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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Opposition Brief
- **Published:** January 1, 2007

## Text

SPO en EP ee
Wy e) FILED

No. 07-484 NOV 13 2007

IN THE

OFFICE OF THE CLERK
SUFAUME COUAT, U.S.

oe

Supreme Court of the Anited States

SEMEN LEYKIN, et al.,
Petitioners,
V.

AT&T CORPORATION, et al.,
Respondents.

On Petition for a Writ of Certiorari
to the United States Court of Appeals
for the Second Circuit

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)

zs

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

1V

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

Vv

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,
V.

AT&T CORPORATION, et al.,
Respondents.

On Petition for a Writ of Certiorari
to the United States Court of Appeals
for the Second Circuit

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.

2

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.

3
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.

5

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

6

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

7

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

8

(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

9

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

10

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

11

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) &
(c) that is now before the Court in the Stoneridge case
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
(c) of Rule 10b-5 do not require a misstatement or
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).

12

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

13

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

14

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).

15

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

16

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.

17

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

18

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.

19

CONCLUSION
This petition for writ of certiorari should be denied.
Respectfully submitted,
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

JONATHAN E. RICH
PROSKAUER ROSE LLP
2049 Century Park East
Suite 3200

Los Angeles, CA 90067
(310) 284-5644

Counsel for Respondent Mark McEachen
November 13, 2007 * Counsel of Record

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40386009_1568%3A3. Public record. Not legal advice.