2d Cir. 1996) ; Steinberg v. PRT Group,

Inc., 88 F.Supp.2d 294, 301 (S.D.N.Y. 2000);

2. The THIRD and FOURTH claims are dismissed

as pre-empted and barred by the Securities Litigation

Uniform Standards Act, 15 U.S.C. § 78bb(f)(1)

(“SLUSA”) which provides:

No covered class action based upon the

statutory or common law of any State or

subdivision thereof may be maintained in any

State or Federal court by any private party

alleging—

(A) a misrepresentation or

omission of a material fact in

connection with the purchase or sale

of a covered security; or

(B) that the defendant used or

employed any manipulative or

deceptive device or contrivance in

connection with the purchase or sale

of a covered security.

Plaintiffs’ arguments that SLUSA does not apply,

e.g., because of the “Delaware carve-out,” are unavailing.

See Zoren v. Genesis Energy, L.P, 195 F-Supp.2d 598

(D. Del. 2002); Professional Management Associates v.

KPMG LLP. 335 F.3d 800, 803 (8th Cir. 2003) (“PMA

48a

Appendix C

cannot avoid preemption by asserting it is only claiming

damages suffered as a result of holding its stock. [citing

Zoren| SLUSA’s “in connection with” requirement

[citation] is not limited to cases involving damages

claimed as a result of the purchase or sale of securities.

Instead, SLUSA applies to any covered class action

alleging an untrue statement or omission of a material

fact in connection with the purchase or sale of a covered

security.”); and

3. Plaintiffs have withdrawn their claims against Mr.

Cinali.

Defendants’ argument that plaintiffs inadequately

show loss causation disregards the basic nature of the

claim: that because of the defendants’ failure to disclose

their planned misappropriation of At Home’s valuable

proprietary technology, plaintiffs paid more than the fair

value of At Home stock when they purchased it. On that

theory, the loss is that increment of the market price

representing the market’s ignorance of the undisclosed

facts, and the loss was caused by purchase of the stock

at the market price. See Suez Equity Investors v.

Toronto-Dominion Bank, 250 F.3d 87, 97-98 (2nd Cir.

2001) (“plaintiffs may allege transaction and loss

causation by averring both that they would not have

entered the transaction but for the misrepresentations

and that the defendants’ misrepresentations induced a

disparity between the transaction price and the true

‘investment quality’ of the securities at the time of

transaction”); Semerenko v. Cendant Corp., 223 F.3d 165,

184 (3rd Cir. 2000) (“where the claimed loss involves the

49a

Appendix C

purchase of a security at a price that is inflated due to

an alleged misrepresentation, there is a sufficient causal

nexus between the loss and the alleged

misrepresentation to satisfy the loss causation

requirement”).

The allegations here are a far cry from

overstatements of the investment value of a stock

followed by its depreciation in a general market decline,

as in In re Merrill Lynch & Co., Inc. Research Reports

Sec. Litig., 02 MDL 1484 (MP) , 2003 WL 21500293, at

*9-12 (S.D.N.Y. June 30, 2003) (holding that plaintiffs

failed to tie inflated investment analyst ratings to the

actual financial demise of the recommended companies).

The legal analysis on this point is fact-specific. See Suez

Equity Investors, 250 F.3d at 96 (“loss causation inquiry

typically examines how directly the subject of the

fraudulent statement caused the loss, and whether the

resulting loss was a foreseeable outcome of the

fraudulent statement”). In Merrill Lynch, the analysts’

stock recommendations would not cause the price to

drop. Other factors, unrelated to the analysts, caused

the price to drop. In this case, at least for pleading

purposes, the undisclosed theft of the “crown jewels”

made a loss inevitable.

The affirmative defense of the statute of limitations

is insufficiently established on this record to justify

dismissal of the FIRST and SECOND claims on that

ground as a matter of law.

50a

Appendix C

So ordered.

DATED: New York, New York

September 17, 2003

s/ Louis L. Stanton

LOUIS L. STANTON U.S. D. J.

Sla

APPENDIX D — MEMORANDUM

ENDORSEMENT

Semen Leykin, On Behalf of Himself and All Other

Persons Similarly Situated v. AT&T Corporation, et al.,

02 Civ. 1765 (LLS)

Defendants’ motions to dismiss Claim Five of the

First Amended Consolidated Class Action Complaint are

granted. There is no statement in At Home’s Form 14A

Proxy Statement dated May 26, 2000 which is rendered

false or misleading by the omission to set forth the

planned misappropriation of At Homes’ valuable

proprietary technology. The Proxy Statement accurately

describes the proposed changes in governance, which

would “grant AT&T voting control of all board actions”

of At Home (as conceded in Amended Complaint 11 66,

137). Nothing in its subject matter is inaccurately

described in the Proxy Statement.

