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

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SPO en EP ee

Wy e) FILED

No. 07-484 NOV 13 2007

IN THE

OFFICE OF THE CLERK

SUFAUME COUAT, U.S.

Supreme Court of the Anited States

SEMEN LEYKIN, et al.,

Petitioners,

AT&T CORPORATION, et al.,

Respondents.

On Petition for a Writ of Certiorari

to the United States Court of Appeals

for the Second Circuit

RESPONDENTS’ BRIEF IN OPPOSITION

WAYNE WATTS DAVID W. CARPENTER*

SENIOR EXECUTIVE VICE STEPHEN C. CARLSON

PRESIDENT AND GENERAL RACHEL B. NIEWOEHNER

COUNSEL DANIEL S. RYAN

AT&T CORP. SIDLEY AUSTIN LLP

175 E. Houston Street One South Dearborn Street

San Antonio, TX 78205 Chicago, IL 60603

(210) 351-3300 (312) 853-7000

EDWARD R. BARILLARI

SENIOR VICE PRESIDENT

AND ASSISTANT GENERAL

COUNSEL

AT&T CORP.

One AT&T Way

Bedminster, NJ 07921

(908) 532-1885

Counsel for AT&T Respondents

November 13, 2007 * Counsel of Record

[Additional Counsel Listed on Inside Cover]

cena = EN PRR ELIE RENAE SOI CORTES AAO HI

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

;

JONATHAN E. RICH

PROSKAUER ROSE LLP

2049 Century Park East

Suite 3200

Los Angeles, CA 90067

(310) 284-5644

Counsel for Respondent Mark McEachen

QUESTIONS RESTATED

Whether the Second Circuit correctly held that

petitioners had not stated a claim for securities fraud

under Section 10(b) of the Securities Exchange Act

and Rule 10b-5 where (1) the _ alleged

misrepresentations and omissions of material facts

concededly did not cause a reduction in the stock

price or losses to petitioners during the class period

and (2) the remaining allegations were acts of

corporate mismanagement and breaches of fiduciary

duties that are not actionable as securities fraud

under the Securities Exchange Act of 1934 and that

were independent of any securities transactions?

(i)

PARTIES TO THE PROCEEDING

The Petition (p. iii) lists the individuals and

corporations that are now parties to this proceeding.

Pursuant to Rule 29.6, respondent AT&T Corp.

states that it is a wholly-owned subsidiary of AT&T

Inc., a publicly traded company.

TABLE OF CONTENTS

QUESTIONS RESTATED.....................cccssssssssseeees

PARTIES TO THE PROCEEDING ..................06

TABLE OF AUTHORITIES ...................:ccsssseeeees

i B88 2 yk eyo, ean

I. DISMISSAL OF THE “SCHEME”

CLAIMS WAS A CORRECT APPLI-

CATION OF SETTLED PRINCIPLEG.......

Il. THE APPLICATION OF DURA PRE-

SENTS NO ISSUE FOR REVIEW. .............

CP IIIT dneciccresudninciasinanctsnrebbniabugioneeieniecesees

(iii)

Page

TABLE OF AUTHORITIES

CASES Page

Affiliated Ute Citizens of Utah v. United

States, 406 U.S. 128 (1972).............ccccsseees 13

In re Charter Commce'ns, Inc. Sec. Litig., —

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

granted sub nom. Stoneridge Inv.

Partners, LLC v. Scientific-Atlanta, Inc.,

127 S. Ct. 1873 (2007) (No. 06-43)............. 11

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

SERS era ean Erman se OtRE 2, 10, 15-18

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

SUN cciariidnuiccinspnnbbaieineasimuakidbensiiiiiiiedesoniae 18

Lentell v. Merrill Lynch & Co., Inc., 396

F.3d 161 (2d-Cir.), cert. denied, 546 U.S.

I ii ite ac ited iucsahmeddunbaarsesuviedaess 16

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

_ v. Dabit, 547 U.S. 71 (2006)..........:.seccereee 13

Mutual Shares Corp. v. Genesco, Inc., 384

F.2d 540 (2d Cir. 1967)........ a ar 2, 9-10

Ray v. Citigroup Global Mkts., Inc., 482

Fe 8 AU Gls BI iitscveviensnccecsccrsvsccene 16

Regents of Univ. of Calif. v. Credit Suisse

First Boston, Inc., 482 F.3d 372 (5th Cir.