Nor was it necessary for the Proxy Statement to

disclose AT&T’s alleged plan to misappropriate At

Home’s technology. Section 14(a) of the Exchange Act,

15 U.S.C. § 78n(a), and cognate Rule 14, 17 C.F.R.

§ 240.14, do not require the disclosure of subjective

purposes of transactions accurately set forth in a proxy

statement. See Virginia Bankshares v. Sandberg, 501

U.S. 1083, 1096 (1991) (“to recognize liability on mere

disbelief or undisclosed motive without any

demonstration that the proxy statement was false or

misleading about its subject would authorize Section

14(a) litigation confined solely to what one skeptical court

spoke of as the ‘impurities’ of a director’s ‘unclean

heart”); Maldonado v. Flynn, 597 F.2d 789, 796 (2d Cir.

52a

Appendix D

1979) (distinguishing between nondisclosure of self-

dealing on the basis of inside information, against

corporation’s interest, on the one hand, and mere “failure

to disclose an alleged ulterior motive for a fully described

corporate action” which is insufficient under Section 14

(a)) .

Dismissal of Claim Five carries with it dismissal of

the related § 20(a) “control persons” claims against the

individual defendants named only in connection with

Claim Five.

In addition, all claims as a “control person” are

dismissed as against Mr. Gyani with respect to the period

before he became an At Home director in June 2000, with

respect to Mr. Liguori after he ceased to be a member

of the At Home board of directors in June 2000, and with

respect to Mr. Noski before he became a director of At

Home in February 2001.

Mr. Rogers’ motion for dismissal of the Second Claim

against him as a “control person” in the First Amended

Consolidated Class Action Complaint is granted with

respect to periods when he was not serving as a director

of At Home, except for documents he signed, actions he

took or statements he made outside those periods of

service.

Plaintiffs have had, and used, sufficient

opportunities for corrections and amendment of their

pleadings. Further leave to amend is denied.

53a

Appendix D

So ordered.

DATED: New York, New York

August 9, 2004

s/ Louis L. Stanton

LOUIS L. STANTON

U.S.D.J.

54a

APPENDIX E — ORDER OF THE UNITED STATES

COURT OF APPEALS FOR THE SECOND

CIRCUIT DENYING PETITION FOR REHEARING

FILED JULY 9, 2007

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Catherine O’Hagan Wolfe

CLERK

Date: 7/9/07

Docket Number: 06-1583-cv

Short Title: Leykin v. AT&T Corporation

DC Docket Number: 02-cv-1765

DC: SDNY (NEW YORK CITY)

DC Judge: Honorable Louis Stanton

At a stated term of the United States Court of

Appeals for the Second Circuit, held at the Daniel Patrick

Moynihan United States Courthouse, 500 Pearl Street,

in the City of New York, on the 9th day of July two

thousand seven.

Semen Leykin,

Plaintiff-Appellant,

AT&T Corporation,

Defendant-Appellees,

55a

Appendix E

A petition for panel rehearing and a petition for

rehearing en banc having been filed herein by the

appellant Semen Leykin. Upon consideration by the

panel that decided the appeal, it is Ordered that said

petition for rehearing is DENIED.

It is further noted that the petition for rehearing en

banc has been transmitted to the judges for the court in

regular active service and to any other judge that heard

the appeal and that no such judge has requested that a

vote be taken thereon.

For the Court,

Catherine O’ Hagan Wolfe, Clerk

By: s/ Arthur Heller

Motion Staff Attorney

56a

APPENDIX F — 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 promulgated thereunder, 17 C.F.R.

§ 240.10b-5 (2004), and SEC Regulation S-K, Item

404(a), 17 C.E.R. § 229.404(a) (1988) are set forth below.

Section 10(b) of the Securities Exchange Act,

15 U.S.C. § 78j(b), provides as follows:

It shall be unlawful for any person, directly or

indirectly, by the use of any means or

instrumentality of interstate commerce or of the

mails, or of any facility of any national securities

exchange-

(b) To use or employ, in connection with the

purchase or sale of any security registered on a

national securities exchange or any security not so

registered, or any securities-based swap agreement

(as defined in section 206B of the Gramm-Leach-

Bliley Act), any manipulative or deceptive device

or contrivance in contravention of such rules and

regulations as the Commission may prescribe as

necessary or appropriate in the public interest or

for the protection of investors.

57a

Appendix F

Section 21D(b)(4) of the Securities Exchange Act,

15 U.S.C. § 78u-4(b)(4), provides as follows:

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.

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

follows:

It shall be unlawful for any person, directly or

indirectly, by the use of any means cr

instrumentality of interstate commerce, or of the

mails or of any facility of any national securities

exchange,

(a) To employ any device, scheme, or artifice to

defraud,

(b) To make any untrue statement of a material fact

or to omit to state a material fact necessary in order

to make the statements made, in the light of the

circumstances under which they were made, not

misleading, or

(c) To 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 any security.

58a

Appendix F

SEC Regulation S-K, Item 404(a), 17 C.F.R.

§ 229.404(a), at all times pertinent hereto provided in

relevant part 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 ....