2007), petition for cert. filed, 75 U.S.L.W.

3557 (U.S. Apr. 5, 2007) (No. 06-1341)..... 11-13

Robbins v. Koger Props., Inc., 116 F.3d

Be oe Ue Ge FE ocevedntvessevsarsseniesvecereens 16

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

EE iakiciscd cniiiaiavercinciimoidtiaeiueniaaas 2, 9-10, 15

SEC v. Zandford, 535 U.S. 813 (2002).. 9, 13-14

Simpson v. AOL Time Warner Inc., 452

F.3d 1040 (9th Cir. 2006), petition for

cert. for filed, 75 U.S.L.W. 3236 (US.

Oct. 19, 2006) (No. 06-560) ...................006 11-13

TABLE OF AUTHORITIES -— continued

Page

Stoneridge Inv. Partners, LLC v. Scientific-

Atlanta, Inc., 127 S. Ct. 1873 (No.

SIT linsaicaissinigsiaincaapneesiainmetieniacadnskiieaiaaiiie 2, 11-13

Superintendent of Ins. of State of N.Y. v.

Bankers Life & Cas. Co., 404 U.S. 6

SIE isiiiiicnectlaiegeiceieintenntibilendinciiaiinainalatieitbasaumdoaiieds 9,13

Teachers’ Ret. Sys. of La. v. Hunter, 477

FAG WEB CRD Cit. BOCT) .cccccecccceeccecorsectersees 16

United States v. O’Hagan, 521 U.S. 642

SITET ciisasseesshanpecnicediaabiaduciinceloianabelasodoabinetimndl 9,13

STATUTES AND REGULATIONS

Be Ss ae SI idiiniiiiceldcltsnninaucicseesinandiaine passim

iia tisaehnieialaieddeciadeiadiainainamoincainall 3.7

I ii aciniceecinbidnnaiieineaaaieateianiael 4,12

I 0. sscisdiniinabincigiganeeionaieiiiaian 16

BF Ch dey FD verevnccssocevsncavesensans iain 14-15

iy SITY TITS sisctninrsquaniednseisnawmepiaiiogs 2,6, 11-12

RULE

Second Circuit's R. 32.1(b) .......cccccoscccccccesooeee 15

IN THE

Supreme Court of the United States

No. 07-484

SEMEN LEYKIN, et al.,

Petitioners,

AT&T CORPORATION, et al.,

Respondents.

On Petition for a Writ of Certiorari

to the United States Court of Appeals

for the Second Circuit

RESPONDENTS’ BRIEF IN OPPOSITION

Petitioners are here seeking review of an

unpublished summary order in which the Second

Circuit upheld the dismissal of a private securities

fraud complaint for failure to state a claim upon

which relief can be granted under Sections 10(b) and

14(a) of the Securities Exchange Act of 1934.

This Second Circuit order does not present the

questions, or the conflicts with other decisions, that

are alleged in the Petition. Rather, as petitioners

correctly stated below, the claims that they have

raised are “sui generis,” and the Second Circuit’s

summary order is a correct application of well-settled

principles to quite unique factual allegations.

First, petitioners’ primary claim was barred by

their inability to allege loss causation under the

standards cf Dura Pharmaceuticals, Inc. v. Broudo,

544 U.S. 336 (2005), and of each federal court of

‘appeals to have addressed this issue. Petitioners

alleged that respondents made fraudulent

misrepresentations and omissions that inflated the

‘stock price of At Home Corporation. However, the

allegations of the complaint also established that

petitioners’ stock had lost its value for other

independent reasons long before the alleged concealed

facts were revealed to the market.

Second, petitioners’ remaining allegations did not

raise any novel issues about the scope of “scheme”

lability under Section 10(b). To the contrary, those

allegations consisted of claims of corporate

mismanagement and abuse that are actionable only

as state law breach of fiduciary duty claims and that

also were independent of any securities transactions.

Santa Fe Indus., Inc. v. Green, 430 U.S. 462, 478-79

(1977); Mutual Shares Corp. v. Genesco, Inc., 384

F.2d 540, 545-546 (2d Cir. 1967).

In this regard, this case does not raise, and the

Second Circuit did not address, the question

presented in Stoneridge Inv. Partners, LLC uv.

Scientific-Atlanta, Inc., No. 06-43: whether private

10b-5 actions can be maintained against third parties

who make no misrepresentations but who allegedly

engaged in transactions with a stock issuer that had

the purpose and effect of misleading the public about

the financial condition of the issuer. There is thus no

reason to hold this case for Stoneridge.

COUNTERSTATEMENT OF THE CASE

1. At Home Corporation (“At Home”) was a

provider of Internet services. At the beginning of the

period at issue in this case, over half of At Home’s

revenues were from Internet content services offered

in competition with entities like Yahoo. The rest of

its revenues were from wholesale Internet access

services provided to AT&T, Cox, Comcast, and other

operators of cable television systems.

-AT&T Corp. was a major shareholder with

representation on At Home’s board throughout the

relevant period. In addition, AT&T acquired full

voting control of At Home in August 2000 as a result

of stock purchases (via a put agreement) with Cox

and Comcast and other transactions announced in

March 2000.

Throughout its existence, At Home had quarterly

losses of many hundreds of millions of dollars and

disclosed the substantial financial and business risks

that it faced in its SEC filings and other public

statements. Nonetheless, At Home enjoyed a stock

price of over $90 per share at the height of the

Internet “bubble,” and its stock price was $49 per

share at the beginning of the class period. Following

the bursting of the Internet bubble in March 2000, At

Home’s stock price fell in virtual lockstep with

Internet stock indices (App. 37a & n.13), and it was

pennies per share when At Home declared

bankruptcy on September 28, 2001. At Home ceased

operations shortly thereafter.

2. This action was brought on behalf of all persons

who had purchased the stock of At Home between

November 9, 1999 and September 28, 2001 (“the class

period”). The defendants now consist of AT&T Corp.

~~ 4

and various of its officers’ who were directors or

officers of At Home (collectively referred to as “AT&T

respondents”) as well as a former At Home officer,

Mark McEachen.! The issue in this case is the legal

sufficiency of Plaintiffs’ Proposed Third Amended

Complaint (“PTAC”).

In the PTAC, petitioners essentially made two sets

of allegations. First, they alleged a traditional

securities fraud action. They contended At Home had

made misrepresentations and omissions that had

artificially inflated the price of At Home’s stock

_ throughout the class period (and that AT&T and the

individual defendants were liable for this conduct as

“control persons” under § 20(a) of the Securities

Exchange Act and/or as signatories of SEC

documents).

In particular, petitioners’ primary allegation was

that At Home had stated that it was protecting the

intellectual property that was critical to its success,

but that these statements were false and misleading

because At Home knew that AT&T was copying and

misappropriating At Home’s intellectual property.

Petitioners also alleged that At Home’s financial

statements had not fully disclosed the precariousness

of its financial condition — a claim that petitioners

have dropped in this Court. The District Court

dismissed both of these allegations for failure to plead

“loss causation” within the meaning of Dura, and the

Second Circuit summarily affirmed this holding.

‘In the lower courts, petitioners also pursued claims against

Comcast, Cox, Kleiner Perkins Caufield & Byers, and various

individual defendants. Petitioners dropped their claims against

these other parties in this Court.

Second, petitioners made a series of allegations to

the effect that AT&T had abused its position as a

major and, later, controlling shareholder of At Home

and committed a number of acts that weakened At

Home financially, pressured it into allowing AT&T to

access and copy intellectual property, and caused or

contributed to At Home’s bankruptcy. These included

announcing “open access” on December 6, 1999,

‘requiring At Home to prepare its network to provide

this access, agreeing to acquire voting control of At

Home in March 2000, requiring At Home to increase

its capital expenditures, interfering with At Home’s

efforts to obtain financing, and other similar conduct.

App. 9a-12a; Pet. at 8-14. Petitioners alleged that all

this conduct was part of a single nefarious “scheme”

that was designed to enable AT&T first to maintain

At Home in a weakened state while AT&T copied its

technology and then to end its life and begin using At

Home’s technology to provide wholesale Internet

access service itself.

>«

All petitioners’ “scheme” allegations were expressly

derived from a parallel state court action in which a

trustee for At Home sought to recover (on behalf of

shareholders and bondholders) damages for alleged

breaches by AT&T of its fiduciary duties as At

Home’s controlling shareholder. See PTAC, 9 55,

58, 59(e)-(q), & 110(b) (referring to this action by

name and repeating allegations from it). This state

court suit is the action that AT&T settled for $400

million (out of a claimed $3 billion). See Pet. at 13.

Petitioners alleged that the nondisclosure of

AT&T’s purported scheme to harm At Home had

artificially inflated the price of At Home’s stock

throughout the class period. At the same time,

although this a*fion was brought on behalf of persons

who purchased stock at these purportedly inflated

prices during the class_ period, petitioners

incongruously alleged that AT&T's abusive conduct

had simultaneously deflated At Home’s stock price.

In particular, they claimed that AT&T’s conduct

artificially lowered the price of At Home’s stock both

at the virtual inception of the class period (the

December 6, 1999 open access announcement) and at

a date early in the class period (the March 2000°

-announcement of the transaction in which AT&T

would acquire voting’ control). Petitioners

maintained that their allegations that acts of

mismanagement artificially reduced At Home's stock

price rendered their securities law claims “sui

generis” and somehow supported the fraud claims

that they brought as purchasers of securities.

Appellants’ Corrected Reply Brief, p. 39 (Filed in

Second Circuit Dec. 5, 2006).

3. The District Court held that the PTAC did not

state a claim for securities fraud and the Second

Circuit summarily affirmed this ruling.

First, the District Court assumed, arguendo, that

petitioners had sufficiently pled misrepresentations

and omissions within the meaning of Rule 10b-5 by

alleging that At Home had stated that it was

protecting its intellectual property without disclosing

AT&T's alleged misappropriation of it. But the

District Court held that these allegations were

insufficient to state a securities fraud claim because

petitioners had not (and could not) allege that their

losses had been caused by these misrepresentations

and omissions, rather than by the collapse in the

Internet economy and other subsequent independent

events. Indeed, as the District Court explained, the

facts admitted in the PTAC established that

petitioners’ At Home shares lost all their value for

these other reasons long before AT&T’s purported

misappropriations could have been known to the

market. App. 34a-39a.

Second, the District Court held that petitioners’

remaining allegations of an undisclosed AT&T

“scheme” to harm At Home did not state a claim for

securities fraud. It concluded these allegations

represented acts of “corporate mismanagement and

abuse” that are actionable only under state law, and

not as “securities fraud.” App. 29a. Specifically, the

District Court held that the scheme alleged here

involved, at most, purported “corporate abuse,

misconduct and diversion of assets, but no

transactions in the relevant securities. Its success

depended on the misappropriation of At Home’s

propriety technology, without regard to any

transactions in At Home stock.” App. 27a-28a. To

the extent petitioners complained that AT&T's

conduct had lowered the price at which Cox and

Comcast agreed to sell stock to AT&T in March 2000,

the District Court held that this was “antecedent, but

not integral, to” any scheme affecting purchasers of

AT&T's stock. App. 28a. For these reasons, the

Court held that AT&T’s scheme was not “in

connection with the purchase or sale of securities.”

Id.

In addition, the District Court dismissed

petitioners’ claim that At Home had violated § 14(a)

of the Securities Exchange Act when it did not

disclose AT&T’s alleged “scheme” in the proxy

solicitation that sought shareholders’ approval of the

March 2000 agreements that gave AT&T voting

control of At Home. The Second Circuit affirmed the

District Court’s dismissal of these claims as well

(App. 4a), and petitioners have not sought review of

these rulings.

REASONS FOR DENYING THE PETITION

The summary order of the Second Circuit is

manifestly unworthy of this Court’s review. This case

is a contrived attempt to take state law claims for

mismanagement of a corporation by a controlling

shareholder — which were previously fully litigated

and settled for $400 million — and now bring them as

a federal securities fraud action. Petitioners made

this attempt by alleging misrepresentations and

omissions that were barred on the face of the

complaint because of the absence of loss causation

and by then contending that the existence of these

alleged misrepresentations allowed the petitioners to

use the securities laws to challenge purported acts of

corporate mismanagement that allegedly weakened

At Home financially during the class period.

The dismissal of this action was a correct

application of well-settled principles to a set of

factual allegations that petitioners have conceded are

sul generis. It does not conflict with any decision of

this Court or of any other federal court of appeals.

The only way petitioners can even argue otherwise is

by misstating the lower courts’ holdings.

I. DISMISSAL OF THE “SCHEME” CLAIMS

WAS A CORRECT APPLICATION OF

SETTLED PRINCIPLES

The primary issue that petitioners seek to have this

Court review is the lower courts’ holding that

petitioners cannot use the federal securities laws to

litigate claims that a controlling shareholder

breached fiduciary duties to the corporation and to

minority shareholders by engaging in self-dealing

and otherwise acting to harm the corporation.

However, as this Court and federal courts of appeals

have repeatedly held, such allegations raise claims

under state corporation law and cannot be converted

into federal securities fraud claims by alleging that it

was a fraud for the corporation to fail to disclose the

breaches of fiduciary duties or the acts of

mismanagement by the controlling shareholder. See

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

Santa Fe concluded that this alleged misconduct is

not actionable under the plain meaning of Section

10(b). Id. 473-77. The Court further held that even if

the terms of Section 10(b) were ambiguous, the Court

would not construe them in a manner that would

permit state breach of fiduciary duty claims to be

brought in federal courts, for. that would federalize

much of state corporation law and create complex

issues of apportioning damages. Id. at 477-79.

Petitioner’s assertion (Pet. at 18) that Section 10(b)

provides a remedy for any undisclosed breaches of

fiduciary duties is simply wrong. In addition to

Santa Fe, this Court has held that Section 10(b) is

not an “ail-purpose breach of fiduciary duty ban”

(United States v. O’Hagan, 521 U.S. 642, 655-56

(1997)) and that “internal corporate mismanagement”

is outside the Act. Superintendent of Ins. of State of

N.Y. v. Bankers Life & Cas. Co., 404 U.S. 6, 9-12

(1971); accord SEC v. Zandford, 535 U.S. 813, 820

(2002).

The decision that the lower courts relied upon —

Mutual Shares Corp. v. Genesco, Inc., 384 F.2d 540,

545-46 (2d Cir. 1967) — was a precursor of Santa Fe.

Mutual Shares dismissed securities law claims

brought by minority shareholders where, as here, a

majority shareholder had acquired a controlling block

of shares from third parties and had not disclosed an

alleged scheme to loot the corporation. Mutual

Shares held that such allegations present only state

law claims and that any claim of fraud here is not “in

connection with the purchase or sale of any security”

within the meaning of the Securities Exchange Act.

15 U.S.C. § 78j(b).

Petitioners here purport to accept the rule of Santa

Fe and Mutual Shares. Pet. at 19. But they argue

that’the rule should not apply to this case because

petitioners alleged (1) that it was a misrepresentation

or omission for At Home to represent that it was

protecting its intellectual property without disclosing

that AT&T was misappropriating it and (2) that

AT&T’s acts of mismanagement were intended to

enable the misappropriations by weakening At Home

and were thus somehow part of a single overall

nefarious “scheme.” But the rule of Santa Fe would

be meaningless if it could be evaded through such

allegations.

Here, moreover, the claimed misrepresentations

and omissions were barred on the face of the

complaint by petitioners’ failure and inability to

plead loss causation under Dura. If petitioners’

scheme theory were accepted, the only issues that

would have been litigated in this case would have

been whether it had been a breach of AT&T’s

fiduciary duties for it to have done such things as

requiring At Home to increase its capital spending,

refusing to provide At Home with favorable financing,

deciding to offer open access to other Internet service

providers, and obtaining access to At Home’s

intellectual property for purposes of testing open

access or helping At Home address provisioning

problems. PTAC, {4 59, 60, 81, 83, 89, 91(b) & 100.

These allegations epitomize matters that are

exclusively addressed under state corporate law and

that cannot support a claim of securities fraud.

Against this background, it is ironic that

petitioners’ principal argument is that the Second

Circuit here decided the same question involving the

scope of “scheme” liability under SEC Rule 10b-5(a) &

and in a second case that presumably is being held

for Stoneridge.? In particular, petitioners contend the

Second Circuit has “limit[ed] the scope of conduct

prohibited by Rule 10b-5 to misrepresentations,” and

has “further exclud[ed] deceptive conduct from

consideration as part of a scheme to defraud” — in

conflict with decisions of the Fifth, Eighth, and Ninth

Circuits. Pet. at 29.

But the Second Circuit's summary order did no

such thing. It summarily affirmed a decision of the

District Court that held that “subparagraphs (a) and

omission” and that did not address whether deceptive

conduct is actionable. Jd. at 19a (emphasis added).

The Second Circuit simply held that “the plaintiffs

here have failed to allege that the AT&T defendants’

conversion scheme was in connection with the

2 Pet. at 28-31. In re Charter Commc'ns, Inc. Sec. Litig., 443

F.3d 987 (8th Ci: 2006), cert. granted sub nom. Stoneridge Inv.

Partners, LLC v. Scientific-Atlanta, Inc., 127 S. Ct. 1873 (2007)

(No. 06-43); Regents of Univ. of Calif. v. Credit Suisse First

Boston, Inc., 482 F.3d 372 (5th Cir. 2007) (“Regents”), petition for

cert. filed, 75 U.S.L.W. 3557 (U.S. Apr. 5, 2007) (No. 06-1341);

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

Cir. 2006), petition for cert. for filed, 75 U.S.L.W. 3236 (U.S. Oct.

19, 2006) (No. 06-560).

purchase or sale of securities” because it involved

claims of mismanagement that are not actionable as

securities fraud. App. 3a. As to that holding, there is

no conflict among the courts of appeals.

By contrast, Stoneridge, Simpson, and Regents

concern “the scope of primary liability for secondary

actors.” Regents, 482 F.3d at 386. In all three cases,

the issue was whether non-speaking parties could be

liable as primary violators of Section 10(b) when they

engaged in transactions with a public corporation

with no legitimate business or economic purpose

except to inflate artificially the public corporation’s

financial statements. Stoneridge Pet. at i (question

presented). The Ninth Circuit held that “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.” Simpson, 452 F.3d at 1052.

This case does not remotely present any such

issues. There is no issue here involving the liability

of secondary actors who are not alleged to be “control

persons” under § 20(a) of the Securities Exchange

Act. Nor does the case present the issue whether

10b-5 liability can be based on “deceptive devices”

other than misrepresentations or omissions.

Similarly, the Second Circuit did not here address a

scheme that had the purpose of misleading the

markets through inflated financial statements and

that was not “complete until misleading information

is disseminated.” Simpson, 452 F.3d at 1052.

Rather, it simply held that the alleged scheme to

harm At Home — which did not involve any actionable

misrepresentations or omissions and whose purpose

was allegedly to steal At Home’s proprietary

information for AT&T’s own use — was not in

connection with the purchase or sale of securities.

App. 3a. See also App. 26a-29a.

In short, the Second Circuit’s decision does not even

address the issue in Stoneridge, Simpson, and

Regents, much less conflict with those cases. There is

thus no reason to hold this case for Stoneridge.

In addition, petitioners are wrong insofar as they

are also asserting that the holding that petitioners’

mismanagement claims were not “in connection with

the purchase or sale of securities” conflicts with prior

decisions of this Court. Pet. at 18. The decisions on

which petitioners rely hold that to constitute a

deceptive scheme in connection with the purchase or

sale of securities, stock transactions must coincide

with or be an integral part of the deceptive scheme.

See Zandford, 535 U.S. at 815-16 (broker sold client’s

securities, redeemed checks, and embezzled proceeds

without disclosure to client where broker had a duty

to disclose); United States v. O’Hagan, 521 U.S. 642,

655-56 (1997) (fiduciary used confidential information

to purchase and sell securities without disclosure to

his principal where fiduciary had a duty to disclose);

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

& Cas. Co., 404 U.S. 6, 7-9 (1971) (defendants

“duped” company’s directors into authorizing sale of

company’s treasury bonds in exchange for company’s

own assets where they had duty to disclose). As the

3 See also Affiliated Ute Citizens of Utah v. United States, 406

U.S. 128, 152-55 (1972) (alleged misrepresentations were used

by bank employees for the purpose of acquiring stock below its

fair value); Merrill Lynch, Pierce, Fenner & Smith, Inc. v, Dabit,

547 U.S. 71, 85 (2006) (noting that the fraud must, at least,

“coincide’ with a securities transaction” and expressly following

District Court here held, AT&T’s alleged scheme was

independent of any stock transactions, for it

“depended on misappropriation of At Home’s

proprietary technology, without regard to any

transactions in At Home’s stock.” App. 28a. The

Second Circuit summarily affirmed this holding.

In this regard, it is irrelevant that AT&T entered

into an agreement that provided for the acquisition of

a block of shares from Cox and Comcast that gave

AT&T undisputed voting control of At Home during

the class period. This Court has held that claims

under Section 10(b) cannot be based on otherwise

legitimate securities transactions independent of the

alleged fraud. See Zandford, 535 U.S. at 819-820 (the

“in connection with” requirement is not met where

“after a lawful transaction had been consummated, a

broker decided to steal the proceeds and did so” or

where “a thief simply invested the proceeds of a

routine conversion in the stock market”). Here, the

District Court correctly applied this standard,

holding that the transaction with Cox and Comcast

was “antecedent to” and independent of the alleged

fraud. App. 28a.

This principle has special force here because

petitioners do not allege that there was any deception

in AT&T's agreement to acquire securities from Cox

and Comcast. App. 28a, 29a & 4la. In this regard,

even if AT&T’s conduct somehow lowered the stock

price that it would have to pay Cox and Comcast (see

Pet. at 10), that conduct is irrelevant to the claims

petitioners have brought on behalf of all persons who

allegedly purchased At Home’s shares at artificially

inflated prices during the class period. Jd. at 2.

and reaffirming Zandford in the context of affirmative

misrepresentations to the marketplace).

Petitioners also attempt to justify review of these

issues by contending that SEC Regulation S-K, Item

404(a) required AT&T to disclose its misappro-

priations of At Home’s intellectual property in the

proxies that were sent to shareholders in connection

with the March 2000 agreements and in other SEC

filings. Pet. at 21. This claim, too, is unworthy of

this Court’s review. This SEC Regulation requires

disclosures of “transactions” between major

shareholders and a corporation. AT&Ts alleged

misappropriations of At Home’s intellectual property

is not a “transaction” within the ordinary meaning of

this term, and this term, too, cannot be construed in

a manner that would make state law breach of

fiduciary duty claims actionable as securities fraud.

See Santa Fe, 430 U.S. at 477-79. Further, the

Second Circuit's correct construction of this SEC

regulation does not conflict with the decision of any

court, and the Petition does not even attempt to

identify such a conflict.

Finally, there is no substance to petitioners’ claim

that the decision below should be reviewed because

that will resolve intra-circuit conflicts and provide

“certainty and predictability” in the Second Circuit.

Pet. at 17. Quite apart from the fact that the

summary order is a correct application of settled law,

the Second Circuit’s Rule 32.1(b) provides that

“rulings by summary order do not have precedential

effect.”

II. THE APPLICATION OF DURA PRESENTS

NO ISSUE FOR REVIEW

Petitioners also ask the Court to review the lower

courts’ application of Dura and their holding that

petitioners’ separate misrepresentation and omission

claims were barred by their failure to allege loss

causation. Petitioners do not contend that there is a

conflict between the Second Circuit’s decision and the

decisions of any other court of appeals regarding the

proper application of Dura. Instead, they merely

assert that over three thousand cases have cited

Dura. But the volume of cases citing Dura does not

demonstrate the existence of an important question

that is appropriate for review in this Court. Here,

the decision below was a correct application of Dura

and of the uniform decisions of other federal courts of

appeals to the unique facts of this case.

Loss causation is an essential element of any

securities law claim under Section 21D(b)(4) of the

Securities Exchange Act of 1934. In Dura, this Court

held that loss causation is not adequately pled when

a plaintiff alleges only that the alleged misrepre-

sentation or omission caused it to pay an inflated

purchase price. Mather, a plaintiff must also

plausibly allege that the subsequent decline in price

was caused by revelation of the “truth” and not by

changed “economic” or market conditions or “other

events.” 544 U.S. at 343-44, 347. Courts of appeals

have thus uniformly held that to plead loss causation,

a plaintiff must allege that the stock price later

declined in response to either (1) a corrective

disclosure that revealed the falsity of the

misrepresentations; or (2) subsequent events that

“materialized” the risk that was concealed by the

misrepresentation or omission. See, e.g., Teachers’

Ret. Sys. of La. v. Hunter, 477 F.3d 162, 187-88 & n.3

(4th Cir. 2007); Ray v. Citigroup Global Mkts., Inc.,

482 F.3d 991, 995-96 (7th Cir. 2007); Lentell v.

Merrill Lynch & Co., Inc., 396 F.3d 161, 175-76 (2d

Cir.), cert. denied, 546 U.S. 935 (2005); Robbins v.

Koger Props., Inc., 116 F.3d 1441, 1447-48 (11th Cir.

1997).

Here, as the District Court held, petitioners’

complaint established that the decline in At Home’s

stock price during the class period was not caused by

a corrective disclosure or by the materialization of

any risks concealed by the alleged misrepresentations

and omissions. The specific alleged misrepresentation

here is that At Home’s statements that it protected

its intellectual property were false because those

statements did not disclose that AT&T was

misappropriating At Home’s intellectual property.

But petitioners specifically alleged that AT&T's

misappropriations of At Home’s intellectual property

and AT&T’s alleged scheme were “never revealed to

the public” during the class period. PTAC, {4 8, 60.

Petitioners’ allegations also establish that there was

no realization of concealed risks during the class

period. For they also alleged that AT&T’s copying of

At Home’s intellectual property “did not diminish the

usefulness and general potential of [this] technology”

to At Home during the class period (PTAC, { 6) and

that AT&T did not actually establish its own network

and begin competing with At Home until December

2001, months after At Home had filed for bankruptcy

and its stock had lost its value. PTAC, 44 111-12;

PTAC, { 6.

Petitioners’ admissions thus established that the

stock market learned the “truth” about the alleged

misappropriations only after the class period ended

and after petitioners’ stock had lost all its value due

to other changed “economic” or “market” conditions

(i.e, the bursting of the Internet stock market

bubble). See Dura, 544 U.S. at 341-43. In short, the

decision below was a correct application of Dura (and

of the uniform decisions of other courts of appeals) to

the unique facts of this case.

Indeed, the arguments that petitioners now make

are all simply challenges to Dura itself. They

contend that Dura’s requirement of loss causation

should be eliminated, or relaxed, in cases where

intentional conduct is alleged. But intentional

conduct was at issue in Dura, for every case arising

under Section 10(b) requires the pleading of an

“intent to deceive, manipulate, or defraud.” Ernst &

Ernst v. Hochfelder, 425 U.S. 185, 193-94 & n.12

(1976).

Finally, petitioners also contend that loss causation

should have been found for two _ alleged

“misrepresentations’ that purportedly “directly

caused the price of At Home stock to decline” — the

December 6, 1999 open access announcement and the

March 29, 2000 announcement that AT&T was

entering into an agreement to acquire stock from Cox

and Comcast that would give AT&T voting control of

At Home. Pet. at 31. But the lower courts did not

address these claims because they correctly held that

the alleged misstatements were not in connection

with the sale of securities and were independent of

the events that were alleged to have caused

purchasers of At Home stock to pay inflated prices.

The latter holding is correct for the reasons stated

above, and there plainly is no basis for the Court to

review a hypothetical loss causation claim that has

not been addressed by lower courts.

CONCLUSION

This petition for writ of certiorari should be denied.

Respectfully submitted,